Fair Isaac 10-Q 2023-12-31

Filed 2024-01-25. 8 sections, 145K characters. Original on sec.gov · Markdown · JSON

Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-11689

Fair Isaac Corporation

(Exact name of registrant as specified in its charter)


Delaware		94-1499887
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5 West Mendenhall, Suite 105		59715
Bozeman,	Montana
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 406-982-7276

Securities registered pursuant to Section 12(b) of the Act:


Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, $0.01 par value per share			FICO			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes			☐			No			☒

The number of shares of common stock outstanding on January 17, 2024 was 24,852,057 (excluding 64,004,726 shares held by us as treasury stock).

TABLE OF CONTENTS


	PART I – FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32
Signatures		33

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

FAIR ISAAC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	December 31, 2023		September 30, 2023
	(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents	$	160,421	$	136,778
Accounts receivable, net	367,478		387,947
Prepaid expenses and other current assets	37,364		31,723
Total current assets	565,263		556,448
Marketable securities	36,955		33,014
Other investments	1,258		1,223
Property and equipment, net	10,406		10,966
Operating lease right-of-use assets	18,916		25,703
Goodwill	777,195		773,327
Intangible assets, net	642		917
Deferred income taxes	63,725		59,136
Other assets	119,158		114,547
Total assets	$	1,593,518	$	1,575,281
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	18,584	$	19,009
Accrued compensation and employee benefits	68,216		102,471
Other accrued liabilities	46,487		59,478
Deferred revenue	146,822		136,730
Current maturities on debt	153,000		50,000
Total current liabilities	433,109		367,688
Long-term debt	1,808,655		1,811,658
Operating lease liabilities	11,899		23,903
Other liabilities	65,620		60,022
Total liabilities	2,319,283		2,263,271
Commitments and contingencies
Stockholders’ deficit:
Preferred stock ($0.01 par value; 1,000 shares authorized; none issued and outstanding)	—		—
Common stock ($0.01 par value; 200,000 shares authorized, 88,857 shares issued and 24,879 and 24,770 shares outstanding at December 31, 2023 and September 30, 2023, respectively)	249		248
Additional paid-in-capital	1,239,131		1,350,713
Treasury stock, at cost (63,978 and 64,087 shares at December 31, 2023 and September 30, 2023, respectively)	(5,380,827)		(5,324,865)
Retained earnings	3,509,124		3,388,059
Accumulated other comprehensive loss	(93,442)		(102,145)
Total stockholders’ deficit	(725,765)		(687,990)
Total liabilities and stockholders’ deficit	$	1,593,518	$	1,575,281

See accompanying notes.

FAIR ISAAC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)


	Quarter Ended December 31,
	2023		2022
	(In thousands, except per share data)
Revenues:
On-premises and SaaS software	$	168,668	$	144,560
Professional services	21,279		22,322
Scores	192,112		177,988
Total revenues	382,059		344,870
Operating expenses:
Cost of revenues	83,461		76,569
Research and development	42,635		36,633
Selling, general and administrative	104,329		92,995
Amortization of intangible assets	275		275

Gain on product line asset sale	—		(1,941)
Total operating expenses	230,700		204,531
Operating income	151,359		140,339
Interest expense, net	(24,162)		(22,800)
Other income, net	3,393		364
Income before income taxes	130,590		117,903
Provision for income taxes	9,525		20,260
Net income	121,065		97,643
Other comprehensive income:
Foreign currency translation adjustments	8,703		18,381
Comprehensive income	$	129,768	$	116,024
Earnings per share:
Basic	$	4.89	$	3.90
Diluted	$	4.80	$	3.84
Shares used in computing earnings per share:
Basic	24,764		25,045
Diluted	25,219		25,443

See accompanying notes.

