Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the PSLRA. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, share repurchases, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding results of business combinations or strategic divestitures; (v) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; and (vi) statements regarding products and services, their characteristics, performance, sales potential or effect in use by customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” “outlook,” “plan,” “estimated,” “will,” variations of these terms and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and in subsequent filings with the SEC. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

OVERVIEW

We were founded in 1956 on the premise that data, used intelligently, can improve business decisions. Today, FICO’s software and the widely used FICO® Score operationalize analytics, enabling thousands of businesses in nearly 120 countries to uncover new opportunities, make timely decisions that matter, and execute them at scale. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, automotive lenders, consumer reporting agencies, public agencies, and organizations in other industries. We also serve consumers through online services that enable people to access and understand their FICO® Scores — the standard measure in the U.S. of consumer credit risk — empowering them to increase financial literacy and manage their financial health.

Our business consists of two operating segments: Scores and Software.

Our Scores segment includes our business-to-business (“B2B”) scoring solutions and services which give our clients access to predictive credit and other scores that can be easily integrated into their transaction streams and decision-making processes. This segment also includes our business-to-consumer (“B2C”) scoring solutions, including our myFICO.com subscription offerings.

Our Software segment includes pre-configured analytic and decision management solutions designed for a specific type of business need or process — such as account origination, customer management, customer engagement, fraud detection, and marketing — as well as associated professional services. This segment also includes FICO® Platform, a modular software offering designed to support advanced analytic and decision use cases, as well as stand-alone analytic and decisioning software that can be configured by our customers to address a wide variety of business use cases. Our offerings are available to our customers as software-as-a-service (“SaaS”) or as on-premises software.

Highlights from the quarter and six months ended March 31, 2023

Total revenue was $380.3 million during the quarter ended March 31, 2023, a 6% increase from the quarter ended March 31, 2022, and $725.1 million during the six months ended March 31, 2023, a 7% increase from the six months ended March 31, 2022.
Total revenue for our Scores segment was $198.5 million during the quarter ended March 31, 2023, an 8% increase from the quarter ended March 31, 2022, and $376.5 million during the six months ended March 31, 2023, a 7% increase from the six months ended March 31, 2022.
Annual Recurring Revenue for our Software segment as of March 31, 2023 was $613.5 million, a 17% increase from March 31, 2022.
Dollar-Based Net Retention Rate for our Software segment was 114% during the quarter ended March 31, 2023.
Operating income was $159.8 million during the quarter ended March 31, 2023, a 5% increase from the quarter ended March 31, 2022, and $300.1 million during the six months ended March 31, 2023, a 12% increase from the six months ended March 31, 2022.
Net income was $101.6 million during the quarter ended March 31, 2023, a 3% decrease from the quarter ended March 31, 2022, and $199.2 million during the six months ended March 31, 2023, a 5% increase from the six months ended March 31, 2022.
Diluted EPS was $4.00 during the quarter ended March 31, 2023, a 1% increase from the quarter ended March 31, 2022, and $7.83 during the six months ended March 31, 2023, a 12% increase from the six months ended March 31, 2022.
Cash flows from operating activities were $182.2 million during the six months ended March 31, 2023, compared with $247.5 million during the six months ended March 31, 2022.
Cash and cash equivalents were $137.8 million as of March 31, 2023, compared with $133.2 million as of September 30, 2022.
Total debt balance was $1.9 billion as of March 31, 2023 and September 30, 2022.
Total share repurchases during the quarter ended March 31, 2023 were $116.3 million, compared with $264.0 million during the quarter ended March 31, 2022, and during the six months ended March 31, 2023 were $191.3 million, compared with $757.6 million during the six months ended March 31, 2022.

Key performance metrics for Software segment

Annual Contract Value Bookings (“ACV Bookings”)

Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of our revenues and other U.S. generally accepted accounting principles (“U.S. GAAP”) measures. We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other software revenues that are non-recurring in nature. For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings.

ACV Bookings is calculated by dividing the total expected contract value by the contract term in years. The expected contract value equals the fixed amount — including guaranteed minimums, if any — stated in the contract, plus estimates of future usage-based fees. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimates and actual results occur due to variability in the estimated usage. This variability can be the result of the economic trends in our customers’ industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate.

We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 8 to the accompanying condensed consolidated financial statements. However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 8, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others.

