FICO 10-Q Q2 2015
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-11689 
 
 
Fair Isaac Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
94-1499887
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
181 Metro Drive, Suite 700
San Jose, California
95110-1346
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 408-535-1500
 
 
 
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  ý    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  ý    No  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):
Large Accelerated Filer
ý
Accelerated Filer
o
 
 
 
 
Non-Accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares of common stock outstanding on April 17, 2015 was 31,051,574 (excluding 57,805,209 shares held by us as treasury stock).
 

Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2015
 
September 30,
2014
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
86,841

 
$
105,075

Accounts receivable, net
169,932

 
155,295

Prepaid expenses and other current assets
44,982

 
28,157

Total current assets
301,755

 
288,527

Marketable securities available for sale
9,706

 
8,751

Other investments
10,958

 
11,033

Property and equipment, net
40,011

 
36,677

Goodwill
809,117

 
779,928

Intangible assets, net
53,582

 
47,914

Deferred income taxes
4,285

 
13,061

Other assets
7,237

 
6,407

Total assets
$
1,236,651

 
$
1,192,298

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,418

 
$
22,000

Accrued compensation and employee benefits
37,301

 
56,650

Other accrued liabilities
30,755

 
36,235

Deferred revenue
67,609

 
56,519

Current maturities on debt
82,000

 
170,000

Total current liabilities
256,083

 
341,404

Long-term debt
576,000

 
376,000

Other liabilities
23,406

 
20,280

Total liabilities
855,489

 
737,684

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 31,368 and 32,047 shares outstanding at March 31, 2015 and September 30, 2014, respectively)
314

 
320

Paid-in-capital
1,130,709

 
1,129,317

Treasury stock, at cost (57,489 and 56,810 shares at March 31, 2015 and September 30, 2014, respectively)
(2,012,431
)
 
(1,936,095
)
Retained earnings
1,316,278

 
1,284,261

Accumulated other comprehensive loss
(53,708
)
 
(23,189
)
Total stockholders’ equity
381,162

 
454,614

Total liabilities and stockholders’ equity
$
1,236,651

 
$
1,192,298


See accompanying notes to condensed consolidated financial statements.

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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Transactional and maintenance
$
138,683

 
$
132,369

 
$
270,093

 
$
262,024

Professional services
37,946

 
34,619

 
73,144

 
68,905

License
30,480

 
18,474

 
53,422

 
38,876

Total revenues
207,109

 
185,462

 
396,659

 
369,805

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues *
70,991

 
58,183

 
137,291

 
115,502

Research and development
24,341

 
19,690

 
46,978

 
37,782

Selling, general and administrative *
73,863

 
65,944

 
146,664

 
132,933

Amortization of intangible assets *
3,515

 
2,908

 
6,447

 
5,921

Restructuring and acquisition-related
—

 
—

 
—

 
3,660

Total operating expenses
172,710

 
146,725

 
337,380

 
295,798

Operating income
34,399

 
38,737

 
59,279

 
74,007

Interest expense, net
(7,718
)
 
(7,099
)
 
(14,923
)
 
(14,225
)
Other income (expense), net
(648
)
 
(351
)
 
1

 
(1,312
)
Income before income taxes
26,033

 
31,287

 
44,357

 
58,470

Provision for income taxes
7,163

 
10,536

 
11,080

 
20,742

Net income
18,870

 
20,751

 
33,277

 
37,728

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(19,068
)
 
2,893

 
(30,519
)
 
6,898

Comprehensive income (loss)
$
(198
)
 
$
23,644

 
$
2,758

 
$
44,626

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.60

 
$
1.05

 
$
1.09

Diluted
$
0.58

 
$
0.59

 
$
1.01

 
$
1.06

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
31,335

 
34,500

 
31,639

 
34,705

Diluted
32,448

 
35,311

 
32,791

 
35,670

 
 
* Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 5 to the condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share data)
 
 
Common Stock
 
 
 
 
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Stockholders’ Equity
 
Shares
 
Par Value
 
Paid-in-Capital
 
Treasury Stock
 
 
 
Balance at September 30, 2014
32,047

 
$
320

 
$
1,129,317

 
$
(1,936,095
)
 
$
1,284,261

 
$
(23,189
)
 
$
454,614

Share-based compensation
—

 
—

 
20,596

 
—

 
—

 
—

 
20,596

Issuance of treasury stock under employee stock plans
705

 
8

 
(28,510
)
 
