Edgar Filing: FAIR ISAAC CORP

10-Q

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, 2016



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 15, 2016 was 31,178,576 (excluding 57,678,207 shares held by us as treasury stock).

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TABLE OF CONTENTS



	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
Signatures		47

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FAIR ISAAC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 31, 2016			September 30, 2015
	(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents	$	85,374		$	86,120
Accounts receivable, net	155,207			158,773
Prepaid expenses and other current assets	36,005			41,709
Total current assets	276,586			286,602
Marketable securities available for sale	10,351			9,567
Other investments	10,958			10,958
Property and equipment, net	38,589			38,208
Goodwill	808,292			814,750
Intangible assets, net	39,580			47,321
Deferred income taxes	23,501			15,196
Other assets	7,084			7,561
Total assets	$	1,214,941		$	1,230,163
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	20,587		$	19,852
Accrued compensation and employee benefits	44,429			54,368
Other accrued liabilities	26,741			30,958
Deferred revenue	54,574			46,697
Current maturities on debt	95,000			92,000
Total current liabilities	241,331			243,875
Long-term debt	516,000			516,000
Other liabilities	32,230			33,290
Total liabilities	789,561			793,165
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 31,159 and 31,290 shares outstanding at March 31, 2016 and September 30, 2015, respectively)	312			313
Paid-in-capital	1,153,810			1,152,789
Treasury stock, at cost (57,698 and 57,567 shares at March 31, 2016 and September 30, 2015, respectively)	(2,080,370		)	(2,033,644		)
Retained earnings	1,409,367			1,368,255
Accumulated other comprehensive loss	(57,739		)	(50,715		)
Total stockholders’ equity	425,380			436,998
Total liabilities and stockholders’ equity	$	1,214,941		$	1,230,163

See accompanying notes.

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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,
	2016			2015			2016			2015
	(In thousands, except per share data)
Revenues:
Transactional and maintenance	$	150,743		$	138,683		$	297,815		$	270,093
Professional services	39,342			37,946			73,494			73,144
License	16,593			30,480			35,445			53,422
Total revenues	206,678			207,109			406,754			396,659
Operating expenses:
Cost of revenues *	62,298			70,991			124,491			137,291
Research and development	24,848			24,341			49,479			46,978
Selling, general and administrative *	77,501			73,863			156,339			146,664
Amortization of intangible assets *	3,507			3,515			7,087			6,447
Total operating expenses	168,154			172,710			337,396			337,380
Operating income	38,524			34,399			69,358			59,279
Interest expense, net	(6,815		)	(7,718		)	(13,539		)	(14,923		)
Other income (expense), net	435			(648		)	101			1
Income before income taxes	32,144			26,033			55,920			44,357
Provision for income taxes	9,028			7,163			13,563			11,080
Net income	23,116			18,870			42,357			33,277
Other comprehensive loss:
Foreign currency translation adjustments	(905		)	(19,068		)	(7,024		)	(30,519		)
Comprehensive income (loss)	$	22,211		$	(198	)	$	35,333		$	2,758
Earnings per share:
Basic	$	0.74		$	0.60		$	1.36		$	1.05
Diluted	$	0.72		$	0.58		$	1.31		$	1.01
Shares used in computing earnings per share:
Basic	31,268			31,335			31,226			31,639
Diluted	32,262			32,448			32,349			32,791

* Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 5.

See accompanying notes.

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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			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at September 30, 2015	31,290		$	313		$	1,152,789		$	(2,033,644	)	$	1,368,255		$	(50,715	)	$	436,998
Share-based compensation	—		—			28,300			—			—			—			28,300
Issuance of treasury stock under employee stock plans	608		6			(40,787		)	21,657			—			—			(19,124		)
Tax effect from share-based payment arrangements	—		—			13,508			—			—			—			13,508
Repurchases of common stock	(739	)	(7		)	—			(68,383		)	—			—			(68,390		)
Dividends paid	—		—			—			—			(1,245		)	—			(1,245		)
Net income	—		—			—			—			42,357			—			42,357
Foreign currency translation adjustments	—		—			—			—			—			(7,024		)	(7,024		)
Balance at March 31, 2016	31,159		$	312		$	1,153,810		$	(2,080,370	)	$	1,409,367		$	(57,739	)	$	425,380

See accompanying notes.