The following table summarizes our ACV Bookings during the periods indicated:


	Quarter Ended March 31,				Six Months Ended March 31,
	2023		2022		2023		2022
	(In millions)
Total on-premises and SaaS software (*)	$	23.3	$	20.2	$	44.8	$	36.6

(*) During the quarter ended December 31, 2022, we sold certain assets related to our Siron compliance business. The amounts above exclude this product line for all periods presented.

Annual Recurring Revenue (“ARR”)

Accounting Standards Codification Topic 606, Revenue from Contacts with Customers, requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription. The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract. This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term. Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract. We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability. ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized. All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded. We calculate ARR as the quarterly recurring revenue run-rate multiplied by four.

The following table summarizes our ARR for on-premises and SaaS software at each of the dates presented:


	June 30, 2021			September 30, 2021			December 31, 2021			March 31, 2022			June 30, 2022			September 30, 2022			December 31, 2022			March 31, 2023
ARR *()**	(In millions)
Platform ()**	$	66.0		$	73.6		$	90.9		$	95.4		$	107.2		$	113.1		$	132.8		$	152.5
Non-platform	425.6			427.7			433.4			430.6			432.3			437.0			450.1			461.0
Total	$	491.6		$	501.3		$	524.3		$	526.0		$	539.5		$	550.1		$	582.9		$	613.5

Percentage
Platform	13		%	15		%	17		%	18		%	20		%	21		%	23		%	25		%
Non-platform	87		%	85		%	83		%	82		%	80		%	79		%	77		%	75		%
Total	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%

YoY Change
Platform	58		%	61		%	71		%	64		%	62		%	54		%	46		%	60		%
Non-platform	1		%	—		%	3		%	3		%	2		%	2		%	4		%	7		%
Total	6		%	6		%	11		%	10		%	10		%	10		%	11		%	17		%

(*) During the quarter ended December 31, 2022, we sold certain assets related to our Siron compliance business. The amounts and percentages above exclude this product line at all dates presented.

(**) FICO platform software is a set of interoperable capabilities which use software assets owned and/or governed by FICO for building solutions and services which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles. These standards encompass shared security context and access using FICO standard application programming interfaces.

Dollar-Based Net Retention Rate (“DBNRR”)

We consider DBNRR to be an important measure of our success in retaining and growing revenue from our existing customers. To calculate DBNRR for any period, we compare the ARR at the end of the prior comparable quarter (“base ARR”) to the ARR from that same cohort of customers at the end of the current quarter (“retained ARR”); we then divide the retained ARR by the base ARR to arrive at the DBNRR. Our calculation includes the positive impact among this cohort of customers of selling additional products, price increases and increases in usage-based fees, and the negative impact of customer attrition, price decreases, and decreases in usage-based fees during the period. However, the calculation does not include the positive impact from sales to any new customers acquired during the period. Our DBNRR may increase or decrease from period to period as a result of various factors, including the timing of new sales and customer renewal rates.

The following table summarizes our DBNRR for on-premises and SaaS software for each of the periods presented:


	Quarter Ended
	June 30, 2021		September 30, 2021		December 31, 2021		March 31, 2022		June 30, 2022		September 30, 2022		December 31, 2022		March 31, 2023
DBNRR *()**
Platform	142	%	146	%	146	%	144	%	137	%	129	%	130	%	146	%
Non-platform	100	%	100	%	102	%	102	%	101	%	101	%	103	%	105	%
Total	104	%	105	%	109	%	109	%	109	%	109	%	110	%	114	%

(*) During the quarter ended December 31, 2022, we sold certain assets related to our Siron compliance business. The percentages above exclude this product line for all periods presented.

RESULTS OF OPERATIONS

We are organized into two reportable segments: Scores and Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance.

Segment revenues, operating income, and related financial information, including disaggregation of revenue, are set forth in Note 8 and Note 11 to the accompanying condensed consolidated financial statements.