24,363

 
—

 
—

 
(4,139
)
Tax effect from share-based payment arrangements
—

 
—

 
9,306

 
—

 
—

 
—

 
9,306

Repurchases of common stock
(1,384
)
 
(14
)
 
—

 
(100,699
)
 
—

 
—

 
(100,713
)
Dividends paid
—

 
—

 
—

 
—

 
(1,260
)
 
—

 
(1,260
)
Net income
—

 
—

 
—

 
—

 
33,277

 
—

 
33,277

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
(30,519
)
 
(30,519
)
Balance at March 31, 2015
31,368

 
$
314

 
$
1,130,709

 
$
(2,012,431
)
 
$
1,316,278

 
$
(53,708
)
 
$
381,162

See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended March 31,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
33,277

 
$
37,728

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,047

 
16,012

Share-based compensation
20,596

 
16,286

Deferred income taxes
2,453

 
(5,073
)
Tax effect from share-based payment arrangements
9,306

 
4,697

Excess tax benefits from share-based payment arrangements
(8,616
)
 
(5,078
)
Provision for doubtful accounts, net
—

 
591

Net loss on sales of property and equipment
12

 
3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(15,072
)
 
3,687

Prepaid expenses and other assets
(15,777
)
 
930

Accounts payable
10,655

 
(734
)
Accrued compensation and employee benefits
(18,912
)
 
(2,740
)
Other liabilities
(6,948
)
 
4,651

Deferred revenue
15,261

 
4,127

Net cash provided by operating activities
43,282

 
75,087

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(10,251
)
 
(4,296
)
Cash paid for acquisitions, net of cash acquired
(56,621
)
 
—

Distribution from cost method investees
75

 
—

Net cash used in investing activities
(66,797
)
 
(4,296
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
152,000

 
23,000

Payments on revolving line of credit
(40,000
)
 
(10,000
)
Proceeds from issuance of treasury stock under employee stock plans
11,853

 
13,256

Taxes paid related to net share settlement of equity awards
(15,992
)
 
(9,571
)
Dividends paid
(1,260
)
 
(1,390
)
Repurchases of common stock
(100,713
)
 
(67,141
)
Excess tax benefits from share-based payment arrangements
8,616

 
5,078

Net cash provided by (used in) financing activities
14,504

 
(46,768
)
Effect of exchange rate changes on cash
(9,223
)
 
975

Increase (decrease) in cash and cash equivalents
(18,234
)
 
24,998

Cash and cash equivalents, beginning of period
105,075

 
83,178

Cash and cash equivalents, end of period
$
86,841

 
$
108,176

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
24,496

 
$
9,819

Cash paid for interest
$
14,709

 
$
13,983

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
4,742

 
$
462

See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
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, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.
In these condensed consolidated financial statements, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “the Company.”
Principles of Consolidation and Basis of Presentation
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the applicable accounting guidance. Consequently, we have not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the year ended September 30, 2014. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.
The condensed consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectibility of accounts receivable; the appropriate levels of various accruals; labor hours in connection with fixed-fee service contracts; the amount of our tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.
New Accounting Pronouncements Recently Issued or Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Early adoption is not permitted. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. We have not yet selected a transition method and we are currently evaluating the impact that the updated standard will have on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance" ("ASU 2015-03"), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015, which means it will be effective for our fiscal year beginning October 1, 2016. Early adoption is permitted. We do not believe that adoption of ASU 2015-03 will have a significant impact on our consolidated financial statements.

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2. Business Combinations
On January 12, 2015, we acquired 100% of the equity of TONBELLER Aktiengesellschaft ("TONBELLER"). TONBELLER is an innovative provider of financial crime and compliance ("FCC") solutions that support the demanding regulatory compliance requirements of more than a thousand banks and commercial organizations. This acquisition will allow us to capitalize on the escalating demand for new, risk-based, integrated FCC solutions.