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FAIR ISAAC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended March 31,
	2016			2015
	(In thousands)
Cash flows from operating activities:
Net income	$	42,357		$	33,277
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,168			17,047
Share-based compensation	28,300			20,596
Deferred income taxes	(2,056		)	2,453
Tax effect from share-based payment arrangements	13,508			9,306
Excess tax benefits from share-based payment arrangements	(14,008		)	(8,616		)
Provision for doubtful accounts, net	870			—
Net loss on sales of property and equipment	—			12
Changes in operating assets and liabilities:
Accounts receivable	566			(15,072		)
Prepaid expenses and other assets	532			(15,777		)
Accounts payable	233			10,655
Accrued compensation and employee benefits	(9,836		)	(18,912		)
Other liabilities	(6,901		)	(6,948		)
Deferred revenue	9,593			15,261
Net cash provided by operating activities	78,326			43,282
Cash flows from investing activities:
Purchases of property and equipment	(7,807		)	(10,251		)
Cash paid for acquisitions, net of cash acquired	—			(56,621		)
Distribution from cost method investees	—			75
Net cash used in investing activities	(7,807		)	(66,797		)
Cash flows from financing activities:
Proceeds from revolving line of credit	44,000			152,000
Payments on revolving line of credit	(41,000		)	(40,000		)
Proceeds from issuance of treasury stock under employee stock plans	6,757			11,853
Taxes paid related to net share settlement of equity awards	(25,881		)	(15,992		)
Dividends paid	(1,245		)	(1,260		)
Repurchases of common stock	(68,390		)	(100,713		)
Excess tax benefits from share-based payment arrangements	14,008			8,616
Net cash provided by (used in) financing activities	(71,751		)	14,504
Effect of exchange rate changes on cash	486			(9,223		)
Decrease in cash and cash equivalents	(746		)	(18,234		)
Cash and cash equivalents, beginning of period	86,120			105,075
Cash and cash equivalents, end of period	$	85,374		$	86,841
Supplemental disclosures of cash flow information:
Income taxes refunds (payments), net	$	2,648		$	(24,496	)
Cash paid for interest	$	13,273		$	14,709
Supplemental disclosures of non-cash investing and financing activities:
Purchase of property and equipment included in accounts payable	$	1,028		$	4,742

See accompanying notes.

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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, 2015. 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 November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 applies to all entities that present a classified statement of financial position. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. ASU 2015-17 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. We elected to early adopt the standard prospectively as of March 31, 2016, which did not have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. Early adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.

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In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, which means it will be effective for our fiscal year beginning October 1, 2019. Early adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.

In May 2014, the 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. In August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for our fiscal year beginning October 1, 2018. Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). 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.

2. Business Combinations

On January 12, 2015, we acquired 100% of the equity of TONBELLER Aktiengesellschaft for $59.6 million in cash. We recorded $14.9 million of intangible assets, which are being amortized using the straight-line method over a weighted average useful life of approximately 4.9 years. We allocated $46.4 million of goodwill to our Applications segment that was not deductible for tax purposes.

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, 2016 and September 30, 2015.

•

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, 2016 and September 30, 2015.

The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2016 and September 30, 2015:

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March 31, 2016	Active Markets for Identical Instruments (Level 1)		Fair Value as of March 31, 2016
	(In thousands)
Assets:
Cash equivalents (1)	$	440	$	440
Marketable securities (2)	10,351		10,351
Total	$	10,791	$	10,791

September 30, 2015	Active Markets for Identical Instruments (Level 1)		Fair Value as of September 30, 2015
	(In thousands)
Assets:
Cash equivalents (1)	$	439	$	439
Marketable securities (2)	9,567		9,567
Total	$	10,006	$	10,006


(1)	Included in cash and cash equivalents on our condensed consolidated balance sheet at March 31, 2016 and September 30, 2015. Not included in these tables are cash deposits of $84.9 million and $85.7 million at March 31, 2016 and September 30, 2015, 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, 2016 and September 30, 2015.

