e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period
from to
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Commission File Number 1-11689
Fair Isaac
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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94-1499887
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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901 Marquette Avenue, Suite 3200
Minneapolis, Minnesota
(Address of principal
executive offices)
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55402-3232
(Zip
Code)
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Registrants telephone number, including area code:
612-758-5200
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Class)
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(Name of Each Exchange on Which Registered)
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Common Stock, $0.01 par value per share
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New York Stock Exchange, Inc.
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Preferred Stock Purchase Rights
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New York Stock Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. þ Yes o No
Indicate by check mark if the registrant is not required to file
report pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated
Filer þ
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Smaller Reporting
Company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes þ No
As of March 31, 2009, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $465,131,153 based on the last transaction price
as reported on the New York Stock Exchange on such date. This
calculation does not reflect a determination that certain
persons are affiliates of the registrant for any other purposes.
The number of shares of common stock outstanding on
October 31, 2009 was 48,180,993 (excluding
40,675,790 shares held by the Company as treasury stock).
Items 10, 11, 12, 13 and 14 of Part III incorporate
information by reference from the definitive proxy statement for
the Annual Meeting of Stockholders to be held on
February 2, 2010.
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 Act). 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
Act. Examples of forward-looking statements include, but are not
limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of
dividends, 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;
(iii) statements of assumptions underlying such statements;
(iv) statements regarding business relationships with
vendors, customers or collaborators; and (v) statements
regarding products, their characteristics, performance, sales
potential or effect in the hands of customers. Words such as
believes, anticipates,
expects, intends, targeted,
should, potential, goals,
strategy, 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 Item 1A of Part I, Risk Factors,
below. 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 reports on
Forms 10-Q
and 8-K to
be filed by the Company in fiscal 2010.
1
PART I
GENERAL
Fair Isaac Corporation (NYSE: FICO) (together with its
consolidated subsidiaries, the Company, which may
also be referred to in this report as we,
us, our, and FICO) provides
products and services that enable businesses to automate,
improve and connect decisions to enhance business performance.
Our predictive analytics, which includes the industry-standard
FICO®
score, and our Decision Management (DM) systems
power hundreds of billions of customer decisions each year.
We were founded in 1956 on the premise that data, used
intelligently, can improve business decisions. Today, we help
thousands of companies in 80 countries use our Decision
Management technology to target and acquire customers more
efficiently, increase customer value, reduce fraud and credit
losses, lower operating expenses, and enter new markets more
profitably. Most leading banks and credit card issuers rely on
our solutions, as do insurers, retailers and healthcare
organizations. We also serve consumers through online services
that enable people to purchase and understand their
FICO®
scores, the standard measure in the United States of credit
risk, empowering them to manage their financial health.
More information about us can be found on our principal website,
www.fico.com. We make our Annual Report on
Form 10-K,
our Quarterly Reports on
Form 10-Q
and our Current Reports on
Form 8-K,
as well as amendments to those reports, available free of charge
through our website as soon as reasonably practicable after we
electronically file them with the SEC. Information on our
website is not part of this report.
PRODUCTS
AND SERVICES
We help businesses automate, improve and connect decisions
across the enterprise, an approach we commonly refer to as
Decision Management. Most of our solutions address customer
decisions, including customer targeting and acquisition, account
origination, customer management, fraud management, collections
and recovery. We also help businesses improve noncustomer
decisions such as transaction and claims processing, and network
integrity review. Our solutions enable users to make decisions
that are more precise, consistent and agile, and that
systematically advance business goals. This helps our clients to
reduce the cost of doing business, increase revenues and
profitability, reduce losses from risks and fraud, and increase
customer loyalty.
Our
Segments
We deliver Decision Management through products and services
that we categorize into the following four operating segments:
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Strategy
Machine®
Solutions. These are preconfigured Decision
Management applications designed for a specific type of business
problem or process, such as marketing, account origination,
customer management, fraud and insurance claims management. This
segment also includes our
myFICO®
solutions for consumers.
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Scoring Solutions. Our scoring solutions give
our clients access to analytics that can be easily integrated
into their transaction streams and decision-making processes.
Our scoring solutions are distributed through major credit
reporting agencies, and we also offer services that provide our
scores to clients directly.
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Professional Services. Through our
professional services, we tailor our Decision Management
products to our clients environments, and we design more
effective decisioning environments for our clients. This segment
includes revenues from custom engagements, business solution and
technical consulting services, systems integration services, and
data management services.
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Analytic Software Tools. This segment is
composed of software tools that clients can use to create their
own custom Decision Management applications.
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Comparative segment revenues, operating income and related
financial information for fiscal 2009, 2008 and 2007 are set
forth in Note 20 to the accompanying consolidated financial
statements.
Key
Products and Services by Operating Segment
In fiscal 2009, we officially adopted the brand FICO as our new
corporate identity. As a result, we have changed the names of
many of our products, reflected in the table below, and the
discussion that follows.
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Operating Segment
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Key Products and Services
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Strategy Machine Solutions
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Marketing
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FICO®
Precision Marketing Manager
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Originations
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FICO®
LiquidCredit®
service
FICO®
Capstone®
Decision Manager
FICO®
Capstone®
Decision Accelerator
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Customer Management
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FICO®
TRIAD®
Customer Manager
FICO®
Transaction Scores
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Fraud
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FICOtm
Falcon®
Fraud Manager
FICOtm
Fraud Predictor with Merchant Profiles
FICOtm
Falcon®
ID solution
FICOtm
Card Alert Service
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Collections & Recovery
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FICO®
Debt
Managertm
solution
FICOtm
Recovery Management
Systemtm
solution
(RMStm)
FICO®
Network
FICOtm
PlacementsPlus®
service
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Insurance and Healthcare
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FICOtm
Insurance Fraud Manager
FICOtm
MIRAtm
Claims Advisor for Reserving
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Analytics
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Predictive Analytics
FICOtm
Custom Decision Optimization
Portfolio Analytics
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Consumer
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myFICO®
service
Score
Watch®
subscription
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Scoring Solutions
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FICO®
Scores
FICO®
Expansion®
Scores
FICO®
Revenue Scores
FICO®
Bankruptcy Scores
FICO®
Insurance Scores
Property
PredictRtm,
a
FICO®
Insurance Score
FICO®
PreScore®
Service
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Professional Services
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Business and solution consulting
Marketing services
Analytic services
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Analytic Software Tools
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FICOtm
Blaze
Advisor®
business rules management system
FICOtm
Model Builder
FICOtm
Decision Optimizer
FICOtm
Xpress Optimization Suite
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Our
Solutions
Our solutions involve three fundamental disciplines:
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Analytics to identify the risks and opportunities associated
with individual clients, prospects and transactions, in order to
detect patterns such as fraud, and to improve the design of
decision logic or strategies;
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Data management, profiling and text recognition that bring
extensive customer information to every decision; and
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Software such as rules management systems that implement
business rules, models and decision strategies, often in a
real-time environment.
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All of our solutions are designed to help businesses make
decisions that are faster, more precise, more consistent and
more agile, while reducing costs and risks incurred in making
decisions.
Strategy
Machine Solutions
We develop industry-tailored Decision Management applications,
categorized as Strategy Machine Solutions, which apply
analytics, data management and Decision Management software to
specific business challenges and processes. These include credit
offer prescreening, insurance claims management and others. Our
Strategy Machine Solutions primarily serve clients in the
banking, insurance, healthcare, and retail sectors. Within our
Strategy Machine Solutions segment our customer management
solutions accounted for 10%, 9% and 8% of total revenues in
fiscal 2009, 2008 and 2007, respectively, and our fraud
solutions accounted for 17%, 15% and 15% of total revenues in
each of these periods, respectively.
Marketing
Strategy Machine Solutions
The chief Strategy Machine offering for marketing is our
FICO®
Precision Marketing Manager. The Precision Marketing Manager
solution is a suite of products, capabilities and services
designed to integrate all of the technology and analytic
services needed to perform context-sensitive customer
acquisition, cross-selling and retention programs. The Precision
Marketing Manager solution enables companies that offer multiple
products and use multiple channels (companies such as large
financial institutions, consumer branded goods companies,
pharmaceutical companies, retail merchants and hospitality
companies) to execute more efficient and profitable customer
interactions. Services offered under the Precision Marketing
Manager brand name include customer data integration services;
services that enable real-time marketing through direct consumer
interaction channels; campaign management and optimization
services; interactive tools that automate the design, execution
and collection of customer response data across multiple
channels; and customer data collection, management and profiling
services.
A number of our marketing products and services are designed for
specific industries, such as retail. For example, a product for
retailers is our
FICO®
Retail Action Manager, which determines the optimal products to
recommend to consumers based on purchase propensity.
Originations
Strategy Machine Solutions
We provide solutions that enable banks, credit unions, finance
companies, installment lenders and other companies to automate
and improve the processing of requests for credit or service.
These solutions increase the speed and efficiency with which
requests are handled, reduce losses and increase approval rates
through analytics that assess applicant risk, and reduce the
need for manual review by loan officers.
Our solutions include the web-based
FICO®
LiquidCredit®
service, which is primarily focused on credit decisions and is
offered largely to mid-tier banking institutions. In addition,
we offer
FICO®
Capstone®
Decision Manager, an end-user software solution for application
decisioning and processing and
FICO®
Capstone®
Decision Accelerator, a rules-based application based on our
FICOtm
Blaze
Advisor®
business rules management system. We also offer custom and
consortium-based credit risk and application fraud models.
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Customer
Management Strategy Machine Solutions
Our customer management products and services enable businesses
to automate and improve decisions on their existing customers.
These solutions help businesses decide which customers to
cross-sell, what additional products and services to offer,
whether customer risk levels have increased or decreased, when
and how much to change a customers credit line, what
pricing adjustments to make in response to account performance
or promotional goals, and how to treat delinquent and high-risk
accounts.
We provide customer management solutions for:
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Banking. In banking, our leading account and
customer management product is the
FICO®
TRIAD®
Customer Manager. The solution is an adaptive control system, so
named because it enables businesses to rapidly adapt to changing
business and internal conditions by designing and testing new
strategies in a champion/challenger environment. The
TRIAD system is the worlds leading credit account
management system. Our latest version of the TRIAD system
enables users to manage risk and communications at both the
account and customer level from a single platform. We also offer
transaction-based neural network models (the term neural network
is defined under Technology later in this section)
called
FICO®
Transaction Scores, which help card issuers identify high-risk
behavior more quickly and thus manage their credit card accounts
more profitably. We market and sell TRIAD end-user software
licenses, maintenance, consulting services, and strategy design
and evaluation. Additionally, we provide TRIAD services and
similar credit account management services through third-party
credit card processors worldwide, including the two largest
processors in the U.S., First Data Resources, Inc. and Total
System Services, Inc.
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Insurance. We provide property and casualty
insurers with Decision Management solutions that enable them to
create, test and implement decision strategies for areas such as
cross-selling, pricing, claims handling, retention, prospecting
and underwriting.
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Fraud
Strategy Machine Solutions
Our fraud management products improve our clients
profitability by predicting the likelihood that a given
transaction or customer account is experiencing fraud. Our fraud
products analyze customer transactions in real time and generate
recommendations for immediate action, which is critical to
stopping third-party fraud, as well as first-party fraud and
deliberate misuse of account privileges. These applications can
also detect some organized fraud schemes, such as skimming or
organized bust-out fraud, that are too complex and well-hidden
to be identified by other methods.
Our solutions are designed to detect and prevent a wide variety
of fraud and risk types across multiple industries, including
credit and debit payment card fraud; deposit account fraud;
identity fraud; technical fraud and bad debt; healthcare fraud;
Medicaid and Medicare fraud; and property and casualty insurance
fraud, including workers compensation fraud. FICO fraud
solutions protect merchants, financial institutions, insurance
companies, government agencies and employers from losses and
damaged customer relationships caused by fraud and related
criminal behavior.
Our leading fraud detection solution is
FICOtm
Falcon®
Fraud Manager, recognized as the leader in global payment card
fraud detection. Falcon Fraud Managers neural network
predictive models and patented profiling technology, both
further described below in the Technology section,
examine transaction, cardholder and merchant data to detect a
wide range of credit and debit card fraud quickly and
accurately. Falcon Fraud Manager analyzes card transactions in
real time, assesses the risk of fraud, and takes the
user-defined steps to prevent fraud while expediting legitimate
transactions.
FICOtm
Fraud Predictor with Merchant Profiles is used in conjunction
with Falcon Fraud Manager to improve fraud detection rates by
analyzing merchant profile data. The merchant profiles include
characteristics that reveal, for example, merchants that have a
history of higher fraud volumes, and which purchase types and
ticket sizes have most often been fraudulent at a particular
merchant.
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FICOtm
Falcon®
ID solution enables lenders to control identity fraud across the
customer lifecycle. Falcon ID solution relies on multiple
sources of data and complex statistical modeling techniques to
identify activity that is at high risk of stemming from identity
theft. It also provides business rules management that companies
can use to identify and resolve cases that appear to involve
identity theft.
In addition to the Falcon products, we offer
FICOtm
Card Alert Service. Card Alert Service is a solution for
fighting debit and ATM fraud in the U.S. The Card Alert
Service identifies and reports counterfeit payment cards to
issuers before the majority of them incur fraud losses. The
service analyzes daily transactions across multiple financial
institutions, and uses this data to pinpoint multi-card fraud
and identify common points of compromise.
Collections &
Recovery Strategy Machine Solutions
Our leading solutions in this area are the
FICO®
Debt
Managertm
solution and the
FICOtm
Recovery Management
Systemtm
(RMS) solution. The Debt Manager solution automates
the full cycle of collections and recovery, including early
collections, late collections, asset disposal, agency placement,
recovery, litigation, bankruptcy, asset management and residual
balance recovery. The RMS solution is focused on the later
phases of distressed debt management, including bankruptcy and
agency management. Companies using the Debt Manager solution and
the RMS solution in the U.S. can access partner services
such as collection agencies and attorneys via the
FICO®
Network, which provides web-based access to and from thousands
of third-party collections and recovery service providers, as
well as access to multiple data sources and FICO solutions
hosted in ASP mode. We also provide the
FICOtm
PlacementsPlus®
service, an account placement optimization and management system.
Insurance
and Healthcare Strategy Machine Solutions
We provide fraud and claims management solutions for different
segments of the healthcare market. Our principal solutions in
this area are:
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FICOtm
Insurance Fraud Manager, which uses predictive modeling to
detect claims fraud, abuse and errors before payment, and
identify suspicious providers as soon as aberrant behavior
patterns emerge. FICO offers versions tailored to Healthcare and
Workers Compensation.
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FICOtm
MIRAtm
Claims Advisor for Reserving, which uses predictive models to
forecast appropriate claims reserves based on individual claim
data.
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Analytic
Strategy Machine Solutions.
We perform custom predictive, descriptive and decision modeling
and related analytic projects for clients in multiple
industries. This work leverages our analytic methodologies and
expertise to solve risk management and marketing challenges for
a single business, using that businesss data and industry
best practices to develop a highly customized solution. Most of
this work falls under predictive analytics, decision analysis
and optimization, which provide greater insight into customer
preferences and future customer behavior. Within decision
analysis and optimization, we apply data and proprietary
algorithms to the design of customer treatment strategies.
Consumer
Strategy Machine Solutions
Through our
myFICO®
service, we provide solutions based on our analytics to
consumers, sold directly by us or through distribution partners.
Consumers can use the myfico.com website to purchase their
FICO®
scores, the credit reports underlying the scores, explanations
of the factors affecting their scores, and customized advice on
how to manage their scores. Customers can use the
myFICO®
service to simulate how taking specific actions would affect
their
FICO®
score. Consumers can also purchase Equifaxs Score
Watch®
subscriptions, which deliver alerts via email and SMS or text
messages when the users scores or balances change. The
myFICO products and subscription offerings are available online
at www.myfico.com in partnership with two major
U.S. credit reporting agencies: Equifax Inc.
(Equifax) and TransUnion
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Corporation (TransUnion). The myFICO products and
subscription offerings are also available to consumers through
lenders, financial portals and numerous other partners.
Scoring
Solutions
We develop the worlds leading credit scores based on
third-party data. Our
FICO®
scores are used in most U.S. credit decisions, by most of
the major financial service and credit card organizations as
well as by mortgage and auto loan originators. These scores
provide a consistent and objective measure of an
individuals credit risk. Credit grantors use the
FICO®
scores to prescreen solicitation candidates, to evaluate
applicants for new credit and to review existing accounts. The
FICO®
scores are calculated based on proprietary scoring models. The
scores produced by these models are available through each of
the three major credit reporting agencies in the United States:
TransUnion, Experian and Equifax. Users generally pay the credit
reporting agencies scoring fees based on usage, and the credit
reporting agencies share these fees with us.
In fiscal 2009, a substantially upgraded version of the
FICO®
score for U.S. lenders, the
FICO®
8 score (formerly referred to as the
FICO®
08 score), became available at the three major credit reporting
agencies. This release includes enhancements that increase its
predictive power, as well as enhancements that consider
authorized user accounts (accounts where another consumer is
added as a user of the primary cardholders account) while
limiting the possibility that such accounts are used to
artificially inflate scores.
Our scoring portfolio also includes the
FICO®
Expansion®
score, which provides scores on U.S. consumers who do not
have traditional
FICO®
scores, generally because they have too few credit accounts
being reported to the credit reporting agencies. The score
analyzes multiple sources of non-traditional credit data such as
subscription memberships, deposit account activity and utility
payment histories. The resulting scores have the same
300
850®
score range as the traditional
FICO®
score.
In fiscal 2009, the
FICO®
Credit Capacity
Indextm,
which forecasts the ability of a consumer to handle additional
credit, became available at Equifax.
In fiscal 2009, the
FICO®
Score Trend Service was released to market. This comprehensive
reporting package allows lenders to drill down into industry
FICO®
score trends, indexed by a range of criteria such as industry,
geography and time period, in order to regularly analyze their
own portfolios, and improve their risk management and
forecasting.
Outside of North America, we offer the
FICO®
score through credit reporting agencies in 11 markets worldwide,
and have installed client-specific versions of the
FICO®
score in a further 10 countries. Like
FICO®
scores in North America, these scores help lenders in
multiple countries leverage the
FICO®
scores predictive analysis to assess the risk of
prospects, applicants and borrowers.
FICO®
scores are in use or being implemented in 21 different
countries across five continents.
In addition to the scoring noted above, we also offer marketing
and bankruptcy scores known as
FICO®
Revenue Scores and
FICO®
Bankruptcy Scores through the U.S. credit reporting
agencies; an application fraud, revenue and bankruptcy score
available in Canada; and commercial credit scores delivered by
both U.S. and U.K. credit reporting agencies, and soon to
be released in Singapore.
We have also developed scoring systems for insurance
underwriters and marketers. Such systems use the same underlying
statistical technology as our FICO risk scores, but are designed
to predict applicant or policyholder insurance loss risk for
automobile or homeowners coverage. Our insurance scores
are available in the U.S. from TransUnion, Experian,
Equifax and ChoicePoint, Inc., and in Canada from Equifax. We
also offer an insurance score called the Property
PredictRtm
score, which analyzes property inspection database data from an
insurance services provider, Millennium Information Services,
Inc., to calculate the loss risk of a property.
We provide credit bureau scoring services and related consulting
directly to users in banking through the
FICO®
PreScore®
service for prescreening solicitation candidates.
7
Professional
Services
We provide a variety of custom offerings, business solution and
technology consulting services, and data management services to
clients worldwide. The focus is on leveraging our industry
experience and technical expertise, typically on a custom basis,
to help clients address unique business challenges, to support
the usage of our Strategy Machine solutions and our analytic
software tools, and to create new sales opportunities for our
other offerings. This group also performs consultative selling,
developing customized solution sets combining various products
and capabilities to meet unique client or industry
opportunities. These services are generally offered on an hourly
or fixed fee basis.
Our services include:
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Business and solution consulting. We help
clients implement and use our solutions and technologies. These
projects draw on our product knowledge, industry expertise and
technical skills. Services that fall into this category include
consulting to improve the effectiveness of our clients
collections and recovery operations, fraud operations and use of
business rules management.
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Marketing services. We help clients gain
insight into their customers by enabling the access, analysis
and application of corporate data and information. This work
involves implementing enterprise-level data and Decision
Management systems, including data warehouses and marts,
campaign management tools, database marketing engines,
rules-based decision engines and analytical applications.
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Analytic services. We help clients implement,
deploy and use custom analytics, with engagements ranging from
model development to full analytic partnerships. Our analytic
services also include delivery, proof of concept and other
engagements for clients in multiple industries.
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Analytic
Software Tools
We provide end-user software products that businesses use to
build their own tailored Decision Management applications. In
contrast to our packaged Strategy Machine solutions developed
for specific industry applications, our analytic software tools
support the addition of Decision Management capabilities to
virtually any application or operational system. These tools are
sold as licensed software, and can be used by themselves or
together to advance a clients Decision Management
initiatives. We use these tools as common software components
for our own Decision Management applications, described above in
the Strategy Machine Solutions section. They are also key
components of our Decision Management architecture, described in
the Technology section. We also partner with third-party
providers within given industry markets and with major software
companies to embed our tools within existing applications.
The principal products offered are software tools for:
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Rules Management. The
FICOtm
Blaze
Advisor®
business rules management system is used to design, develop,
execute and maintain rules-based business applications. The
Blaze Advisor system enables businesses to more quickly develop
complex decision-making applications, respond to changing
customer needs, implement regulatory compliance and reduce the
total cost of day-to-day operations. The Blaze Advisor system is
sold as an end-user tool and is also the rules engine within
several of our Decision Management applications. The Blaze
Advisor system, available in six languages, is a multi-platform
solution that supports Web Services and service-oriented
architectures (SOA), Java 2 Enterprise Edition (J2EE) platforms,
Microsoft .NET and COBOL for z/OS mainframes, and is the first
rules engine to support Java, .NET and COBOL deployment of the
same rules. It also incorporates the exclusive Rete III
rules execution technology, which improves the efficiency and
speed with which the Blaze Advisor system is able to process and
execute complex, high-volume business rules.
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Model
Development. FICOtm
Model Builder enables the user to develop and deploy
sophisticated predictive models for use in automated decisions.
This software is based on the methodology and tools FICO uses to
build both client-level and industry-level predictive models,
which we have evolved over nearly 40 years. The predictive
models produced can be embedded in custom production
applications or
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one of our Decision Management applications and can also be
executed in the
FICOtm
Blaze
Advisor®
system.
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Optimization. FICOtm
Xpress Optimization Suite includes Xpress-Mosel, a powerful
compiled modeling and programming language specifically designed
for the rapid modeling and deployment of optimization problems;
Xpress-Optimizer, sophisticated, robust optimization algorithms
for solving large optimization problems; and Xpress-IVE, a
complete visual development environment for Xpress-Mosel under
Windows, incorporating a Mosel program editor, compiler and
execution environment. The Xpress tools are licensed to end
users, consultants and independent software vendors in several
industries, and Xpress-Optimizer is embedded in
FICOtm
Decision Optimizer software. Decision Optimizer is a software
tool that enables complex, large-scale optimizations involving
dozens of networked action-effect models, and enables
exploration and simulation of many optimized scenarios along an
efficient frontier of options. The data-driven
strategies produced by these tools can be executed by the
FICOtm
Blaze
Advisor®
system or one of our Decision Management applications.
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Effective October 1, 2009, we implemented an organizational
restructuring that consolidated our current operating segment
structure from four segments to three. The new segments are as
follows:
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Scores. This segment will include our
business-to-business Scoring Solutions, our
myFICO®
solutions for consumers and associated professional services.
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Applications. This segment will include the
current Strategy Machine Solutions, excluding our
myFICO®
solutions for consumers and associated professional services.
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Tools. This segment will include our Analytic
Software Tools and associated professional services.
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The Professional Services segment, which represents delivery and
integration services, will be combined with the applicable
segment to which the services relate.
COMPETITION
The market for our advanced solutions is intensely competitive
and is constantly changing. Our competitors vary in size and in
the scope of the products and services they offer. We encounter
competition from a number of sources, including:
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in-house analytic and systems developers;
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scoring model builders;
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enterprise resource planning (ERP) and customer
relationship management (CRM) packaged solutions
providers;
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business intelligence solutions providers;
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business process management and business rules management
providers;
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providers of credit reports and credit scores;
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providers of automated application processing services;
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data vendors;
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neural network developers and artificial intelligence system
builders;
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third-party professional services and consulting organizations;
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providers of account/workflow management software;
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software companies supplying modeling, rules, or analytic
development tools.
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We believe that none of our competitors offers the same mix of
products as we do, has the same expertise in predictive
analytics and their integration with Decision Management
software, and can offer the enhanced
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lifecycle management capabilities we offer in areas like
banking. However, certain competitors may have larger shares of
particular geographic or product markets.
Strategy
Machine Solutions
The competition for our Strategy Machine Solutions varies by
both application and industry.
In the marketing services market, we compete with Acxiom,
Epsilon, Equifax, Experian,
Harte-Hanks,
InfoUSA, KnowledgeBase, Merkle and TargetBase, among others. We
also compete with traditional advertising agencies and
companies own internal information technology and
analytics departments.
In the origination market, we compete with Experian, Equifax,
and CGI, among others.
In the customer management market, we compete with Experian,
among others.
In the fraud solutions market, we mainly compete with NICE
Systems, ID Analytics, Experian, SAS, Retail Decisions plc,
Norkom and ACI Worldwide, a division of Transaction Systems
Architects, in the banking market; IBM and ViPS in the
healthcare segment; and SAS, Infoglide Software Corporation,
NetMap Analytics and Magnify in the property and casualty and
workers compensation insurance market.
In the collections and recovery solutions market, we mainly
compete with CGI, Experian, and various boutique firms for
software and ASP servicing and in-house scoring and computer
science departments, along with the three major U.S. credit
reporting agencies and Experian-Scorex for scoring and
optimization projects.
In the insurance and healthcare solutions market, we mainly
compete with Emdeon, Ingenix, ViPS, MedStat, Detica, SAS, Verisk
Analytics and IBM.
For our direct-to-consumer services that deliver credit scores,
credit reports and consumer credit education services, we
compete with our credit reporting agency partners and their
affiliated companies, as well as with Trilegiant, InterSections
and others.
Scoring
Solutions
In this segment, we compete with both outside suppliers and
in-house analytics and computer systems departments for scoring
business. Major competitors among outside suppliers of scoring
models include the three major credit reporting agencies in the
U.S. and Canada, which are also our partners in offering
our scoring solutions; Experian and Experian-Scorex
(U.S. partner), TransUnion and TransUnion International,
Equifax, VantageScore (a joint venture entity established by the
major U.S. credit reporting agencies), CRIF and other
credit reporting agencies outside the United States; and other
data providers like LexisNexis and ChoicePoint, some of which
also represent FICO partners.