The purchase price allocation as of the date of the acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed become available. The major classes of assets and liabilities to which we have preliminarily allocated the purchase price are as follows:
 
 
(In thousands)
Consideration
 
 
 
 
 
Cash
 
$
59,640

 
 
 
Acquisition-related costs (included in the company’s condensed consolidated statement of income for the quarter and six months ended March 31, 2015 as a component of selling, general and administrative expenses)
 
$
486

 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
 
 
Cash and cash equivalents
 
$
2,640

Accounts receivable, net
 
5,389

Prepaid expenses and other current assets
 
209

Intangible assets:
 
 
   Completed technology
 
2,700

   Customer relationships
 
11,600

   Trade names
 
600

Other assets
 
112

Accounts payable
 
(1,118
)
Accrued compensation and employee benefits
 
(1,493
)
Other accrued liabilities
 
(2,838
)
Deferred income taxes
 
(4,349
)
   Total identifiable net assets
 
13,452

 
 
 
Goodwill
 
46,188

Total
 
$
59,640


The acquired identifiable intangible assets have a weighted average useful life of approximately 4.9 years and are being amortized using the straight-line method over their estimated useful lives as follows: completed technology, five years; customer relationships, five years; and trade names, three years. The goodwill of $46.2 million arising from the acquisition consists largely of the revenue synergies related to market expansion and more rapid innovation for our solutions. The goodwill was allocated to our Applications segment and is not deductible for tax purposes. TONBELLER has been included in our operating results since the acquisition date. The pro forma impact of this acquisition was not deemed material to our results of operations.


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3. Fair Value Measurements
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 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 assets 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. We do not have any assets that are valued using inputs identified under a Level 2 hierarchy as of March 31, 2015 and September 30, 2014.
•
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 as of March 31, 2015 and September 30, 2014.
The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2015 and September 30, 2014:
March 31, 2015
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of March 31, 2015
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
439

 
$
439

Marketable securities (2)
9,706

 
9,706

Total
$
10,145

 
$
10,145

 
 
 
 
September 30, 2014
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2014
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
10,326

 
$
10,326

Marketable securities (2)
8,751

 
8,751

Total
$
19,077

 
$
19,077

 
(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at March 31, 2015 and September 30, 2014. Not included in these tables are cash deposits of $86.4 million and $94.7 million at March 31, 2015 and September 30, 2014, respectively.
(2)
Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities available for sale on our condensed consolidated balance sheet at March 31, 2015 and September 30, 2014.
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 would apply to our Level 2 investments. We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

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For the fair value of our derivative instruments and senior notes, see Note 4 and Note 8 to the condensed consolidated financial statements, respectively.
4. Derivative Financial Instruments
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 receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. 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 exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro and Canadian dollar.
Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months.
The following tables summarize our outstanding foreign currency forward contracts, by currency, at March 31, 2015 and September 30, 2014:
 
March 31, 2015
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
7,550

 
$
5,923

 
$
—

Euro (EUR)
EUR 
6,050

 
$
6,508

 
$
—

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,366

 
$
9,400

 
$
—

 
September 30, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
3,300

 
$
2,960

 
$
—

Euro (EUR)
EUR 
3,800

 
$
4,790

 
$
—

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,795

 
$
11,000

 
$
—

The foreign currency forward contracts were entered into on March 31, 2015 and September 30, 2014, respectively; therefore, their fair value was $0 on each of these dates.
Gains (losses) on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following:
 
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Gains (losses) on Foreign currency forward contracts
$
(10
)
 
$
194

 
$
(339
)
 
$
532


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5. Goodwill and Intangible Assets
Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption within the accompanying condensed consolidated statements of income and comprehensive income, consisted of the following:
 
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cost of revenues
$
1,901

 
$
1,823

 
$
3,737

 
$
3,622

Selling, general and administrative expenses
1,614

 
1,085

 
2,710

 
2,299

 
$
3,515

 
$
2,908

 
$
6,447

 
$
5,921


Cost of revenues reflects our amortization of completed technology and selling, general and administrative expenses reflects our amortization of other intangible assets. Intangible assets, gross were $152.6 million and $142.2 million as of March 31, 2015 and September 30, 2014, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2015, was as follows (in thousands):
Year Ended September 30,
 
2015 (excluding the six months ended March 31, 2015)
$
7,091

2016
13,953

2017
12,850

2018
5,898

2019
5,385

Thereafter
8,405


$
53,582

The following table summarizes changes to goodwill during the six months ended March 31, 2015, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Tools
 
Total
 
(In thousands)
Balance at September 30, 2014
$
560,295

 
$
146,648

 
$
72,985

 
$
779,928

Addition from acquisitions
46,188

 
—

 
—

 
46,188

Foreign currency translation adjustment
(14,695
)
 
—

 
(2,304
)
 