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.

For the fair value of our derivative instruments and senior notes, see Note 4 and Note 8, 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, 2016 and September 30, 2015:

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	March 31, 2016
	Contract Amount				Fair Value
	Foreign Currency		US$		US$
	(In thousands)
Sell foreign currency:
Canadian dollar (CAD)	CAD	1,250	$	963	$	—
Euro (EUR)	EUR	5,500	$	6,303	$	—
Buy foreign currency:
British pound (GBP)	GBP	5,026	$	7,250	$	—



	September 30, 2015
	Contract Amount				Fair Value
	Foreign Currency		US$		US$
	(In thousands)
Sell foreign currency:
Canadian dollar (CAD)	CAD	2,750	$	2,045	$	—
Euro (EUR)	EUR	5,600	$	6,296	$	—
Buy foreign currency:
British pound (GBP)	GBP	6,943	$	10,550	$	—

The foreign currency forward contracts were entered into on March 31, 2016 and September 30, 2015, respectively; therefore, their fair value was $0 on each of these dates.

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,
	2016		2015		2016		2015
	(In thousands)
Losses on foreign currency forward contracts	$	956	$	10	$	1,255	$	339

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,
	2016		2015		2016		2015
	(In thousands)
Cost of revenues	$	1,840	$	1,901	$	3,747	$	3,737
Selling, general and administrative expenses	1,667		1,614		3,340		2,710
	$	3,507	$	3,515	$	7,087	$	6,447

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 $152.7 million and $154.2 million as of March 31, 2016 and September 30, 2015, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2016, was as follows (in thousands):

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Year Ended September 30,
2016 (excluding the six months ended March 31, 2016)	$	6,861
2017	12,857
2018	5,996
2019	5,480
2020	3,360
Thereafter	5,026
	$	39,580

The following table summarizes changes to goodwill during the six months ended March 31, 2016, both in total and as allocated to our segments:



	Applications			Scores		Tools			Total
	(In thousands)
Balance at September 30, 2015	$	596,765		$	146,648	$	71,337		$	814,750
Adjustment related to prior acquisitions	283			—		—			283
Foreign currency translation adjustment	(5,953		)	—		(788		)	(6,741		)
Balance at March 31, 2016	$	591,095		$	146,648	$	70,549		$	808,292

6. Composition of Certain Financial Statement Captions

The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at March 31, 2016 and September 30, 2015:



	March 31, 2016			September 30, 2015
	(In thousands)
Property and equipment	$	116,939		$	109,860
Less: accumulated depreciation and amortization	(78,350		)	(71,652		)
	$	38,589		$	38,208

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, 2016, we had $235.0 million in borrowings outstanding at a weighted average interest rate of 1.815%, 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, 2016.

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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 7.2% and the weighted average maturity is 10.0 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, 2016, 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 $376.0 million as of March 31, 2016 and September 30, 2015. The fair value of the Senior Notes was $398.7 million and $401.6 million as of March 31, 2016 and September 30, 2015, 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. The current portion and non-current portion is recorded in other accrued current liabilities and other long-term liabilities, respectively, within the accompanying condensed consolidated balance sheets. The balance for all the facilities charges will be paid by the end of our fiscal 2020. The balance for all the employee separation costs will be paid by the end of the third quarter of our fiscal 2016.