Revenues

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six-month periods ended March 31, 2023 and 2022:


	Quarter Ended March 31,				Percentage of Revenues				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022		2023		2022
	(In thousands)								(In thousands)
Scores	$	198,507	$	183,742	52	%	51	%	$	14,765	8	%
Software	181,759		173,453		48	%	49	%	8,306		5	%
Total	$	380,266	$	357,195	100	%	100	%	23,071		6	%

	Six Months Ended March 31,				Percentage of Revenues				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022		2023		2022
	(In thousands)								(In thousands)
Scores	$	376,495	$	353,229	52	%	52	%	$	23,266	7	%
Software	348,641		326,327		48	%	48	%	22,314		7	%
Total	$	725,136	$	679,556	100	%	100	%	45,580		7	%

Quarter Ended March 31, 2023 Compared to Quarter Ended March 31, 2022

Scores

Scores segment revenues increased $14.8 million due to an increase of $19.6 million in our business-to-business scores revenue, partially offset by a decrease of $4.8 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price, partially offset by a decrease in volume in mortgage originations. The decrease in business-to-consumer revenue was primarily attributable to a decrease in direct sales generated from the myFICO.com website.

Software


	Quarter Ended March 31,				Period-to-Period Change		Period-to-Period Percentage Change
	2023		2022
	(In thousands)				(In thousands)
On-premises and SaaS software	$	154,584	$	149,088	$	5,496	4	%
Professional services	27,175		24,365		2,810		12	%
Total	$	181,759	$	173,453	8,306		5	%

Software segment revenues increased $8.3 million due to a $5.5 million increase in our on-premises and SaaS software revenue and a $2.8 million increase in services revenue. The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in over-time recognition largely driven by SaaS growth, partially offset by a decrease in point-in-time recognition mainly due to a large license deal entered into during the quarter ended March 31, 2022.

Six Months Ended March 31, 2023 Compared to Six Months Ended March 31, 2022

Scores

Scores segment revenues increased $23.3 million due to an increase of $31.6 million in our business-to-business scores revenue, partially offset by a decrease of $8.3 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price, partially offset by a decrease in volume in mortgage originations. The decrease in business-to-consumer revenue was primarily attributable to a decrease in direct sales generated from the myFICO.com website.

Software


	Six Months Ended March 31,				Period-to-Period Change		Period-to-Period Percentage Change
	2023		2022
	(In thousands)				(In thousands)
On-premises and SaaS software	$	299,144	$	275,426	$	23,718	9	%
Professional services	49,497		50,901		(1,404)		(3)	%
Total	$	348,641	$	326,327	22,314		7	%

Software segment revenues increased $22.3 million due to a $23.7 million increase in our on-premises and SaaS software revenue, partially offset by a $1.4 million decrease in services revenue. The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in over-time recognition largely driven by SaaS growth, partially offset by a decrease in point-in-time recognition mainly due to a large license deal entered into during the six months ended March 31, 2022.

Operating Expenses and Other Income (Expense), Net

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and six-month periods ended March 31, 2023 and 2022:


	Quarter Ended March 31,				Percentage of Revenues				Period-to-Period Change		Period-to- Period Percentage Change
	2023		2022		2023		2022
	(In thousands, except employees)								(In thousands, except employees)
Revenues	$	380,266	$	357,195	100	%	100	%	$	23,071	6	%
Operating expenses:
Cost of revenues	79,806		71,794		21	%	20	%	8,012		11	%
Research and development	40,266		36,387		11	%	10	%	3,879		11	%
Selling, general and administrative	100,158		96,414		26	%	27	%	3,744		4	%
Amortization of intangible assets	275		543		—	%	—	%	(268)		(49)	%


Total operating expenses	220,505		205,138		58	%	57	%	15,367		7	%
Operating income	159,761		152,057		42	%	43	%	7,704		5	%
Interest expense, net	(23,897)		(17,211)		(6)	%	(5)	%	(6,686)		39	%
Other income (expense), net	1,605		(2,361)		—	%	(1)	%	3,966		(168)	%
Income before income taxes	137,469		132,485		36	%	37	%	4,984		4	%
Provision for income taxes	35,919		28,102		9	%	8	%	7,817		28	%
Net income	$	101,550	$	104,383	27	%	29	%	(2,833)		(3)	%
Number of employees at quarter end	3,320		3,460						(140)		(4)	%


	Six Months Ended March 31,				Percentage of Revenues				Period-to-Period Change		Period-to- Period Percentage Change
	2023		2022		2023		2022
	(In thousands)								(In thousands)
Revenues	$	725,136	$	679,556	100	%	100	%	$	45,580	7	%
Operating expenses:
Cost of revenues	156,375		140,997		21	%	21	%	15,378		11	%
Research and development	76,899		75,367		11	%	11	%	1,532		2	%
Selling, general and administrative	193,153		194,462		27	%	29	%	(1,309)		(1)	%
Amortization of intangible assets	550		1,087		—	%	—	%	(537)		(49)	%