(16,999
)
Balance at March 31, 2015
$
591,788

 
$
146,648

 
$
70,681

 
$
809,117

6. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization at March 31, 2015 and September 30, 2014:
 
 
March 31,
2015
 
September 30,
2014
 
(In thousands)
Property and equipment
$
165,485

 
$
164,548

Less: accumulated depreciation and amortization
(125,474
)
 
(127,871
)
 
$
40,011

 
$
36,677


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7. Revolving Line of Credit
We  have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on December 30, 2019. 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 our 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, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a minimum fixed charge ratio of 2.5 and a maximum consolidated leverage ratio of 3.0, subject to a step up to 3.5 following certain permitted acquisitions. The credit agreement also contains other covenants typical of unsecured facilities. As of March 31, 2015, we had $211.0 million in borrowings outstanding at a weighted average interest rate of 1.555%, of which $200.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of March 31, 2015.
8. Senior Notes
On May 7, 2008, we issued $275 million of senior notes in a private placement to a group of institutional investors (the “2008 Senior Notes”). The 2008 Senior Notes were issued in four series with maturities ranging from 5 to 10 years. The outstanding 2008 Senior Notes’ weighted average interest rate is 7.0% and the weighted average maturity is 9.0 years. On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The 2010 Senior Notes’ weighted average interest rate is 5.2% and the weighted average maturity is 8.0 years. The Senior Notes require interest payments semi-annually and also include certain restrictive covenants. As of March 31, 2015, we were in compliance with all financial covenants which include the maintenance of consolidated net debt to consolidated EBITDA ratio and a fixed charge coverage ratio. The issuance of the Senior Notes also required us to make certain covenants typical of unsecured facilities. The carrying value of the Senior Notes was $447.0 million as of March 31, 2015 and September 30, 2014. The fair value of the Senior Notes was $465.8 million and $462.7 million as of March 31, 2015 and September 30, 2014, respectively. We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.
9. Restructuring Expenses

The following table summarizes our restructuring accruals and certain FICO facility closures. There is no restructuring accrual as of March 31, 2015.
 
 
Accrual at
 
Cash
Payments
 
Accrual at
 
September 30, 2014
 
 
March 31, 2015
 
(In thousands)
Facilities charges
$
92

 
$
(92
)
 
$
—

Employee separation
170

 
(170
)
 
—

 
$
262

 
$
(262
)
 
$
—

10. Income Taxes
Effective Tax Rate
The effective income tax rate was 27.5% and 33.7% during the quarters ended March 31, 2015 and 2014, respectively and 25.0% and 35.5% during the six months ended March 31, 2015 and 2014, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The decrease in our effective tax rate year over year was primarily due to the retroactive extension of the U.S. Federal Research and Development Credit through 2014, which was enacted during the first quarter of our fiscal 2015, as well as a higher percentage of revenue expected in lower taxing jurisdictions.

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The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $5.0 million and $4.6 million at March 31, 2015 and September 30, 2014, respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. We have accrued interest of $0.6 million and $0.5 million, related to unrecognized tax benefits as of March 31, 2015 and September 30, 2014, respectively.

11. Earnings Per Share
The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and six months ended March 31, 2015 and 2014:
 
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
 
 
 
 
Net Income
$
18,870

 
$
20,751

 
$
33,277

 
$
37,728

Denominator - share:
 
 
 
 
 
 
 
Basic weighted-average shares
31,335

 
34,500

 
31,639

 
34,705

Effect of dilutive securities
1,113

 
811

 
1,152

 
965

Diluted weighted-average shares
32,448

 
35,311

 
32,791

 
35,670

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.60

 
$
1.05

 
$
1.09

Diluted
$
0.58

 
$
0.59

 
$
1.01

 
$
1.06

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the options’ exercise price exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 46,000 and 14,000 options excluded for the quarters ended March 31, 2015 and 2014, respectively. There were approximately 270,000 and 7,000 options excluded for the six months ended March 31, 2015 and 2014, respectively.
12. Segment Information
We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.
 
•
Applications. Our Applications products are pre-configured decision management applications and associated professional services, designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and insurance claims management.
•
Scores. This segment includes our business-to-business scoring solutions, our myFICO® solutions for consumers and associated professional services. 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, as well as services through which we provide our scores to clients directly.
•
Tools. The Tools segment is composed of software tools and associated professional services that clients can use to create their own custom decision management applications.
Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate broad-based incentive expense, share-based compensation expense, restructuring expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation amounts are allocated to the segments from their internal cost centers as described above.