FAIR ISAAC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(Unaudited)


	Common Stock			Additional Paid-in-Capital		Treasury Stock	Retained Earnings	Accumulated Other Comprehensive Loss	Total Stockholders’ Deficit
(In thousands)	Shares	Par Value
Balance at September 30, 2023	24,770	$	248	$	1,350,713

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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, 2023 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 more than 100 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 ended December 31, 2023

Total revenue was $382.1 million during the quarter ended December 31, 2023, an 11% increase from the quarter ended December 31, 2022.
Total revenue for our Scores segment was $192.1 million during the quarter ended December 31, 2023, an 8% increase from the quarter ended December 31, 2022.
Annual Recurring Revenue for our Software segment as of December 31, 2023 was $687.7 million, an 18% increase from December 31, 2022.
Dollar-Based Net Retention Rate for our Software segment was 114% during the quarter ended December 31, 2023.
Operating income was $151.4 million during the quarter ended December 31, 2023, an 8% increase from the quarter ended December 31, 2022.
Net income was $121.1 million during the quarter ended December 31, 2023, a 24% increase from the quarter ended December 31, 2022.
Diluted EPS was $4.80 during the quarter ended December 31, 2023, a 25% increase from the quarter ended December 31, 2022.
Cash flows from operating activities were $122.1 million during the quarter ended December 31, 2023, compared with $92.4 million during the quarter ended December 31, 2022.
Cash and cash equivalents were $160.4 million as of December 31, 2023, compared with $136.8 million as of September 30, 2023.
Total debt balance was $2.0 billion as of December 31, 2023, compared with $1.9 billion as of September 30, 2023.
Total share repurchases during the quarter ended December 31, 2023 were $71.7 million, compared with $75.0 million during the quarter ended December 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 7 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 7, 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 December 31,
	2023		2022 (*****)
	(In millions)
Total on-premises and SaaS software	$	18.3	$	21.5

(*) During the quarter ended December 31, 2022, we sold certain assets related to our Siron compliance business and the amount above excludes this product line.

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:


	March 31, 2022			June 30, 2022			September 30, 2022			December 31, 2022			March 31, 2023			June 30, 2023			September 30, 2023			December 31, 2023
ARR *()**	(In millions)
Platform	$	95.4		$	107.2		$	113.1		$	132.8		$	152.5		$	164.1		$	173.2		$	190.3
Non-platform	430.6			432.3			437.0			450.1			461.0			481.8			496.2			497.4
Total	$	526.0		$	539.5		$	550.1		$	582.9		$	613.5		$	645.9		$	669.4		$	687.7

Percentage
Platform	18		%	20		%	21		%	23		%	25		%	25		%	26		%	28		%
Non-platform	82		%	80		%	79		%	77		%	75		%	75		%	74		%	72		%
Total	100		%	100		%	100		%	100		%	100		%	100		%	100		%	100		%

YoY Change
Platform	64		%	62		%	54		%	46		%	60		%	53		%	53		%	43		%
Non-platform	3		%	2		%	2		%	4		%	7		%	11		%	14		%	11		%
Total	10		%	10		%	10		%	11		%	17		%	20		%	22		%	18		%

(*) 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.

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
	March 31, 2022		June 30, 2022		September 30, 2022		December 31, 2022		March 31, 2023		June 30, 2023		September 30, 2023		December 31, 2023
DBNRR *()**
Platform	144	%	137	%	129	%	130	%	146	%	142	%	145	%	136	%
Non-platform	102	%	101	%	101	%	103	%	105	%	109	%	111	%	108	%
Total	109	%	109	%	109	%	110	%	114	%	117	%	120	%	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 7 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 ended December 31, 2023 and 2022:


	Quarter Ended December 31,				Percentage of Revenues				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022		2023		2022
	(In thousands)								(In thousands)
Scores	$	192,112	$	177,988	50	%	52	%	$	14,124	8	%
Software	189,947		166,882		50	%	48	%	23,065		14	%
Total	$	382,059	$	344,870	100	%	100	%	37,189		11	%

Scores

Scores segment revenues increased $14.1 million due to an increase of $15.5 million in our business-to-business scores revenue, partially offset by a decrease of $1.4 million in our business-to-consumer revenue. The increase in business-to-business scores revenue was primarily attributable to a higher unit price. 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 December 31,				Period-to-Period Change		Period-to-Period Percentage Change
	2023		2022
	(In thousands)				(In thousands)
On-premises and SaaS software	$	168,668	$	144,560	$	24,108	17	%
Professional services	21,279		22,322		(1,043)		(5)	%
Total	$	189,947	$	166,882	23,065		14	%

Software segment revenues increased $23.1 million due to a $24.1 million increase in our on-premises and SaaS software revenue, partially offset by a $1.0 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.