Gain on product line asset sale	(1,941)		—		—	%	—	%	(1,941)		—	%
Total operating expenses	425,036		411,913		59	%	61	%	13,123		3	%
Operating income	300,100		267,643		41	%	39	%	32,457		12	%
Interest expense, net	(46,697)		(29,406)		(6)	%	(4)	%	(17,291)		59	%
Other income (expense), net	1,969		(932)		—	%	—	%	2,901		(311)	%
Income before income taxes	255,372		237,305		35	%	35	%	18,067		8	%
Provision for income taxes	56,179		47,963		8	%	7	%	8,216		17	%
Net income	$	199,193	$	189,342	27	%	28	%	9,851		5	%

Cost of Revenues

Cost of revenues consists primarily of employee salaries, incentives, and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; overhead, facilities and data center costs; software royalty fees; credit bureau data and processing services; third-party hosting fees related to our SaaS services; travel costs; and outside services.

The quarter-over-prior year quarter increase in cost of revenues of $8.0 million was primarily attributable to an $8.5 million increase in personnel and labor costs, partially offset by a $1.8 million decrease in direct materials costs. The increase in personnel and labor costs was primarily attributable to increases in employee time allocated to cost of revenues, increased incentive expense and headcount. The decrease in direct materials costs was primarily attributable to a decrease in telecommunications costs to support FICO® Customer Communications Services revenue and a decrease in credit bureau data costs associated with decreased business-to-consumer scoring solutions revenue through the myFICO.com website. Cost of revenues as a percentage of revenues increased to 21% during the quarter ended March 31, 2023 from 20% during the quarter ended March 31, 2022, primarily due to an increase in personnel and labor costs.

The year-to-date period over period increase in cost of revenues of $15.4 million was primarily attributable to a $17.7 million increase in personnel and labor costs and a $0.8 million increase in travel costs, partially offset by a $4.0 million decrease in direct materials costs. The increase in personnel and labor costs was primarily attributable to increases in employee time allocated to cost of revenues, increased incentive expense, and headcount. The increase in travel costs was primarily attributable to relaxed COVID-19 related restrictions. The decrease in direct materials costs was primarily attributable to a decrease in telecommunications costs to support FICO® Customer Communications Services revenue and a decrease in credit bureau data costs associated with decreased business-to-consumer scoring solutions revenue through the myFICO.com website. Cost of revenues as a percentage of revenues remained consistent at 21% during the six months ended March 31, 2023 and 2022.

Research and Development

Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Software products.

The quarter-over-prior year quarter increase in research and development expenses of $3.9 million was primarily attributable to a $2.8 million increase in personnel and labor costs as a result of increased incentive expense and increases in time allocated to research and development activities, and a $0.9 million increase in infrastructure costs primarily attributable to increased third-party cloud computing costs. Research and development expenses as a percentage of revenues increased to 11% during the quarter ended March 31, 2023 from 10% during the quarter ended March 31, 2022.

The year-to-date period over period increase in research and development expenses of $1.5 million was primarily attributable to a $1.4 million increase in infrastructure costs primarily attributable to increased third-party cloud computing and SaaS costs. Research and development expenses as a percentage of revenues remained consistent at 11% during the six months ended March 31, 2023 and 2022.

Selling, General and Administrative

Selling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; and business development expenses.

The quarter-over-prior year quarter increase in selling, general and administrative expenses of $3.7 million was primarily attributable to a $3.3 million increase in marketing and business development costs, a $2.6 million increase in outside services, and a $1.0 million increase in travel costs, partially offset by a $2.0 million decrease in infrastructure costs and a $1.2 million decrease in personnel and labor costs. The increases in marketing, business development and travel costs were primarily driven by increased corporate events, as certain COVID-19 related restrictions have been relaxed, and increased advertising and promotional expenses. The increase in outside services was primarily attributable to increased legal and third-party consulting expenses. The decrease in infrastructure costs was primarily the result of a decrease in software royalty fees and maintenance. The decrease in personnel and labor costs was primarily a result of decreases in employee time allocated to these expenses, decreased share-based compensation, and decreased non-capitalizable commission costs, partially offset by increased fringe benefit costs related to our supplemental retirement and savings plan. Selling, general and administrative expenses as a percentage of revenues decreased to 26% during the quarter ended March 31, 2023 from 27% during the quarter ended March 31, 2022.