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The following tables summarize segment information for the quarters and six months ended March 31, 2015 and 2014:
 
 
Quarter Ended March 31, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
80,315

 
$
47,814

 
$
10,554

 
$
—

 
$
138,683

Professional services
30,992

 
966

 
5,988

 
—

 
37,946

License
23,081

 
1,157

 
6,242

 
—

 
30,480

Total segment revenues
134,388

 
49,937

 
22,784

 
—

 
207,109

Segment operating expense
(95,035
)
 
(14,618
)
 
(27,987
)
 
(19,753
)
 
(157,393
)
Segment operating income (loss)
$
39,353

 
$
35,319

 
$
(5,203
)
 
$
(19,753
)
 
49,716

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(11,802
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,515
)
Operating income
 
 
 
 
 
 
 
 
34,399

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,718
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(648
)
Income before income taxes
 
 
 
 
 
 
 
 
$
26,033

Depreciation expense
$
3,706

 
$
227

 
$
807

 
$
685

 
$
5,425


 
Quarter Ended March 31, 2014
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
76,898

 
$
46,560

 
$
8,911

 
$
—

 
$
132,369

Professional services
28,373

 
777

 
5,469

 
—

 
34,619

License
10,339

 
521

 
7,614

 
—

 
18,474

Total segment revenues
115,610

 
47,858

 
21,994

 
—

 
185,462

Segment operating expense
(78,951
)
 
(10,939
)
 
(20,804
)
 
(24,072
)
 
(134,766
)
Segment operating income
$
36,659

 
$
36,919

 
$
1,190

 
$
(24,072
)
 
50,696

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(9,051
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(2,908
)
Operating income
 
 
 
 
 
 
 
 
38,737

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,099
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(351
)
Income before income taxes
 
 
 
 
 
 
 
 
$
31,287

Depreciation expense
$
3,461

 
$
198

 
$
622

 
$
656

 
$
4,937



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Six Months Ended March 31, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
        Transactional and maintenance
$
158,866

 
$
90,751

 
$
20,476

 
$
—

 
$
270,093

        Professional services
59,491

 
1,754

 
11,899

 
—

 
73,144

        License
31,529

 
1,373

 
20,520

 
—

 
53,422

              Total segment revenues
249,886

 
93,878

 
52,895

 
—

 
396,659

Segment operating expense
(183,929
)
 
(27,510
)
 
(57,526
)
 
(41,372
)
 
(310,337
)
              Segment operating income (loss)
$
65,957

 
$
66,368

 
$
(4,631
)
 
$
(41,372
)
 
86,322

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(20,596
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(6,447
)
Operating income
 
 
 
 
 
 
 
 
59,279

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(14,923
)
Unallocated other income, net
 
 
 
 
 
 
 
 
1

Income before income taxes
 
 
 
 
 
 
 
 
$
44,357

Depreciation expense
$
7,214

 
$
444

 
$
1,590

 
$
1,352

 
$
10,600


 
Six Months Ended March 31, 2014
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
        Transactional and maintenance
$
154,677

 
$
89,878

 
$
17,469

 
—

 
$
262,024

        Professional services
55,160

 
1,366

 
12,379

 
—

 
68,905

        License
17,689

 
3,794

 
17,393

 
—

 
38,876

              Total segment revenues
227,526

 
95,038

 
47,241

 
—

 
369,805

Segment operating expense
(160,913
)
 
(21,314
)
 
(41,875
)
 
(45,829
)
 
(269,931
)
              Segment operating income
$
66,613

 
$
73,724

 
$
5,366

 
$
(45,829
)
 
99,874

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(16,286
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(5,921
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(3,660
)
Operating income
 
 
 
 
 
 
 
 
74,007

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(14,225
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(1,312
)
Income before income taxes
 
 
 
 
 
 
 
 
$
58,470

Depreciation expense
$
7,098

 
$
410

 
$
1,236

 
$
1,347

 
$
10,091



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13. Contingencies
We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


FORWARD LOOKING STATEMENTS
Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “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, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; 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 Part II, Item 1A, Risk Factors. 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 us in fiscal 2015.