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 ended December 31, 2023 and 2022:


	Quarter Ended December 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	$	382,059	$	344,870	100	%	100	%	$	37,189	11	%
Operating expenses:
Cost of revenues	83,461		76,569		22	%	22	%	6,892		9	%
Research and development	42,635		36,633		11	%	11	%	6,002		16	%
Selling, general and administrative	104,329		92,995		27	%	27	%	11,334		12	%
Amortization of intangible assets	275		275		—	%	—	%	—		—	%

Gain on product line asset sale	—		(1,941)		—	%	(1)	%	1,941		(100)	%
Total operating expenses	230,700		204,531		60	%	59	%	26,169		13	%
Operating income	151,359		140,339		40	%	41	%	11,020		8	%
Interest expense, net	(24,162)		(22,800)		(7)	%	(7)	%	(1,362)		6	%
Other income, net	3,393		364		1	%	—	%	3,029		832	%
Income before income taxes	130,590		117,903		34	%	34	%	12,687		11	%
Provision for income taxes	9,525		20,260		2	%	6	%	(10,735)		(53)	%
Net income	$	121,065	$	97,643	32	%	28	%	23,422		24	%
Number of employees at quarter end	3,485		3,305						180		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 $6.9 million was primarily attributable to a $3.9 million increase in personnel and labor costs, a $1.4 million increase in infrastructure and facilities costs, and a $0.9 million increase in direct materials costs. The increase in personnel and labor costs was primarily attributable to increased headcount and increased share-based compensation expense. The increase in infrastructure and facilities costs was primarily attributable to increased third-party data center hosting fees. The increase in direct materials costs was primarily attributable to increased telecommunications expenses to support FICO® Customer Communications Services revenue, partially offset by decreased software royalty fees. Cost of revenues as a percentage of revenues remained consistent at 22% during the quarters ended December 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 $6.0 million was primarily attributable to an increase in personnel and labor costs as a result of increased headcount, increased employee time allocated to research and development activities, and increased share-based compensation expense. Research and development expenses as a percentage of revenues remained consistent at 11% during the quarters ended December 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 $11.3 million was primarily attributable to a $7.4 million increase in personnel and labor costs, a $1.8 million increase in infrastructure and facilities costs, a $1.1 million increase in travel costs, and a $0.8 million increase in marketing and business development costs. The increase in personnel and labor costs was primarily attributable to increased headcount, increased fringe benefit costs related to our supplemental retirement and savings plan, and increased commission expense. The increase in infrastructure and facilities costs was primarily attributable to the impact of a favorable adjustment in the prior year quarter from the termination of an office lease. The increases in travel, marketing and business development costs were primarily attributable to increased advertising and other promotional expenses and increased corporate event costs. Selling, general and administrative expenses as a percentage of revenues remained consistent at 27% during the quarters ended December 31, 2023 and 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 five years.

Amortization expense was $0.3 million during each of the quarters ended December 31, 2023 and 2022.

Gain on Product Line Asset Sale

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

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 $1.4 million was primarily attributable to a higher average interest rate on our revolving line of credit and term loan, and a higher average outstanding balance on our revolving line of credit during the quarter ended December 31, 2023.

Other Income, Net

Other income, 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-prior year quarter increase in other income, net of $3.0 million was primarily attributable to an increase in net realized and unrealized gains on investments classified as trading securities in our supplemental retirement and savings plan, and a decrease in foreign currency exchange losses.