The year-to-date period over period decrease in selling, general and administrative expenses of $1.3 million was primarily attributable to a $6.7 million decrease in personnel and labor costs and a $4.7 million decrease in facilities and infrastructure costs, partially offset by a $5.5 million increase in marketing and business development costs, a $2.6 million increase in travel costs and a $2.2 million increase in outside services. The decrease in personnel and labor costs was primarily a result of decreases in employee time allocated to these expenses, decreased share-based compensation, decreased non-capitalizable commission costs and decreased headcount, partially offset by increased fringe benefit costs related to our supplemental retirement and savings plan. The decrease in facilities and infrastructure costs was primarily attributable to a decrease in software royalty fees and maintenance, and a favorable adjustment from the termination of an office lease related to our consolidation of office space. The increases in marketing, business development and travel costs were primarily driven by increased corporate events, as certain COVID-19 related restrictions have been relaxed, and increased advertising and other promotional expenses. The increase in outside services was primarily attributable to increased legal and third-party consulting expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 27% during the six months ended March 31, 2023 from 29% during the six months ended March 31, 2022.

Amortization of Intangible Assets

Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are amortized using the straight-line method over periods ranging from five to ten years.

Amortization expense was $0.3 million during the quarter ended March 31, 2023 compared to $0.5 million during the quarter ended March 31, 2022.

Amortization expense was $0.6 million during the six months ended March 31, 2023 compared to $1.1 million during the six months ended March 31, 2022.

Gain on Product Line Asset Sale

The $1.9 million gain on product line asset sale during the six months ended March 31, 2023 was attributable to the sale of certain assets related to our Siron compliance business in the quarter ended December 31, 2022.

Interest Expense, Net

Interest expense includes interest on the senior notes issued in December 2021, December 2019 and May 2018, as well as interest and credit agreement fees on the revolving line of credit and term loan. On our condensed consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

The quarter-over-prior year quarter increase in interest expense of $6.7 million was primarily attributable to a higher average outstanding debt balance, as well as a higher average interest rate on our revolving line of credit and term loan during the quarter ended March 31, 2023.

The year-to-date period over period increase in interest expense of $17.3 million was primarily attributable to a higher average outstanding debt balance, as well as a higher average interest rate on our revolving line of credit and term loan during the six months ended March 31, 2023.

Other Income (Expense), Net

Other income (expense), net consists primarily of unrealized investment gains/losses and realized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The quarter-over-quarter change in other income (expense), net of $4.0 million, from $2.4 million in other expense, net to $1.6 million in other income, net, was primarily attributable to net unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan in the current year period compared to losses in the prior year period, partially offset by an increase in foreign currency exchange losses.

The year-to-date period over period change in other income (expense), net of $2.9 million, from $0.9 million in other expense, net to $2.0 million in other income, net, was primarily attributable to net unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan in the current year period compared to losses in the prior year period, partially offset by an increase in foreign currency exchange losses.

Provision for Income Taxes

The effective income tax rate was 26.1% and 21.2% during the quarters ended March 31, 2023 and 2022, respectively, and 22.0% and 20.2% during the six months ended March 31, 2023 and 2022, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The increase in the effective tax rate for the six months ended March 31, 2023 was primarily due to a decrease in tax benefits related to the reduction of research and development credits.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income for the quarters and six-month periods ended March 31, 2023 and 2022.


	Quarter Ended March 31,				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022
	(In thousands)				(In thousands)
Scores	$	175,405	$	161,342	$	14,063	9	%
Software	54,867		52,634		2,233		4	%
Unallocated corporate expenses	(43,183)		(33,440)		(9,743)		29	%
Total segment operating income	187,089		180,536		6,553		4	%
Unallocated share-based compensation	(27,053)		(27,936)		883		(3)	%
Unallocated amortization expense	(275)		(543)		268		(49)	%


Operating income	$	159,761	$	152,057	7,704		5	%


	Scores								Software
	Quarter Ended March 31,				Percentage of Revenues				Quarter Ended March 31,				Percentage of Revenues
	2023		2022		2023		2022		2023		2022		2023		2022
	(In thousands)								(In thousands)
Segment revenues	$	198,507	$	183,742	100	%	100	%	$	181,759	$	173,453	100	%	100	%
Segment operating expense	(23,102)		(22,400)		(12)	%	(12)	%	(126,892)		(120,819)		(70)	%	(70)	%
Segment operating income	$	175,405	$	161,342	88	%	88	%	$	54,867	$	52,634	30	%	30	%

The quarter-over-prior year quarter increase in operating income of $7.7 million was primarily attributable to a $23.1 million increase in segment revenues and a $0.9 million decrease in share-based compensation cost, partially offset by a $9.7 million increase in corporate expenses and a $6.8 million increase in segment operating expenses.