Professional
Services
We compete with a variety of organizations that offer consulting
services, primarily specialty technology and consulting firms.
In addition, a client may use its own resources rather than
engage an outside firm for these services. Our competitors
include information technology product and services vendors,
management and strategy consulting firms, smaller specialized
information technology consulting firms and analytical services
firms.
Analytic
Software Tools
Our primary competitors in this segment include IBM, SAS, SPSS
(being acquired by IBM), Angoss, Computer Associates
International and Pegasystems.
Competitive
Factors
We believe the principal competitive factors affecting our
markets include: technical performance; access to unique
proprietary databases; availability in ASP format; product
attributes like adaptability, scalability, interoperability,
functionality and ease-of-use; product price; customer service
and support; the effectiveness of
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sales and marketing efforts; existing market penetration; and
our reputation. Although we believe our products and services
compete favorably with respect to these factors, we may not be
able to maintain our competitive position against current and
future competitors.
MARKETS
AND CUSTOMERS
Our products and services serve clients in multiple industries,
including primarily banking, insurance, retail and healthcare,.
End users of our products include 91 of the 100 largest
financial institutions in the United States, and more than half
of the largest 100 banks in the world. Our clients also include
more than 400 insurers, including the top ten U.S. property
and casualty insurers; more than 200 retailers and general
merchandisers, including about one-third of the top 100
U.S. retailers; more than 100 government or public
agencies; and more than 150 healthcare and pharmaceuticals
companies, including eight of the worlds top ten
pharmaceuticals companies. Nine of the top ten companies on the
2009 Fortune 500 list use FICOs solutions.
In addition, our consumer services are marketed to an estimated
200 million U.S. consumers whose credit relationships
are reported to the three major credit reporting agencies.
In the United States, we market our products and services
primarily through our own direct sales organization that is
organized around vertical markets. Sales groups are based in our
headquarters and in field offices strategically located both in
and outside the United States. We also market our products
through indirect channels, including alliance partners and other
resellers.
During fiscal 2009, 2008 and 2007, revenues generated from our
agreements with Equifax, TransUnion and Experian collectively
accounted for 19%, 19%, and 20% of our total revenues,
respectively.
Outside the United States, we market our products and services
primarily through our subsidiary sales organizations. Our
subsidiaries license and support our products in their local
countries as well as within other foreign countries where we do
not operate through a direct sales subsidiary. We also market
our products through resellers and independent distributors in
international territories not covered by our subsidiaries
direct sales organizations.
Our largest market segments outside the United States are the
United Kingdom and Canada. In addition, we have delivered
products to users in over 80 countries.
Revenues from international customers, including end users and
resellers, amounted to 32%, 33%, and 31% of our total revenues
in fiscal 2009, 2008 and 2007, respectively. See Note 20 to
the accompanying consolidated financial statements for a summary
of our operating segments and geographic information.
TECHNOLOGY
We specialize in analytics, software and data management
technologies that analyze data and drive business processes and
decision strategies. We maintain active research in a number of
fields for the purposes of deriving greater insight and
predictive value from data, making various forms of data more
usable and valuable to the model-building process, and
automating and applying analytics to the various processes
involved in making high-volume decisions in real time.
Because of our pioneering work in credit scoring and fraud
detection, we are widely recognized as the leader in predictive
analytics. In addition, our Blaze Advisor software is
consistently ranked as a leader in rules management systems. In
all our work, we believe that our tools and processes are among
the very best commercially available, and that we are uniquely
able to integrate advanced analytic, software and data
technologies into mission-critical business solutions that offer
superior returns on investment.
In 2009, we introduced our first product releases that support
our integrated technical architecture for Decision Management,
which will ensure interoperability across FICO systems. Our
intention is to bring greater flexibility, higher analytic
performance and better decisions across the lifecycle. Building
on FICOs broad and deep experience in developing Decision
Management applications, the architecture is service-oriented,
designed for easy standards-based integration with our
clients core systems and will support and
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deliver ever more powerful analytics that operate both within
specific stages of the customer lifecycle and across them. This
Decision Management architecture will contain capabilities from
existing FICO products, from new and existing components and
from third-party providers. We have developed the
architectures components and are migrating our software
products onto the architecture. This migration will take the
form of successive product releases that also provide immediate
client value through added functionality.
The technologies listed below are all supported by the Decision
Management architecture, which will create tighter integration
between our Decision Management applications, as well as our
Analytic Software Tools.
Principal
Areas of Expertise
Predictive Modeling. Predictive modeling
identifies and mathematically represents underlying
relationships in historical data in order to explain the data
and make predictions or classifications about future events. Our
models summarize large quantities of data to amplify its value.
Predictive models typically analyze current and historical data
on individuals to produce easily understood metrics such as
scores. These scores rank-order individuals by likely future
performance, e.g., their likelihood of making credit payments on
time, or of responding to a particular offer for services. We
also include in this category models that detect the likelihood
of a transaction being fraudulent. Our predictive models are
frequently operationalized in mission-critical transactional
systems and drive decisions and actions in near real time. A
number of analytic methodologies underlie our products in this
area. These include proprietary applications of both linear and
nonlinear mathematical programming algorithms, in which one
objective is optimized within a set of constraints, and advanced
neural systems, which learn complex patterns from
large data sets to predict the probability that a new individual
will exhibit certain behaviors of business interest. We also
apply various related statistical techniques for analysis and
pattern detection within large datasets.
Decision Analysis and Optimization. Decision
analysis refers to the broad quantitative field that deals with
modeling, analyzing and optimizing decisions made by
individuals, groups and organizations. Whereas predictive models
analyze multiple aspects of individual behavior to forecast
future behavior, decision analysis analyzes multiple aspects of
a given decision to identify the most effective action to take
to reach a desired result. We have developed an integrated
approach to decision analysis that incorporates the development
of a decision model that mathematically maps the entire decision
structure; proprietary optimization technology that identifies
the most effective strategies, given both the performance
objective and constraints; the development of designed testing
required for active, continuous learning; and the robust
extrapolation of an optimized strategy to a wider set of
scenarios than historically encountered. Our optimization
capabilities also include a proprietary mathematical modeling
and programming language, an easy-to-use development
environment, and a state-of-the-art set of optimization
algorithms. These capabilities allow us to solve a large variety
of optimization problems across all industries.
Transaction Profiling. Transaction profiling
is a patent-protected technique used to extract meaningful
information and reduce the complexity of transaction data used
in modeling. Many of our products operate using transactional
data, such as credit card purchase transactions, or other types
of data that change over time. In its raw form, this data is
very difficult to use in predictive models for several reasons.
First, an isolated transaction contains very little information
about the behavior of the individual who generated the
transaction. In addition, transaction patterns change rapidly
over time. Finally, this type of data can often be highly
complex. To overcome these issues, we have developed a set of
proprietary techniques that transform raw transactional data
into a mathematical representation that reveals latent
information, and which make the data more usable by predictive
models. This profiling technology accumulates data across
multiple transactions of many types to create and update
profiles of transaction patterns. These profiles enable our
neural network models to efficiently and effectively make
accurate assessments of, for example, fraud risk and credit risk
within real-time transaction streams.
Customer Data Integration. Decisions made on
customers or prospects can benefit from data stored in multiple
sources, both inside and outside the enterprise. We have focused
on developing data integration
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processes that are able to assemble and integrate those
disparate data sources into a unified view of the customer or
household, through the application of persistent keying
technology.
Decision Management Software. In order to make
a decision strategy operational, the various steps and rules
need to be programmed or exported into the business
software infrastructure, where it can communicate with
front-end, customer-facing systems and back-end systems such as
billing systems. We have developed software systems, sometimes
known as decision engines and business rules management systems,
which perform the necessary functions to execute a decision
strategy. Our software includes very efficient programs for
these functions, facilitating, for example, business user
definition of extremely complex decision strategies using
graphic user interfaces; simultaneous testing of hundreds of
decision strategies in champion/challenger
(test/control) mode; high-volume processing and analysis of
transactions in real time; integration of multiple data sources;
and execution of predictive models for improved behavior
forecasts and finer segmentation. Decision Management software
is an integral part of our Decision Management applications,
described earlier.
Research
and Development Activities
Our research and development expenses were $73.6 million,
$77.8 million, and $69.3 million in fiscal 2009, 2008
and 2007, respectively. We believe that our future success
depends on our ability to continually maintain and improve our
core technologies, enhance our existing products, and develop
new products and technologies that meet an expanding range of
markets and customer requirements. In the development of new
products and enhancements to existing products, we use our own
development tools extensively.
We have traditionally relied primarily on the internal
development of our products. Based on timing and cost
considerations; however, we have acquired, and in the future may
consider acquiring, technology or products from third parties.
PRODUCT
PROTECTION AND TRADEMARKS
We rely on a combination of patent, copyright, trademark and
trade secret laws and confidentiality agreements and procedures
to protect our proprietary rights.
We retain the title to and protect the suite of models and
software used to develop scoring models as a trade secret. We
also restrict access to our source code and limit access to and
distribution of our software, documentation and other
proprietary information. We have generally relied upon the laws
protecting trade secrets and upon contractual nondisclosure
safeguards and restrictions on transferability to protect our
software and proprietary interests in our product and service
methodology and know-how. Our confidentiality procedures include
invention assignment and proprietary information agreements with
our employees and independent contractors, and nondisclosure
agreements with our distributors, strategic partners and
customers. We also claim copyright protection for certain
proprietary software and documentation.
We have patents on many of our technologies and have patent
applications pending on other technologies. The patents we hold
may not be upheld as valid and may not prevent the development
of competitive products. In addition, patents may never be
issued on our pending patent applications or on any future
applications that we may submit. We currently hold 72
U.S. and 14 foreign patents with 146 applications pending.
Despite our precautions, it may be possible for competitors or
users to copy or reproduce aspects of our software or to obtain
information that we regard as trade secrets. In addition, the
laws of some foreign countries do not protect proprietary rights
to the same extent as do the laws of the United States. Patents
and other protections for our intellectual property are
important, but we believe our success and growth will depend
principally on such factors as the knowledge, ability,
experience and creative skills of our personnel, new products,
frequent product enhancements and name recognition.
We have developed technologies for research projects conducted
under agreements with various United States government agencies
or their subcontractors. Although we have acquired commercial
rights to these technologies, the United States government
typically retains ownership of intellectual property rights and
licenses in the technologies that we develop under these
contracts. In some cases, the United States
13
government can terminate our rights to these technologies if we
fail to commercialize them on a timely basis. In addition, under
United States government contracts, the government may make the
results of our research public, which could limit our
competitive advantage with respect to future products based on
funded research.
We have used, registered
and/or
applied to register certain trademarks and service marks for our
technologies, products and services. We currently have 46
trademarks registered in the U.S. and select foreign
countries.
PERSONNEL
As of September 30, 2009, we employed 2,086 persons
worldwide. Of these, 322 full-time employees were located
in our Minneapolis and Arden Hills, Minnesota offices,
289 full-time employees were located in our
San Rafael, California office, 305 full-time employees
were located in our San Diego, California office,
315 full-time employees were located in our India-based
office and 208 full-time employees were located in our
United Kingdom-based offices. None of our employees is covered
by a collective bargaining agreement, and no work stoppages have
been experienced.
Information regarding our officers is included in
Executive Officers of the Registrant at the end of
Part I of this report.
Risks
Related to Our Business
We
have expanded the pursuit of our Decision Management strategy,
and we may not be successful, which could cause our growth
prospects and results of operations to suffer.
We have expanded the pursuit of our business objective to become
a leader in helping businesses automate and improve decisions
across their enterprises, an approach that we commonly refer to
as Decision Management, or DM. Our DM strategy is
designed to enable us to increase our business by selling
multiple products to clients, as well as to enable the
development of custom client solutions that may lead to
opportunities to develop new proprietary scores or other new
proprietary products. The market may be unreceptive to this
general DM business approach, including being unreceptive to
purchasing multiple products from us or unreceptive to our
customized solutions. If our DM strategy is not successful, we
may not be able to grow our business, growth may occur more
slowly than we anticipate or our revenues and profits may
decline.
We
derive a substantial portion of our revenues from a small number
of products and services, and if the market does not continue to
accept these products and services, our revenues will
decline.
As we implement our DM strategy, we expect that revenues derived
from our scoring solutions, account management solutions, fraud
solutions, and originations, collections and recovery solutions
will continue to account for a substantial portion of our total
revenues for the foreseeable future. Our revenues will decline
if the market does not continue to accept these products and
services. Factors that might affect the market acceptance of
these products and services include the following:
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changes in the business analytics industry;
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changes in technology;
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our inability to obtain or use key data for our products;
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saturation or contraction of market demand;
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loss of key customers;
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industry consolidation;
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failure to execute our selling approach; and
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inability to successfully sell our products in new vertical
markets.
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If we
are unable to access new markets or develop new distribution
channels, our business and growth prospects could
suffer.
We expect that part of the growth that we seek to achieve
through our DM strategy will be derived from the sale of DM
products and service solutions in industries and markets we do
not currently serve. We also expect to grow our business by
delivering our DM solutions through additional distribution
channels. If we fail to penetrate these industries and markets
to the degree we anticipate utilizing our DM strategy, or if we
fail to develop additional distribution channels, we may not be
able to grow our business, growth may occur more slowly than we
anticipate or our revenues and profits may decline.
If we
are unable to develop successful new products or if we
experience defects, failures and delays associated with the
introduction of new products, our business could suffer serious
harm.
Our growth and the success of our DM strategy depend upon our
ability to develop and sell new products or suites of products.
If we are unable to develop new products, or if we are not
successful in introducing new products, we may not be able to
grow our business, or growth may occur more slowly than we
anticipate. In addition, significant undetected errors or delays
in new products or new versions of products may affect market
acceptance of our products and could harm our business,
financial condition or results of operations. In the past, we
have experienced delays while developing and introducing new
products and product enhancements, primarily due to difficulties
developing models, acquiring data and adapting to particular
operating environments. We have also experienced errors or
bugs in our software products, despite testing prior
to release of the products. Software errors in our products
could affect the ability of our products to work with other
hardware or software products, could delay the development or
release of new products or new versions of products and could
adversely affect market acceptance of our products. Errors or
defects in our products that are significant, or are perceived
to be significant, could result in rejection of our products,
damage to our reputation, loss of revenues, diversion of
development resources, an increase in product liability claims,
and increases in service and support costs and warranty claims.
We
rely on relatively few customers, as well as our contracts with
the three major credit reporting agencies, for a significant
portion of our revenues and profits. Certain of our large
customers have been negatively impacted by the current financial
crisis. If these customers continue to be negatively impacted,
or if the terms of these relationships otherwise change, our
revenues and operating results could decline.
Most of our customers are relatively large enterprises, such as
banks, credit card processors, insurance companies, healthcare
firms and retailers. As a result, many of our customers and
potential customers are significantly larger than we are and may
have sufficient bargaining power to demand reduced prices and
favorable nonstandard terms.
In addition, since mid-2007, global financial markets have
suffered substantial stress, volatility, illiquidity and
disruption. These forces reached unprecedented levels in the
fall of 2008, resulting in the bankruptcy or acquisition of, or
government assistance to, several major domestic and
international financial institutions which are customers of our
company. The potential for increased and continuing economic
disruption presents considerable risks to our business,
including potential bankruptcies or credit deterioration of
financial institutions with which we have substantial
relationships. Further deterioration or a continuation of the
market conditions experienced since the fall of 2008 is likely
to lead to a continued decline in the volume of transactions
that we execute for our customers.
We also derive a substantial portion of our revenues and
operating income from our contracts with the three major credit
reporting agencies, TransUnion, Equifax and Experian, and other
parties that distribute our products to certain markets. We are
also currently involved in litigation with TransUnion and
Experian arising from their development and marketing of credit
scoring products competitive with our products. We have asserted
various claims, including unfair competition, antitrust, and
breach of contract against these credit
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reporting agencies and their collective joint venture entity,
VantageScore, LLC. This litigation could have a material adverse
effect on our relationship with one or more of the major credit
reporting agencies, or with major customers.
The loss of or a significant change in a relationship with a
major customer, the loss of or a significant change in a
relationship with one of the major credit reporting agencies
with respect to their distribution of our products or with
respect to our
myFICO®
offerings, the loss of or a significant change in a relationship
with a significant third-party distributor or the delay of
significant revenues from these sources, could have a material
adverse effect on our revenues and results of operations.
We
rely on relationships with third parties for marketing,
distribution and certain services. If we experience difficulties
in these relationships, our future revenues may be adversely
affected.
Most of our products rely on distributors, and we intend to
continue to market and distribute our products through existing
and future distributor relationships. Our Scoring Solutions
segment relies on, among others, TransUnion, Equifax and
Experian. Failure of our existing and future distributors to
generate significant revenues, demands by such distributors to
change the terms on which they offer our products or our failure
to establish additional distribution or sales and marketing
alliances could have a material adverse effect on our business,
operating results and financial condition. In addition, certain
of our distributors presently compete with us and may compete
with us in the future either by developing competitive products
themselves or by distributing competitive offerings. For
example, TransUnion, Equifax and Experian have developed a
credit scoring product to compete directly with our products and
are collectively attempting to sell the product. Competition
from distributors or other sales and marketing partners could
significantly harm sales of our products and services.
If we
do not engage in acquisition activity to the extent we have in
the past, we may be unable to increase our revenues at
historical growth rates.
Our historical revenue growth has been augmented by numerous
acquisitions, and we anticipate that acquisitions may continue
to be an important part of our revenue growth. Our future
revenue growth rate may decline if we do not make acquisitions
of similar size and at a comparable rate as in the past.
If we
engage in acquisitions, significant investments in new
businesses, or divestitures of existing businesses, we will
incur a variety of risks, any of which may adversely affect our
business.
We have made in the past, and may make in the future,
acquisitions of, or significant investments in, businesses that
offer complementary products, services and technologies. Any
acquisitions or investments will be accompanied by the risks
commonly encountered in acquisitions of businesses, which may
include:
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failure to achieve the financial and strategic goals for the
acquired and combined business;
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overpayment for the acquired companies or assets;
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difficulty assimilating the operations and personnel of the
acquired businesses;
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product liability and other exposure associated with acquired
businesses or the sale of their products;
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disruption of our ongoing business;
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dilution of our existing stockholders and earnings per share;
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unanticipated liabilities, legal risks and costs;
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retention of key personnel;
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distraction of management from our ongoing business; and
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impairment of relationships with employees and customers as a
result of integration of new management personnel.
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We have also divested ourselves of businesses in the past and
may do so again in the future. Any divestitures will be
accompanied by the risks commonly encountered in the sale of
businesses, which may include:
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disruption of our ongoing business;
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reductions of our revenues or earnings per share;
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unanticipated liabilities, legal risks and costs;
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the potential loss of key personnel;
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distraction of management from our ongoing business; and
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impairment of relationships with employees and customers as a
result of migrating a business to new owners.
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These risks could harm our business, financial condition or
results of operations, particularly if they occur in the context
of a significant acquisition. Acquisitions of businesses having
a significant presence outside the U.S. will increase our
exposure to the risks of conducting operations in international
markets.
Our
reengineering initiative may not be successful which could cause
our growth prospects and profitability to suffer.
As part of our management approach, we implement reengineering
initiatives designed to grow revenues through strategic resource
allocation and improve profitability through cost reductions.
Periodically, implementation of our reengineering initiative may
reduce our revenues as a result of our exit from non-strategic
product lines. Our reengineering initiative may not be
successful as a result of our failure to reduce expenses at the
anticipated level, our inability to exit all non-strategic
product lines included in the initiative, or a lower, or no,
positive impact on revenues from strategic resource allocation.
If our reengineering initiative is not successful, our revenues,
results of operations and business may suffer.
The
occurrence of certain negative events may cause fluctuations in
our stock price.
The market price of our common stock may be volatile and could
be subject to wide fluctuations due to a number of factors,
including variations in our revenues and operating results. We
believe that you should not rely on period-to-period comparisons
of financial results as an indication of future performance.
Because many of our operating expenses are fixed and will not be
affected by short-term fluctuations in revenues, short-term
fluctuations in revenues may significantly impact operating
results. Additional factors that may cause our stock price to
fluctuate include the following:
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variability in demand from our existing customers;
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failure to meet the expectations of market analysts;
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changes in recommendations by market analysts;
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the lengthy and variable sales cycle of many products, combined
with the relatively large size of orders for our products,
increases the likelihood of short-term fluctuation in revenues;
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consumer dissatisfaction with, or problems caused by, the
performance of our products;
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the timing of new product announcements and introductions in
comparison with our competitors;
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the level of our operating expenses;
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changes in competitive and other conditions in the consumer
credit, banking and insurance industries;
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fluctuations in domestic and international economic conditions,
including a continuation of the substantial disruption currently
being experienced by the global financial markets;
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our ability to complete large installations on schedule and
within budget;
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acquisition-related expenses and charges; and
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timing of orders for and deliveries of software systems.
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In addition, the financial markets have experienced significant
price and volume fluctuations that have particularly affected
the stock prices of many technology companies and financial
services companies, and these fluctuations sometimes have been
unrelated to the operating performance of these companies. Broad
market fluctuations, as well as industry-specific and general
economic conditions may adversely affect the market price of our
common stock.
Due to ongoing uncertainty in economic conditions and weakness
in financial credit markets, the fair value of our businesses
has declined. If difficult market and economic conditions
continue over a sustained period, we may experience a further
decline in the fair value of one or more of our businesses from
fiscal 2009 year-end levels. Such further declines in fair
value may require us to record an impairment charge related to
goodwill, which could adversely affect our results of
operations, stock price and business.
Our
products have long and variable sales cycles. If we do not
accurately predict these cycles, we may not forecast our
financial results accurately, and our stock price could be
adversely affected.
We experience difficulty in forecasting our revenues accurately
because the length of our sales cycles makes it difficult for us
to predict the quarter in which sales will occur. In addition,
our selling approach is complex because it emphasizes the sale
of complete DM solutions involving multiple products or services
across our customers organizations. This makes forecasting
of revenues in any given period more difficult. As a result of
our sales approach and lengthening sales cycles, revenues and
operating results may vary significantly from period to period.
For example, the sales cycle for licensing our products
typically ranges from 60 days to 18 months. Customers
are often cautious in making decisions to acquire our products,
because purchasing our products typically involves a significant
commitment of capital, and may involve shifts by the customer to
a new software
and/or
hardware platform or changes in the customers operational
procedures. Since our DM strategy contemplates the sale of
multiple decision solutions to a customer, expenditures by any
given customer are expected to be larger than with our prior
sales approach. This may cause customers, particularly those
experiencing financial stress, to make purchasing decisions more
cautiously. Delays in completing sales can arise while customers
complete their internal procedures to approve large capital
expenditures and test and accept our applications. Consequently,
we face difficulty predicting the quarter in which sales to
expected customers will occur and experience fluctuations in our
revenues and operating results. If we are unable to accurately
forecast our revenues, our stock price could be adversely
affected.
We
typically have revenue-generating transactions concentrated in
the final weeks of a quarter, which may prevent accurate
forecasting of our financial results and cause our stock price
to decline.
Large portions of our software license agreements are
consummated in the weeks immediately preceding quarter end.
Before these agreements are consummated, we create and rely on
forecasted revenues for planning, modeling and earnings
guidance. Forecasts, however, are only estimates and actual
results may vary for a particular quarter or longer periods of
time. Consequently, significant discrepancies between actual and
forecasted results could limit our ability to plan, budget or
provide accurate guidance, which could adversely affect our
stock price. Any publicly-stated revenue or earnings projections
are subject to this risk.
The
failure to recruit and retain additional qualified personnel
could hinder our ability to successfully manage our
business.
Our DM strategy and our future success will depend in large part
on our ability to attract and retain experienced sales,
consulting, research and development, marketing, technical
support and management personnel. The complexity of our products
requires highly trained customer service and technical support
personnel to assist customers with product installation and
deployment. The labor market for these individuals is very
competitive due to the limited number of people available with
the necessary technical skills and understanding and may become
more competitive with general market and economic improvement.
We cannot be certain that our compensation strategies will be
perceived as competitive by current or prospective
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employees. This could impair our ability to recruit and retain
personnel. We have experienced difficulty in recruiting
qualified personnel, especially technical, sales and consulting
personnel, and we may need additional staff to support new
customers
and/or
increased customer needs. We may also recruit skilled technical
professionals from other countries to work in the United States.
Limitations imposed by immigration laws in the United States and
abroad and the availability of visas in the countries where we
do business could hinder our ability to attract necessary
qualified personnel and harm our business and future operating
results. There is a risk that even if we invest significant
resources in attempting to attract, train and retain qualified
personnel, we will not succeed in our efforts, and our business
could be harmed. The failure of the value of our stock to
appreciate may adversely affect our ability to use equity and
equity based incentive plans to attract and retain personnel,
and may require us to use alternative and more expensive forms
of compensation for this purpose.
The
failure to obtain certain forms of model construction data from
our customers or others could harm our business.
We must develop or obtain a reliable source of sufficient
amounts of current and statistically relevant data to analyze
transactions and update our products. In most cases, these data
must be periodically updated and refreshed to enable our
products to continue to work effectively in a changing
environment. We do not own or control much of the data that we
require, most of which is collected privately and maintained in
proprietary databases. Customers and key business alliances
provide us with the data we require to analyze transactions,
report results and build new models. Our DM strategy depends in
part upon our ability to access new forms of data to develop
custom and proprietary analytic tools. If we fail to maintain
sufficient data sourcing relationships with our customers and
business alliances, or if they decline to provide such data due
to legal privacy concerns, competition concerns, prohibitions or
a lack of permission from their customers, we could lose access
to required data and our products, and the development of new
products might become less effective. Third parties have
asserted copyright interests in these data, and these
assertions, if successful, could prevent us from using these
data. Any interruption of our supply of data could seriously
harm our business, financial condition or results of operations.
We
will continue to rely upon proprietary technology rights, and if
we are unable to protect them, our business could be
harmed.
Our success depends, in part, upon our proprietary technology
and other intellectual property rights. To date, we have relied
primarily on a combination of copyright, patent, trade secret,
and trademark laws, and nondisclosure and other contractual
restrictions on copying and distribution to protect our
proprietary technology. This protection of our proprietary
technology is limited, and our proprietary technology could be
used by others without our consent. In addition, patents may not
be issued with respect to our pending or future patent
applications, and our patents may not be upheld as valid or may
not prevent the development of competitive products. Any
disclosure, loss, invalidity of, or failure to protect our
intellectual property could negatively impact our competitive
position, and ultimately, our business. There can be no
assurance that our protection of our intellectual property
rights in the United States or abroad will be adequate or that
others, including our competitors, will not use our proprietary
technology without our consent. Furthermore, litigation may be
necessary to enforce our intellectual property rights, to
protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could
harm our business, financial condition or results of operations.