OVERVIEW
We provide products and services that enable businesses to automate, improve and connect decisions across the enterprise, an approach we commonly refer to as decision management. Our predictive analytics, which includes the industry-standard FICO® Score, and our decision management systems power hundreds of billions of customer decisions each year. We help thousands of companies in over 100 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, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries. We also serve consumers through online services that enable people to purchase and understand their FICO® Scores, the standard measure in the U.S. of consumer credit risk, empowering them to manage their financial health. Most of our solutions address customer engagement, including customer acquisition, customer servicing and management, and customer protection. We also help businesses improve noncustomer decisions such as transaction and claims processing. 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.

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We derive a significant portion of our revenues from clients outside the U.S. International revenues accounted for 39% and 38% of total consolidated revenues for the quarters ended March 31, 2015 and 2014, respectively, and 39% of total consolidated revenues for the six months ended March 31, 2015 and 2014. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 68% and 74% of our revenues were derived from within this industry during the quarters ended March 31, 2015 and 2014, respectively, and 68% and 75% of our revenues were derived from within this industry during the six months ended March 31, 2015 and 2014, respectively. In addition, we derive a significant share of revenue from transactional or unit-based software license fees, transactional fees derived under scoring, network service or internal hosted software arrangements, annual software maintenance fees and annual license fees under long-term software license arrangements. Arrangements with transactional or unit-based pricing accounted for approximately 67% and 71% of our revenues during the quarters ended March 31, 2015 and 2014, respectively. Arrangements with transactional or unit-based pricing accounted for approximately 68% and 71% of our revenues during the six months ended March 31, 2015 and 2014, respectively.

We continue to invest in growth initiatives that expand our addressable markets. For our Scores segment, we introduced the FICO® Score Open Access program in fiscal 2014 which allows our participating clients to provide their customers with a free FICO® Score along with materials to help them understand what affects their score. We now have more than 62 million consumer accounts with access to their free score through the FICO® Score Open Access program and with the addition of new participants we expect this to grow to more than 80 million. On December 29, 2014, we announced the FICO® Score is now available to consumers through Experian, a leading global information services provider. Consumers can go to Experian to access the credit score lenders use most when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit.

We introduced a full suite of applications for the FICO® Analytic Cloud in fiscal 2014 and continue to invest in the areas of cloud computing and software as a service (“SaaS”). Through the expansion of our product offerings in our Applications and Tools segments, we can accommodate small-to-midsize companies that benefit from the affordability and simplicity of cloud-based solutions.

We continue to make acquisitions that deliver solutions to the financial services industry and adjacent vertical industries; our latest acquisition of TONBELLER was consummated to address the rapidly growing demand for integrated, enterprise-class financial crime and compliance solutions. We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter and six months ended March 31, 2015, we repurchased approximately 0.5 million shares for a total value of $40.1 million and 1.4 million shares for a total value of $100.7 million, respectively.
Bookings
Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings.
Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms. Our revenue types are transactional and maintenance, professional services and license. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update initial booking estimates in future periods for changes between estimated and actual results. Actual revenue and the timing thereof could differ materially from our initial estimates. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability.
Transactional and Maintenance Bookings
We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate. Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the following:
 
•
The health of the economy and economic trends in our customers’ industries;
•
Individual performance of our customers relative to their competitors; and

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•
Regulatory and other factors that affect the business environment in which our customers operate.
We calculate maintenance bookings directly from the terms stated in the contract.
Professional Services Bookings
We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred. These differences typically result from customer decisions to alter the mix of FICO and customer services resources used to complete a project.
License Bookings
Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.

Bookings Trend Analysis
 
Bookings
 
Bookings
Yield (1)
 
Number of
Bookings
over $1
Million
 
Weighted-
Average
Term (2)
 
(In millions)
 
 
 
 
 