At the segment level, the quarter-over-prior year quarter increase in segment operating income of $6.6 million was the result of a $14.1 million increase in our Scores segment operating income, a $2.2 million increase in our Software segment operating income, partially offset by a $9.7 million increase in corporate expenses.

The quarter-over-prior year quarter increase in Scores segment operating income of $14.1 million was due to a $14.8 million increase in segment revenue, partially offset by a $0.7 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 88%, consistent with the quarter ended March 31, 2022.

The quarter-over-prior year quarter increase in Software segment operating income of $2.2 million was due to an $8.3 million increase in segment revenue, partially offset by a $6.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software was 30%, consistent with the quarter ended March 31, 2022.


	Six Months Ended March 31,				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022
	(In thousands)				(In thousands)
Scores	$	332,097	$	309,665	$	22,432	7	%
Software	100,632		87,471		13,161		15	%
Unallocated corporate expenses	(77,265)		(70,592)		(6,673)		9	%
Total segment operating income	355,464		326,544		28,920		9	%
Unallocated share-based compensation	(56,755)		(57,814)		1,059		(2)	%
Unallocated amortization expense	(550)		(1,087)		537		(49)	%

Unallocated gain on product line asset sale	1,941		—		1,941		—	%
Operating income	$	300,100	$	267,643	32,457		12	%


	Scores								Software
	Six Months Ended March 31,				Percentage of Revenues				Six Months Ended March 31,				Percentage of Revenues
	2023		2022		2023		2022		2023		2022		2023		2022
	(In thousands)								(In thousands)
Segment revenues	$	376,495	$	353,229	100	%	100	%	$	348,641	$	326,327	100	%	100	%
Segment operating expense	(44,398)		(43,564)		(12)	%	(12)	%	(248,009)		(238,856)		(71)	%	(73)	%
Segment operating income	$	332,097	$	309,665	88	%	88	%	$	100,632	$	87,471	29	%	27	%

The year-to-date period over period increase of $32.5 million in operating income was primarily attributable to a $45.6 million increase in segment revenues, a $1.9 million gain on product line asset sale, and a $1.1 million decrease in share-based compensation cost, partially offset by a $10.0 million increase in segment operating expenses and a $6.7 million increase in corporate expenses.

At the segment level, the year-to-date period over period increase of $28.9 million in segment operating income was the result of a $22.4 million increase in our Scores segment operating income, a $13.2 million increase in our Software segment operating income, partially offset by a $6.7 million increase in corporate expenses.

The year-to-date period over period $22.4 million increase in Scores segment operating income was attributable to a $23.3 million increase in segment revenue, partially offset by a $0.9 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 88%, consistent with the six months ended March 31, 2022.

The year-to-date period over period $13.2 million increase in Software segment operating income was attributable to a $22.3 million increase in segment revenue, partially offset by a $9.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software increased to 29% from 27%.

CAPITAL RESOURCES AND LIQUIDITY

Outlook

As of March 31, 2023, we had $137.8 million in cash and cash equivalents, which included $110.5 million held by our foreign subsidiaries. We believe our cash and cash equivalents balances, including those held by our foreign subsidiaries, as well as available borrowings from our $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future, including the $15.0 million principal payments on our term loan due over the next 12 months. Under our current financing arrangements, we have no other significant debt obligations maturing over the next 12 months. For jurisdictions outside the U.S. where cash may be repatriated in the future, the Company expects the net impact of any repatriations to be immaterial to the Company’s overall tax liability.

In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

Summary of Cash Flows


	Six Months Ended March 31,				Period-to-Period Change
	2023		2022
	(In thousands)
Cash provided by (used in):
Operating activities	$	182,244	$	247,484	$	(65,240)
Investing activities	(11,887)		(3,664)		(8,223)
Financing activities	(173,245)		(263,162)		89,917
Effect of exchange rate changes on cash	7,457		(1,793)		9,250
Increase (decrease) in cash and cash equivalents	$	4,569	$	(21,135)	25,704

Cash Flows from Operating Activities

Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities decreased to $182.2 million during the six months ended March 31, 2023 from $247.5 million during the six months ended March 31, 2022. The $65.2 million decrease was attributable to a $42.9 million decrease due to the timing of receipts and payments in our ordinary course of business and a $32.2 million decrease in non-cash items. The decrease was partially offset by a $9.9 million increase in net income.