Provision for Income Taxes

The effective income tax rate was 7.3% and 17.2% during the quarters ended December 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 effective tax rate for the quarter ended December 31, 2023 was favorably impacted by the excess tax benefit relating to stock awards.

Operating Income

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


	Quarter Ended December 31,				Period-to-Period Change		Period-to-Period Percentage Change
Segment	2023		2022
	(In thousands)				(In thousands)
Scores	$	168,654	$	156,692	$	11,962	8	%
Software	55,122		45,765		9,357		20	%
Unallocated corporate expenses	(40,568)		(34,082)		(6,486)		19	%
Total segment operating income	183,208		168,375		14,833		9	%
Unallocated share-based compensation	(31,574)		(29,702)		(1,872)		6	%
Unallocated amortization expense	(275)		(275)		—		—	%

Unallocated gain on product line asset sale	—		1,941		(1,941)		(100)	%
Operating income	$	151,359	$	140,339	11,020		8	%


	Scores								Software
	Quarter Ended December 31,				Percentage of Revenues				Quarter Ended December 31,				Percentage of Revenues
	2023		2022		2023		2022		2023		2022		2023		2022
	(In thousands)								(In thousands)
Segment revenues	$	192,112	$	177,988	100	%	100	%	$	189,947	$	166,882	100	%	100	%
Segment operating expense	(23,458)		(21,296)		(12)	%	(12)	%	(134,825)		(121,117)		(71)	%	(73)	%
Segment operating income	$	168,654	$	156,692	88	%	88	%	$	55,122	$	45,765	29	%	27	%

The quarter-over-prior year quarter increase in operating income of $11.0 million was attributable to a $37.2 million increase in segment revenues, partially offset by a $15.9 million increase in segment operating expenses, a $6.5 million increase in corporate expenses, a $1.9 million decrease in gain on product line asset sale, and a $1.9 million increase in share-based compensation cost.

At the segment level, the quarter-over-prior year quarter increase in segment operating income of $14.8 million was the result of a $12.0 million increase in our Scores segment operating income and a $9.4 million increase in our Software segment operating income, partially offset by a $6.5 million increase in corporate expenses.

The quarter-over-prior year quarter increase in Scores segment operating income of $12.0 million was due to a $14.1 million increase in segment revenue, partially offset by a $2.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores for the quarter ended December 31, 2023 was 88%, consistent with the quarter ended December 31, 2022.

The quarter-over-prior year quarter increase in Software segment operating income of $9.4 million was due to a $23.1 million increase in segment revenue, partially offset by a $13.7 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software increased to 29% from 27%, primarily attributable to an increase in higher-margin license revenue recognized at a point in time and a decrease in sales of our lower-margin professional services.

CAPITAL RESOURCES AND LIQUIDITY

Outlook

As of December 31, 2023, we had $160.4 million in cash and cash equivalents, which included $114.5 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


	Quarter Ended December 31,				Period-to-Period Change
	2023		2022
	(In thousands)
Cash provided by (used in):
Operating activities	$	122,120	$	92,440	$	29,680
Investing activities	(2,418)		(10,590)		8,172
Financing activities	(99,866)		(79,624)		(20,242)
Effect of exchange rate changes on cash	3,807		4,428		(621)
Increase in cash and cash equivalents	$	23,643	$	6,654	16,989

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 increased to $122.1 million during the quarter ended December 31, 2023 from $92.4 million during the quarter ended December 31, 2022. The $29.7 million increase was attributable to a $23.4 million increase in net income, a $3.4 million increase in non-cash items, and a $2.9 million increase due to the timing of receipts and payments in our ordinary course of business.

Cash Flows from Investing Activities

Net cash used in investing activities decreased to $2.4 million for the quarter ended December 31, 2023 from $10.6 million for the quarter ended December 31, 2022. The $8.2 million decrease was primarily attributable to a $7.6 million decrease in cash transferred, net of proceeds, from the product line asset sale.