Some of our technologies were developed under research projects
conducted under agreements with various U.S. government
agencies or subcontractors. Although we have commercial rights
to these technologies, the U.S. government typically
retains ownership of intellectual property rights and licenses
in the technologies developed by us under these contracts, and
in some cases can terminate our rights in these technologies if
we fail to commercialize them on a timely basis. Under these
contracts with the U.S. government, the results of research
may be made public by the government, limiting our competitive
advantage with respect to future products based on our research.
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If we
are subject to infringement claims, it could harm our
business.
We expect that products in the industry segments in which we
compete, including software products, will increasingly be
subject to claims of patent and other intellectual property
infringement as the number of products and competitors in our
industry segments grow. We may need to defend claims that our
products infringe intellectual property rights, and as a result
we may:
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incur significant defense costs or substantial damages;
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be required to cease the use or sale of infringing products;
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expend significant resources to develop or license a substitute
non-infringing technology;
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discontinue the use of some technology; or
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be required to obtain a license under the intellectual property
rights of the third party claiming infringement, which license
may not be available or might require substantial royalties or
license fees that would reduce our margins.
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Breaches
of security, or the perception that
e-commerce
is not secure, could harm our business.
Our business requires the appropriate and secure utilization of
consumer and other sensitive information. Internet-based
electronic commerce requires the secure transmission of
confidential information over public networks, and several of
our products are accessed through the Internet, including our
consumer services accessible through the www.myfico.com website.
Security breaches in connection with the delivery of our
products and services, including products and services utilizing
the Internet, or well-publicized security breaches, and the
trend toward broad consumer and general public notification of
such incidents, could significantly harm our business, financial
condition or results of operations. We cannot be certain that
advances in criminal capabilities, discovery of new
vulnerabilities, attempts to exploit vulnerabilities in our
systems, data thefts, physical system or network break-ins or
inappropriate access, or other developments will not compromise
or breach the technology protecting the networks that access our
net-sourced products, consumer services and proprietary database
information.
Protection
from system interruptions is important to our business. If we
experience a sustained interruption of our telecommunication
systems, it could harm our business.
Systems or network interruptions could delay and disrupt our
ability to develop, deliver or maintain our products and
services, causing harm to our business and reputation and
resulting in loss of customers or revenue. These interruptions
can include fires, floods, earthquakes, power losses, equipment
failures and other events beyond our control.
Risks
Related to Our Industry
Our
ability to increase our revenues will depend to some extent upon
introducing new products and services. If the marketplace does
not accept these new products and services, our revenues may
decline.
We have a significant share of the available market in portions
of our Scoring Solutions segment and for certain services in our
Strategy Machine Solutions segment, specifically, the markets
for account management services at credit card processors and
credit card fraud detection software. To increase our revenues,
we must enhance and improve existing products and continue to
introduce new products and new versions of existing products
that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve
market acceptance. We believe much of the future growth of our
business and the success of our DM strategy will rest on our
ability to continue to expand into newer markets for our
products and services. Such areas are relatively new to our
product development and sales and marketing personnel. Products
that we plan to market in the future are in various stages of
development. We cannot assure you that the marketplace will
accept these products. If our current or potential customers are
not willing to switch to or adopt our new products and services,
either as a result of the quality of these products and services
or due to other factors, such as economic conditions, our
revenues will decrease.
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If we
fail to keep up with rapidly changing technologies, our products
could become less competitive or obsolete.
In our markets, technology changes rapidly, and there are
continuous improvements in computer hardware, network operating
systems, programming tools, programming languages, operating
systems, database technology and the use of the Internet. If we
fail to enhance our current products and develop new products in
response to changes in technology or industry standards, or if
we fail to bring product enhancements or new product
developments to market quickly enough, our products could
rapidly become less competitive or obsolete. For example, the
rapid growth of the Internet environment creates new
opportunities, risks and uncertainties for businesses, such as
ours, which develop software that must also be designed to
operate in Internet, intranet and other online environments. Our
future success will depend, in part, upon our ability to:
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innovate by internally developing new and competitive
technologies;
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use leading third-party technologies effectively;
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continue to develop our technical expertise;
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anticipate and effectively respond to changing customer needs;
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initiate new product introductions in a way that minimizes the
impact of customers delaying purchases of existing products in
anticipation of new product releases; and
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influence and respond to emerging industry standards and other
technological changes.
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If our
competitors introduce new products and pricing strategies, it
could decrease our product sales and market share, or could
pressure us to reduce our product prices in a manner that
reduces our margins.
We may not be able to compete successfully against our
competitors, and this inability could impair our capacity to
sell our products. The market for business analytics is new,
rapidly evolving and highly competitive, and we expect
competition in this market to persist and intensify. Our
regional and global competitors vary in size and in the scope of
the products and services they offer, and include:
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in-house analytic and systems developers;
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scoring model builders;
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enterprise resource planning (ERP) and customer relationship
management (CRM) packaged solutions providers;
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business intelligence solutions providers;
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credit report and credit score providers;
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business process management solution providers;
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process modeling tools providers;
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automated application processing services providers;
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data vendors;
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neural network developers and artificial intelligence system
builders;
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third-party professional services and consulting organizations;
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account/workflow management software providers; and
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software tools companies supplying modeling, rules, or analytic
development tools.
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We expect to experience additional competition from other
established and emerging companies, as well as from other
technologies. For example, certain of our fraud solutions
products compete against other methods of preventing credit card
fraud, such as credit cards that contain the cardholders
photograph, smart
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cards, cardholder verification and authentication solutions and
other card authorization techniques. Many of our anticipated
competitors have greater financial, technical, marketing,
professional services and other resources than we do, and
industry consolidation is creating even larger competitors in
many of our markets. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes
in customer requirements. They may also be able to devote
greater resources than we can to develop, promote and sell their
products. Many of these companies have extensive customer
relationships, including relationships with many of our current
and potential customers. Furthermore, new competitors or
alliances among competitors may emerge and rapidly gain
significant market share. For example, TransUnion, Equifax and
Experian have formed an alliance that has developed a credit
scoring product competitive with our products. If we are unable
to respond as quickly or effectively to changes in customer
requirements as our competition, our ability to expand our
business and sell our products will be negatively affected.
Our competitors may be able to sell products competitive to ours
at lower prices individually or as part of integrated suites of
several related products. This ability may cause our customers
to purchase products that directly compete with our products
from our competitors. Price reductions by our competitors could
negatively impact our margins, and could also harm our ability
to obtain new long-term contracts and renewals of existing
long-term contracts on favorable terms.
Legislation
that is enacted by the U.S. Congress, the states, Canadian
provinces, and other countries, and government regulations that
apply to us or to our customers may expose us to liability,
affect our ability to compete in certain markets, limit the
profitability of or demand for our products, or render our
products obsolete. If these laws and regulations require us to
change our current products and services, it could adversely
affect our business and results of operations.
Legislation and governmental regulation affect how our business
is conducted and, in some cases, subject us to the possibility
of future lawsuits arising from our products and services.
Globally, legislation and governmental regulation also influence
our current and prospective customers activities, as well
as their expectations and needs in relation to our products and
services. Both our core businesses and our newer initiatives are
affected globally by federal, regional, provincial, state and
other jurisdictional regulations, including those in the
following significant regulatory areas:
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Use of data by creditors and consumer reporting agencies.
Examples in the U.S. include the Fair Credit Reporting Act
(FCRA), the Fair and Accurate Credit Transactions
Act (FACTA), which amends FCRA, and certain proposed
regulations and studies mandated by FACTA, under consideration;
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Laws and regulations that limit the use of credit scoring models
such as state mortgage trigger laws, state
inquiries laws, state insurance restrictions on the
use of credit based insurance scores, and the Consumer Credit
Directive in the European Union.
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Fair lending laws, such as the Truth In Lending Act
(TILA) and Regulation Z, and the Equal Credit
Opportunity Act (ECOA) and Regulation B.
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Privacy and security laws and regulations that limit the use and
disclosure of personally identifiable information or require
security procedures, including but not limited to the provisions
of the Financial Services Modernization Act of 1999, also known
as the Gramm Leach Bliley Act (GLBA); FACTA; the
Health Insurance Portability and Accountability Act of 1996
(HIPAA); the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (USA Patriot Act); identity
theft, file freezing, security breach notification and similar
state privacy laws;
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Extension of credit to consumers through the Electronic Fund
Transfers Act, as well as nongovernmental VISA and MasterCard
electronic payment standards;
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Regulations applicable to secondary market participants such as
Fannie Mae and Freddie Mac that could have an impact on our
products;
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Insurance laws and regulations applicable to our insurance
clients and their use of our insurance products and services;
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The application or extension of consumer protection laws,
including, laws governing the use of the Internet and
telemarketing, advertising, endorsements and testimonials and
credit repair;
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Laws and regulations applicable to operations in other
countries, for example, the European Unions Privacy
Directive and the Foreign Corrupt Practices Act; and
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Sarbanes-Oxley Act (SOX) requirements to maintain
and verify internal process controls, including controls for
material event awareness and notification.
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The implementation of the Emergency Economic Stabilization Act
of 2008 by federal regulators to manage the financial crisis in
the United States;
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Laws and regulations regarding export controls as they apply to
FICO products delivered in non-US countries.
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In making credit evaluations of consumers, or in performing
fraud screening or user authentication, our customers are
subject to requirements of multiple jurisdictions, which may
impose onerous and contradictory requirements. Privacy
legislation such as GLBA or the European Unions Privacy
Directive may also affect the nature and extent of the products
or services that we can provide to customers, as well as our
ability to collect, monitor and disseminate information subject
to privacy protection. In addition to existing regulation,
changes in legislative, judicial, regulatory or consumer
environments could harm our business, financial condition or
results of operations. These regulations and amendments to them
could affect the demand for or profitability of some of our
products, including scoring and consumer products. New
regulations pertaining to financial institutions could cause
them to pursue new strategies, reducing the demand for our
products.
In response to recent market disruptions, legislators and
financial regulators implemented a number of mechanisms designed
to add stability to the financial markets, including the
provision of direct and indirect assistance to distressed
financial institutions, assistance by the banking authorities in
arranging acquisitions of weakened banks and broker-dealers, and
implementation of programs by the Federal Reserve to provide
liquidity to the commercial paper markets. The overall effects
of these and other legislative and regulatory efforts on the
financial markets are uncertain, and they may not have the
intended stabilization effects. Should these or other
legislative or regulatory initiatives fail to stabilize and add
liquidity to the financial markets, our business, financial
condition, results of operations and prospects could be
materially and adversely affected. Whether or not legislative or
regulatory initiatives or other efforts designed to address
recent economic conditions successfully stabilize and add
liquidity to the financial markets, we may need to modify our
strategies, businesses or operations, and we may incur
additional costs in order to compete in a changed business
environment.
Our
revenues depend, to a great extent, upon conditions in the
consumer credit, banking and insurance industries. If our
clients industries continue to experience a downturn, it
will likely harm our business, financial condition or results of
operations.
During fiscal 2009, 76% of our revenues were derived from sales
of products and services to the consumer credit, banking and
insurance industries. Since mid-2007, global credit and other
financial markets have suffered substantial stress, volatility,
illiquidity and disruption. These forces reached unprecedented
levels in the fall of 2008, resulting in the bankruptcy or
acquisition of, or government assistance to, several major
domestic and international financial institutions. The recent
market developments and the potential for increased and
continuing disruptions present considerable risks to our
businesses and operations. These risks include potential
bankruptcies or credit deterioration of financial institutions,
many of which are our customers. Further deterioration or a
continuation of recent market conditions is likely to lead to a
continued decline in the revenue we receive from financial and
other institutions.
While the rate of account growth in the U.S. bankcard
industry has been slowing and many of our large institutional
customers have consolidated in recent years, we have generated
most of our revenue growth from
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our bankcard-related scoring and account management businesses
by selling and cross-selling our products and services to large
banks and other credit issuers. As the banking industry
continues to experience contraction in the number of
participating institutions, we may have fewer opportunities for
revenue growth due to reduced or changing demand for our
products and services that support customer acquisition programs
of our customers. In addition, industry contraction could affect
the base of recurring revenues derived from contracts in which
we are paid on a per-transaction basis as formerly separate
customers combine their operations under one contract. There can
be no assurance that we will be able to prevent future revenue
contraction or effectively promote future revenue growth in our
businesses.
While we are attempting to expand our sales of consumer credit,
banking and insurance products and services into international
markets, the risks are greater as these markets are also
experiencing substantial disruption and we are less well-known
in them.
Risk
Related to External Conditions
Continuing
material adverse developments in global economic conditions, or
the occurrence of certain other world events, could affect
demand for our products and services and harm our
business.
Purchases of technology products and services and decisioning
solutions are subject to adverse economic conditions. When an
economy is struggling, companies in many industries delay or
reduce technology purchases, and we experience softened demand
for our decisioning solutions and other products and services.
Since mid-2007, global credit and other financial markets have
suffered substantial stress, volatility, illiquidity and
disruption. These forces reached unprecedented levels in the
fall of 2008, resulting in the bankruptcy or acquisition of, or
government assistance to, several major domestic and
international financial institutions. The widespread economic
downturn has also negatively affected the businesses and
purchasing decisions of companies in the other industries we
serve. These recent market developments and the potential for
increased and continuing disruptions present considerable risks
to our businesses and operations. If global economic conditions
continue to experience stress and negative volatility, or if
there is an escalation in regional or global conflicts or
terrorism, we will likely experience reductions in the number of
available customers and in capital expenditures by our remaining
customers, longer sales cycles, deferral or delay of purchase
commitments for our products and increased price competition,
which may adversely affect our business, results of operations
and liquidity.
Whether or not legislative or regulatory initiatives or other
efforts successfully stabilize and add liquidity to the
financial markets, we may need to modify our strategies,
businesses or operations, and we may incur additional costs in
order to compete in a changed business environment. Given the
volatile nature of the current economic downturn and the
uncertainties underlying efforts to mitigate or reverse the
downturn, we may not timely anticipate or manage existing, new
or additional risks, as well as contingencies or developments,
which may include regulatory developments and trends in new
products and services. Our failure to do so could materially and
adversely affect our business, financial condition, results of
operations and prospects.
In
operations outside the United States, we are subject to unique
risks that may harm our business, financial condition or results
of operations.
A growing portion of our revenues is derived from international
sales. During fiscal 2009, 32% of our revenues were derived from
business outside the United States. As part of our growth
strategy, we plan to continue to pursue opportunities outside
the United States, including opportunities in countries with
economic systems that are in early stages of development and
that may not mature sufficiently to result in growth for our
business. Accordingly, our future operating results could be
negatively affected by a variety of factors arising out of
international commerce, some of which are beyond our control.
These factors include:
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general economic and political conditions in countries where we
sell our products and services;
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difficulty in staffing and efficiently managing our operations
in multiple geographic locations and in various countries;
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effects of a variety of foreign laws and regulations, including
restrictions on access to personal information;
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import and export licensing requirements;
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longer payment cycles;
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reduced protection for intellectual property rights;
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currency fluctuations;
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changes in tariffs and other trade barriers; and
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difficulties and delays in translating products and related
documentation into foreign languages.
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There can be no assurance that we will be able to successfully
address each of these challenges in the near term. Additionally,
some of our business will be conducted in currencies other than
the U.S. dollar. Foreign currency transaction gains and
losses are not currently material to our cash flows, financial
position or results of operations. However, an increase in our
foreign revenues could subject us to increased foreign currency
transaction risks in the future.
In addition to the risk of depending on international sales, we
have risks incurred in having research and development personnel
located in various international locations. We currently have a
substantial portion of our product development staff in
international locations, some of which have political and
developmental risks. If such risks materialize, our business
could be damaged.
Our
anti-takeover defenses could make it difficult for another
company to acquire control of FICO, thereby limiting the demand
for our securities by certain types of purchasers or the price
investors are willing to pay for our stock.
Certain provisions of our Restated Certificate of Incorporation,
as amended, could make a merger, tender offer or proxy contest
involving us difficult, even if such events would be beneficial
to the interests of our stockholders. These provisions include
adopting a Shareholder Rights Agreement, commonly known as a
poison pill, and giving our board the ability to
issue preferred stock and determine the rights and designations
of the preferred stock at any time without stockholder approval.
The rights of the holders of our common stock will be subject
to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for
a third party to acquire, or discouraging a third party from
acquiring, a majority of our outstanding voting stock. These
factors and certain provisions of the Delaware General
Corporation Law may have the effect of deterring hostile
takeovers or otherwise delaying or preventing changes in control
or changes in our management, including transactions in which
our stockholders might otherwise receive a premium over the fair
market value of our common stock.
If we
experience changes in tax laws or adverse outcomes resulting
from examination of our income tax returns, it could adversely
affect our results of operations.
We are subject to federal and state income taxes in the United
States and in certain foreign jurisdictions. Significant
judgment is required in determining our worldwide provision for
income taxes. Our future effective tax rates could be adversely
affected by changes in tax laws, by our ability to generate
taxable income in foreign jurisdictions in order to utilize
foreign tax losses, and by the valuation of our deferred tax
assets. In addition, we are subject to the examination of our
income tax returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse
outcomes resulting from such examinations to determine the
adequacy of our provision for income taxes. There can be no
assurance that the outcomes from such examinations will not have
an adverse effect on our operating results and financial
condition.
25
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our properties consist primarily of leased office facilities for
sales, data processing, research and development, consulting and
administrative personnel. Our principal office is located in
Minneapolis, Minnesota.
Our leased properties include:
|
|
|
|
|
approximately 243,000 square feet of office, data center,
and data processing space in Arden Hills and Minneapolis,
Minnesota, in six buildings under leases expiring in 2011 or
later; 33,000 square feet of this space is subleased to a
third party;
|
|
|
|
approximately 124,000 square feet of office space in
San Rafael, California in one building under a lease
expiring 2020;
|
|
|
|
approximately 130,000 square feet of office space in
San Diego, California in one building under a lease
expiring in 2010; 26,000 square feet of this space is
subleased to two third parties; and
|
|
|
|
an aggregate of approximately 340,000 square feet of office
and data center space in; Annandale, VA; Bangalore, India;
Beijing, China; Birmingham, United Kingdom; Boston, MA; Chicago,
IL; Englewood Cliffs, NJ; Hong Kong, China; Gauteng, Malaysia;
Irvine, CA; Leamington Spa, United Kingdom; London, United
Kingdom; Madrid, Spain; Melbourne, Australia; New Castle, DE;
New York, NY; Norcross, GA; San Jose, CA; Sao Paulo,
Brazil; Seoul, Korea; Shanghai, China; Singapore, Singapore;
Sydney, Australia; Tokyo, Japan; Toronto, Canada; Westminster,
CO; and White Marsh, MD; 64,000 square feet of this space
is subleased to third parties.
|
See Note 21 to the accompanying consolidated financial
statements for information regarding our obligations under
leases. We believe that suitable additional space will be
available to accommodate future needs.
|
|
Item 3.
|
Legal
Proceedings
|
On October 11, 2006, we filed a lawsuit in the
U.S. District Court for the District of Minnesota captioned
Fair Isaac Corporation and myFICO Consumer Services Inc. v.
Equifax Inc., Equifax Information Services LLC, Experian
Information Solutions, Inc., TransUnion LLC, VantageScore
Solutions LLC, and Does I through X. The lawsuit related in part
to the development, marketing, and distribution of VantageScore,
a credit score product developed by VantageScore Solutions LLC,
which is jointly owned by the three national credit reporting
companies. We alleged in the lawsuit violations of antitrust
laws, unfair competitive practices and false advertising,
trademark infringement, and breach of contract. We have been
seeking injunctive relief, and compensatory and punitive
damages. On June 6, 2008, we entered into a settlement
agreement with Equifax Inc. and Equifax Information Services
LLC, and on June 13, 2008, Equifax Inc. and Equifax
Information Services LLC were formally dismissed from this
lawsuit. On February 9, 2009, the Court granted our motion
to strike counterclaims the remaining defendants had attempted
to bring against us in the case, allowing them to assert only a
counterclaim for trademark cancellation. On July 24, 2009,
the Court issued a summary judgment order, which limited the
claims that will proceed to trial. The Court dismissed our
antitrust claims, contract, and certain false advertising
claims. The Court allowed our trademark infringement, unfair
competition, and passing off claims to proceed to trial. After a
three-week trial on these claims, the jury ruled in the
defendants favor on November 20, 2009. We will file
post-trial motions to address certain issues in the trial, and
should the jury verdict stand, we plan to appeal. We also expect
to appeal the dismissal of our antitrust, contract, and false
advertising claims.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Not applicable.
26
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our current executive officers are as follows:
|
|
|
|
|
|
|
Name
|
|
Positions Held
|
|
Age
|
|
Mark N. Greene
|
|
February 2007-present, Chief Executive Officer and member of the
Board of Directors of the Company. 1995-2007, various leadership
positions at IBM Corporation including Vice President, Financial
Services-Sales and Distribution, General Manager, Global Banking
Industry-Sales and Distribution, Vice President, Financial
Services Strategy and Solutions-Sales and Distribution, Vice
President, SecureWay-Software Group, and Vice President,
Electronic Commerce-Software Group. 1989-1994 -Various
leadership positions at Technology Solutions Company, Berkeley
Investment Technologies and Citicorp. 1982-1988, various
positions at the Federal Reserve Board.
|
|
|
55
|
|
|
|
|
|
|
|
|
Thomas A. Bradley
|
|
April 2009-present, Executive Vice Present and Chief Financial
Officer of the Company. 2004-2009, various leadership positions
including Head of North American Operations for Zurich Financial
Services (USA) and President and Chief Executive Officer, Zurich
Direct Underwriters. 1998-2004, various leadership positions at
St. Paul Companies, Inc. including Executive Vice President and
Chief Financial Officer. 1984-1993, various leadership positions
at Maryland Casualty Company/Zurich RE including Vice President
and Chief Financial Officer, Commercial Division. 1980-1984,
various positions at Ernst & Young, LLP.
|
|
|
52
|
|
|
|
|
|
|
|
|
Deborah Kerr
|
|
February 2009-present, Executive Vice Present, Chief Product and
Technology Officer of the Company. 2005-2009, various leadership
positions at Hewlett Packard Company including Chief Technology
Officer EDS and Vice President, BTO Products. 1998-2005,
various positions at Peregrine Systems, Inc. including Senior
Vice President, Product Delivery. 1988-1998, various leadership
positions at NASA including Mission Operations Manager at
NASA/Jet Propulsion Laboratory.
|
|
|
37
|
|
|
|
|
|
|
|
|
Mark R. Scadina
|
|
February 2009-present, Executive Vice President and General
Counsel and Corporate Secretary of the Company. June
2007-February 2009, Senior Vice President and General Counsel
and Corporate Secretary of the Company. 2003-2007, various
senior positions including Executive Vice President, General
Counsel and Corporate Secretary, Liberate Technologies, Inc.
1999-2003,
various leadership positions including Vice President and
General Counsel, Intertrust Technologies Corporation. 1994-1999,
Associate, Pennie and Edmonds LLP.
|
|
|
40
|
|
|
|
|
|
|
|
|
Richard S. Deal
|
|
August 2007-present, Senior Vice President, Chief Human
Resources Officer of the Company. January 2001-July 2007, Vice
President, Human Resources of the Company. 1998-2001, Vice
President, Human Resources, Arcadia Financial, Ltd. 1993-1998,
managed broad range of human resources corporate and line
consulting functions with U.S. Bancorp.
|
|
|
42
|
|
|
|
|
|
|
|
|
Andrew N. Jennings
|
|
October 2007-present, Senior Vice President, Chief Research
Officer of the Company. May 2007-September 2007, Vice President,
Analytic Research and Development of the Company. May 2006-May
2007, Vice President, EDM Applications of the Company. October
1994-May 2006, various senior management positions of the
Company including Vice President of International Operations,
Vice President European Operations, Vice President Analytic,
Customer Management and Collections Business units. 1991-1994,
Head of Credit Risk Management, Abbey National plc. 1987-1991,
Head of Credit Risk, Barclaycard, Barclays Bank plc. 1980-1987,
Lecturer Economic and Econometrics University of Nottingham.
|
|
|
54
|
|
|
|
|
|
|
|
|
Michael J. Pung
|
|
August 2004-present, Vice President, Finance of the Company.
2000-2004, Vice President and Controller, Hubbard Media Group,
LLC. 1999-2000, Controller, Capella Education, Inc. 1998-1999,
Controller, U.S. Satellite Broadcasting, Inc. 1992-1998,
various financial management positions with Deluxe Corporation.
1985-1992, various audit positions, including audit manager, at
Deloitte & Touche LLP.
|
|
|
46
|
|
27
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock trades on the New York Stock Exchange under the
symbol: FICO. According to records of our transfer agent, at
September 30, 2009, we had 541 shareholders of record
of our common stock.
The following table shows the high and low closing prices for
our stock, as listed on the New York Stock Exchange for each
quarter in the last two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
October 1-December 31, 2007
|
|
$
|
39.98
|
|
|
$
|
32.15
|
|
January 1-March 31, 2008
|
|
$
|
31.44
|
|
|
$
|
20.83
|
|
April 1-June 30, 2008
|
|
$
|
26.70
|
|
|
$
|
20.31
|
|
July 1-September 30, 2008
|
|
$
|
26.67
|
|
|
$
|
19.08
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
October 1-December 31, 2008
|
|
$
|
22.57
|
|
|
$
|
10.94
|
|
January 1-March 31, 2009
|
|
$
|
17.25
|
|
|
$
|
9.90
|
|
April 1-June 30, 2009
|
|
$
|
18.37
|
|
|
$
|
14.15
|
|
July 1-September 30, 2009
|
|
$
|
24.22
|
|
|
$
|
13.88
|
|
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each quarter of fiscal 2009, 2008 and
2007. Our dividend rate is set by the Board of Directors on a
quarterly basis taking into account a variety of factors,
including among others, our operating results and cash flows,
general economic and industry conditions, our obligations,
changes in applicable tax laws and other factors deemed relevant
by the Board. Although we expect to continue to pay dividends at
the current rate, our dividend rate is subject to change from
time to time based on the Boards business judgment with
respect to these and other relevant factors.
Unregistered
Sales of Equity Securities and Use of Proceeds
Not applicable.