Cash Flows from Investing Activities

Net cash used in investing activities increased to $11.9 million for the six months ended March 31, 2023 from $3.7 million for the six months ended March 31, 2022. The $8.2 million increase was primarily attributable to an $8.4 million decrease in cash proceeds from the product line asset sales, net of cash transferred.

Cash Flows from Financing Activities

Net cash used in financing activities decreased to $173.2 million for the six months ended March 31, 2023 from $263.2 million for the six months ended March 31, 2022. The $89.9 million decrease was primarily attributable to a $576.6 million decrease in repurchases of common stock and a $76.3 million decrease in payments, net of proceeds, on our revolving line of credit, partially offset by a $550.0 million decrease in proceeds from the issuance of senior notes and a $25.8 million increase in taxes paid related to net share settlement of equity awards.

Repurchases of Common Stock

In October 2022, our Board of Directors approved a new stock repurchase program replacing our previously authorized program. This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions.

We expended $116.3 million and $264.0 million during the quarters ended March 31, 2023 and 2022, respectively, and $191.3 million and $757.6 million during the six months ended March 31, 2023 and 2022, respectively under our previously authorized stock repurchase programs and the October 2022 program. As of March 31, 2023, we had $334.8 million remaining under the October 2022 program.

Revolving Line of Credit and Term Loan

We have a $600 million unsecured revolving line of credit and a $300 million unsecured term loan with a syndicate of banks that mature on August 19, 2026. Borrowings under the revolving line of credit and term loan can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the repurchase of our common stock. The term loan requires principal payments in consecutive quarterly installments of $3.75 million on the last business day of each quarter. In November 2022, we amended our credit agreement to replace the LIBOR reference rate with the Secured Overnight Financing Rate (“SOFR”) reference rate. Interest rates on amounts borrowed under the revolving line of credit and term loan are based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.5%, and (c) one-month adjusted term SOFR rate plus 1%, plus, in each case, an applicable margin, or (ii) an adjusted term SOFR rate plus an applicable margin. The applicable margin for base rate borrowings and for SOFR borrowings is determined based on our consolidated leverage ratio. The applicable margin for base rate borrowings ranges from 0% to 0.75% per annum and for SOFR borrowings ranges from 1% to 1.75% per annum. In addition, we must pay certain credit facility fees. The revolving line of credit and term loan contain certain restrictive covenants including a maximum consolidated leverage ratio of 3.5 to 1.0, subject to a step up to 4.0 to 1.0 following certain permitted acquisitions and subject to certain conditions, and a minimum interest coverage ratio of 3.0 to 1.0. The credit agreement also contains other covenants typical of unsecured credit facilities.

As of March 31, 2023, we had $357.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.343%, and $281.3 million in outstanding balance of the term loan at an interest rate of 6.529%, of which $531.3 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets. We were in compliance with all financial covenants under this credit agreement as of March 31, 2023.

Senior Notes

On May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026. On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”). The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028. On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private offering to qualified institutional investors (the “2021 Senior Notes,” and collectively with the 2018 Senior Notes and the 2019 Senior Notes, the “Senior Notes”). The 2021 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028, the same date as the 2019 Senior Notes. The indentures for the Senior Notes contain certain covenants typical of unsecured obligations. As of March 31, 2023, the carrying value of the Senior Notes was $1.3 billion and we were in compliance with all financial covenants under these obligations.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. GAAP. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill and other long-lived assets — impairment assessment, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and such differences could be material to our financial condition and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

You should carefully consider the critical accounting estimates disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (“Annual Report on Form 10-K”). There have been no significant changes from the critical accounting estimates disclosed in our Annual Report on Form 10-K.

New Accounting Pronouncements

For information about recent accounting pronouncements not yet adopted and the impact on our consolidated financial statements, refer to Part I, Item 1, “Unaudited Financial Statements,” Note 1, “Nature of Business” in our accompanying Notes to Condensed Consolidated Financial Statements.

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