Cash Flows from Financing Activities

Net cash used in financing activities increased to $99.9 million for the quarter ended December 31, 2023 from $79.6 million for the quarter ended December 31, 2022. The $20.2 million increase was primarily attributable to a $59.0 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $32.0 million decrease in payments on our revolving line of credit and term loan.

Repurchases of Common Stock

In October 2022, our Board of Directors approved a new stock repurchase program replacing our previously authorized program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. As of December 31, 2023, we had $48.8 million remaining under our then current stock repurchase program. During the quarters ended December 31, 2023 and 2022, we expended $71.7 million and $75.0 million, respectively, under our then current and previously authorized stock repurchase programs.

In January 2024, our Board of Directors approved a new stock repurchase program, replacing the October 2022 stock repurchase program which was terminated. The new program is open-ended and authorizes repurchases of shares of our common stock from time to time, up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. The new stock repurchase program became effective on January 23, 2024, and will remain in effect until the total authorized amount is expended or until further action by our Board of Directors.

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. 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 Secured Overnight Financing Rate (“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 December 31, 2023, we had $403.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.708%, and $270.0 million in outstanding balance of the term loan at an interest rate of 6.713%. We were in compliance with all financial covenants under this credit agreement as of December 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 December 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 POLICIES AND ESTIMATES

We prepare our condensed 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 condensed consolidated 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 resulting from business combinations 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, 2023 (“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 recently adopted and 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Disclosures

We are exposed to market risk related to changes in interest rates and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate

We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at December 31, 2023 and September 30, 2023:


	December 31, 2023						September 30, 2023
	Cost Basis		Carrying Amount		Average Yield		Cost Basis		Carrying Amount		Average Yield
	(Dollars in thousands)
Cash and cash equivalents	$	160,421	$	160,421	3.32	%	$	136,778	$	136,778	3.05	%

On May 8, 2018, we issued $400 million of senior notes in a private placement to qualified institutional investors (the “2018 Senior Notes”). On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”). On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private placement to qualified institutional investors (the “2021 Senior Notes” and collectively with the 2018 Senior Notes and 2019 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” for additional information on the Senior Notes. The following table presents the face values and fair values for the Senior Notes at December 31, 2023 and September 30, 2023:


	December 31, 2023				September 30, 2023
	Face Value		Fair Value		Face Value		Fair Value
	(In thousands)
The 2018 Senior Notes	400,000		396,000		400,000		386,000
The 2019 Senior Notes and the 2021 Senior Notes	900,000		846,000		900,000		803,250
Total	$	1,300,000	$	1,242,000	$	1,300,000	$	1,189,250

We have interest rate risk with respect to our unsecured revolving line of credit and term loan. 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. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the instrument. As of December 31, 2023, we had $403.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.708%, and $270.0 million in outstanding balance of the term loan at an interest rate of 6.713%.

Foreign Currency Forward Contracts

We maintain a program to manage our foreign exchange rate risk on existing foreign-currency-denominated receivable and cash balances by entering into forward contracts to sell or buy foreign currencies. At period end, foreign-currency-denominated receivable and cash balances held by our various reporting entities are remeasured into their respective functional currencies at current market rates. The change in value from this remeasurement is then reported as a foreign exchange gain or loss for that period in our accompanying condensed consolidated statements of income and comprehensive income and the resulting gain or loss on the forward contract mitigates the foreign exchange rate risk of the associated assets. All of our foreign currency forward contracts have maturity periods of less than three months. Such derivative financial instruments are subject to market risk.