	Accrual at			Cash Payments			Accrual at
	September 30, 2015			Cash Payments			March 31, 2016
	(In thousands)
Facilities charges	$	12,995		$	(1,551	)	$	11,444
Employee separation	2,405			(2,398		)	7
	15,400			$	(3,949	)	11,451
Less: current portion	(5,570		)				(4,287		)
Non-current	$	9,830					$	7,164

10. Income Taxes

Effective Tax Rate

The effective income tax rate was 28.1% and 27.5% during the quarters ended March 31, 2016 and 2015, respectively and 24.3% and 25.0% during the six months ended March 31, 2016 and 2015, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The effective rates for both periods were significantly impacted by the mix of global earnings toward lower tax jurisdictions, as well as retroactive extensions of the U.S. Federal Research and Development Credit.

The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $5.7 million and $4.6 million at March 31, 2016 and September 30, 2015, 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 $0.3 million and $0.2 million, related to unrecognized tax benefits as of March 31, 2016 and September 30, 2015, 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, 2016 and 2015:

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	Quarter Ended March 31,				Six Months Ended March 31,
	2016		2015		2016		2015
	(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
Net Income	$	23,116	$	18,870	$	42,357	$	33,277
Denominator - share:
Basic weighted-average shares	31,268		31,335		31,226		31,639
Effect of dilutive securities	994		1,113		1,123		1,152
Diluted weighted-average shares	32,262		32,448		32,349		32,791
Earnings per share:
Basic	$	0.74	$	0.60	$	1.36	$	1.05
Diluted	$	0.72	$	0.58	$	1.31	$	1.01

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 21,000 and 46,000 options excluded for the quarters ended March 31, 2016 and 2015, respectively. There were approximately 18,000 and 270,000 options excluded for the six months ended March 31, 2016 and 2015, 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. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our new FICO^® Decision Management Suite, as well as associated professional services.

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.

The following tables summarize segment information for the quarters and six months ended March 31, 2016 and 2015:

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	Quarter Ended March 31, 2016
	Applications			Scores			Tools			Unallocated Corporate Expenses			Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	80,751		$	59,265		$	10,727		$	—		$	150,743
Professional services	31,719			1,112			6,511			—			39,342
License	9,447			739			6,407			—			16,593
Total segment revenues	121,917			61,116			23,645			—			206,678
Segment operating expense	(87,955		)	(14,090		)	(27,120		)	(21,882		)	(151,047		)
Segment operating income (loss)	$	33,962		$	47,026		$	(3,475	)	$	(21,882	)	55,631
Unallocated share-based compensation expense													(13,600		)
Unallocated amortization expense													(3,507		)
Operating income													38,524
Unallocated interest expense, net													(6,815		)
Unallocated other income, net													435
Income before income taxes													$	32,144
Depreciation expense	$	2,708		$	185		$	1,000		$	327		$	4,220



	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

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	Six Months Ended March 31, 2016
	Applications			Scores			Tools			Unallocated Corporate Expenses			Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	161,734		$	114,482		$	21,599		—			$	297,815
Professional services	58,845			1,860			12,789			—			73,494
License	21,479			776			13,190			—			35,445
Total segment revenues	242,058			117,118			47,578			—			406,754
Segment operating expense	(175,392		)	(28,259		)	(52,414		)	(45,944		)	(302,009		)
Segment operating income (loss)	$	66,666		$	88,859		$	(4,836	)	$	(45,944	)	104,745
Unallocated share-based compensation expense													(28,300		)
Unallocated amortization expense													(7,087		)
Operating income													69,358
Unallocated interest expense, net													(13,539		)
Unallocated other income, net													101
Income before income taxes													$	55,920
Depreciation expense	$	5,452		$	362		$	1,635		$	632		$	8,081



	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

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.

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

FORWARD LOOKING STATEMENTS

Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 2016.

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.

We derive a significant portion of our revenues from clients outside the U.S. International revenues accounted for 35% and 39% of total consolidated revenues for the quarters ended March 31, 2016 and 2015, respectively, and 34% and 39% of total consolidated revenues for the six months ended March 31, 2016 and 2015, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 72% and 68% of our revenues were derived from within this industry during the quarters ended March 31, 2016 and 2015, respectively, and 74% and 68% of our revenues were derived from within this industry during the six months ended March 31, 2016 and 2015, 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 73% and 67% of our revenues during the quarters ended March 31, 2016 and 2015, respectively. Arrangements with transactional or unit-based pricing accounted for approximately 73% and 68% of our revenues during the six months ended March 31, 2016 and 2015, respectively.