(Months)
Quarter Ended March 31, 2015
$
79.6

 
30
%
 
14

 
22

Quarter Ended March 31, 2014
$
109.1

 
20
%
 
21

 
28

Six Months Ended March 31, 2015
$
149.2

 
40
%
 
28

 
NM

Six Months Ended March 31, 2014
$
192.0

 
27
%
 
37

 
NM

 
(1)
Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.
(2)
NM – Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.
Transactional and maintenance bookings were 28% and 34% of total bookings for the quarters ended March 31, 2015 and 2014, respectively. Professional services bookings were 46% and 38% of total bookings for the quarters ended March 31, 2015 and 2014, respectively. License bookings were 26% and 28% of total bookings for the quarters ended March 31, 2015 and 2014, respectively.
Transactional and maintenance bookings were 25% and 31% of total bookings for the six months ended March 31, 2015 and 2014, respectively. Professional services bookings were 49% and 46% of total bookings for the six months ended March 31, 2015 and 2014, respectively. License bookings were 26% and 23% of total bookings for the six months ended March 31, 2015 and 2014, respectively.
The weighted-average term of bookings achieved measures the average term over which the bookings are expected to be recognized as revenue. As the weighted-average term increases, the average amount of revenues expected to be realized in a quarter decreases; however, the revenues are expected to be recognized over a longer period of time. As the weighted-average term decreases, the average amount of revenues expected to be realized in a quarter increases; however, the revenues are expected to be recognized over a shorter period of time.
Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance.
Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service related and are dependent upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog.


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RESULTS OF OPERATIONS
Revenues
The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six months ended March 31, 2015 and 2014:

 
 
Quarter Ended March 31,
 
Percentage of Revenues
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
134,388

 
$
115,610

 
65
%
 
62
%
 
$
18,778

 
16
 %
Scores
49,937

 
47,858

 
24
%
 
26
%
 
2,079

 
4
 %
Tools
22,784

 
21,994

 
11
%
 
12
%
 
790

 
4
 %
Total
$
207,109

 
$
185,462

 
100
%
 
100
%
 
21,647

 
12
 %
 
 
 
 
 
 
 
Period-to-Period
 
Six Months Ended March 31,
 
Percentage of Revenues
 
Period-to-Period
 
Percentage
Segment
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
249,886

 
$
227,526

 
63
%
 
61
%
 
$
22,360

 
10
 %
Scores
93,878

 
95,038

 
24
%
 
26
%
 
(1,160
)
 
(1
)%
Tools
52,895

 
47,241

 
13
%
 
13
%
 
5,654

 
12
 %
Total
$
396,659

 
$
369,805

 
100
%
 
100
%
 
26,854

 
7
 %
Quarter Ended March 31, 2015 Compared to Quarter Ended March 31, 2014
Applications
 
Quarter Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
80,315

 
$
76,898

 
$
3,417

 
4
%
Professional services
30,992

 
28,373

 
2,619

 
9
%
License
23,081

 
10,339

 
12,742

 
123
%
Total
$
134,388

 
$
115,610

 
18,778

 
16
%
Applications segment revenues increased $18.8 million primarily due to a $16.2 million increase in our fraud solutions, driven by a couple of multi-year license transactions in the current quarter. In addition, we had a $3.2 million increase in our compliance solutions which was attributable to our acquisition of TONBELLER in January 2015.

Scores
 
Quarter Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
47,814

 
$
46,560

 
$
1,254

 
3
%
Professional services
966

 
777

 
189

 
24
%
License
1,157

 
521

 
636

 
122
%
Total
$
49,937

 
$
47,858

 
2,079

 
4
%

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Scores segment revenues increased $2.1 million due to an increase of $2.9 million in our business-to-consumer services revenue, partially offset by a decrease of $0.8 million in our business-to-business Scores revenue. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Scores available to consumers on Experian.com. The decrease in our business-to-business Scores was primarily attributable to a royalty true-up during the quarter ended March 31, 2014, partially offset by an increase in our transactional scores driven by new originations.
During the quarters ended March 31, 2015 and 2014, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 14% and 16%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.
Tools
 
 
Quarter Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
10,554

 
$
8,911

 
$
1,643

 
18
 %
Professional services
5,988

 
5,469

 
519

 
9
 %
License
6,242

 
7,614

 
(1,372
)
 
(18
)%
Total
$
22,784

 
$
21,994

 
790

 
4
 %
Tools segment revenues increased $0.8 million primarily attributable to an increase in transactional and maintenance revenue.

Six Months Ended March 31, 2015 Compared to Six Months Ended March 31, 2014
Applications

 
Six Months Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
158,866

 
$
154,677

 
$
4,189

 
3
%
Professional services
59,491

 
55,160

 
4,331

 
8
%
License
31,529

 
17,689

 
13,840

 
78
%
Total
$
249,886

 
$
227,526

 
22,360

 
10
%
Applications segment revenues increased $22.4 million primarily due to a $15.8 million increase in our fraud solutions, driven by a couple of multi-year license transactions in the current quarter. In addition, we had a $3.2 million increase in our compliance solutions which was attributable to our acquisition of TONBELLER in January 2015.