Issuer
Purchases of Equity Securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
Maximum
|
|
|
|
|
|
|
of Shares
|
|
Dollar Value of
|
|
|
Total
|
|
|
|
Purchased as
|
|
Shares that
|
|
|
Number of
|
|
Average
|
|
Part of Publicly
|
|
may yet be
|
|
|
Shares
|
|
Price
|
|
Announced
|
|
Purchased
|
|
|
Purchased
|
|
Paid Per
|
|
Plans or
|
|
Under the Plans or
|
Period
|
|
(2)
|
|
Share
|
|
Programs
|
|
Programs
|
|
July 1, 2009 through July 31, 2009
|
|
|
29,559
|
|
|
$
|
15.33
|
|
|
|
|
|
|
$
|
148,161,062
|
|
August 1, 2009 through August 31, 2009
|
|
|
831,500
|
|
|
$
|
22.25
|
|
|
|
831,500
|
|
|
$
|
129,661,314
|
|
September 1, 2009 through September 30, 2009
|
|
|
1,356
|
|
|
$
|
22.57
|
|
|
|
|
|
|
$
|
129,661,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862,415
|
|
|
|
|
|
|
|
831,500
|
|
|
$
|
129,661,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
(1) |
|
In November 2007, our Board of Directors approved a common stock
repurchase program that allows us to purchase shares of our
common stock up to an aggregate cost of $250.0 million in
the open market or through negotiated transactions. The November
2007 program does not have a fixed expiration date. |
|
(2) |
|
Includes 30,915 shares delivered in satisfaction of the tax
withholding obligations resulting from the vesting of restricted
stock units held by employees during the quarter ended
September 30, 2009. |
Performance
Graph
The follow graph shows the total stockholder return of an
investment of $100 in cash on September 30, 2004, in
(a) the Companys Common Stock (b) the
Standard & Poors 500 Stock Index and
(c) the Standard & Poors 500 Application
Software Index, in each case with reinvestment of dividends. We
do not believe there are any publicly traded companies that
compete with us across the full spectrum of our product and
service offerings.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among FICO, The S&P 500 Index
And The S&P Application Software Index
|
|
|
* |
|
$100 invested on 9/30/04 in stock or index, including
reinvestment of dividends. Fiscal year ending September 30. |
Copyright©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
The Company is listed on the New York Stock Exchange
(NYSE). As an NYSE-listed company, our Chief
Executive Officer must certify annually that he is not aware of
any violation by the Company of NYSE corporate governance
listing standards as of the date of that certification. The most
recent Chief Executive Officers certification was filed
with the NYSE on February 25, 2009.
|
|
Item 6.
|
Selected
Financial Data
|
We acquired RulesPower, Inc. (RulesPower) in
September 2005 and Dash Optimization (Dash) in
January 2008. Results of operations from the acquisitions are
included prospectively from the date of each acquisition. As a
result of these acquisitions, the comparability of the data
below is impacted.
29
In April 2008, we completed the sale of our Insurance Bill
Review business unit. We accounted for this business unit as a
discontinued operation and, accordingly, we have reclassified
the selected financial data for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
|
2009(1)(2)(3)
|
|
|
2008(1)(2)
|
|
|
2007(1)(2)(3)
|
|
|
2006(1)(2)
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
630,735
|
|
|
$
|
744,842
|
|
|
$
|
784,188
|
|
|
$
|
782,995
|
|
|
$
|
748,509
|
|
Operating income
|
|
|
116,747
|
|
|
|
122,283
|
|
|
|
160,327
|
|
|
|
154,400
|
|
|
|
195,018
|
|
Income from continuing operations
|
|
|
65,465
|
|
|
|
81,186
|
|
|
|
111,851
|
|
|
|
104,505
|
|
|
|
135,767
|
|
Income (loss) from discontinued operations
|
|
|
(363
|
)
|
|
|
2,766
|
|
|
|
(7,201
|
)
|
|
|
(1,019
|
)
|
|
|
(1,219
|
)
|
Net income
|
|
|
65,102
|
|
|
|
83,952
|
|
|
|
104,650
|
|
|
|
103,486
|
|
|
|
134,548
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.35
|
|
|
$
|
1.66
|
|
|
$
|
2.00
|
|
|
$
|
1.64
|
|
|
$
|
2.04
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.13
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.34
|
|
|
$
|
1.72
|
|
|
$
|
1.87
|
|
|
$
|
1.63
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.34
|
|
|
$
|
1.64
|
|
|
$
|
1.94
|
|
|
$
|
1.60
|
|
|
$
|
1.88
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.12
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.33
|
|
|
$
|
1.70
|
|
|
$
|
1.82
|
|
|
$
|
1.59
|
|
|
$
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended September 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Working capital (deficit)
|
|
$
|
327,970
|
|
|
$
|
229,071
|
|
|
$
|
(103,173
|
)
|
|
$
|
(123,719
|
)
|
|
$
|
274,523
|
|
Total assets
|
|
|
1,303,888
|
|
|
|
1,275,253
|
|
|
|
1,275,771
|
|
|
|
1,321,205
|
|
|
|
1,351,061
|
|
Senior convertible notes
|
|
|
|
|
|
|
|
|
|
|
390,963
|
|
|
|
400,000
|
|
|
|
400,000
|
|
Senior Notes
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
|
|
|
295,000
|
|
|
|
295,000
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
600,269
|
|
|
|
561,941
|
|
|
|
566,314
|
|
|
|
770,028
|
|
|
|
805,094
|
|
|
|
|
(1) |
|
Results of operations for fiscal years 2009, 2008, 2007 and 2006
include pre-tax share-based compensation expense from continuing
operations of $19.9 million, $27.7 million,
$35.5 million and $41.1 million respectively, after
our adoption of accounting guidance effective on October 1,
2005 related to share-based compensation. |
|
(2) |
|
Results of operations for fiscal years 2009, 2008, 2007 and 2006
include pre-tax charges of $8.7 million,
$10.2 million, $2.5 million and $19.5 million,
respectively, in restructuring expenses. |
|
(3) |
|
Results of operations for fiscal year 2009 and 2007 include a
$3.0 million pre-tax loss and a $1.5 million pre-tax
gain on the sale of product line assets, respectively. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
We are a leader in Decision Management (DM)
solutions that enable businesses to automate, improve and
connect decisions to enhance business performance. Our
predictive analytics, which include the industry standard
FICO®
score, and our Decision Management systems power billions of
customer
30
decisions each year. We help companies acquire customers more
efficiently, increase customer value, reduce fraud and credit
losses, lower operating expenses and enter new markets more
profitably. Most leading banks and credit card issuers rely on
our solutions, as do many insurers, retailers, healthcare
organizations, pharmaceutical companies and government agencies.
We also serve consumers through online services that enable
people to purchase and understand their
FICO®
scores, the standard measure in the United States of credit
risk, empowering them to manage their financial health.
Most of our revenues are derived from the sale of products and
services within the consumer credit, banking and insurance
industries, and during the year ended September 30, 2009,
76% of our revenues were derived from within these industries. A
significant portion of our remaining revenues is derived from
the healthcare and retail industries. Our clients utilize our
products and services to facilitate a variety of business
processes, including customer marketing and acquisition, account
origination, credit and underwriting risk management, fraud loss
prevention and control, and client account and policyholder
management. A significant portion of our revenues is derived
from transactional or unit-based software license fees, annual
license fees under long-term software license arrangements,
transactional fees derived under scoring, network service or
internal hosted software arrangements, and annual software
maintenance fees. The recurrence of these revenues is, to a
significant degree, dependent upon our clients continued
usage of our products and services in their business activities.
The more significant activities underlying the use of our
products in these areas include: credit and debit card usage or
active account levels; lending acquisition, origination and
customer management activity; and customer acquisition, cross
selling and retention programs. Approximately 76% of our
revenues during fiscal 2009 were derived from arrangements with
transactional or unit-based pricing. We also derive revenues
from other sources which generally do not recur and include, but
are not limited to, perpetual or time-based licenses with
upfront payment terms, non-recurring professional service
arrangements and gain-share arrangements where revenue is
derived based on percentages of client revenue growth or cost
reductions attributable to our products.
One measure used by management as an indicator of our business
performance is the volume of bookings achieved. We define a
booking as estimated future contractual revenues, including
agreements with perpetual, multi-year and annual terms. Bookings
values may include: (i) estimates of variable fee
components such as hours to be incurred under new professional
services arrangements and customer account or transaction
activity for agreements with transactional-based fee
arrangements; (ii) additional or expanded business from
renewals of contracts; and (iii) to a lesser extent,
previous customers that have attrited and been resold only as a
result of a significant sales effort. In the fourth quarter of
fiscal 2009, we achieved bookings of $85.9 million,
including five deals with bookings values of $3.0 million
or more. In comparison, bookings in the fourth quarter of fiscal
2008 were $71.2 million, including two deals with bookings
values of $3.0 million or more.
Management regards the volume of bookings achieved, among other
factors, as an important indicator of future revenues, but they
are not comparable to, nor should they be substituted for, an
analysis of our revenues, and they are subject to a number of
risks and uncertainties, including those described in
Item 1A Risk Factors, concerning timing and
contingencies affecting product delivery and performance.
Although many of our contracts have fixed noncancelable terms,
some of our contracts are terminable by the client on short
notice. Accordingly, we do not believe it is appropriate to
characterize all of our bookings as backlog that will generate
future revenue.
Our revenues derived from clients outside the United States have
generally grown, and may in the future grow, more rapidly than
our revenues from domestic clients. International revenues
totaled $199.8 million, $246.3 million, and
$240.5 million in fiscal 2009, 2008 and 2007, respectively,
representing 32%, 33%, and 31% of total consolidated revenues in
each of these years. Revenues declined $18.3 million for
the year ended September 30, 2009, from the prior fiscal
year, due to unfavorable currency translation. We expect that
the percentage of our revenues derived from international
clients will increase in the future, subject to the impact of
foreign currency fluctuations.
31
Reengineering
Initiative
In April 2008, we announced the details of an ongoing
reengineering initiative designed to grow revenues through
strategic resource allocation and improve profitability through
cost reduction. Key components of the initiative included
rationalizing the business portfolio, simplifying management
hierarchy, eliminating low-priority positions, consolidating
facilities and managing fixed and variable costs. Also in
connection with the initiative, we sold our Insurance Bill
Review business unit and our
LiquidCredit®
Service for Telecom (LCT) and
RoamEx®
product line assets, and we fully exited our Cortronics neural
research product line, Fast Panel diagnostics product line and
advertising services group.
In January of 2009, we completed additional actions under our
reengineering initiative. The additional actions were aimed at
reducing costs through headcount reductions and facility
consolidations. With respect to headcount reductions, we
identified and eliminated 255 positions throughout the Company
for an expected annual cost savings of approximately
$30 million. In addition, we incurred charges of
$2.6 million related to the exit of certain leases and a
$1.2 million charge due to unfavorable sublease
arrangements we entered into for office space previously vacated.
Current
Business Environment
Throughout fiscal 2009, financial markets continued to
experience significant volatility and general economic
conditions remained unstable. These conditions have had a
substantial impact on our customers, especially financial
institutions. This has included continued consolidations among
our customers, a significant decline in new account acquisition
activities and extension of credit by financial institutions and
a general slowing of software purchases and related
implementation services by our customers. These unfavorable
conditions have affected our business in 2009 and are expected
to continue to affect us through most of fiscal 2010.
Our annual impairment testing of goodwill indicated that all of
our reporting segments fair values exceeded their
respective recorded values. Worsening economic conditions have
negatively impacted the estimates used in our July 1, 2009
annual goodwill impairment testing, and in particular, for our
Strategy Machine Solutions segment, which has
$501.9 million in goodwill. If difficult market and
economic conditions continue and cause revenues to decline more
quickly than we can reduce costs, our margins will decrease and
we may experience a further decline in the fair value of our
reporting units. Such further declines in fair value may require
us to record an impairment charge related to goodwill.
As a result of this difficult business environment, we will
continue to aggressively manage our expenses in an effort to
maintain solid earnings and cash flows. We also plan to continue
to invest in our Decision Management solutions as well as our
core business operations.
Acquisition
and Divestiture Activity
In June 2009, we signed definitive agreements to sell the assets
associated with our
LiquidCredit®
for Telecom (LCT) and RoamEx product lines for
$6.2 million in cash. We recognized a combined
$3.0 million pre-tax loss, and a $3.9 million
after-tax loss on the sales, as the goodwill associated with the
sale of these product lines was not deductible for income tax
purposes. LCT and RoamEx solutions were included in our Strategy
Machine segment. Revenues attributable to the LCT and RoamEx
product lines were $15.7 million, $24.9 million and
$28.6 million during fiscal 2009, 2008 and 2007
respectively. The earnings contribution from the LCT and RoamEx
product lines were not significant to our fiscal 2009, 2008 and
2007 results of operations.
In January 2008, we acquired Dash Optimization Ltd., a leading
provider of decision modeling and optimization software, for an
aggregate purchase price of $34.1 million in cash. Results
of operations from this acquisition are included in our results
prospectively from the date of acquisition.
In April 2008, we completed the sale of our Insurance Bill
Review business unit for $16.0 million in cash. We recorded
a $6.9 million pre-tax loss, but a $3.4 million
after-tax gain on the sale as the amount of goodwill disposed of
for income tax purposes exceeded the amount determined for
financial reporting
32
purposes. During fiscal 2009, we recorded an additional
$0.4 million working capital adjustment in favor of the
purchaser. Revenues from the business were $22.9 million
and $38.0 million in fiscal 2008 and 2007, respectively.
After-tax losses were $0.7 million and $7.2 in fiscal 2008
and 2007, respectively. The Insurance Bill Review business unit
is classified as discontinued operations in our consolidated
financial statements and in the following management discussion
and analysis.
In March 2007, we sold the assets and products associated with
our mortgage banking solutions product line, which was included
in the Strategy Machines Solutions segment, for
$15.8 million in cash. We recognized a $1.5 million
pre-tax gain, but a $0.4 million after-tax loss on the sale
due to goodwill associated with the product line that was not
deductible for income tax purposes. For fiscal 2007 we recorded
revenues from the mortgage banking solutions product line of
$7.7 million. The earnings contribution from the mortgage
banking solutions product line was not significant to our fiscal
2007 results of operations.
Segment
Information
Our reportable segments are: Strategy Machine Solutions, Scoring
Solutions, Professional Services and Analytic Software Tools.
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. Comparative segment
revenues, operating income, and related financial information
for the years ended September 30, 2009, 2008 and 2007 are
set forth in Note 20 to the accompanying consolidated
financial statements. During the first quarter of 2010, we
consolidated our operating segment structure from four segments
to three in order to better align the segments with how
management evaluates the business.
RESULTS
OF OPERATIONS
Continuing
Operations
Revenues
The following tables set forth certain summary information on a
segment basis related to our revenues for the fiscal years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
Revenues
|
|
|
2009
|
|
|
2008
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Strategy Machine Solutions
|
|
$
|
338,753
|
|
|
$
|
388,108
|
|
|
$
|
404,881
|
|
|
$
|
(49,355
|
)
|
|
$
|
(16,773
|
)
|
Scoring Solutions
|
|
|
131,621
|
|
|
|
156,816
|
|
|
|
180,444
|
|
|
|
(25,195
|
)
|
|
|
(23,628
|
)
|
Professional Services
|
|
|
111,174
|
|
|
|
147,864
|
|
|
|
147,430
|
|
|
|
(36,690
|
)
|
|
|
434
|
|
Analytical Software Tools
|
|
|
49,187
|
|
|
|
52,054
|
|
|
|
51,433
|
|
|
|
(2,867
|
)
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
630,735
|
|
|
$
|
744,842
|
|
|
$
|
784,188
|
|
|
|
(114,107
|
)
|
|
|
(39,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
Percentage Change
|
|
|
Percentage of Revenues
|
|
2009
|
|
2008
|
|
|
Fiscal Year
|
|
to
|
|
to
|
Segment
|
|
2009
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Strategy Machine Solutions
|
|
|
53
|
%
|
|
|
52
|
%
|
|
|
51
|
%
|
|
|
(13
|
)%
|
|
|
(4
|
)%
|
Scoring Solutions
|
|
|
21
|
|
|
|
21
|
|
|
|
23
|
|
|
|
(16
|
)%
|
|
|
(13
|
)%
|
Professional Services
|
|
|
18
|
|
|
|
20
|
|
|
|
19
|
|
|
|
(25
|
)%
|
|
|
|
|
Analytical Software Tools
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
(15
|
)%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Fiscal
2009 Revenues Compared to Fiscal 2008 Revenues
Strategy Machine Solutions segment revenues decreased
$49.4 million due to a $12.0 million decrease in
revenues from our collections and recovery solutions, a
$10.3 million decrease in revenues from our customer
management solutions, a $9.7 million decrease in
revenues from our fraud solutions, a $7.0 million
decrease in revenues from our consumer solutions, a
$6.1 million decrease in revenues from our originations
solutions and a $4.3 million decrease in revenues from
our other strategy machine solutions.
Overall segment revenues were adversely impacted by difficult
global economic conditions that caused our customers to restrict
investments in large technology projects. In addition, revenues
declined $5.8 million due to unfavorable currency
translation related to the weakening of the British Pound versus
the U.S. dollar. At the product group level, the decrease
in collections and recovery solutions revenues resulted
from a decline in license sales as the prior year quarter
included several large license sales, the loss of one large
customer and decreases in volumes associated with
transactional-based agreements. The decrease in customer
management solutions revenues was attributable to a decline
in license sales, as the prior year period included several
large license sales. In addition, there was a decline in
transactional revenues. The decrease in fraud solutions
revenues was attributable primarily to decreases in volumes
associated with transactional-based agreements. The decline was
also due to the June 2009 divestiture of our RoamEx product
line. Revenues were also adversely impacted by the restructuring
of a large customer contract. The decrease in consumer
solutions was primarily attributed to revenues lost from
Experian terminating its relationship with myFICO.com. The
decrease in originations solutions revenues was
attributable primarily to a decline in sales volumes associated
with our LCT product, which was divested in June 2009.
Scoring Solutions segment revenues decreased
$25.2 million due primarily to a $20.3 million
reduction in revenues derived from the credit reporting
agencies, which resulted from a decline in volumes. Volumes
declined as financial institutions have significantly reduced
new account acquisition activities and extension of credit.
Revenues were also impacted by a $4.4 million reduction in
revenues from our services sold directly to users, which
resulted from increased pricing pressures and a decline in
volumes due to a decrease in prescreening initiatives by our
customers. We expect that competitive pricing pressures as well
as reduced volumes due to weakness in the U.S. financial
credit market will continue to adversely affect segment revenues
in fiscal 2010.
During fiscal 2009 and 2008, revenues generated from our
agreements with Equifax, TransUnion and Experian, collectively
accounted for approximately 19% of our total revenues, including
revenues from these customers that are recorded in our other
segments.
Professional Services segment revenues decreased
$36.7 million as difficult global economic conditions have
caused customers to slow down contracted services, and as a
result of the weakening of the British pound versus the
U.S. dollar, which accounted for $6.4 million of the
decrease. The decline in revenues also reflects the overall
decline in license sales, which results in a corresponding
decline in implementation services. In addition, the decline in
revenues is the result of our decision to stop pursuing certain
lower margin consulting service engagements.
Analytic Software Tools segment revenues decreased
$2.9 million due to a $6.5 million decline in sales of
our Blaze
Advisor®,
Decision Optimizer and Model Builder products which was
partially offset by $3.6 million increase from products
acquired in our January 2008 acquisition of Dash Optimization
Ltd.
Fiscal
2008 Revenues Compared to Fiscal 2007 Revenues
Strategy Machine Solutions segment revenues decreased
$16.8 million due partially to the sale of our mortgage
banking solutions product line in 2007, which caused a
$7.1 million decline in segment revenues. In addition,
segment revenues declined due to a $6.5 million decrease in
revenues from our marketing solutions, a
$5.3 million decrease in revenues from our fraud
solutions, a $4.4 million decrease in revenues from our
analytic solutions and a $1.7 million decrease in
revenues from our other strategy machine solutions. The revenue
decrease was partially offset by a $4.7 million increase in
revenues from our customer management solutions and a
$3.5 million increase in revenues from our consumer
solutions.
34
The decrease in marketing solutions revenues was
attributable primarily to a decline in sales volumes resulting
from the loss of a large customer in 2007 and pricing pressures.
The decrease in fraud solutions revenues was attributable
primarily to a large license sale that occurred in 2007 and a
decline in volumes associated with transactional-based
agreements. In addition, we experienced a delay in a product
upgrade, which impacted 2008 bookings and revenues. The decline
in analytic solutions resulted from a decline in license
sales. The increase in customer management solutions
revenues was due to the sale of several large licenses in
2008 and increased maintenance revenues from an increase in our
installed base. The increase in consumer solutions
revenues was attributable to increases in revenues derived
from myFICO.com as a result of increased volumes. The higher
volumes were driven by increased demand by consumers to access
and monitor their credit scores.
Scoring Solutions segment revenues decreased
$23.6 million due to a $13.2 million reduction in
revenues derived from the credit reporting agencies, which
resulted from a decline in prescreen volumes. Volumes declined
as financial institutions significantly reduced new account
acquisition activities and extension of credit during 2008.
Revenues were also impacted by a $9.0 million reduction in
revenues from our services sold directly to users, which
resulted from increased pricing pressures and a decline in
volumes due to a decrease in prescreening initiatives by our
customers.
During fiscal 2008 and 2007, revenues generated from our
agreements with Equifax, TransUnion and Experian collectively
accounted for approximately 19% and 20%, respectively, of our
total revenues, including revenues from these customers that are
recorded in our other segments.
Professional Services segment revenues increased
$0.4 million due to an increase in implementation services
for our collection and recovery products and for Blaze Advisor.
The increase was partially offset by a decline in analytic and
insurance and healthcare consulting services. In addition, the
revenue increase was partially offset by a decline in
implementation services for our originations products.
Analytic Software Tools segment revenues increased
$0.6 million primarily due to sales of $4.1 million
from products acquired in our acquisition of Dash Optimization
Ltd. and an increase in maintenance revenues. The increase in
maintenance revenues resulted from the overall growth in our
installed base of Blaze Advisor. The increase was offset by a
decline in sales of Blaze Advisor licenses.
35
Operating
Expenses and Other Income (Expense)
The following tables set forth certain summary information
related to our statements of income for the fiscal years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Percentage Change
|
|
|
|
Revenues
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
to
|
|
|
to
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except employees)
|
|
|
(In thousands, except employees)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
630,735
|
|
|
$
|
744,842
|
|
|
$
|
784,188
|
|
|
$
|
(114,107
|
)
|
|
$
|
(39,346
|
)
|
|
|
(15
|
)%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
206,448
|
|
|
|
274,917
|
|
|
|
259,450
|
|
|
|
(68,469
|
)
|
|
|
15,467
|
|
|
|
(25
|
)%
|
|
|
6
|
%
|
Research and development
|
|
|
73,626
|
|
|
|
77,794
|
|
|
|
69,322
|
|
|
|
(4,168
|
)
|
|
|
8,472
|
|
|
|
(5
|
)%
|
|
|
12
|
%
|
Selling, general, and administrative
|
|
|
209,319
|
|
|
|
245,639
|
|
|
|
273,705
|
|
|
|
(36,320
|
)
|
|
|
(28,066
|
)
|
|
|
(15
|
)%
|
|
|
(10
|
)%
|
Amortization of intangible assets
|
|
|
12,891
|
|
|
|
14,043
|
|
|
|
20,470
|
|
|
|
(1,152
|
)
|
|
|
(6,427
|
)
|
|
|
(8
|
)%
|
|
|
(31
|
)%
|
Restructuring
|
|
|
8,711
|
|
|
|
10,166
|
|
|
|
2,455
|
|
|
|
(1,455
|
)
|
|
|
7,711
|
|
|
|
(14
|
)%
|
|
|
|
|
(Gain) loss on sale of product line assets
|
|
|
2,993
|
|
|
|
|
|
|
|
(1,541
|
)
|
|
|
2,993
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
513,988
|
|
|
|
622,559
|
|
|
|
623,861
|
|
|
|
(108,571
|
)
|
|
|
(1,302
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
116,747
|
|
|
|
122,283
|
|
|
|
160,327
|
|
|
|
(5,536
|
)
|
|
|
(38,044
|
)
|
|
|
(5
|
)%
|
|
|
(24
|
)%
|
Interest income
|
|
|
4,717
|
|
|
|
8,802
|
|
|
|
13,527
|
|
|
|
(4,085
|
)
|
|
|
(4,725
|
)
|
|
|
(46
|
)%
|
|
|
(35
|
)%
|
Interest expense
|
|
|
(25,481
|
)
|
|
|
(20,335
|
)
|
|
|
(12,766
|
)
|
|
|
(5,146
|
)
|
|
|
(7,569
|
)
|
|
|
25
|
%
|
|
|
59
|
%
|
Other income, net
|
|
|
1,587
|
|
|
|
2,245
|
|
|
|
427
|
|
|
|
(658
|
)
|
|
|
1,818
|
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
97,570
|
|
|
|
112,995
|
|
|
|
161,515
|
|
|
|
(15,425
|
)
|
|
|
(48,520
|
)
|
|
|
(14
|
)%
|
|
|
(30
|
)%
|
Provision for income taxes
|
|
|
32,105
|
|
|
|
31,809
|
|
|
|
49,664
|
|
|
|
296
|
|
|
|
(17,855
|
)
|
|
|
1
|
%
|
|
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
65,465
|
|
|
|
81,186
|
|
|
|
111,851
|
|
|
|
(15,721
|
)
|
|
|
(30,665
|
)
|
|
|
(19
|
)%
|
|
|
(27
|
)%
|
Income (loss) from discontinued operations
|
|
|
(363
|
)
|
|
|
2,766
|
|
|
|
(7,201
|
)
|
|
|
(3,129
|
)
|
|
|
9,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,102
|
|
|
$
|
83,952
|
|
|
$
|
104,650
|
|
|
|
(18,850
|
)
|
|
|
(20,698
|
)
|
|
|
(22
|
)%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at fiscal year-end
|
|
|
2,086
|
|
|
|
2,480
|
|
|
|
2,824
|
|
|
|
(394
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
33
|
%
|
|
|
37
|
%
|
|
|
33
|
%
|
Research and development
|
|
|
12
|
%
|
|
|
11
|
%
|
|
|
9
|
%
|
Selling, general, and administrative
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
Amortization of intangible assets
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
Restructuring
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
(Gain) loss on sale of product line assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
81
|
%
|
|
|
84
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
19
|
%
|
|
|
16
|
%
|
|
|
20
|
%
|
Interest income
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Interest expense
|
|
|
(5
|
)%
|
|
|
(2
|
)%
|
|
|
(1
|
)%
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
21
|
%
|
Provision for income taxes
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
14
|
%
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues
Cost of revenues consists primarily of employee salaries and
benefits for personnel directly involved in developing,
installing and supporting revenue products; travel costs;
overhead costs; costs of computer service bureaus; internal
network hosting costs; amounts payable to credit reporting
agencies for scores; software costs; and expenses related to our
consumer score services through myFICO.com.