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We continue to invest in our growth initiatives, while continuing to redirect our incremental investment from product development to expanding and refining our distribution capabilities. This emphasis of control over our operating expenses contributed to an increase of our operating income to $38.5 million and $69.4 million during the quarter and six months ended March 31, 2016, respectively, from $34.4 million and $59.3 million during the quarter and six months ended March 31, 2015, respectively, a 12% increase quarter over quarter and a 17% increase year-to-date period over period. Our operating margin increased to 19% from 17%, a 12% increase quarter over quarter and increased to 17% from 15%, a 14% increase year-to-date period over period.

We continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter and six months ended March 31, 2016, we repurchased approximately 0.4 million shares at a total repurchase price of $40.0 million and 0.7 million shares for a total repurchase price of $68.4 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


•	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

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	Bookings		Bookings Yield (1)		Number of Bookings over $1 Million	Weighted- Average Term (2)
	(In millions)					(Months)
Quarter Ended March 31, 2016	$	132.5	13	%	15	55
Quarter Ended March 31, 2015	$	79.6	30	%	14	22
Six Months Ended March 31, 2016	$	218.9	24	%	25	NM^(a)
Six Months Ended March 31, 2015	$	149.2	40	%	28	NM^(a)


(1)	Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.


(2)	Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.


(a)	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 50% and 28% of total bookings for the quarters ended March 31, 2016 and 2015, respectively. Professional services bookings were 38% and 46% of total bookings for the quarters ended March 31, 2016 and 2015, respectively. License bookings were 12% and 26% of total bookings for the quarters ended March 31, 2016 and 2015, respectively.

Transactional and maintenance bookings were 41% and 25% of total bookings for the six months ended March 31, 2016 and 2015, respectively. Professional services bookings were 44% and 49% of total bookings for the six months ended March 31, 2016 and 2015, respectively. License bookings were 15% and 26% of total bookings for the six months ended March 31, 2016 and 2015, respectively.

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, 2016 and 2015:



	Quarter Ended March 31,				Percentage of Revenues				Period-to-Period			Period-to-Period Percentage
Segment	2016		2015		2016		2015		Change			Change
	(In thousands)								(In thousands)
Applications	$	121,917	$	134,388	59	%	65	%	$	(12,471	)	(9	)%
Scores	61,116		49,937		30	%	24	%	11,179			22	%
Tools	23,645		22,784		11	%	11	%	861			4	%
Total	$	206,678	$	207,109	100	%	100	%	(431		)	—	%
												Period-to-Period
	Six Months Ended March 31,				Percentage of Revenues				Period-to-Period			Percentage
Segment	2016		2015		2016		2015		Change			Change
	(In thousands)								(In thousands)
Applications	$	242,058	$	249,886	59	%	63	%	$	(7,828	)	(3	)%
Scores	117,118		93,878		29	%	24	%	23,240			25	%
Tools	47,578		52,895		12	%	13	%	(5,317		)	(10	)%
Total	$	406,754	$	396,659	100	%	100	%	10,095			3	%

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Quarter Ended March 31, 2016 Compared to Quarter Ended March 31, 2015

Applications



	Quarter Ended March 31,				Period-to-			Period-to- Period Percentage
	2016		2015		Period Change			Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	80,751	$	80,315	$	436		1	%
Professional services	31,719		30,992		727			2	%
License	9,447		23,081		(13,634		)	(59	)%
Total	$	121,917	$	134,388	(12,471		)	(9	)%

Applications segment revenues decreased $12.5 million primarily due to a $14.9 million decrease in our fraud solutions and a $2.7 million decrease in our marketing solutions, partially offset by a $2.8 million increase in our customer management solutions and a $2.3 million increase in our customer communication services. The decrease in fraud solutions was primarily attributable to a decrease in software revenues mainly driven by two large deals occurring during the quarter ended March 31, 2015. The decrease in marketing solutions was primarily attributable to a decrease in services and transactional revenues. The increase in customer management solutions was primarily attributable to an increase in license revenue. The increase in customer communication services was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market.