The following tables summarize our outstanding foreign currency forward contracts, by currency, at December 31, 2023 and September 30, 2023:


	December 31, 2023
	Contract Amount				Fair Value
	Foreign Currency		USD		USD
	(In thousands)
Sell foreign currency:

Euro (EUR)	EUR	9,900	$	10,941	$	—
Buy foreign currency:
British pound (GBP)	GBP	9,911	$	12,600	$	—
Singapore dollar (SGD)	SGD	10,400	$	7,900	$	—

	September 30, 2023
	Contract Amount				Fair Value
	Foreign Currency		USD		USD
	(In thousands)
Sell foreign currency:

Euro (EUR)	EUR	12,900	$	13,621	$	—
Buy foreign currency:
British pound (GBP)	GBP	10,700	$	13,100	$	—
Singapore dollar (SGD)	SGD	8,569	$	6,300	$	—

The foreign currency forward contracts were entered into on December 31, 2023 and September 30, 2023; therefore, their fair value was $0 on each of these dates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of FICO’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of FICO’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the CEO and CFO have concluded that FICO’s disclosure controls and procedures were effective as of December 31, 2023 to ensure that information required to be disclosed by FICO in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures are designed to ensure that information required to be disclosed is accumulated and communicated to management, including the CEO and CFO, allowing timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in FICO’s internal control over financial reporting was identified in connection with the evaluation required by Rules 13a-15 or 15d-15 of the Exchange Act that occurred during the period covered by this quarterly report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended September 30, 2023 (our “Annual Report on Form 10-K”). The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may materially and adversely affect our business, financial condition or operating results in the future. There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October 1, 2023 through October 31, 2023	64,039	$	873.57	63,365	$	65,186,375
November 1, 2023 through November 30, 2023	12,134	$	1,081.35	12,000	$	52,190,244
December 1, 2023 through December 31, 2023	118,663	$	1,133.89	3,000	$	48,845,152
	194,836	$	1,045.06	78,365	$	48,845,152

(1)Includes 116,471 shares delivered in satisfaction of the tax withholding obligations resulting from the vesting of restricted stock units held by employees during the quarter ended December 31, 2023.

(2)In October 2022, our Board of Directors approved a stock repurchase program replacing our previously authorized program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. In January 2024, our Board of Directors approved a new stock repurchase program, replacing the October 2022 stock repurchase program which was terminated. The new program is open-ended and authorizes repurchases of shares of our common stock from time to time, up to an aggregate cost of $500.0 million in the open market or in negotiated transactions. The new stock repurchase program became effective on January 23, 2024, and will remain in effect until the total authorized amount is expended or until further action by our Board of Directors.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Trading Arrangements

On November 13, 2023, William Lansing, our Chief Executive Officer and a member of our Board of Directors, entered into a pre-arranged trading plan that is intended to satisfy the affirmative defense of Rule 10b5-1(c) of the Securities Exchange Act of 1934, as amended. This plan provides for the sale of up to 24,000 shares of our common stock in the aggregate, and terminates on the earlier of the close of business on August 15, 2024 or the date all shares are sold thereunder.

Item 6. Exhibits



Exhibit Number						Description
3.1						Composite Restated Certificate of Incorporation of Fair Isaac Corporation. (Incorporated by reference to Exhibit 3.2 to the Company’s Form 10-Q for the quarter ended December 31, 2009).

3.2						By-laws of Fair Isaac Corporation. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended December 31, 2009).

10.1						Letter Agreement, dated November 2, 2023, between Stephanie Covert and the Company. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November 8, 2023).

31.1 *						Rule 13a-14(a)/15d-14(a) Certifications of CEO.

31.2 *						Rule 13a-14(a)/15d-14(a) Certifications of CFO.

32.1 *						Section 1350 Certification of CEO.

32.2 *						Section 1350 Certification of CFO.

101.INS *						Inline XBRL Instance Document.

101.SCH *						Inline XBRL Taxonomy Extension Schema Document.

101.CAL *						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF *						Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB *						Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE *						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104 *						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).


*			Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		FAIR ISAAC CORPORATION

DATE:	January 25, 2024

		By	/s/ STEVEN P. WEBER
			Steven P. Weber
			Executive Vice President and Chief Financial Officer
			(for Registrant as duly authorized officer and
			as Principal Financial Officer)

DATE:	January 25, 2024

		By	/s/ MICHAEL S. LEONARD
			Michael S. Leonard
			Vice President and Chief Accounting Officer (Principal Accounting Officer)