Cost of revenues as a percentage of revenues was 33% in fiscal
2009, as compared to 37% for fiscal 2008. The decrease was
driven by a decline in costs associated with lower margin
professional services projects and myFICO consumer data costs.
The decrease of $68.5 million resulted from a
$43.6 million decrease in personnel and other labor-related
costs, a $9.8 million decrease in facilities and
infrastructure costs, an $8.2 million decrease in third
party software and data, a $4.9 million decrease in
billable travel costs, and a $2.0 million decrease in other
costs. The decrease in personnel and other labor-related costs
was attributable primarily to a decline in salary and related
benefit costs resulting from staff reductions and from the
decline in professional services activities. The decrease in
facilities and infrastructure costs was attributable primarily
to a decline in allocated costs resulting from staff reductions
and exiting certain facilities. The decrease in third party
software and data costs was due to decreased sales in our
consumer solutions that required data acquisition. The decrease
in travel costs was from the overall reduction in professional
services activities.
Cost of revenues as a percentage of revenues was 37% in fiscal
2008, as compared to 33% in fiscal 2007. The increase was driven
by a decline in sales of our higher margin scoring solutions
products and an increase in professional services projects,
which generally have much lower profit margins. In dollars, cost
of revenues increased $15.5 million due to a
$7.8 million increase in personnel and other labor-related
costs, a $4.0 million increase in facilities and
infrastructure costs, a $2.2 million increase in
third-party software and data and a $1.5 million net
increase in various other expenditures. The increase in
personnel and other labor-related costs was attributable
primarily to an increase in salary and related benefit costs and
an increase in outside staff costs utilized for professional
service projects. The increase in personnel and other
labor-related costs was
37
partially offset by lower incentive and share-based compensation
expense. The decline in share-based compensation expense was due
to an overall decline in share-based grants and the impact of
forfeitures. The increase in facilities and infrastructure costs
was attributable to an increase in allocated costs associated
with an increase in professional services activities. The
increase in third-party software and data costs was due to an
increase in consumer solutions costs, which resulted from
higher revenues.
In fiscal 2010, we expect that cost of revenues as a percentage
of revenues will be slightly less than the cost of revenues
incurred during fiscal 2009.
Research
and Development
Research and development expenses include the personnel and
related overhead costs incurred in the development of new
products and services, including the research of mathematical
and statistical models and the development of new versions of
Strategy Machine Solutions and Analytic Software Tools.
The fiscal 2009 over 2008 decrease of $4.2 million in
research and development expenditures was attributable primarily
to a decrease of $5.2 million in personnel and
$1.5 million in other expenses, partially offset by a
$2.5 million increase in data related expenses. The
decrease in personnel and related costs was driven by reductions
associated with our reengineering program. The increase in data
expenses was due to higher costs for data that is used for
product development initiatives.
The fiscal 2008 over 2007 increase of $8.5 million in
research and development expenditures was attributable primarily
to an increase in personnel and related costs of
$5.8 million, a $0.9 million increase in facilities
and infrastructure costs and a $1.8 million net increase in
other costs. The increase in personnel and related costs was
driven by additional staff to support product development
initiatives and costs associated with annual salary adjustments.
The increase was partially offset by lower incentive expense.
The increase in facilities and infrastructure costs was
attributable primarily to an increase in allocated facility and
information system costs associated with increased development
activities. The increase in other costs was partially due to
higher costs for data that is used for product development
initiatives.
In fiscal 2010, we expect that research and development
expenditures as a percentage of revenues will be consistent with
those incurred during fiscal 2009 as we continue to invest in
our Decision Management solutions.
Selling,
General and Administrative
Selling, general and administrative expenses consist principally
of employee salaries and benefits, travel, overhead, advertising
and other promotional expenses, corporate facilities expenses,
legal expenses, business development expenses, and the cost of
operating computer systems.
The fiscal 2009 over 2008 decrease of $36.3 million in
selling, general and administrative expenses was attributable to
a decrease of $23.6 million in personnel and other
labor-related costs, a $4.4 million decrease in
professional fees, a $4.4 million decrease in travel costs,
a $2.9 million decrease in bad debt expense, a
$1.8 million decrease in facilities and infrastructure
costs, partially offset by a $0.8 million increase in other
expenses. The decrease in personnel and labor-related costs
related primarily to a decrease in salary and benefits costs
resulting from staff reductions associated with our
reengineering program. The decrease in professional fees is
primarily due to decreased legal expenses. The decrease in
travel expenses was due to management programs focused on
reducing expenses. The decrease in bad debt expense is due to
successful collection efforts and a decrease in revenues. The
decrease in facilities and infrastructure costs was attributable
primarily to a decline in allocated costs resulting from staff
reductions and exiting certain facilities.
The fiscal 2008 over 2007 decrease of $28.1 million in
selling, general and administrative expenses was attributable to
a $24.6 million decrease in personnel and other
labor-related costs, a $3.6 million decrease in facilities
and infrastructure costs, a $2.0 million decrease in travel
costs and a $0.9 million net decrease in other costs. The
decrease in selling, general and administrative expenses was
partially offset by a $3.0 million increase in legal fees.
The decrease in personnel and labor-related costs related
primarily to lower sales commissions which resulted from the
decline in revenues, lower incentive and share-based
compensation
38
expense and a decline in salary and benefit costs resulting from
staff reductions. The decline in share-based compensation was
due to an overall decline in share-based grants and the impact
of forfeitures. The decline in travel costs was driven by
management programs focused on reducing discretionary expenses.
The increase in legal fees was primarily due to litigation costs
associated with the VantageScore litigation.
In fiscal 2010, we expect that selling, general and
administrative expenses as a percentage of revenues will be
consistent with, or slightly higher than, those incurred during
fiscal 2009.
Amortization
of Intangible Assets
Amortization of intangible assets consists of amortization
expense related to intangible assets recorded in connection with
acquisitions accounted for by the purchase method of accounting.
Our definite-lived intangible assets, consisting primarily of
completed technology and customer contracts and relationships,
are being amortized using the straight-line method or based on
forecasted cash flows associated with the assets over periods
ranging from two to fifteen years.
The fiscal 2009 over 2008 decline of $1.2 million in
amortization expense was attributable mainly to certain
intangible assets associated with our London Bridge acquisition
becoming fully amortized.
The fiscal 2008 over 2007 decline of $6.4 million in
amortization expense was attributable to certain intangible
assets associated with our fiscal 2002 acquisition of HNC
Software Inc. becoming fully amortized during fiscal 2007. The
decline was partially offset by amortization recorded in
connection with intangible assets acquired in our purchase of
Dash Optimization, Ltd.
In fiscal 2010, we expect amortization expense will be slightly
lower than the amortization expense incurred in 2009 due to
certain intangible assets related to our London Bridge
acquisition that will become fully amortized within fiscal 2010.
Restructuring
The following table sets forth certain summary information on
restructuring expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Severance costs
|
|
$
|
5,860
|
|
|
$
|
7,353
|
|
|
$
|
1,012
|
|
Lease exit costs and other adjustments
|
|
|
2,851
|
|
|
|
2,813
|
|
|
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expense
|
|
$
|
8,711
|
|
|
$
|
10,166
|
|
|
$
|
2,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009, we incurred restructuring charges of
$8.7 million. The charges include $5.9 million for
severance costs associated with the reduction of 255 positions
throughout the Company, which were paid in fiscal 2009. We also
recognized a $2.9 million, net charge associated with lease
exit activities and a reversal of accrued expenses as a result
of favorable adjustments.
In fiscal 2008, we eliminated 280 positions across the company
and incurred charges of $7.4 million for severance costs.
Cash payments for the majority of the severance costs were paid
in fiscal 2008. We also recognized charges of $2.8 million
associated with lease exit activities.
In fiscal 2007, we recorded a charge of $1.0 million for
severance costs associated with the elimination of 13 management
positions. In addition, we recorded a charge of
$1.4 million to vacate excess leased space located in
California and Maryland. Included in the $1.4 million
charge was $0.2 million to write off fixed assets that were
abandoned as part of this action. The remaining charge of
$1.2 million was for future cash lease obligations, net of
estimated sublease income. Cash payments for the majority of
these costs were paid in fiscal 2008.
39
Gain
(Loss) on Sale of Product Line Assets
In June 2009, we signed definitive agreements to sell the assets
associated with our LCT and RoamEx product lines for
$6.2 million in cash. We recognized a $3.0 million
pre-tax loss, and a $3.9 million after-tax loss on the
sales, as the goodwill associated with the sale of these product
lines was not deductible for income tax purposes.
In March 2007, we completed the sale of the assets and products
associated with our mortgage banking solutions product
line for $15.8 million in cash. We recognized a
$1.5 million pre-tax gain on the sale.
Interest
Income
Interest income is derived primarily from the investment of
funds in excess of our immediate operating requirements.
The fiscal 2009 over 2008 decrease of $4.1 million in
interest income was attributable to a decline in interest rates
and investment income yields due to market conditions, partially
offset by an increase in average cash and investment balances.
The fiscal 2008 over 2007 decrease of $4.7 million in
interest income was attributable to lower average cash and
investment balances and a decline in interest rates and
investment income yields due to market conditions. The decrease
in average cash and investment balances resulted principally
from cash used to repurchase common stock.
Interest
Expense
In fiscal 2009, interest expense included interest on the Senior
Notes issued in May 2008 and borrowings under our revolving
credit facility. In fiscal 2008, interest expense included
interest on our Senior Notes; interest related to our
1.5% Senior Convertible Notes and interest associated with
borrowings under our revolving credit facility. All of our
Senior Convertible Notes were repurchased during 2008. In fiscal
2007, interest expense included interest related to our Senior
Convertible Notes and revolving credit facility.
The increase in interest expense of $5.1 million in fiscal
2009 compared to fiscal 2008 was the result of higher average
interest rates on outstanding borrowings. The increase in the
average interest rate was due to incurring a full year of
interest expense on the Senior Notes, which had an average
interest rate of 6.8% and were issued in May 2008. In fiscal
2008 we had our Senior Convertible Notes that had an interest
rate of 1.5%. The increase was partially offset by a lower
average interest rate on our revolving credit facility.
The increase in interest expense of $7.6 million in fiscal
2008 as compared to fiscal 2007 resulted from increased
borrowings under our revolving credit facility and a higher
weighted average interest rate on our borrowings. The increase
in the average interest rate was due primarily to the issuance
of the Senior Notes, which had a weighted average interest rate
of 6.8%.
In fiscal 2010, we expect that interest expense will be
consistent with what we incurred during fiscal 2009.
Other
Income, Net
Other income, net consists primarily of realized investment
gains/losses, exchange rate gains/losses resulting from
re-measurement of foreign-denominated receivable and cash
balances held by our U.S. reporting entities into the
U.S. dollar functional currency at period-end market rates,
net of the impact of offsetting forward exchange contracts, and
other non-operating items.
Other income, net was $1.6 million in fiscal 2009, compared
to $2.2 million in 2008. The change in other income, net
was primarily due to $0.9 million gain recognized in fiscal
2008 on the redemption of $123.7 million of Senior
Convertible Notes
40
Other income, net was $2.2 million in fiscal 2008, compared
with $0.4 million in fiscal 2007. The change resulted from
an increase in foreign exchange gains of $1.2 million due
to favorable exchange rate fluctuations and that fiscal 2007
included a $0.5 million loss from the sale of company owned
aircraft.
Provision
for Income Taxes
Our effective tax rates were 32.9%, 28.2%, and 30.7% in fiscal
2009, 2008 and 2007, respectively.
The increase in our effective tax rate in fiscal 2009 compared
with fiscal 2008 was due to adjustments to our tax reserves
associated with a proposed settlement of the IRS audit for
fiscals 2002 through 2006, and a change in mix between domestic
and foreign income.
The decrease in our effective tax rate in fiscal 2008 compared
with fiscal 2007 was due to the recognition in fiscal 2008 of
$4.6 million of discrete tax benefits, an increase in the
domestic production deduction and the impact of higher earnings
in certain foreign jurisdictions that have tax rates lower than
the U.S. federal statutory rate. The $4.6 million of
discrete tax benefits, which reduced our effective tax rate by
4.0%, was primarily related to the reversal of a valuation
allowance associated with foreign net operating losses.
Excluding these discrete tax benefits, the effective tax rate
for fiscal 2008 would have been 32.2%. The decline in the
effective tax rate in fiscal 2008 was partially offset by the
impact of a delay in the extension of the U.S. federal
research tax credit and that fiscal 2007 income tax expense was
reduced by favorable tax settlements.
Operating
Income
The following table sets forth certain summary information on a
segment basis related to our operating income for the fiscal
years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period
|
|
|
Period-to-Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Percentage Change
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
Fiscal Year
|
|
|
to
|
|
|
to
|
|
|
to
|
|
|
to
|
|
Segment
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Strategy Machine Solutions
|
|
$
|
70,775
|
|
|
$
|
61,478
|
|
|
$
|
73,409
|
|
|
$
|
9,297
|
|
|
$
|
(11,931
|
)
|
|
|
15
|
%
|
|
|
(16
|
)%
|
Scoring Solutions
|
|
|
75,888
|
|
|
|
90,458
|
|
|
|
115,317
|
|
|
|
(14,570
|
)
|
|
|
(24,859
|
)
|
|
|
(16
|
)%
|
|
|
(22
|
)%
|
Professional Services
|
|
|
(5,997
|
)
|
|
|
627
|
|
|
|
6,904
|
|
|
|
(6,624
|
)
|
|
|
(6,277
|
)
|
|
|
|
|
|
|
(91
|
)%
|
Analytic Software Tools
|
|
|
7,720
|
|
|
|
7,610
|
|
|
|
1,071
|
|
|
|
110
|
|
|
|
6,539
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
148,386
|
|
|
|
160,173
|
|
|
|
196,701
|
|
|
|
(11,787
|
)
|
|
|
(36,528
|
)
|
|
|
(7
|
)%
|
|
|
(19
|
)%
|
Unallocated share-based compensation expense
|
|
|
(19,935
|
)
|
|
|
(27,724
|
)
|
|
|
(35,460
|
)
|
|
|
7,789
|
|
|
|
7,736
|
|
|
|
(28
|
)%
|
|
|
(22
|
)%
|
Unallocated restructuring expense
|
|
|
(8,711
|
)
|
|
|
(10,166
|
)
|
|
|
(2,455
|
)
|
|
|
1,455
|
|
|
|
(7,711
|
)
|
|
|
(14
|
)%
|
|
|
|
|
Unallocated gain (loss) on sale of product line assets
|
|
|
(2,993
|
)
|
|
|
|
|
|
|
1,541
|
|
|
|
(2,993
|
)
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
116,747
|
|
|
$
|
122,283
|
|
|
$
|
160,327
|
|
|
|
(5,536
|
)
|
|
|
(38,044
|
)
|
|
|
(5
|
)%
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fiscal 2009 over 2008 decrease of $5.5 million in
operating income was primarily attributable to a decrease in
segment revenues and a loss on the sale of product line assets,
partially offset by a decline in segment operating expenses,
restructuring charges and share-based compensation expenses. At
the segment level, the decline in segment operating income was
driven by a $14.6 million decrease in our Scoring Solutions
segment operating income and a $6.6 million decrease in our
Professional Services segment operating income. The decline was
partially offset by a $9.3 million increase in our Strategy
Machine Solutions segment operating income. The decrease in
Scoring Solutions segment operating income was attributable
primarily to a decline in revenues derived from services to the
credit reporting agencies and for
41
services that we provided directly to users in banking partially
offset by reduced operating expenses. The decrease in
Professional Services segment operating income was due to the
decline in revenues partially offset by reduced operating
expenses. Professional Services revenues decreased as difficult
global economic conditions have caused customers to slow down
contracted services. The decline in revenues also reflects the
overall decline in license sales, which resulted in a
corresponding decline in implementation services. We expect the
difficult business environment to continue to adversely affect
Professional Services segment results, and accordingly we are
aggressively managing our expenses in order to offset the
revenue declines. The increase in Strategy Machine Solutions
segment operating income was attributable to a significant
decline in operating expenses, which was driven by our
reengineering initiative. Under the reengineering initiative, we
have reduced operating costs through staff reductions, facility
consolidations and restriction of discretionary expenditures.
The increase in Strategy Machine Solutions operating income was
partially offset by a decline in revenues. Segment revenues were
adversely impacted by difficult global economic conditions that
caused our customers to restrict investments in large technology
projects.
The fiscal 2008 over fiscal 2007 decrease of $38.0 million
in operating income was attributable to a decline in revenues
and an increase in restructuring expenses. The decrease in
operating income was partially offset by a reduction in
share-based compensation expense. At the segment level, the
decline in operating income was driven by decreases of
$24.9 million in segment operating income in our Scoring
Solutions segment, $11.9 million in segment operating
income in our Strategy Machine Solutions segment, and
$6.3 million in segment operating income in our
Professional Services segment. These decreases were partially
offset by a $6.5 million increase in segment operating
income within our Analytical Software Tools segment. The
decrease in Scoring Solutions segment operating income was
attributable primarily to a decline in revenues derived from
prescreening services that we provide directly to users in
banking and a decline in revenues derived from the credit
reporting agencies. Revenues declined as financial institutions
significantly reduced new account acquisition activities and
extension of credit. In addition, segment income declined on
higher legal expenses. The decrease in Strategy Machine
Solutions segment operating income was attributable to a decline
in revenues that was partially offset by lower operating costs.
The decrease in operating costs was driven by lower salary and
benefit costs that resulted from staff reductions, lower
incentive costs and a reduction in amortization expense. The
decrease in Professional Services segment operating income was
the result of higher personnel costs to support increased
professional service activities, including increased use of
outside staff costs. In our Analytic Software Tools segment,
higher segment operating income was due to an increase in sales
of licenses for our Decision Management products and reduced
operating costs. The decrease in operating costs was driven by
lower salary and benefit costs, which resulted from staff
reductions, and lower incentive costs. In addition, internal
staff was re-deployed to develop Decision Management solutions
associated with our Strategy Machines Solutions segment.
Discontinued
Operations
On April 30, 2008, we completed the sale of our Insurance
Bill Review business unit for $16.0 million in cash. We
recorded a $6.9 million pre-tax loss, but a
$3.4 million after-tax gain on the sale as the amount of
goodwill disposed of for income tax purposes exceeded the amount
determined for financial reporting purposes. During fiscal 2009,
we recorded an additional $0.4 million working capital
adjustment in favor of the purchaser. Revenues from discontinued
operations were $22.9 million and $38.0 million in
fiscal 2008 and 2007, respectively. After-tax losses from
discontinued operations were $0.7 million and
$7.2 million in fiscal 2008 and 2007, respectively. The
large loss in fiscal 2007 was primarily the result of costs
associated with the settlement of a lawsuit.
Capital
Resources and Liquidity
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 totaled $151.6 million in
fiscal 2009 compared to $159.2 million in fiscal 2008.
Operating cashflows were negatively impacted by a decline in
earnings in fiscal 2009 and a $23.8 million decrease in
other liabilities. Operating cash flows were positively impacted
by
42
an increase in accrued compensation and employee benefits of
$12.4 million, which was due to the timing of payments, and
a decrease in accounts receivable of $11.2 million, which
resulted from the timing of cash receipts and improvements made
to our collections process.
Net cash provided by operating activities decreased to
$159.2 million in fiscal 2008 from $179.2 million in
fiscal 2007. Operating cash flows were negatively impacted by
the decline in earnings in fiscal 2008, cash paid for a legal
settlement and cash paid for incentive payments that were
accrued last year. In addition, operating cash flows were also
negatively impacted by $10.9 million paid for
restructuring-related liabilities. The decline in operating cash
flows was partially offset by a decrease in trade receivables of
$20.2 million, which resulted from the timing of cash
receipts and improvements made to our collections process.
Cash
Flows from Investing Activities
Net cash used in investing activities totaled $81.9 million
in fiscal 2009 compared to $31.1 million in fiscal 2008.
The change in cash flows was due to an $81.2 million
decrease in proceeds from sales and maturities of marketable
securities, net of purchases, and an $8.8 million decrease
in capital expenditures. In addition, the change in cash flows
was due to $33.3 million paid for the acquisition of Dash
Optimization Ltd. in January 2008 and $15.6 million cash
received in April 2008 from the sale of our Insurance Bill
Review business unit.
Net cash used in investing activities totaled $31.1 million
in fiscal 2008 compared to net cash provided by investing
activities of $37.4 million in fiscal 2007. The change in
cash flows from investing activities was attributable to
$33.3 million of cash paid for our acquisitions of Dash
Optimization, Ltd., $15.6 million in cash proceeds received
from the disposition of our Insurance Bill Review business unit,
and a $46.2 million decline in proceeds from sales and
maturities of marketable securities, net of purchases. In
addition, the change in cash flows was due to $15.8 million
in cash received from the sale of our mortgage banking solutions
product line in fiscal 2007 and a $10.0 million investment
we made in a company in fiscal 2007 that is developing
predictive analytics solutions for healthcare providers.
Cash
Flows from Financing Activities
Net cash used in financing activities totaled $18.8 million
in 2009, compared to $91.0 million in 2008. The decrease in
cash used in financing activities was primarily due to a
$98.1 million decrease in common stock repurchased, a
$16.5 million decrease in proceeds from the issuance of
common stock under employee stock plans and a $9.9 million
decrease in cash proceeds from net borrowings under our
revolving credit facility, senior notes and senior convertible
notes.
Net cash used in financing activities totaled $91.0 million
in 2008, compared to $198.7 million in fiscal 2007. The
decrease in cash used in financing activities was primarily due
to a $334.4 million decline in common stock repurchased.
Cash used for investing activities in fiscal 2008 also included
the repurchase of all outstanding Senior Convertible Notes,
which totaled $390.1 million. In order to fund the
repurchase of the Senior Convertible Notes, we borrowed an
additional $125.0 million under our revolving credit
facility and issued $275 million of new Senior Notes. The
change in cash flows used in financing activities was also a
result of a $64.3 million decrease in proceeds from the
issuance of common stock under employee stock plans and an
$11.3 million decrease in excess tax benefits from
share-based arrangements.
Repurchases
of Common Stock
From time to time, we repurchase our common stock in the open
market pursuant to programs approved by our Board of Directors.
During fiscal 2009, 2008 and 2007, we expended
$18.5 million, $116.6 million and $451.1 million,
respectively, in connection with our repurchase of common stock
under such programs. In November 2007, our Board of Directors
approved a common stock repurchase program that allows us to
purchase shares of our common stock up to an aggregate cost of
$250.0 million. As of September 30, 2009, we had
$129.7 million remaining under this authorization.
43
Dividends
We paid quarterly dividends of two cents per share, or eight
cents per year, during each of fiscal 2009, 2008 and 2007. Our
dividend rate is set by the Board of Directors on a quarterly
basis taking into account a variety of factors, including among
others, our operating results and cash flows, general economic
and industry conditions, our obligations, changes in applicable
tax laws and other factors deemed relevant by the Board.
Although we expect to continue to pay dividends at the current
rate, our dividend rate is subject to change from time to time
based on the Boards business judgment with respect to
these and other relevant factors.
Credit
Agreement
In October 2006, we entered into a five-year unsecured revolving
credit facility with a syndicate of banks. In July 2007, we
entered into an amended and restated credit agreement that
increased the revolving credit facility from $300 million
to $600 million. Proceeds from the credit facility 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 the Companys common stock. Interest
on amounts borrowed under the credit facility is based on
(i) a base rate, which is the greater of (a) the prime
rate and (b) the Federal Funds rate plus 0.50% or
(ii) LIBOR plus an applicable margin. The margin on LIBOR
borrowings ranges from 0.30% to 0.55% and is determined based on
our consolidated leverage ratio. In addition, we must pay
utilization fees if borrowings and commitments under the credit
facility exceed 50% of the total credit facility commitment, as
well as facility fees. The credit facility contains certain
restrictive covenants, including maintenance of consolidated
leverage and fixed charge coverage ratios. The credit facility
also contains covenants typical of unsecured facilities. As of
September 30, 2009, we had $295.0 million of
borrowings outstanding under the credit facility at an average
interest rate of 0.6%.
Senior
Notes
In May 2008, we issued $275 million of Senior Notes in a
private placement to a group of institutional investors. The
Senior Notes were issued in four series with maturities ranging
from 5 to 10 years. The Senior Notes weighted average
interest rate is 6.8% and the weighted average maturity is
7.9 years. The Senior Notes are subject to certain
restrictive covenants that are substantially similar to those in
the credit agreement for the revolving credit facility including
maintenance of consolidated leverage and fixed charge coverage
ratios. The purchase agreement for the Senior Notes also
includes covenants typical of unsecured facilities.
Capital
Resources and Liquidity Outlook
As of September 30, 2009, we had $379.2 million in
cash, cash equivalents and marketable security investments. We
believe that these balances, as well as available borrowings
from our $600 million revolving credit facility and
anticipated cash flows from operating activities, will be
sufficient to fund our working and other capital requirements
and scheduled repayments of existing debt over the course of the
next twelve months. 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 and marketable security investments to fund such
activities in the future. In the event additional needs for cash
arise, 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.
44
Contractual
Obligations
The following is a summary of our contractual obligations at
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Senior Notes(1)
|
|
$
|
|
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
|
$
|
49,000
|
|
|
$
|
8,000
|
|
|
$
|
202,000
|
|
|
$
|
275,000
|
|
Revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
295,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,000
|
|
Interest due on debt obligations(2)
|
|
|
20,563
|
|
|
|
20,563
|
|
|
|
18,381
|
|
|
|
17,774
|
|
|
|
14,652
|
|
|
|
42,360
|
|
|
|
134,293
|
|
Operating lease obligations
|
|
|
22,472
|
|
|
|
15,661
|
|
|
|
13,460
|
|
|
|
11,296
|
|
|
|
10,813
|
|
|
|
36,054
|
|
|
|
109,756
|
|
Purchase obligations(3)
|
|
|
5,800
|
|
|
|
13,100
|
|
|
|
4,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
24,900
|
|
Unrecognized tax benefits(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
48,835
|
|
|
$
|
57,324
|
|
|
$
|
338,841
|
|
|
$
|
80,070
|
|
|
$
|
33,465
|
|
|
$
|
280,414
|
|
|
$
|
857,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$275 million represents the unpaid principal amount of our
Senior Notes issued in May 2008. The Senior Notes were issued in
four series in a private placement to a group of institutional
investors. |
|
(2) |
|
Interest due on debt obligations represents interest payments on
our Senior Notes and revolving line of credit. Based on the
terms of our revolving credit facility (see Note 11),
interest paid is based on variable rates applied to outstanding
principal. Borrowings and rates will vary during the term of the
credit facility, which has a maturity date of October 20,
2011. As a result, future interest payments are difficult to
estimate. Accordingly, interest obligations shown in the table
were estimated using a rate of 0.6%, which was the rate in
effect on borrowings outstanding at September 30, 2009. |
|
(3) |
|
Represents amounts associated with agreements that are
enforceable, legally binding and specify terms, including: fixed
or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the
payments. |
|
(4) |
|
Unrecognized tax benefits related to uncertain tax positions. As
we are not able to reasonably estimate the timing of the
payments or the amount by which the liability will increase or
decrease over time, the related balances have not been reflected
in the section of the table showing payment by fiscal year. |
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material
effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity
with U.S. generally accepted accounting principles. 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, the allowance
for doubtful accounts, goodwill and other intangible assets
resulting from business acquisitions, 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.