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Table of Contents

Scores
 
 
Six Months Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
90,751

 
$
89,878

 
$
873

 
1
 %
Professional services
1,754

 
1,366

 
388

 
28
 %
License
1,373

 
3,794

 
(2,421
)
 
(64
)%
Total
$
93,878

 
$
95,038

 
(1,160
)
 
(1
)%
Scores segment revenues decreased $1.2 million due to a decrease of $3.5 million in our business-to-business Scores revenue, partially offset by an increase of $2.3 million in our business-to-consumer services revenue. The decrease in our business-to-business Scores was primarily attributable to decreased software revenue related to our Global FICO® Score, and a royalty true-up during the six months ended March 31, 2014, partially offset by an increase in our transactional scores driven by new originations. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Score available to consumers on Experian.com.
During the six months ended March 31, 2015 and 2014, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 14% and 16%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

Tools
 
 
Six Months Ended March 31,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
20,476

 
$
17,469

 
$
3,007

 
17
 %
Professional services
11,899

 
12,379

 
(480
)
 
(4
)%
License
20,520

 
17,393

 
3,127

 
18
 %
Total
$
52,895

 
$
47,241

 
5,654

 
12
 %
Tools segment revenues increased $5.7 million primarily attributable to a one-time settlement with a customer related to under-reported royalties from a multi-year period.
Operating Expenses and Other Income / Expenses
The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and six months ended March 31, 2015 and 2014:
 


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Table of Contents

 
Quarter Ended March 31,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
207,109

 
$
185,462

 
100
 %
 
100
 %
 
$
21,647

 
12
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
70,991

 
58,183

 
34
 %
 
31
 %
 
12,808

 
22
 %
Research and development
24,341

 
19,690

 
12
 %
 
10
 %
 
4,651

 
24
 %
Selling, general and administrative
73,863

 
65,944

 
35
 %
 
36
 %
 
7,919

 
12
 %
Amortization of intangible assets
3,515

 
2,908

 
2
 %
 
2
 %
 
607

 
21
 %
Total operating expenses
172,710

 
146,725

 
83
 %
 
79
 %
 
25,985

 
18
 %
Operating income
34,399

 
38,737

 
17
 %
 
21
 %
 
(4,338
)
 
(11
)%
Interest expense, net
(7,718
)
 
(7,099
)
 
(4
)%
 
(4
)%
 
(619
)
 
9
 %
Other expense, net
(648
)
 
(351
)
 
(1
)%
 
—
 %
 
(297
)
 
85
 %
Income before income taxes
26,033

 
31,287

 
12
 %
 
17
 %
 
(5,254
)
 
(17
)%
Provision for income taxes
7,163

 
10,536

 
3
 %
 
6
 %
 
(3,373
)
 
(32
)%
Net income
$
18,870

 
$
20,751

 
9
 %
 
11
 %
 
(1,881
)
 
(9
)%
Number of employees at quarter end
2,748

 
2,512

 
 
 
 
 
236

 
9
 %

 
Six Months Ended March 31,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
396,659

 
$
369,805

 
100
 %
 
100
 %
 
$
26,854

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
137,291

 
115,502

 
34
 %
 
31
 %
 
21,789

 
19
 %
Research and development
46,978

 
37,782

 
12
 %
 
10
 %
 
9,196

 
24
 %
Selling, general and administrative
146,664

 
132,933

 
37
 %
 
36
 %
 
13,731

 
10
 %
Amortization of intangible assets
6,447

 
5,921

 
2
 %
 
2
 %
 
526

 
9
 %
Restructuring and acquisition-related
—

 
3,660

 
—
 %
 
1
 %
 
(3,660
)
 
(100
)%
Total operating expenses
337,380

 
295,798

 
85
 %
 
80
 %
 
41,582

 
14
 %
Operating income
59,279

 
74,007

 
15
 %
 
20
 %
 
(14,728
)
 
(20
)%
Interest expense, net
(14,923
)
 
(14,225
)
 
(4
)%
 
(4
)%
 
(698
)
 
5
 %
Other income (expense), net
1

 
(1,312
)
 
—
 %
 
—
 %
 
1,313

 
(100
)%
Income before income taxes
44,357

 
58,470

 
11
 %
 
16
 %
 
(14,113
)
 
(24
)%
Provision for income taxes
11,080

 
20,742

 
3
 %
 
6