Scores



	Quarter Ended March 31,				Period-to-			Period-to- Period Percentage
	2016		2015		Period Change			Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	59,265	$	47,814	$	11,451		24	%
Professional services	1,112		966		146			15	%
License	739		1,157		(418		)	(36	)%
Total	$	61,116	$	49,937	11,179			22	%

Scores segment revenues increased $11.2 million due to an increase of $6.3 million in our business-to-consumer services revenue and an increase of $4.9 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 increase in our business-to-business Scores was primarily attributable to an increase in our transactional scores driven by new prescreen, originations and account management, as well as the resolution of under reported royalties from a prior period.

During the quarters ended March 31, 2016 and 2015, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 20% and 14%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.

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Tools



	Quarter Ended March 31,				Period-to-		Period-to- Period Percentage
	2016		2015		Period Change		Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	10,727	$	10,554	$	173	2	%
Professional services	6,511		5,988		523		9	%
License	6,407		6,242		165		3	%
Total	$	23,645	$	22,784	861		4	%

Tools segment revenues increased $0.9 million primarily attributable to an increase in services revenue.

Six Months Ended March 31, 2016 Compared to Six Months Ended March 31, 2015

Applications



	Six Months Ended March 31,				Period-to-			Period-to- Period Percentage
	2016		2015		Period Change			Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	161,734	$	158,866	$	2,868		2	%
Professional services	58,845		59,491		(646		)	(1	)%
License	21,479		31,529		(10,050		)	(32	)%
Total	$	242,058	$	249,886	(7,828		)	(3	)%

Applications segment revenues decreased $7.8 million primarily due to a $12.8 million decrease in our fraud solutions and a $4.6 million decrease in our marketing solutions, partially offset by a $4.2 million increase in our customer communication services and a $4.2 million increase in our compliance solutions. The decrease in fraud solutions was primarily attributable to a decrease in software revenues mainly driven by two large deals occurring during the six months ended March 31, 2015. The decrease in marketing solutions was primarily attributable to a decrease in service and transactional revenues. The increase in customer communication services was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication market. The increase in compliance solutions was attributable to our acquisition of TONBELLER in January 2015.

Scores



	Six Months Ended March 31,				Period-to-			Period-to- Period Percentage
	2016		2015		Period Change			Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	114,482	$	90,751	$	23,731		26	%
Professional services	1,860		1,754		106			6	%
License	776		1,373		(597		)	(43	)%
Total	$	117,118	$	93,878	23,240			25	%

Scores segment revenues increased $23.2 million due to an increase of $15.6 million in our business-to-consumer services revenue and an increase of $7.6 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 increase in our business-to-business Scores was primarily attributable to an increase in our transactional scores driven by new prescreen, account management, and originations, as well as the resolution of under reported royalties from a prior period.

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During the six months ended March 31, 2016 and 2015, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 20% and 14%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.

Tools



	Six Months Ended March 31,				Period-to-			Period-to- Period Percentage
	2016		2015		Period Change			Change
	(In thousands)				(In thousands)
Transactional and maintenance	$	21,599	$	20,476	$	1,123		5	%
Professional services	12,789		11,899		890			7	%
License	13,190		20,520		(7,330		)	(36	)%
Total	$	47,578	$	52,895	(5,317		)	(10	)%

Tools segment revenues decreased $5.3 million primarily attributable to a decrease in license revenue driven by a one-time settlement during the six months ended March 31, 2015 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, 2016 and 2015:



	Quarter Ended March 31,						Percentage of Revenues				Period-to-			Period-to- Period Percentage
	2016			2015			2016		2015		Period Change			Change
	(In thousands, except employees)										(In thousands, except employees)
Revenues	$	206,678		$	207,109		100	%	100	%	$	(431	)	—	%
Operating expenses:
Cost of revenues	62,298			70,991			30	%	34	%	(8,693		)	(12	)%
Research and development	24,848			24,341			12	%	12	%	507			2	%
Selling, general and administrative	77,501			73,863			38	%	35	%	3,638			5	%
Amortization of intangible assets	3,507			3,515			2	%	2	%	(8		)	—	%
Total operating expenses	168,154			172,710			82	%	83	%	(4,556		)	(3	)%
Operating income	38,524			34,399			18	%	17	%	4,125			12	%
Interest expense, net	(6,815		)	(7,718		)	(3	)%	(4	)%	903			(12	)%
Other income (expense), net	435			(648		)	—	%	(1	)%	1,083			(167	)%
Income before income taxes	32,144			26,033			15	%	12	%	6,111			23	%
Provision for income taxes	9,028			7,163			4	%	3	%	1,865			26	%
Net income	$	23,116		$	18,870		11	%	9	%	4,246			23	%
Number of employees at quarter end	2,852			2,748							104			4	%

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	Six Months Ended March 31,						Percentage of Revenues				Period-to-			Period-to- Period Percentage
	2016			2015			2016		2015		Period Change			Change
	(In thousands)										(In thousands)
Revenues	$	406,754		$	396,659		100	%	100	%	$	10,095		3	%
Operating expenses:
Cost of revenues	124,491			137,291			31	%	34	%	(12,800		)	(9	)%
Research and development	49,479			46,978			12	%	12	%	2,501			5	%
Selling, general and administrative	156,339			146,664			39	%	37	%	9,675			7	%
Amortization of intangible assets	7,087			6,447			2	%	2	%	640			10	%
Total operating expenses	337,396			337,380			84	%	85	%	16			—	%
Operating income	69,358			59,279			16	%	15	%	10,079			17	%
Interest expense, net	(13,539		)	(14,923		)	(3	)%	(4	)%	1,384			(9	)%
Other income, net	101			1			—	%	—	%	100			10,000	%
Income before income taxes	55,920			44,357			13	%	11	%	11,563			26	%
Provision for income taxes	13,563			11,080			3	%	3	%	2,483			22	%
Net income	$	42,357		$	33,277		10	%	8	%	9,080			27	%

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; outside services; internal network hosting costs; software royalty fees; and credit bureau data and processing services.

Cost of revenues as a percentage of revenues decreased to 30% during the quarter ended March 31, 2016 from 34% during the quarter ended March 31, 2015. The quarter over quarter decrease of $8.7 million was primarily attributable to a $5.7 million decrease in personnel and labor costs and a $3.2 million decrease in outside services. The decrease in personnel and labor costs was primarily attributable to a decrease in professional services delivery cost, including a nonrecurring charge related to a large implementation project during the quarter ended March 31, 2015. The decrease in outside services was primarily attributable to a decrease in our billable consulting projects utilizing temporary resources.

Cost of revenues as a percentage of revenues decreased to 31% during the six months ended March 31, 2016 from 34% during the six months ended March 31, 2015. The year-to-date period over period decrease of $12.8 million was primarily attributable to an $8.0 million decrease in outside services and a $6.7 million decrease in personnel and labor costs. The decrease in outside services was primarily attributable to a decrease in our billable consulting projects utilizing temporary resources. The decrease in personnel and labor costs was primarily attributable to a decrease in professional services delivery cost, including a nonrecurring charge related to a large implementation project during the six months ended March 31, 2015, partially offset by an increase in incentive cost.

Over the next several quarters, we expect cost of revenues as a percentage of revenues will be consistent with or slightly higher than those incurred during the quarter ended March 31, 2016.

Research and Development

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

Research and development expenses increased $0.5 million to $24.8 million during the quarter ended March 31, 2016 from the quarter ended March 31, 2015. Research and development expenses as a percentage of revenues was 12% for the quarter ended March 31, 2016, consistent with the quarter ended March 31, 2015.