45
We believe the following critical accounting policies involve
the most significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue
Recognition
Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customers location, the fee is fixed or
determinable and collection is probable. We use the residual
method to recognize revenue when an arrangement includes one or
more elements to be delivered at a future date and
vendor-specific objective evidence (VSOE) of the
fair value of all undelivered elements exists. VSOE of fair
value is based on the normal pricing practices for those
products and services when sold separately by us and customer
renewal rates for post-contract customer support services. Under
the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is
recognized as revenue. If evidence of the fair value of one or
more undelivered elements does not exist, the revenue is
deferred and recognized when delivery of those elements occurs
or when fair value can be established. The determination of
whether fees are fixed or determinable and collection is
probable involves the use of assumptions. We evaluate contract
terms and customer information to ensure that these criteria are
met prior to our recognition of license fee revenue. Changes to
the elements in a software arrangement, the ability to identify
VSOE for those elements, the fair value of the respective
elements, and change to a products estimated life cycle
could materially impact the amount of earned and unearned
revenue.
When software licenses are sold together with implementation or
consulting services, license fees are recognized upon delivery
provided that the above criteria are met, payment of the license
fees is not dependent upon the performance of the services, and
the services do not provide significant customization or
modification of the software products and are not essential to
the functionality of the software that was delivered. For
arrangements with services that are essential to the
functionality of the software, the license and related service
revenues are recognized using contract accounting as described
below.
If at the outset of an arrangement we determine that the
arrangement fee is not fixed or determinable, revenue is
deferred until the arrangement fee becomes fixed or
determinable, assuming all other revenue recognition criteria
have been met. If at the outset of an arrangement we determine
that collectibility is not probable, revenue is deferred until
the earlier of when collectibility becomes probable or the
receipt of payment. If there is uncertainty as to the
customers acceptance of our deliverables, revenue is not
recognized until the earlier of receipt of customer acceptance,
expiration of the acceptance period, or when we can demonstrate
we meet the acceptance criteria.
Revenues from post-contract customer support services, such as
software maintenance, are recognized on a straight-line basis
over the term of the support period. The majority of our
software maintenance agreements provide technical support as
well as unspecified software product upgrades and releases when
and if made available by us during the term of the support
period.
Revenues recognized from our credit scoring, data processing,
data management and internet delivery services are recognized as
these services are performed, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable, and
collection is reasonably assured. The determination of certain
of our credit scoring and data processing revenues requires the
use of estimates, principally related to transaction volumes in
instances where these volumes are reported to us by our clients
on a monthly or quarterly basis in arrears. In these instances,
we estimate transaction volumes based on preliminary customer
transaction information, if available, or based on average
actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes
reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between
our estimates and actual reported volumes in the past and
anticipate that we will be able to continue to make reasonable
estimates in the future. If for some reason we were unable to
reasonably estimate transaction volumes in the future, revenue
may be deferred until actual customer data was received, and
this could have a material impact on our results of operations
during the period of time that we changed accounting methods.
46
Transactional or unit-based license fees under software license
arrangements, network service and internally-hosted software
agreements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license
fees, provided persuasive evidence of an arrangement exists,
fees are fixed or determinable and collection is probable. The
determination of certain of our transactional or unit-based
license fee revenues requires the use of estimates, principally
related to transaction usage or active account volumes in
instances where this information is reported to us by our
clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary
customer transaction information, if available, or based on
average actual reported volumes for an immediate trailing
period. Differences between our estimates and actual final
volumes reported are recorded in the period in which actual
volumes are reported. We have not experienced significant
variances between our estimates and actual reported volumes in
the past and anticipate that we will be able to continue to make
reasonable estimates in the future. If for some reason we were
unable to reasonably estimate customer account or transaction
volumes in the future, revenue would be deferred until actual
customer data was received, and this could have a material
impact on our consolidated results of operations.
We provide consulting, training, model development and software
integration services under both hourly-based time and materials
and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For
fixed-price service contracts, we apply the
percentage-of-completion method of contract accounting to
determine progress towards completion, which requires the use of
estimates. In such instances, management is required to estimate
the input measures, generally based on hours incurred to date
compared to total estimated hours of the project, with
consideration also given to output measures, such as contract
milestones, when applicable. Adjustments to estimates are made
in the period in which the facts requiring such revisions become
known and, accordingly, recognized revenues and profits are
subject to revisions as the contract progresses to completion.
Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs
indicate a loss. If substantive uncertainty related to customer
acceptance of services exists, we apply the completed contract
method of accounting and defer the associated revenue until the
contract is completed. If we are unable to accurately estimate
the input measures used for percentage-of-completion accounting,
revenue would be deferred until the contract is complete, and
this could have a material impact on our consolidated results of
operations.
Revenue recognized under the percentage-of-completion method in
excess of contract billings is recorded as an unbilled
receivable. Such amounts are generally billable upon reaching
certain performance milestones as defined by individual
contracts. Billings collected in advance of performance and
recognition of revenue under contracts is recorded as deferred
revenue.
In certain of our non-software arrangements, we enter into
contracts that include the delivery of a combination of two or
more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data
management tools or systems and an ongoing obligation to manage,
host or otherwise run solutions for our customer. Such
arrangements are divided into separate units of accounting
provided that the delivered item has stand-alone value and there
is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the
undelivered elements based on their fair values and to the
initial delivered elements using the residual method. Revenue is
recognized separately, and in accordance with our revenue
recognition policy, for each element.
As described above, sometimes our customer arrangements have
multiple deliverables, including service elements. Generally,
our multiple element arrangements fall within the scope of
specific accounting standards that provide guidance regarding
the separation of elements in multiple-deliverable arrangements
and the allocation of consideration among those elements. If
not, we apply separation provisions, which require us to
unbundle multiple element arrangements into separate units of
accounting when the delivered element(s) has stand-alone value
and fair value of the undelivered element(s) exists. When we are
able to unbundle the arrangement into separate units of
accounting, we apply one of the accounting policies described
above to each unit. If we are unable to unbundle the arrangement
into separate units of accounting, we apply one of the
accounting policies described above to the entire arrangement.
Sometimes this results in recognizing the entire arrangement fee
when delivery of the last element in a multiple element
arrangement occurs. For example, if the last undelivered element
is a service, we recognize revenue for the entire arrangement
fee as the service is
47
performed, or if no pattern of performance is discernable, we
recognize revenue on a straight-line basis over the term of the
arrangement.
We apply accounting guidance to determine whether the Company
should report revenue for certain transactions based upon the
gross amount billed to the customer, or the net amount retained
by the Company. In accordance with the guidance we record
revenue on a gross basis for sales in which we have acted as the
principal and on a net basis for those sales in which we have in
substance acted as an agent or broker in the transaction.
Allowance
for Doubtful Accounts
We make estimates regarding the collectibility of our accounts
receivable. When we evaluate the adequacy of our allowance for
doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness,
current economic trends and changes in our customer payment
cycles. Material differences may result in the amount and timing
of expense for any period if we were to make different judgments
or utilize different estimates. If the financial condition of
our customers deteriorates resulting in an impairment of their
ability to make payments, additional allowances might be
required.
Business
Acquisitions; Valuation of Goodwill and Other Intangible
Assets
Our business acquisitions typically result in the recognition of
goodwill and other intangible assets, and in certain cases
non-recurring charges associated with the write-off of
in-process research and development (IPR&D),
which affect the amount of current and future period charges and
amortization expense. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired,
including identified intangible assets, in connection with our
business combinations accounted for by the purchase method of
accounting. We amortize our definite-lived intangible assets
using the straight-line method or based on forecasted cash flows
associated with the assets over the estimated useful lives,
while IPR&D is recorded as a non-recurring charge on the
acquisition date. Goodwill is not amortized, but is assessed at
least annually for impairment.
The determination of the value of these components of a business
combination, as well as associated asset useful lives, requires
management to make various estimates and assumptions. Critical
estimates in valuing certain of the intangible assets include
but are not limited to: future expected cash flows from product
sales and services, maintenance agreements, consulting
contracts, customer contracts, and acquired developed
technologies and patents or trademarks; expected costs to
develop the IPR&D into commercially viable products and
estimating cash flows from the projects when completed; the
acquired companys brand awareness and market position, as
well as assumptions about the period of time the acquired
products and services will continue to be used in our product
portfolio; and discount rates. Managements estimates of
fair value and useful lives are based upon assumptions believed
to be reasonable, but which are inherently uncertain and
unpredictable. Unanticipated events and circumstances may occur
and assumptions may change. Estimates using different
assumptions could also produce significantly different results.
We continually review the events and circumstances related to
our financial performance and economic environment for factors
that would provide evidence of the impairment of our intangible
assets. When impairment indicators are identified with respect
to our previously recorded intangible assets with finite useful
lives, we test for impairment using undiscounted cash flows. If
such tests indicate impairment, then we measure the impairment
as the difference between the carrying value of the asset and
the fair value of the asset, which is measured using discounted
cash flows. Indefinite-lived intangible assets are assessed
annually for impairment by comparing the fair value of such
intangible assets, measured using discounted cash flows, to the
respective fair value. To the extent the fair value is less than
the associated carrying value, impairment is recorded.
Significant management judgment is required in forecasting of
future operating results, which are used in the preparation of
the projected discounted cash flows and should different
conditions prevail, material write downs of net intangible
assets and other long-lived assets could occur. We periodically
review the estimated remaining useful lives of our acquired
intangible assets. A reduction in our estimate of remaining
useful lives, if any, could result in increased amortization
expense in future periods.
48
We test goodwill for impairment at the reporting unit level at
least annually during the fourth quarter of each fiscal year and
more frequently if impairment indicators are identified. We have
determined that our reporting units are the same as our
reportable segments. The first step of the goodwill impairment
test is a comparison of the fair value of a reporting unit to
its carrying value. We estimate the fair values of our reporting
units using discounted cash flow valuation models and by
comparing our reporting units to guideline publicly-traded
companies. These methods require estimates of our future
revenues, profits, capital expenditures, working capital, and
other relevant factors, as well as selecting appropriate
guideline publicly-traded companies for each reporting unit. We
estimate these amounts by evaluating historical trends, current
budgets, operating plans, industry data, and other relevant
factors. The estimated fair value of each of our reporting units
exceeded its respective carrying value in fiscal 2009,
indicating the underlying goodwill of each reporting unit was
not impaired as of our most recent testing date. Accordingly, we
were not required to complete the second step of the goodwill
impairment test. The timing and frequency of our goodwill
impairment test is based on an ongoing assessment of events and
circumstances that would more than likely reduce the fair value
of a reporting unit below its carrying value. There are various
assumptions and estimates underlying the determination of an
impairment loss, and estimates using different, but each
reasonable, assumptions could produce significantly different
results and materially affect the determination of fair value
and/or
goodwill impairment for each reporting unit. We believe that the
assumptions and estimates utilized were appropriate based on the
information available to management. The timing and recognition
of impairment losses by us in the future, if any, may be highly
dependent upon our estimates and assumptions.
Due to ongoing uncertainty in economic conditions and weakness
in financial credit markets, which have adversely affected the
fair value of our reporting units, we will continue to carefully
monitor and evaluate the carrying value of goodwill. We had
$667.6 million of goodwill recorded on our consolidated
balance sheet as of September 30, 2009. As of the most
recent testing date (July 1, 2009), the fair value of our
reporting units exceeded their respective carrying values by
between $20 million and $329 million. However, if
difficult market and economic conditions continue over a
sustained period, we may experience a further decline in the
fair value of one or more of our reporting units as compared to
fiscal 2009 year-end levels. Such further declines in fair
value may require us to record an impairment charge related to
goodwill.
Share-Based
Compensation
We account for share-based compensation using the fair value
recognition provisions as required in the accounting literature.
We estimate the fair value of options granted using the
Black-Scholes option valuation model and the assumptions shown
in Note 17 to the accompanying consolidated financial
statements. We estimate the volatility of our common stock at
the date of grant based on a combination of the implied
volatility of publicly traded options on our common stock and
our historical volatility rate. Our decision to use implied
volatility was based upon the availability of actively traded
options on our common stock and our assessment that implied
volatility is more representative of future stock price trends
than historical volatility. Beginning in fiscal 2008, we
estimated the expected term of options granted based on
historical exercise patterns. In fiscal 2007, we estimated the
expected term consistent with the simplified method. The
dividend yield assumption is based on historical dividend
payouts. The risk-free interest rate assumption is based on
observed interest rates appropriate for the term of our employee
options. We use historical data to estimate pre-vesting option
forfeitures and record share-based compensation expense only for
those awards that are expected to vest. For options granted, we
amortize the fair value on a straight-line basis. All options
are amortized over the requisite service periods of the awards,
which are generally the vesting periods. If factors change we
may decide to use different assumptions under the Black-Scholes
option valuation model in the future, which could materially
affect our share-based compensation expense, net income and
earnings per share.
Income
Taxes
We use the asset and liability approach to account for income
taxes. This methodology recognizes deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
base of assets and liabilities and operating loss and tax credit
carryforwards.
49
We then record a valuation allowance to reduce deferred tax
assets to an amount that more likely than not will be realized.
We consider future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, which requires the use of estimates. If we
determine during any period that we could realize a larger net
deferred tax asset than the recorded amount, we would adjust the
deferred tax asset to increase income for the period or reduce
goodwill if such deferred tax asset relates to an acquisition.
Conversely, if we determine that we would be unable to realize a
portion of our recorded deferred tax asset, we would adjust the
deferred tax asset to record a charge to income for the period
or increase goodwill if such deferred tax asset relates to an
acquisition. Although we believe that our estimates are
reasonable, there is no assurance that our valuation allowance
will not need to be increased to cover additional deferred tax
assets that may not be realizable, and such an increase could
have a material adverse impact on our income tax provision and
results of operations in the period in which such determination
is made. In addition, the calculation of tax liabilities also
involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. Resolution
of these uncertainties in a manner inconsistent with
managements expectations could also have a material impact
on our income tax provision and results of operations in the
period in which such determination is made.
We adopted new accounting guidance related to the accounting for
uncertainty in income taxes, on October 1, 2007. The
cumulative effect of the change did not result in an adjustment
to the beginning balance of retained earnings. Following
implementation, the ongoing recognition of changes in
measurement of uncertain tax positions will be reflected as a
component of income tax expense.
Contingencies
and Litigation
We are subject to various proceedings, lawsuits and claims
relating to products and services, technology, labor,
shareholder and other matters. We are required to assess the
likelihood of any adverse outcomes and the potential range of
probable losses in these matters. If the potential loss is
considered probable and the amount can be reasonably estimated,
we accrue a liability for the estimated loss. If the potential
loss is considered less than probable or the amount cannot be
reasonably estimated, disclosure of the matter is considered.
The amount of loss accrual or disclosure, if any, is determined
after analysis of each matter, and is subject to adjustment if
warranted by new developments or revised strategies. Due to
uncertainties related to these matters, accruals or disclosures
are based on the best information available at the time.
Significant judgment is required in both the assessment of
likelihood and in the determination of a range of potential
losses. Revisions in the estimates of the potential liabilities
could have a material impact on our consolidated financial
position or consolidated results of operations.
New
Accounting Pronouncements Not Yet Adopted
In December 2007, the FASB issued new guidance on the accounting
for business combinations. The guidance states that business
combinations will result in all assets and liabilities of an
acquired business being recorded at their fair values. Certain
forms of contingent consideration and acquired contingencies
will be recorded at fair value at the acquisition date. Further,
acquisition costs will be expensed as incurred and restructuring
costs will be expensed in periods after the acquisition date.
This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are in
the process of determining what effect, if any, the adoption of
this guidance will have on our consolidated financial statements.
In December 2007, the FASB issued new accounting guidance on
non-controlling interests in consolidated financial statements.
The guidance clarifies that a noncontrolling or minority
interest in a subsidiary is considered an ownership interest
and, accordingly, requires all entities to report such interests
in subsidiaries as equity in the consolidated financial
statements. The guidance is effective for fiscal years beginning
after December 15, 2008. We are in the process of
determining what effect, if any, the adoption of this guidance
will have on our consolidated financial statements.
In February 2008, the FASB issued new accounting guidance which
deferred the effective date of applying fair value measurement
guidance for non-financial assets and liabilities, except for
items that are
50
recognized or disclosed at fair value in an entitys
financial statements on a recurring basis (at least annually).
We elected to defer the adoption of this guidance until
October 1, 2009. We are in the process of determining the
impact of adoption on our consolidated financial statements.
In June 2009, the FASB issued new accounting guidance related to
the consolidation of variable interest entities. The guidance
requires revised evaluations of whether entities represent
variable interest entities, ongoing assessments of control over
such entities, and additional disclosures for variable
interests. We are in the process of determining what effect, if
any, the adoption of this guidance will have on our consolidated
financial statements.
In September 2009, the FASB issued new accounting guidance
related to revenue arrangements with multiple deliverables. The
guidance removes the fair value threshold for separation of
deliverables into separate units of accounting and in many cases
will result in accelerated revenue recognition. The guidance
also replaces the term fair value with selling
price, provides a hierarchy that entities must use to
estimate the selling price, which is used in allocating revenue
to each deliverable, eliminates the use of the residual method
of allocation, and expands certain disclosures. The guidance is
effective for fiscal years beginning on or after June 15,
2010. Entities can elect to apply this issue on a prospective or
a retrospective basis and early adoption is permitted. We are in
the process of determining the impact of adoption on our
consolidated financial statements.
In May 2008, the FASB issued new guidance on the accounting for
convertible instruments that may be settled in cash upon
conversion. The guidance requires that proceeds from the
issuance of convertible debt instruments be allocated between
debt (at a discount) and an equity component. The debt discount
will be amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest
expense. This guidance is effective for fiscal years beginning
after December 15, 2008, and is to be applied
retrospectively to prior periods. The guidance changes the
accounting treatment for our Senior Convertible Notes, which
were issued in August 2003; however, the only retrospective
adjustment to our financial statements would be a
reclassification between equity accounts. The guidance does not
require retrospective adoption if instruments were not
outstanding during any of the periods presented in the annual
financial statements for the period of adoption, or if
restatement would only lead to an entity reclassifying amounts
between its opening equity accounts for periods presented in the
annual financial statements. As a result, the adoption of this
guidance will not impact our consolidated financial statements.
In April 2008, the FASB issued new guidance in determining the
useful life of intangible assets. The guidance amends the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset. This new guidance is intended to
improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to
measure the fair value of the asset. The guidance is effective
for fiscal years beginning after December 15, 2008. We are
in the process of determining what effect, if any, the adoption
of this guidance will have on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk Disclosures
We are exposed to market risk related to changes in interest
rates, equity market prices, and foreign currency exchange
rates. We do not use derivative financial instruments for
speculative or trading purposes.
51
Interest
Rate Risk
We maintain an investment portfolio consisting mainly of income
securities with an average maturity of two years or less. These
available-for-sale
securities are subject to interest rate risk and will fall in
value if market interest rates increase. We have the ability to
hold our fixed income investments until maturity, and therefore
we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden
change in market interest rates on our securities portfolio. The
following table presents the principal amounts and related
weighted-average yields for our investments with interest rate
risk at September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
Carrying
|
|
|
Average
|
|
|
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Cost Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
Cost Basis
|
|
|
Amount
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
178,157
|
|
|
$
|
178,157
|
|
|
|
0.12
|
%
|
|
$
|
129,678
|
|
|
$
|
129,678
|
|
|
|
2.56
|
%
|
Short-term investments
|
|
|
139,149
|
|
|
|
139,673
|
|
|
|
1.26
|
%
|
|
|
57,065
|
|
|
|
57,049
|
|
|
|
3.42
|
%
|
Long-term investments
|
|
|
57,437
|
|
|
|
57,611
|
|
|
|
1.44
|
%
|
|
|
67,274
|
|
|
|
67,397
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
374,743
|
|
|
$
|
375,441
|
|
|
|
0.75
|
%
|
|
$
|
254,017
|
|
|
$
|
254,124
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2008, we issued $275 million of Senior Notes to a
group of institutional investors in a private placement. The
fair value of our Senior Notes may increase or decrease due to
various factors, including fluctuations in market interest rates
and fluctuations in general economic conditions. See
Managements Discussion and Analysis of Financial Condition
and Results of Operations Capital Resources and
Liquidity, above, for additional information on these notes. The
following table presents the principal amounts, carrying
amounts, and fair values for our Senior Notes at
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
Carrying
|
|
|
|
|
Principal
|
|
Amounts
|
|
Fair Value
|
|
|
|
|
(In thousands)
|
|
|
|
Senior Notes
|
|
$
|
275,000
|
|
|
$
|
275,000
|
|
|
$
|
301,295
|
|
We have interest rate risk with respect to our five-year
$600 million unsecured revolving credit facility. Interest
on amounts borrowed under the credit facility is based on
(i) a base rate, which is the greater of (a) the prime
rate and (b) the Federal Funds rate plus 0.50% or
(ii) LIBOR plus an applicable margin. The margin on LIBOR
borrowings ranges from 0.30% to 0.55% and is determined based on
our consolidated leverage ratio. 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. We
had $295.0 million of borrowings outstanding on this
facility as of September 30, 2009 and 2008.
Forward
Foreign Currency Contracts
We maintain a program to manage our foreign currency exchange
rate risk on existing foreign currency receivable and cash
balances by entering into forward contracts to sell or buy
foreign currency. At period end, foreign-denominated receivables
and cash balances held by our U.S. reporting entities are
remeasured into the U.S. dollar functional currency at
current market rates. The change in value from this
remeasurement is then reported as a foreign exchange gain or
loss for that period in our accompanying consolidated statements
of income and the resulting gain or loss on the forward contract
mitigates the exchange rate risk of the associated assets. All
of our forward foreign currency contracts have maturity periods
of less than three months. Such derivative financial instruments
are subject to market risk.
52
The following table summarizes our outstanding forward foreign
currency contracts, by currency at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
Contract Amount
|
|
|
|
|
Foreign
|
|
|
|
Fair Value
|
|
|
Currency
|
|
US$
|
|
US$
|
|
|
(In thousands)
|
|
Sell foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar (CAD)
|
|
CAD
|
1,100
|
|
|
$
|
1,022
|
|
|
$
|
|
|
Euro (EUR)
|
|
EUR
|
6,100
|
|
|
|
8,908
|
|
|
|
|
|
Japanese yen (JPY)
|
|
JPY
|
61,000
|
|
|
|
679
|
|
|
|
|
|
Buy foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
British pound (GBP)
|
|
GBP
|
2,866
|
|
|
|
4,600
|
|
|
|
|
|
The forward foreign currency contracts were all entered into on
September 30, 2009, therefore, the fair value was $0 on
that date.
53
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fair Isaac Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of
Fair Isaac Corporation and subsidiaries (the
Company) as of September 30, 2009 and 2008, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended September 30, 2009. We also have
audited the Companys internal control over financial
reporting as of September 30, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for these financial statements, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement and whether
effective internal control over financial reporting was
maintained in all material respects. Our audits of the
consolidated financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of September 30, 2009 and 2008,
and the results of its
54
operations and its cash flows for each of the three years in the
period ended September 30, 2009, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2009, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As discussed in Note 15 to the consolidated financial
statements, effective October 1, 2007, the Company adopted
a new accounting standard concerning accounting for uncertainty
in income taxes.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 24, 2009
55
FAIR
ISAAC CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
178,157
|
|
|
$
|
129,678
|
|
Marketable securities available for sale, current portion
|
|
|
139,673
|
|
|
|
57,049
|
|
Accounts receivable, net
|
|
|
101,742
|
|
|
|
141,571
|
|
Prepaid expenses and other current assets
|
|
|
22,986
|
|
|
|
23,404
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
442,558
|
|
|
|
351,702
|
|
Marketable securities available for sale, less current portion
|
|
|
61,371
|
|
|
|
72,101
|
|
Other investments
|
|
|
11,074
|
|
|
|
12,374
|
|
Property and equipment, net
|
|
|
34,340
|
|
|
|
46,360
|
|
Goodwill
|
|
|
667,640
|
|
|
|
686,082
|
|
Intangible assets, net
|
|
|
38,255
|
|
|
|
52,468
|
|
Deferred income taxes
|
|
|
38,100
|
|
|
|
45,786
|
|
Other assets
|
|
|
10,550
|
|
|
|
8,380
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,303,888
|
|
|
$
|
1,275,253
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,593
|
|
|
$
|
11,172
|
|
Accrued compensation and employee benefits
|
|
|
28,139
|
|
|
|
29,551
|
|
Other accrued liabilities
|
|
|
38,183
|
|
|
|
43,665
|
|
Deferred revenue
|
|
|
39,673
|
|
|
|
38,243
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
114,588
|
|
|
|
122,631
|
|
Revolving line of credit
|
|
|
295,000
|
|
|
|
295,000
|
|
Senior notes
|
|
|
275,000
|
|
|
|
275,000
|
|
Other liabilities
|
|
|
19,031
|
|
|
|
20,681
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
703,619
|
|
|
|
713,312
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
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 48,156 and
48,473 shares outstanding at September 30, 2009 and
2008, respectively)
|
|
|
482
|
|
|
|
485
|
|
Paid-in-capital
|
|
|
1,106,292
|
|
|
|
1,110,165
|
|
Treasury stock, at cost (40,701 and 40,384 shares at
September 30, 2009 and 2008, respectively)
|
|
|
(1,375,400
|
)
|
|
|
(1,374,455
|
)
|
Retained earnings
|
|
|
886,324
|
|
|
|
825,109
|
|
Accumulated other comprehensive income (loss)
|
|
|
(17,429
|
)
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
600,269
|
|
|
|
561,941
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,303,888
|
|
|
$
|
1,275,253
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
56
FAIR
ISAAC CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
630,735
|
|
|
$
|
744,842
|
|
|
$
|
784,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues(1)
|
|
|
206,448
|
|
|
|
274,917
|
|
|
|
259,450
|
|
Research and development
|
|
|
73,626
|
|
|
|
77,794
|
|
|
|
69,322
|
|
Selling, general and administrative(1)
|
|
|
209,319
|
|
|
|
245,639
|
|
|
|
273,705
|
|
Amortization of intangible assets
|
|
|
12,891
|
|
|
|
14,043
|
|
|
|
20,470
|
|
Restructuring
|
|
|
8,711
|
|
|
|
10,166
|
|
|
|
2,455
|
|
(Gain) loss on sale of product line assets
|
|
|
2,993
|
|
|
|
|
|
|
|
(1,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
513,988
|
|
|
|
622,559
|
|
|
|
623,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
116,747
|
|
|
|
122,283
|
|
|
|
160,327
|
|
Interest income
|
|
|
4,717
|
|
|
|
8,802
|
|
|
|
13,527
|
|
Interest expense
|
|
|
(25,481
|
)
|
|
|
(20,335
|
)
|
|
|
(12,766
|
)
|
Other income, net
|
|
|
1,587
|
|
|
|
2,245
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
97,570
|
|
|
|
112,995
|
|
|
|
161,515
|
|
Provision for income taxes
|
|
|
32,105
|
|
|
|
31,809
|
|
|
|
49,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
65,465
|
|
|
|
81,186
|
|
|
|
111,851
|
|
Income (loss) from discontinued operations
|
|
|
(363
|
)
|
|
|
2,766
|
|
|
|
(7,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,102
|
|
|
$
|
83,952
|
|
|
$
|
104,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.35
|
|
|
$
|
1.66
|
|
|
$
|
2.00
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.34
|
|
|
$
|
1.72
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations
|
|
$
|
1.34
|
|
|
$
|
1.64
|
|
|
$
|
1.94
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.06
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.33
|
|
|
$
|
1.70
|
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
48,658
|
|
|
|
48,940
|
|
|
|
56,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
48,776
|
|
|
|
49,373
|
|
|
|
57,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenues and selling, general and administrative
expenses exclude the amortization of intangible assets. See
Note 9 to consolidated financial statements. |
See accompanying notes to consolidated financial statements.
57
FAIR
ISAAC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
Years Ended September 30, 2009, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-in-
|
|
|
Treasury
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Balance at September 30, 2006
|
|
|
59,369
|
|
|
$
|
594
|
|
|
$
|
1,073,886
|
|
|
$
|
(952,979
|
)
|
|
$
|
644,836
|
|
|
$
|
3,691
|
|
|
$
|
770,028
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
36,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,261
|
|
|
|
|
|
Exercise of stock options
|
|
|
3,137
|
|
|
|
31
|
|
|
|
(29,262
|
)
|
|
|
104,357
|
|
|
|
|
|
|
|
|
|
|
|
75,126
|
|
|
|
|
|
Tax effect from exercised stock options
|
|
|
|
|
|
|
|
|
|
|
16,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,684
|
|
|
|
|
|
Forfeitures of restricted stock
|
|
|
(23
|
)
|
|
|
|
|
|
|
732
|
|
|
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(11,716
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
(450,971
|
)
|
|
|
|
|
|
|
|
|
|
|
(451,088
|
)
|
|
|
|
|
Issuance of ESPP shares from treasury
|
|
|
277
|
|
|
|
3
|
|
|
|
(328
|
)
|
|
|
9,286
|
|
|
|
|
|
|
|
|
|
|
|
8,961
|
|
|
|
|
|
Issuance of restricted stock to employees from treasury
|
|
|
20
|
|
|
|
|
|
|
|
(646
|
)
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,432
|
)
|
|
|
|
|
|
|
(4,432
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,650
|
|
|
|
|
|
|
|
104,650
|
|
|
$
|
104,650
|
|
Unrealized gains on investments, net of tax of $165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261
|
|
|
|
261
|
|
|
|
261
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,863
|
|
|
|
9,863
|
|
|
|
9,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
51,064
|
|
|
|
511
|
|
|
|
1,097,327
|
|
|
|
(1,290,393
|
)
|
|
|
745,054
|
|
|
|
13,815
|
|
|
|
566,314
|
|
|
$
|
114,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
27,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,981
|
|
|
|
|
|
Exercise of stock options
|
|
|
523
|
|
|
|
5
|
|
|
|
(5,594
|
)
|
|
|
17,878
|
|
|
|
|
|
|
|
|
|
|
|
12,289
|
|
|
|
|
|
Tax effect from share based payment arrangements
|
|
|
|
|
|
|
|
|
|
|
(2,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,375
|
)
|
|
|
|
|
Forfeitures of restricted stock
|
|
|
(35
|
)
|
|
|
|
|
|
|
1,114
|
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(3,540
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
(116,607
|
)
|
|
|
|
|
|
|
|
|
|
|
(116,642
|
)
|
|
|
|
|
Issuance of ESPP shares from treasury
|
|
|
384
|
|
|
|
3
|
|
|
|
(4,691
|
)
|
|
|
13,142
|
|
|
|
|
|
|
|
|
|
|
|
8,454
|
|
|
|
|
|
Issuance of restricted stock to employees from treasury
|
|
|
77
|
|
|
|
1
|
|
|
|
(3,597
|
)
|
|
|
2,639
|
|
|
|
|
|
|
|
|
|
|
|
(957
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,897
|
)
|
|
|
|
|
|
|
(3,897
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,952
|
|
|
|
|
|
|
|
83,952
|
|
|
$
|
83,952
|
|
Unrealized gains on investments, net of tax of $25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
38
|
|
|
|
38
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,216
|
)
|
|
|
(13,216
|
)
|
|
|
(13,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
48,473
|
|
|
|
485
|
|
|
|
1,110,165
|
|
|
|
(1,374,455
|
)
|
|
|
825,109
|
|
|
|
637
|
|
|
|
561,941
|
|
|
$
|
70,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
19,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,935
|
|
|
|
|
|
Exercise of stock options
|
|
|
148
|
|
|
|
1
|
|
|
|
(3,197
|
)
|
|
|
5,027
|
|
|
|
|
|
|
|
|
|
|
|
1,831
|
|
|
|
|
|
Tax effect from share based payment arrangements
|
|
|
|
|
|
|
|
|
|
|
(9,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,545
|
)
|
|
|
|
|
Forfeitures of restricted stock
|
|
|
(2
|
)
|
|
|
|
|
|
|
64
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(832
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(18,492
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,500
|
)
|
|
|
|
|
Issuance of ESPP shares from treasury
|
|
|
195
|
|
|
|
2
|
|
|
|
(3,848
|
)
|
|
|
6,646
|
|
|
|
|
|
|
|
|
|
|
|
2,800
|
|
|
|
|
|
Issuance of restricted stock to employees from treasury
|
|
|
174
|
|
|
|
2
|
|
|
|
(7,282
|
)
|
|
|
5,938
|
|
|
|
|
|
|
|
|
|
|
|
(1,342
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,887
|
)
|
|
|
|
|
|
|
(3,887
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,102
|
|
|
|
|
|
|
|
65,102
|
|
|
$
|
65,102
|
|
Unrealized gains on investments, net of tax of $232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359
|
|
|
|
359
|
|
|
|
359
|
|
Cumulative translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,425
|
)
|
|
|
(18,425
|
)
|
|
|
(18,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
48,156
|
|
|
$
|
482
|
|
|
$
|
1,106,292
|
|
|
$
|
(1,375,400
|
)
|
|
$
|
886,324
|
|
|
$
|
(17,429
|
)
|
|
$
|
600,269
|
|
|
$
|
47,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
58
FAIR
ISAAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,102
|
|
|
$
|
83,952
|
|
|
$
|
104,650
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,419
|
|
|
|
39,494
|
|
|
|
50,224
|
|
Share-based compensation
|
|
|
19,935
|
|
|
|
27,981
|
|
|
|
36,261
|
|
Deferred income taxes
|
|
|
(5,031
|
)
|
|
|
(23,095
|
)
|
|
|
3,800
|
|
Tax effect from share-based payment arrangements
|
|
|
(9,545
|
)
|
|
|
(2,375
|
)
|
|
|
16,684
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(280
|
)
|
|
|
(1,342
|
)
|
|
|
(12,623
|
)
|
Gain on repurchase of senior convertible notes
|
|
|
|
|
|
|
(896
|
)
|
|
|
|
|
Net amortization (accretion) of premium (discount) on marketable
securities
|
|
|
1,057
|
|
|
|
579
|
|
|
|
(1,098
|
)
|
Provision for doubtful accounts
|
|
|
499
|
|
|
|
3,414
|
|
|
|
4,972
|
|
Loss on sale of business unit
|
|
|
|
|
|
|
6,952
|
|
|
|
|
|
(Gain) loss on sale of product line assets
|
|
|
2,993
|
|
|
|
|
|
|
|
(1,541
|
)
|
Net loss on sales of property and equipment
|
|
|
115
|
|
|
|
39
|
|
|
|
693
|
|
Changes in operating assets and liabilities, net of acquisition
and disposition effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
31,316
|
|
|
|
20,153
|
|
|
|
(15,837
|
)
|
Prepaid expenses and other assets
|
|
|
36
|
|
|
|
1,766
|
|
|
|
(3,400
|
)
|
Accounts payable
|
|
|
(2,519
|
)
|
|
|
(1,569
|
)
|
|
|
1,584
|
|
Accrued compensation and employee benefits
|
|
|
(976
|
)
|
|
|
(13,363
|
)
|
|
|
8,864
|
|
Other liabilities
|
|
|
3,214
|
|
|
|
14,033
|
|
|
|
(9,492
|
)
|
Deferred revenue
|
|
|
7,298
|
|
|
|
3,427
|
|
|
|
(4,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
151,633
|
|
|
|
159,150
|
|
|
|
179,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(13,958
|
)
|
|
|
(22,780
|
)
|
|
|
(22,735
|
)
|
Cash proceeds from sales of property and equipment
|
|
|
|
|
|
|
1,527
|
|
|
|
566
|
|
Cash proceeds from sales of product line assets
|
|
|
4,000
|
|
|
|
|
|
|
|
15,758
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
|
|
|
|
(33,336
|
)
|
|
|
|
|
Cash proceeds from sale of business unit
|
|
|
|
|
|
|
15,581
|
|
|
|
|
|
Purchases of marketable securities
|
|
|
(197,274
|
)
|
|
|
(161,803
|
)
|
|
|
(180,951
|
)
|
Proceeds from sale of marketable securities
|
|
|
7,400
|
|
|
|
2,008
|
|
|
|
14,250
|
|
Proceeds from maturities of marketable securities
|
|
|
116,585
|
|
|
|
167,684
|
|
|
|
220,763
|
|
Distribution from (investment in) cost method investees
|
|
|
1,300
|
|
|
|
|
|
|
|
(10,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(81,947
|
)
|
|
|
(31,119
|
)
|
|
|
37,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
|
|
|
|
300,000
|
|
|
|
170,000
|
|
Payments on revolving line of credit
|
|
|
|
|
|
|
(175,000
|
)
|
|
|
|
|
Proceeds from issuance of senior notes
|
|
|
|
|
|
|
275,000
|
|
|
|
|
|
Payments for repurchases of senior convertible notes
|
|
|
|
|
|
|
(390,067
|
)
|
|
|
(9,037
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(1,477
|
)
|
|
|
(858
|
)
|
Proceeds from issuances of common stock under employee stock
option and purchase plans
|
|
|
3,289
|
|
|
|
19,786
|
|
|
|
84,087
|
|
Dividends paid
|
|
|
(3,887
|
)
|
|
|
(3,897
|
)
|
|
|
(4,432
|
)
|
Repurchases of common stock
|
|
|
(18,500
|
)
|
|
|
(116,642
|
)
|
|
|
(451,088
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
|
280
|
|
|
|
1,342
|
|
|
|
12,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(18,818
|
)
|
|
|
(90,955
|
)
|
|
|
(198,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(2,389
|
)
|
|
|
(2,682
|
)
|
|
|
2,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
48,479
|
|
|
|
34,394
|
|
|
|
20,130
|
|
Cash and cash equivalents, beginning of year
|
|
|
129,678
|
|
|
|
95,284
|
|
|
|
75,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
178,157
|
|
|
$
|
129,678
|
|
|
$
|
95,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds of $2,742, $1,447 and
$30 during the years ended September 30, 2009, 2008 and
2007, respectively
|
|
$
|
28,364
|
|
|
$
|
20,074
|
|
|
$
|
38,127
|
|
Cash paid for interest
|
|
$
|
26,189
|
|
|
$
|
13,009
|
|
|
$
|
9,580
|
|
See accompanying notes to consolidated financial statements.
59
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended September 30, 2009, 2008 and 2007
|
|
1.
|
Nature of
Business and Summary of Significant Accounting
Policies
|
Fair
Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac
Corporation (FICO) is a provider of analytic,
software and data management products and services that enable
businesses to automate, improve and connect decisions. FICO
provides a range of analytical solutions, credit scoring and
credit account management products and services to banks, credit
reporting agencies, credit card processing agencies, insurers,
retailers and healthcare organizations.
In these consolidated financial statements, FICO is referred to
as we, us, our, or
FICO.
Principles
of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
FICO and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates. These estimates and assumptions include, but
are not limited to, assessing the following: the recoverability
of accounts receivable, goodwill and other intangible assets,
software development costs and deferred tax assets; the benefits
related to uncertain tax positions, the determination of the
fair value of stock-based compensation, the ability to estimate
hours in connection with fixed-fee service contracts, the
ability to estimate transactional-based revenues for which
actual transaction volumes have not yet been received, and the
determination of whether fees are fixed or determinable and
collection is probable or reasonably assured.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash in banks and
investments with a maturity of 90 days or less at time of
purchase.
Fair
Value of Financial Instruments
The fair value of certain of our financial instruments,
including cash and cash equivalents, receivables, other current
assets, accounts payable, accrued compensation and employee
benefits, other accrued liabilities and amounts outstanding
under our revolving line of credit, approximate their carrying
amounts because of the short-term maturity of these instruments.
The fair values of our cash and cash equivalents and marketable
security investments are disclosed in Note 5. The fair
value of our cost-method investments approximate their recorded
value. The fair value of our Senior Notes is disclosed in
Note 12.
Investments
Management determines the appropriate classification of our
investments in marketable debt and equity securities at the time
of purchase, and re-evaluates this designation at each balance
sheet date. While it is our intent to hold debt securities to
maturity, our investments in U.S. government obligations
and marketable equity and debt securities that have readily
determinable fair values are classified as
available-for-sale,
as the sale of such securities may be required prior to maturity
to implement management strategies. Therefore, such securities
are carried at fair value with unrealized gains or losses
related to these securities included in
60
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
accumulated other comprehensive income (loss). The fair value of
marketable securities is based upon inputs including quoted
prices for identical or similar assets. Realized gains and
losses are included in other income, net on the consolidated
statements of income. The cost of investments sold is based on
the specific identification method. Losses resulting from other
than temporary declines in fair value are charged to operations.
Investments with remaining maturities over one year are
classified as long-term investments.
Our investments in equity securities of companies over which we
do not have significant influence are accounted for under the
cost method. Investments in which we own 20% to 50% and exercise
significant influence over operating and financial policies are
accounted for using the equity method. Under the equity method,
the investment is originally recorded at cost and adjusted to
recognize our share of net earnings or losses of the investee,
limited to the extent of our investment in, advances to, and
financial guarantees for the investee. Under the cost method,
the investment is originally recorded at cost and adjusted for
additional contributions or distributions. Management
periodically reviews equity-method and cost-method investments
for instances where fair value is less than the carrying amount
and the decline in value is determined to be other than
temporary. If the decline in value is judged to be other than
temporary, the carrying amount of the security is written down
to fair value and the resulting loss is charged to operations.
Concentration
of Risk
Financial instruments that potentially expose us to
concentrations of risk consist primarily of cash and cash
equivalents, marketable securities and accounts receivable,
which are generally not collateralized. Our policy is to place
our cash, cash equivalents, and marketable securities with high
quality financial institutions, commercial corporations and
government agencies in order to limit the amount of credit
exposure. We have established guidelines relative to
diversification and maturities for maintaining safety and
liquidity. We generally do not require collateral from our
customers, but our credit extension and collection policies
include analyzing the financial condition of potential
customers, establishing credit limits, monitoring payments, and
aggressively pursuing delinquent accounts. We maintain
allowances for potential credit losses.
A significant portion of our revenues are derived from the sales
of products and services to the consumer credit, banking and
insurance industries.
Property
and Equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Major renewals and improvements
are capitalized, while repair and maintenance costs are expensed
as incurred. Depreciation and amortization charges are
calculated using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Estimated Useful Life
|
|
Data processing equipment and software
|
|
2 to 3 years
|
Office furniture and equipment
|
|
3 to 7 years
|
Leasehold improvements
|
|
Shorter of estimated useful life or lease term
|
The cost and accumulated depreciation for property and equipment
sold, retired or otherwise disposed of are removed from the
applicable accounts and resulting gains or losses are recorded
in operations. Depreciation and amortization on property and
equipment totaled $25.5 million, $24.1 million and
$26.2 million during fiscal 2009, 2008 and 2007,
respectively.
61
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
Internal-use
Software
Costs incurred to develop internal-use software during the
application development stage are capitalized and reported at
cost, subject to an impairment test as described below.
Application development stage costs generally include costs
associated with internal-use software configuration, coding,
installation and testing. Costs of significant upgrades and
enhancements that result in additional functionality are also
capitalized whereas costs incurred for maintenance and minor
upgrades and enhancements are expensed as incurred. Capitalized
costs are amortized using the straight-line method over two to
three years.
We assess potential impairment of capitalized internal-use
software whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset group to the
future undiscounted net cash flows that are expected to be
generated by the asset group. If such assets are considered to
be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell. We capitalized $0.3 million, $0.3 million and
$0.2 million in fiscal 2009, 2008 and 2007, respectively.
Amortization expense related to internal-use software was
$0.3 million, $0.6 million and $2.0 million in
fiscal 2009, 2008 and 2007, respectively.
Goodwill
and Intangible Assets
Goodwill represents the excess of the purchase price over the
fair value of net assets acquired in connection with our
business combinations accounted for by the purchase method of
accounting (see Note 9). We test goodwill for impairment at
the reporting unit level at least annually during the fourth
quarter of each fiscal year and more frequently if impairment
indicators are identified. We have determined that our reporting
units are the same as our reportable segments. The first step of
the goodwill impairment test is a comparison of the fair value
of a reporting unit to its carrying value. We estimate the fair
values of our reporting units using discounted cash flow
valuation models and by comparing our reporting units to
guideline publicly-traded companies. These methods require
estimates of our future revenues, profits, capital expenditures,
working capital, and other relevant factors, as well as
selecting appropriate guideline publicly-traded companies for
each reporting unit. We estimate these amounts by evaluating
historical trends, current budgets, operating plans, industry
data, and other relevant factors.
Definite-lived intangible assets are tested for impairment if
impairment indicators arise. We amortize our definite-lived
intangible assets, which result from our acquisitions accounted
for under the purchase method of accounting, using the
straight-line method or based on the forecasted cash flows
associated with the assets over the following estimated useful
lives:
|
|
|
|
|
Estimated Useful Life
|
|
Completed technology
|
|
4 to 6 years
|
Customer contracts and relationships
|
|
2 to 15 years
|
Trade names
|
|
5 years
|
Revenue
Recognition
Software license fee revenue is recognized when persuasive
evidence of an arrangement exists, delivery of the product has
occurred at our customers location, the fee is fixed or
determinable and collection is probable. We use the residual
method to recognize revenue when an arrangement includes one or
more elements to be delivered at a future date and
vendor-specific objective evidence (VSOE) of the
fair value of all undelivered elements exists. VSOE of fair
value is based on the normal pricing practices for those
products and services when sold separately by us and customer
renewal rates for post-contract customer support
62
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
services. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenue. If evidence of the
fair value of one or more undelivered elements does not exist,
the revenue is deferred and recognized when delivery of those
elements occurs or when fair value can be established. The
determination of whether fees are fixed or determinable and
collection is probable involves the use of assumptions. We
evaluate contract terms and customer information to ensure that
these criteria are met prior to our recognition of license fee
revenue. Changes to the elements in a software arrangement, the
ability to identify VSOE for those elements, the fair value of
the respective elements, and change to a products
estimated life cycle could materially impact the amount of
earned and unearned revenue.
When software licenses are sold together with implementation or
consulting services, license fees are recognized upon delivery
provided that the above criteria are met, payment of the license
fees is not dependent upon the performance of the services, and
the services do not provide significant customization or
modification of the software products and are not essential to
the functionality of the software that was delivered. For
arrangements with services that are essential to the
functionality of the software, the license and related service
revenues are recognized using contract accounting as described
below.
If at the outset of an arrangement we determine that the
arrangement fee is not fixed or determinable, revenue is
deferred until the arrangement fee becomes fixed or
determinable, assuming all other revenue recognition criteria
have been met. If at the outset of an arrangement we determine
that collectibility is not probable, revenue is deferred until
the earlier of when collectibility becomes probable or the
receipt of payment. If there is uncertainty as to the
customers acceptance of our deliverables, revenue is not
recognized until the earlier of receipt of customer acceptance,
expiration of the acceptance period, or when we can demonstrate
we meet the acceptance criteria.
Revenues from post-contract customer support services, such as
software maintenance, are recognized on a straight-line basis
over the term of the support period. The majority of our
software maintenance agreements provide technical support as
well as unspecified software product upgrades and releases when
and if made available by us during the term of the support
period.
Revenues recognized from our credit scoring, data processing,
data management and internet delivery services are recognized as
these services are performed, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable, and
collection is reasonably assured. The determination of certain
of our credit scoring and data processing revenues requires the
use of estimates, principally related to transaction volumes in
instances where these volumes are reported to us by our clients
on a monthly or quarterly basis in arrears. In these instances,
we estimate transaction volumes based on preliminary customer
transaction information, if available, or based on average
actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes
reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between
our estimates and actual reported volumes in the past and
anticipate that we will be able to continue to make reasonable
estimates in the future. If for some reason we were unable to
reasonably estimate transaction volumes in the future, revenue
may be deferred until actual customer data was received, and
this could have a material impact on our results of operations
during the period of time that we changed accounting methods.
Transactional or unit-based license fees under software license
arrangements, network service and internally-hosted software
agreements are recognized as revenue based on system usage or
when fees based on system usage exceed monthly minimum license
fees, provided persuasive evidence of an arrangement exists,
fees are fixed or determinable and collection is probable. The
determination of certain of our transactional or unit-based
license fee revenues requires the use of estimates, principally
related to transaction usage or active account volumes in
instances where this information is reported to us by our
clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary
customer transaction
63
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
information, if available, or based on average actual reported
volumes for an immediate trailing period. Differences between
our estimates and actual final volumes reported are recorded in
the period in which actual volumes are reported. We have not
experienced significant variances between our estimates and
actual reported volumes in the past and anticipate that we will
be able to continue to make reasonable estimates in the future.
If for some reason we were unable to reasonably estimate
customer account or transaction volumes in the future, revenue
would be deferred until actual customer data was received, and
this could have a material impact on our consolidated results of
operations.
We provide consulting, training, model development and software
integration services under both hourly-based time and materials
and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For
fixed-price service contracts, we apply the
percentage-of-completion
method of contract accounting to determine progress towards
completion, which requires the use of estimates. In such
instances, management is required to estimate the input
measures, generally based on hours incurred to date compared to
total estimated hours of the project, with consideration also
given to output measures, such as contract milestones, when
applicable. Adjustments to estimates are made in the period in
which the facts requiring such revisions become known and,
accordingly, recognized revenues and profits are subject to
revisions as the contract progresses to completion. Estimated
losses, if any, are recorded in the period in which current
estimates of total contract revenue and contract costs indicate
a loss. If substantive uncertainty related to customer
acceptance of services exists, we apply the completed contract
method of accounting and defer the associated revenue until the
contract is completed. If we are unable to accurately estimate
the input measures used for
percentage-of-completion
accounting, revenue would be deferred until the contract is
complete, and this could have a material impact on our
consolidated results of operations.
Revenue recognized under the
percentage-of-completion
method in excess of contract billings is recorded as an unbilled
receivable. Such amounts are generally billable upon reaching
certain performance milestones as defined by individual
contracts. Billings collected in advance of performance and
recognition of revenue under contracts are recorded as deferred
revenue.
In certain of our non-software arrangements, we enter into
contracts that include the delivery of a combination of two or
more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data
management tools or systems and an ongoing obligation to manage,
host or otherwise run solutions for our customer. Such
arrangements are divided into separate units of accounting
provided that the delivered item has stand-alone value and there
is objective and reliable evidence of the fair value of the
undelivered items. The total arrangement fee is allocated to the
undelivered elements based on their fair values and to the
initial delivered elements using the residual method. Revenue is
recognized separately, and in accordance with our revenue
recognition policy, for each element.
As described above, sometimes our customer arrangements have
multiple deliverables, including service elements. Generally,
our multiple element arrangements fall within the scope of
specific accounting standards that provide guidance regarding
the separation of elements in multiple-deliverable arrangements
and the allocation of consideration among those elements. If
not, we apply separation provisions, which require us to
unbundle multiple element arrangements into separate units of
accounting when the delivered element(s) has stand-alone value
and fair value of the undelivered element(s) exists. When we are
able to unbundle the arrangement into separate units of
accounting, we apply one of the accounting policies described
above to each unit. If we are unable to unbundle the arrangement
into separate units of accounting, we apply one of the
accounting policies described above to the entire arrangement.
Sometimes this results in recognizing the entire arrangement fee
when delivery of the last element in a multiple element
arrangement occurs. For example, if the last undelivered element
is a service, we recognize revenue for the entire arrangement
fee as the service is performed, or if no pattern of performance
is discernable, we recognize revenue on a straight-line basis
over the term of the arrangement.
64
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
We apply accounting guidance to determine whether the Company
should report revenue for certain transactions based upon the
gross amount billed to the customer, or the net amount retained
by the Company. In accordance with the guidance we record
revenue on a gross basis for sales in which we have acted as the
principal and on a net basis for those sales in which we have in
substance acted as an agent or broker in the transaction.
Allowance
for Doubtful Accounts
We make estimates regarding the collectibility of our accounts
receivable. When we evaluate the adequacy of our allowance for
doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness,
current economic trends and changes in our customer payment
cycles. Material differences may result in the amount and timing
of expense for any period if we were to make different judgments
or utilize different estimates. If the financial condition of
our customers deteriorates resulting in an impairment of their
ability to make payments, additional allowances might be
required.