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The year-to-date period over period increase of $2.5 million in research and development expenses was primarily attributable to an increase in personnel and labor costs, driven by our continued investment in the areas of cloud computing and software-as-a-service (“SaaS”), as well as higher incentive cost during the six months ended March 31, 2016. Research and development expenses as a percentage of revenues was 12% for the six months ended March 31, 2016, consistent with the six months ended March 31, 2015.

Over the next several quarters, we expect research and development expenditures as a percentage of revenues will be consistent with or slightly lower than those incurred during the quarter ended March 31, 2016.

Selling, General and Administrative

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

Selling, general and administrative expenses as a percentage of revenues increased to 38% during the quarter ended March 31, 2016 from 35% during the quarter ended March 31, 2015. The quarter over quarter increase of $3.6 million was primarily attributable to a $4.7 million increase in labor and personnel costs, mainly driven by our investment in expanding and refining our distribution capabilities, as well as an increase in incentive cost.

Selling, general and administrative expenses as a percentage of revenues increased to 39% during the six months ended March 31, 2016 from 37% during the six months ended March 31, 2015. The year-to-date period over period increase of $9.7 million was primarily attributable to an $8.4 million increase in labor and personnel costs and a $5.6 million increase in share-based compensation cost, partially offset by a $3.1 million decrease in marketing expenses. The increase in labor and personnel costs was primarily attributable to our investment in expanding and refining our distribution capabilities, as well as an increase in incentive cost. The increase in share-based compensation cost was primarily attributable to an adjustment related to the reduction in our estimated forfeiture rate, as well as higher stock price. The decrease in marketing expenses was primarily attributable to a company-wide marketing event during the six months ended March 31, 2015.

Over the next several quarters, we expect selling, general and administrative expenses as a percentage of revenues will be consistent with those incurred during the quarter ended March 31, 2016.

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 acquisition method of accounting. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from four to fifteen years.

Amortization expense for the quarter ended March 31, 2016 was $3.5 million, consistent with that recorded during the quarter ended March 31, 2015.

The year-to-date period over period increase of $0.6 million in amortization expense was primarily attributable to the addition of intangible assets associated with our TONBELLER acquisition in January 2015.

Over the next several quarters we expect that amortization expense will be consistent with or slightly lower than the amortization expense we recorded during the quarter ended March 31, 2016 due to certain assets associated with our Entiera acquisition becoming fully amortized in May 2016.

Interest Expense, Net

Interest expense includes primarily interest on the senior notes issued in May 2008 and July 2010, as well as interest and credit facility fees on the revolving line of credit. Our consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

The quarter over quarter decrease in interest expense of $0.9 million was primarily attributable to the $71.0 million principal payment in May 2015 on the senior notes issued in May 2008 resulting in lower average debt balance for the quarter ended March 31, 2016, partially offset by a higher average balance on our revolving line of credit.

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The year-to-date period over period decrease in interest expense of $1.4 million was primarily attributable to the $71.0 million principal payment in May 2015 on the senior notes issued in May 2008 resulting in lower average debt balance for the six months ended March 31, 2016, partially offset by a higher average balance on our revolving line of credit.

Over the next several quarters we expect net interest expense will be consistent with or lower than the net interest expense incurred during the quarter ended March 31, 2016 due to the $60.0 million principal payment scheduled to occur in July 2016 on the senior notes issued in July 2010.

Other Income (Expense), Net

Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The quarter over quarter change in other income (expense), net of $1.0 million was primarily attributable to a non-recurring charge during the quarter ended March 31, 2015 as well as an increase in foreign currency exchange gain during the quarter ended March 31, 2016.

Provision for Income Taxes

The effective income tax rate was 28.1% and 27.5% during the quarters ended March 31, 2016 and 2015, respectively, and 24.3% and 25.0% during the six months ended March 31, 2016 and 2015, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year.