Income
Taxes
Income taxes are recognized during the year in which
transactions enter into the determination of financial statement
income, with deferred taxes being provided for temporary
differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax
laws. A deferred income tax asset or liability is computed for
the expected future impact of differences between the financial
reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax
credit carryforwards. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount
more likely than not to be realized in future tax
returns. Tax rate changes are reflected in income during the
period the changes are enacted. We recognize interest expense
related to unrecognized tax benefits and penalties as part of
the provision for income taxes in our consolidated statements of
income. We recognize interest earned related to income tax
matters as interest income in our consolidated statements of
income.
Earnings
per Share
Basic earnings per share are computed on the basis of the
weighted-average number of common shares outstanding during the
period under measurement. Diluted earnings per share are based
on the weighted-average number of common shares outstanding and
potential common shares. Potential common shares result from the
assumed exercise of outstanding stock options or other
potentially dilutive equity instruments, when they are dilutive
under the treasury stock method or the if-converted method.
Comprehensive
Income
Comprehensive income is the change in our equity (net assets)
during each period from transactions and other events and
circumstances from non-owner sources. It includes net income,
foreign currency translation adjustments and unrealized gains
and losses, net of tax, on our investments in marketable
securities.
Foreign
Currency
We have determined that the functional currency of each foreign
operation is the local currency. Assets and liabilities
denominated in their local foreign currencies are translated
into U.S. dollars at the exchange rate on the balance sheet
date. Revenues and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments
are accumulated as a separate component of stockholders
equity.
65
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
At the end of the reporting period, foreign currency denominated
receivable and cash balances are remeasured into the functional
currency of the reporting entities at current market rates. The
change in value from this remeasurement is reported as a foreign
exchange gain or loss for that period in other income, net in
the accompanying consolidated statements of income. We recorded
$2.5 million, $2.0 million and $(0.4) million of
transactional foreign currency exchange gains (losses) during
2009, 2008 and 2007, respectively.
Derivative
Financial Instruments
From time to time, we utilize forward contract instruments to
manage market risks associated with fluctuations in certain
foreign currency exchange rates as they relate to specific
balances of accounts receivable and cash denominated in foreign
currencies. It is our policy to use derivative financial
instruments to protect against market risks arising in the
normal course of business. Our policies prohibit the use of
derivative instruments for the sole purpose of trading for
profit on price fluctuations or to enter into contracts that
intentionally increase our underlying exposure. All of our
forward foreign currency contracts have maturity periods of less
than three months. Gains or losses from forward foreign currency
contracts are included in other income, net.
Share-Based
Compensation Expense
We amortize share-based compensation expense based upon the fair
value of share-based awards on a straight-line basis over the
requisite vesting period as defined in the applicable plan
documents. Corporate income tax benefits realized upon exercise
or vesting of an award in excess of that previously recognized
in earnings, referred to as an excess tax benefit, is presented
in the consolidated statements of cash flow as a financing
activity. Realized excess tax benefits are credited to
additional capital in the consolidated balance sheets. Realized
shortfall tax benefits, amounts which are less than that
previously recognized in earnings, are first offset against the
cumulative balance of excess tax benefits, if any, and then
charged directly to income tax expense. See Note 17 for
further discussion of our share-based employee benefit plans.
Impairment
of Long-Lived Assets
We assess potential impairment to long-lived assets and certain
identifiable intangible assets with finite lives whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted net cash flows that are
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. We determined that
our long-lived assets were not impaired at September 30,
2009, 2008 and 2007. Assets to be disposed are reported at the
lower of the carrying amount or fair value less costs to sell.
Advertising
and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Advertising and promotion costs totaled $6.8 million,
$1.9 million and $1.2 million in fiscal 2009, 2008 and
2007, respectively, and are included in selling, general and
administrative expenses in the accompanying consolidated
statements of income.
Recently
Issued Accounting Standards
Recently
Adopted Accounting Standards
During the fourth quarter of 2009, we adopted new accounting
guidance related to the Financial Accounting Standards Board
(FASB) accounting standards codification, which was
effective for financial
66
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
statements issued for interim or annual periods ending after
September 15, 2009. The codification is the single source
of authoritative accounting principles recognized by the FASB in
preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) and creates
one level of authoritative GAAP. All other literature is
considered non-authoritative. The adoption did not have an
impact on our consolidated financial statements other than
changes in reference to various authoritative accounting
pronouncements.
During the third quarter of 2009, we adopted new accounting
guidance on the accounting for, and disclosure of, events that
occur after the balance sheet date, but before financial
statements are issued or are available to be issued, also known
as subsequent events. We have evaluated subsequent events
through the time of filing these financial statements on
November 24, 2009.
On April 1, 2009, we adopted new accounting guidance on
interim disclosures about the fair value of financial
instruments. The standard requires fair value disclosures of
financial instruments on a quarterly basis, as well as new
disclosures regarding the methodology and significant
assumptions underlying the fair value measures and any changes
to the methodology and assumptions during the reporting period.
The additional disclosures required by this standard are
included in Note 7 and Note 12. The adoption of did
not affect our consolidated financial statements, but did result
in an expansion of our associated disclosures.
On April 1, 2009, we adopted new accounting guidance on
estimating fair value when the volume and level of activity for
an asset or liability have significantly decreased in relation
to normal market activity for the asset or liability. The
adoption of this guidance did not affect our consolidated
financial statements.
On April 1, 2009, we adopted accounting guidance that
provides criteria for determining whether an impairment of a
debt security is temporary and recorded in other comprehensive
income in the equity section of the balance sheet or
other-than-temporary
and recorded as a loss on the statement of operations. The
adoption of this guidance did not affect our consolidated
financial statements.
On January 1, 2009, we adopted accounting guidance on
disclosures about derivative financial instruments and hedging
activities. The new guidance expands the disclosure requirements
about an entitys derivative instruments and hedging
activities by requiring additional qualitative and quantitative
information on the use of derivatives and its impact on the
consolidated financial statements. The additional disclosures
required by this standard are included in Note 6.
On October 1, 2008, we adopted new accounting guidance on
fair value measurements. The new guidance defines fair value,
establishes a framework for measuring fair value under
U.S. GAAP, and expands disclosures about fair value
measurements. The standard also responds to investors
requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value and the effect of fair
value measurements on earnings. The guidance applies whenever
accounting guidance requires or permits assets or liabilities to
be measured at fair value, but does not expand the use of fair
value in any new circumstances. Subsequent guidance has been
issued to assist in determining the fair value of a financial
asset when the market for that asset is not active. Refer to
Note 7 for information regarding the fair value measurement
of our financial assets and liabilities.
On October 1, 2008, we adopted new accounting guidance that
provides companies with an option to report selected financial
assets and liabilities at fair value. The objective of the
guidance is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. The
guidance also requires companies to provide additional
information that will help investors and other users of
financial statements to more easily understand the effect of a
companys choice to use fair value on its earnings and it
requires companies to display the fair value of those assets and
liabilities for which a company has chosen to use fair value on
the face of the balance sheet. Upon adoption, we did not elect
the fair value option for any additional financial assets or
liabilities that we held at that date.
67
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
Accounting
Standards not yet Adopted
In December 2007, the FASB issued new guidance on the accounting
for business combinations. The guidance states that business
combinations will result in all assets and liabilities of an
acquired business being recorded at their fair values. Certain
forms of contingent consideration and acquired contingencies
will be recorded at fair value at the acquisition date. Further,
acquisition costs will be expensed as incurred and restructuring
costs will be expensed in periods after the acquisition date.
This statement is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are in
the process of determining what effect, if any, the adoption of
this guidance will have on our consolidated financial statements.
In December 2007, the FASB issued new accounting guidance on
non-controlling interests in consolidated financial statements.
The guidance clarifies that a noncontrolling or minority
interest in a subsidiary is considered an ownership interest
and, accordingly, requires all entities to report such interests
in subsidiaries as equity in the consolidated financial
statements. The guidance is effective for fiscal years beginning
after December 15, 2008. We are in the process of
determining what effect, if any, the adoption of this guidance
will have on our consolidated financial statements.
In February 2008, the FASB issued new accounting guidance which
deferred the effective date of applying fair value measurement
guidance for non-financial assets and liabilities, except for
items that are recognized or disclosed at fair value in an
entitys financial statements on a recurring basis (at
least annually). We elected to defer the adoption of this
guidance until October 1, 2009. We are in the process of
determining the impact of adoption on our consolidated financial
statements.
In June 2009, the FASB issued new accounting guidance related to
the consolidation of variable interest entities. The guidance
requires revised evaluations of whether entities represent
variable interest entities, ongoing assessments of control over
such entities, and additional disclosures for variable
interests. We are in the process of determining what effect, if
any, the adoption of this guidance will have on our consolidated
financial statements.
In September 2009, the FASB issued new accounting guidance
related to non-software revenue arrangements with multiple
deliverables. The guidance removes the fair value threshold for
separation of deliverables into separate units of accounting and
in many cases will result in accelerated revenue recognition.
The guidance also replaces the term fair value with
selling price, provides a hierarchy that entities
must use to estimate the selling price, which is used in
allocating revenue to each deliverable, eliminates the use of
the residual method of allocation, and expands certain
disclosures. The guidance is effective for fiscal years
beginning on or after June 15, 2010. Entities can elect to
apply this issue on a prospective or a retrospective basis and
early adoption is permitted. We are in the process of
determining the impact of adoption on our consolidated financial
statements.
In May 2008, the FASB issued new guidance on the accounting for
convertible instruments that may be settled in cash upon
conversion. The guidance requires that proceeds from the
issuance of convertible debt instruments be allocated between
debt (at a discount) and an equity component. The debt discount
will be amortized over the period the convertible debt is
expected to be outstanding as additional non-cash interest
expense. This guidance is effective for fiscal years beginning
after December 15, 2008, and is to be applied
retrospectively to prior periods. The guidance changes the
accounting treatment for our Senior Convertible Notes, which
were issued in August 2003; however, the only retrospective
adjustment to our financial statements would be a
reclassification between equity accounts. The guidance does not
require retrospective adoption if instruments were not
outstanding during any of the periods presented in the annual
financial statements for the period of adoption, or if
restatement would only lead to a reclassification between its
68
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
opening equity accounts for periods presented in the annual
financial statements. As a result, the adoption of this guidance
will not impact our consolidated financial statements.
In April 2008, the FASB issued new guidance in determining the
useful life of intangible assets. The guidance amends the
factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset. This new guidance is intended to
improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to
measure the fair value of the asset. The guidance is effective
for fiscal years beginning after December 15, 2008. We are
in the process of determining what effect, if any, the adoption
of this guidance will have on our consolidated financial
statements.
In January 2008, we acquired Dash Optimization
(Dash), a leading provider of decision modeling and
optimization software, for an aggregate cash purchase price of
approximately $34.1 million. The acquisition of Dash was
consummated principally to augment our decision management
analytic tools. We accounted for this transaction using the
purchase method of accounting and allocated the associated
goodwill to our Analytical Software Tools segment. The results
of Dash have been included in our operating results since the
date of acquisition. The pro forma effects of this acquisition
on our Consolidated Financial Statements were not material.
|
|
3.
|
Discontinued
Operations
|
In April 2008, we completed the sale of our Insurance Bill
Review business unit for $16.0 million in cash. At the time
of the disposition, we recorded a $6.9 million pre-tax
loss, but a $3.4 million after-tax gain on the sale as the
amount of goodwill disposed of for income tax purposes exceeded
the amount determined for financial reporting purposes. During
fiscal 2009, we recorded an additional charge of
$0.4 million, net of tax, as a result of an unfavorable
final working capital adjustment.
The decision to sell the Insurance Bill Review business was the
result of managements decision to divest non-strategic
businesses and focus resources on our core products and
services. Insurance Bill Review was part of the Strategy Machine
Solutions and Professional Services segments.
We determined that the Insurance Bill Review business was a
discontinued operation and as a result we have segregated the
net assets, net liabilities and operating results from
continuing operations in our balance sheets and statements of
income for all periods prior to the sale. Revenues from
discontinued operations were $22.9 million and
$38.0 million for the years ended September 30, 2008
and 2007, respectively. Pre-tax losses from discontinued
operations were $1.1 million and $11.9 million for the
years ended September 30, 2008 and 2007, respectively.
|
|
4.
|
Sales of
Product Line Assets
|
In June 2009, we sold the assets associated with our
LiquidCredit®
for Telecom (LCT) and
RoamEx®
product lines. LCT and RoamEx solutions were included primarily
in our Strategy Machine segment. The LCT sale, which was for
$3.5 million, includes a $0.5 million receivable for
post-closing working capital adjustments. In addition, we have
an earn-out agreement that allows for payment of up to
$3.0 million if the acquired business achieves certain
earnings before interest, tax, depreciation and amortization
goals. The primary assets sold include accounts receivable and
goodwill. Included in the results of operations for fiscal 2009
were a $1.5 million pre-tax loss and a $2.1 million
after-tax loss on the sale as the goodwill associated with the
LCT solution product line was not deductible for income tax
purposes. Revenues attributable to the LCT solutions product
line were $9.1 million, $13.4 million and
$13.6 million during fiscal 2009, 2008
69
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
and 2007, respectively. The RoamEx sale, which was for
$2.7 million, includes a $1.4 million escrow balance
and a $0.3 million receivable for post-closing working
capital adjustments. The primary assets sold include accounts
receivable and goodwill. We recognized a $1.5 million
pre-tax loss, and a $1.8 million after-tax loss on the sale
as the goodwill associated with the RoamEx product line was not
deductible for income tax purposes. Revenues attributable to the
RoamEx product line were $6.6 million, $11.5 million
and $15.0 million in fiscal 2009, 2008 and 2007,
respectively.
In March 2007, we sold the assets and products associated with
our mortgage banking solutions product line for
$15.8 million in cash. The assets sold include accounts
receivable, certain identifiable intangible assets and goodwill.
We recognized a $1.5 million pre-tax gain, but a
$0.4 million after-tax loss on the sale due to goodwill
associated with the mortgage banking solutions product line that
was not deductible for income tax purposes. The product line
sold includes software and
e-commerce
services used in the origination processing, underwriting,
pricing, product definition, closing, secondary marketing,
servicing, default management of mortgage and construction
loans, and
BridgeLinktm
e-Services
for the mortgage industry. Revenues attributable to the mortgage
banking solutions product line for the years ended
September 30, 2007 were $7.7 million.
|
|
5.
|
Cash,
Cash Equivalents and Marketable Securities Available for
Sale
|
The following is a summary of cash, cash equivalents and
marketable securities available for sale at September 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
64,689
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
64,689
|
|
|
$
|
56,979
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,979
|
|
Money market funds
|
|
|
113,468
|
|
|
|
|
|
|
|
|
|
|
|
113,468
|
|
|
|
72,699
|
|
|
|
|
|
|
|
|
|
|
|
72,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178,157
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
178,157
|
|
|
$
|
129,678
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
129,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
102,575
|
|
|
$
|
460
|
|
|
$
|
|
|
|
$
|
103,035
|
|
|
$
|
55,564
|
|
|
$
|
54
|
|
|
$
|
(65
|
)
|
|
$
|
55,553
|
|
U.S. corporate debt
|
|
|
8,735
|
|
|
|
31
|
|
|
|
|
|
|
|
8,766
|
|
|
|
1,501
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
1,496
|
|
Non U.S. corporate debt
|
|
|
27,839
|
|
|
|
33
|
|
|
|
|
|
|
|
27,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,149
|
|
|
$
|
524
|
|
|
$
|
|
|
|
$
|
139,673
|
|
|
$
|
57,065
|
|
|
$
|
54
|
|
|
$
|
(70
|
)
|
|
$
|
57,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
43,423
|
|
|
$
|
174
|
|
|
$
|
(22
|
)
|
|
$
|
43,575
|
|
|
$
|
62,175
|
|
|
$
|
190
|
|
|
$
|
(64
|
)
|
|
$
|
62,301
|
|
U.S. corporate debt
|
|
|
2,928
|
|
|
|
3
|
|
|
|
|
|
|
|
2,931
|
|
|
|
5,099
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
5,096
|
|
Non U.S. corporate debt
|
|
|
11,086
|
|
|
|
19
|
|
|
|
|
|
|
|
11,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
4,580
|
|
|
|
|
|
|
|
(820
|
)
|
|
|
3,760
|
|
|
|
5,679
|
|
|
|
|
|
|
|
(975
|
)
|
|
|
4,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,017
|
|
|
$
|
196
|
|
|
$
|
(842
|
)
|
|
$
|
61,371
|
|
|
$
|
72,953
|
|
|
$
|
190
|
|
|
$
|
(1,042
|
)
|
|
$
|
72,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
Short-term marketable securities mature at various dates over
the course of the next twelve months. Our long-term
U.S. government obligations and corporate debt investments
mature at various dates over the next one to three years. During
fiscal 2009, 2008 and 2007, we did not recognize any material
realized gains or losses on investments.
The long-term marketable equity securities represent securities
held under a supplemental retirement and savings plan for
certain officers and senior management employees, which are
distributed upon termination or retirement of the employees.
The following table shows the gross unrealized losses and fair
value of our investments with unrealized losses that are not
deemed to be
other-than-temporarily
impaired, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized
loss position, at September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Description of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
1,253
|
|
|
$
|
(21
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,253
|
|
|
$
|
(21
|
)
|
U.S. corporate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non U.S. corporate debt
|
|
|
2,076
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
2,076
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,329
|
|
|
$
|
(22
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,329
|
|
|
$
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
Description of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
48,144
|
|
|
$
|
(128
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48,144
|
|
|
$
|
(128
|
)
|
U.S. corporate debt
|
|
|
6,592
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
6,592
|
|
|
|
(9
|
)
|
Non U.S. corporate debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,736
|
|
|
$
|
(137
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,736
|
|
|
$
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Derivative
Financial Instruments
|
On January 1, 2009, we adopted new accounting guidance
which requires expanded disclosures on derivative investments
and hedging activities. We use derivative instruments to manage
risks caused by fluctuations in foreign exchange rates. The
primary objective of our derivative instruments is to protect
the value of foreign currency denominated accounts receivable
and cash balances from the effects of volatility in foreign
exchange rates that might occur prior to conversion to their
functional currency. We principally utilize foreign currency
forward contracts, which enable us to buy and sell foreign
currencies in the future at fixed exchange rates and
economically offset changes in foreign currency exchange rates.
We routinely enter into contracts to offset exposures
denominated in the British pound, Euro and Japanese yen.
Foreign currency denominated accounts receivable and cash
balances are re-measured at foreign currency rates in effect on
the balance sheet date with the effects of changes in foreign
currency rates reported in other income, net. The forward
contracts are not designated as hedges and are marked to market
through other
71
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
income, net. Fair value changes in the forward contracts help
mitigate the changes in the value of the re-measured accounts
receivable and cash balances attributable to changes in foreign
currency exchange rates. The forward contracts are short-term in
nature and typically have average maturities at inception of
less than three months.
The following table summarizes the fair value of our derivative
instruments and their location in the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
September 30, 2009
|
|
Balance Sheet
|
|
|
|
Balance Sheet
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
Location
|
|
Amount
|
|
Location
|
|
Amount
|
|
|
(In thousands)
|
|
Foreign currency forward contracts
|
|
Other current assets
|
|
$
|
|
|
|
Other current liabilities
|
|
$
|
|
|
The following table summarizes our outstanding forward foreign
currency contracts, by currency at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
Contract Amount
|
|
|
|
|
Foreign
|
|
|
|
Fair Value
|
|
|
Currency
|
|
US$
|
|
US$
|
|
|
(In thousands)
|
|
Sell foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar (CAD)
|
|
CAD
|
1,100
|
|
|
$
|
1,022
|
|
|
$
|
|
|
Euro (EUR)
|
|
EUR
|
6,100
|
|
|
|
8,908
|
|
|
|
|
|
Japanese yen (JPY)
|
|
JPY
|
61,000
|
|
|
|
679
|
|
|
|
|
|
Buy foreign currency:
|
|
|
|
|
|
|
|
|
|
|
|
|
British pound (GBP)
|
|
GBP
|
2,866
|
|
|
|
4,600
|
|
|
|
|
|
The forward foreign currency contracts were all entered into on
September 30, 2009; therefore, the fair value was $0 on
that date.
The location in the consolidated statements of income and
amounts of gains and losses related to derivative instruments
not designated as hedging instruments are as follows:
|
|
|
|
|
|
|
|
|
Loss on Derivatives
|
|
|
Recognized in Income
|
Year Ended September 30, 2009
|
|
Location
|
|
Amount
|
|
|
(In thousands)
|
|
Foreign currency forward contracts
|
|
Other income, net
|
|
$
|
(2,064
|
)
|
|
|
7.
|
Fair
Value Measurements
|
As discussed in Note 1, we adopted new guidance for
financial assets and financial liabilities and for non-financial
assets and non-financial liabilities that we recognize or
disclose at fair value on a recurring basis (at least annually).
As of the date of adoption, these included cash equivalents,
available-for-sale
marketable securities, and our derivative financial instruments.
We elected to defer the provisions of the accounting guidance
that relate to non-financial assets and non-financial
liabilities that we do not recognize or disclose at fair value
on a recurring basis.
Fair value is defined as the price that would be received from
the sale of an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. The accounting guidance
establishes a
72
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
three-level hierarchy for disclosure that is based on the extent
and level of judgment used to estimate the fair value of assets
and liabilities.
|
|
|
|
|
Level 1 uses unadjusted quoted prices that are
available in active markets for identical assets or liabilities.
Our Level 1 securities are comprised of money market funds
and certain equity securities.
|
|
|
|
Level 2 uses inputs other than quoted prices
included in Level 1 that are either directly or indirectly
observable through correlation with market data. These include
quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; and inputs to
valuation models or other pricing methodologies that do not
require significant judgment because the inputs used in the
model, such as interest rates and volatility, can be
corroborated by readily observable market data. Our Level 2
securities are comprised of U.S. government and corporate
debt obligations that are generally held to maturity.
|
|
|
|
Level 3 uses one or more significant inputs
that are unobservable and supported by little or no market
activity, and that reflect the use of significant management
judgment. Level 3 assets and liabilities include those
whose fair value measurements are determined using pricing
models, discounted cash flow methodologies or similar valuation
techniques, and significant management judgment or estimation.
We do not have any assets or liabilities that are valued using
inputs identified under a Level 3 hierarchy.
|
The following table represents financial assets that we measured
at fair value on a recurring basis at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Fair Value as of
|
|
|
|
Identical Instruments
|
|
|
Observable Inputs
|
|
|
September 30,
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
|
$
|
113,468
|
|
|
$
|
|
|
|
$
|
113,468
|
|
U.S. corporate debt(2)
|
|
|
|
|
|
|
11,697
|
|
|
|
11,697
|
|
Non U.S. corporate debt(2)
|
|
|
|
|
|
|
38,977
|
|
|
|
38,977
|
|
U.S. government obligations(2)
|
|
|
|
|
|
|
146,610
|
|
|
|
146,610
|
|
Marketable securities(3)
|
|
|
3,760
|
|
|
|
|
|
|
|
3,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,228
|
|
|
$
|
197,284
|
|
|
$
|
314,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in cash and cash equivalents on our balance sheet at
September 30, 2009. Not included in this table are
$64.7 million of cash deposit balances. |
|
(2) |
|
Included in marketable securities (current and non-current) on
our balance sheet at September 30, 2009. |
|
(3) |
|
Represents securities held under a supplemental retirement and
savings plan for certain officers and senior management
employees, which are distributed upon termination or retirement
of the employees. Included in long-term marketable securities on
our balance sheet at September 30, 2009. |
Where applicable, we use quoted prices in active markets for
identical assets or liabilities to determine fair value. This
pricing applies to our Level 1 investments. To the extent
quoted prices in active markets for assets or liabilities are
not available, the valuation techniques used to measure the fair
values of our financial assets incorporate market inputs, which
include reported trades, broker/dealer quotes, benchmark yields,
issuer spreads, benchmark securities and other inputs derived
from or corroborated by observable market data. This methodology
applies to our Level 2 investments. The Company has not
changed its valuation techniques in measuring the fair value of
any financial assets and liabilities during the period.
73
FAIR
ISAAC CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Years
Ended September 30, 2009, 2008 and 2007
Receivables at September 30, 2009 and 2008 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Billed
|
|
$
|
81,835
|
|
|
$
|
115,556
|
|
Unbilled
|
|
|
26,808
|
|
|
|
34,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,643
|
|
|
|
149,678
|
|
Less: allowance for doubtful accounts
|
|
|
(6,901
|
)
|
|
|
(8,107
|
)
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
101,742
|
|
|
$
|
141,571
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables represent revenue recorded in excess of
amounts billable pursuant to contract provisions and generally
become billable at contractually specified dates or upon the
attainment of milestones. Unbilled amounts are expected to be
realized within one year. During fiscal 2009, 2008 and 2007, we
increased our allowance for the provision for doubtful accounts
by $0.5 million, $3.4 million and $4.8 million,
respectively, and wrote off receivables (net of recoveries) of
$1.4 million, $2.8 million and $1.8 million,
respectively. The remaining change to the allowance for doubtful
accounts in fiscal 2009 of $0.3 million was primarily due
to a favorable change in foreign exchange rates.
|
|
9.
|
Goodwill
and Intangible Assets
|
Goodwill and intangible assets with indefinite lives are tested
for impairment at least annually or more frequently if
impairment indicators arise. Our other intangible assets have
definite lives and are being amortized using the straight-line
method or based on the forecasted cash flows associated with the
assets over their estimated useful lives.
We have determined that our reporting units are the same as our
reportable segments (see Note 20). We performed our annual
goodwill impairment test, and determined that goodwill was not
impaired as of July 1, 2009 and 2008.
Intangible assets that are subject to amortization consisted of
the following at September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Life
|
|
|
|
(In thousands)
|
|
|
Completed technology
|
|
$
|
75,287
|
|
|
$
|
(67,179
|
)
|
|
$
|
8,108
|
|
|
|
6
|
|
|
$
|
78,967
|
|
|
$
|
(64,032
|
)
|
|
$
|
14,935
|
|
|
|
6
|
|
Customer contracts and relationships
|
|
|
63,956
|
|
|
|
(34,315
|
)
|
|
|
29,641
|
|
|
|
12
|
|
|
|
65,336
|
|
|
|
(29,769
|
)
|
|
|
35,567
|
|
|
|
12
|
|
Trade names
|
|
|
9,291
|
|
|
|
(8,834
|
)
|
|
|
457
|
|
|
|
5
|
|
|
|
9,291
|
|
|
|
(8,695
|
)
|
|
|
596
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148,534
|
|
|
$
|
(110,328
|
)
|
|
|
38,206
|
|
|
|
|
|
|
$
|
153,594
|
|
|
$
|
(102,496
|
)
|
|
|
51,098
|
|
|
|
|
|
|
|
  |