Document
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 June 30, 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 July 15, 2016 was 30,854,567 (excluding 58,002,216 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)
 
June 30,
2016
 
September 30,
2015
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
118,155

 
$
86,120

Accounts receivable, net
155,196

 
158,773

Prepaid expenses and other current assets
22,443

 
41,709

Total current assets
295,794

 
286,602

Marketable securities available for sale
10,645

 
9,567

Other investments
10,920

 
10,958

Property and equipment, net
41,106

 
38,208

Goodwill
802,202

 
814,750

Intangible assets, net
37,212

 
47,321

Deferred income taxes
22,109

 
15,196

Other assets
6,724

 
7,561

Total assets
$
1,226,712

 
$
1,230,163

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,096

 
$
19,852

Accrued compensation and employee benefits
56,720

 
54,368

Other accrued liabilities
36,543

 
30,958

Deferred revenue
50,884

 
46,697

Current maturities on debt
85,000

 
92,000

Total current liabilities
250,243

 
243,875

Long-term debt
516,000

 
516,000

Other liabilities
32,428

 
33,290

Total liabilities
798,671

 
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 30,952 and 31,290 shares outstanding at June 30, 2016 and September 30, 2015, respectively)
310

 
313

Paid-in-capital
1,165,403

 
1,152,789

Treasury stock, at cost (57,905 and 57,567 shares at June 30, 2016 and September 30, 2015, respectively)
(2,109,507
)
 
(2,033,644
)
Retained earnings
1,443,730

 
1,368,255

Accumulated other comprehensive loss
(71,895
)
 
(50,715
)
Total stockholders’ equity
428,041

 
436,998

Total liabilities and stockholders’ equity
$
1,226,712

 
$
1,230,163


See accompanying notes.

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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Transactional and maintenance
$
153,886

 
$
144,695

 
$
451,701

 
$
414,788

Professional services
44,304

 
37,998

 
117,798

 
111,142

License
40,588

 
26,673

 
76,033

 
80,095

Total revenues
238,778

 
209,366

 
645,532

 
606,025

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues *
66,384

 
66,202

 
190,875

 
203,493

Research and development
26,417

 
25,610

 
75,896

 
72,588

Selling, general and administrative *
87,172

 
74,645

 
243,511

 
221,309

Amortization of intangible assets *
3,486

 
3,599

 
10,573

 
10,046

Restructuring and acquisition-related
—

 
2,256

 
—

 
2,256

Total operating expenses
183,459

 
172,312

 
520,855

 
509,692

Operating income
55,319

 
37,054

 
124,677

 
96,333

Interest expense, net
(6,781
)
 
(7,360
)
 
(20,320
)
 
(22,283
)
Other income, net
1,752

 
770

 
1,853

 
771

Income before income taxes
50,290

 
30,464

 
106,210

 
74,821

Provision for income taxes
15,303

 
10,558

 
28,866

 
21,638

Net income
34,987

 
19,906

 
77,344

 
53,183

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(14,156
)
 
12,779

 
(21,180
)
 
(17,740
)
Comprehensive income
$
20,831

 
$
32,685

 
$
56,164

 
$
35,443

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.12

 
$
0.64

 
$
2.48

 
$
1.69

Diluted
$
1.08

 
$
0.62

 
$
2.39

 
$
1.63

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
31,149

 
31,118

 
31,201

 
31,465

Diluted
32,313

 
32,363

 
32,337

 
32,648

 
 
* 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
 
 
 
Balance at September 30, 2015
31,290

 
$
313

 
$
1,152,789

 
$
(2,033,644
)
 
$
1,368,255

 
$
(50,715
)
 
$
436,998

Share-based compensation
—

 
—

 
41,704

 
—

 
—

 
—

 
41,704

Issuance of treasury stock under employee stock plans
689

 
7

 
(44,794
)
 
24,599

 
—

 
—

 
(20,188
)
Tax effect from share-based payment arrangements
—

 
—

 
15,704

 
—

 
—

 
—

 
15,704

Repurchases of common stock
(1,027
)
 
(10
)
 
—

 
(100,462
)
 
—

 
—

 
(100,472
)
Dividends paid
—

 
—

 
—

 
—

 
(1,869
)
 
—

 
(1,869
)
Net income
—

 
—

 
—

 
—

 
77,344

 
—

 
77,344

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
(21,180
)
 
(21,180
)
Balance at June 30, 2016
30,952

 
$
310

 
$
1,165,403

 
$
(2,109,507
)
 
$
1,443,730

 
$
(71,895
)
 
$
428,041

See accompanying notes.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended June 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
77,344

 
$
53,183

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,127

 
26,093

Share-based compensation
41,704

 
32,762

Deferred income taxes
(455
)
 
75

Tax effect from share-based payment arrangements
15,704

 
10,903

Excess tax benefits from share-based payment arrangements
(16,100
)
 
(11,364
)
Provision for doubtful accounts, net
1,305

 
—

Net loss on sales of property and equipment
—

 
12

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,184
)
 
10,609

Prepaid expenses and other assets
14,306

 
(11,309
)
Accounts payable
(1,635
)
 
2,324

Accrued compensation and employee benefits
2,556

 
(19,700
)
Other liabilities
(1,166
)
 
(6,968
)
Deferred revenue
8,119

 
(220
)
Net cash provided by operating activities
161,625

 
86,400

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(12,541
)
 
(18,266
)
Cash paid for acquisitions, net of cash acquired
(5,683
)
 
(56,992
)
Distribution from cost method investees
37

 
75

Net cash used in investing activities
(18,187
)
 
(75,183
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
49,000

 
241,000

Payments on revolving line of credit
(56,000
)
 
(68,000
)
Payments on senior notes
—

 
(71,000
)
Proceeds from issuance of treasury stock under employee stock plans
8,356

 
13,643

Taxes paid related to net share settlement of equity awards
(28,544
)
 
(18,102
)
Dividends paid
(1,869
)
 
(1,882
)
Repurchases of common stock
(96,121
)
 
(130,719
)
Excess tax benefits from share-based payment arrangements
16,100

 
11,364

Net cash used in financing activities
(109,078
)
 
(23,696
)
Effect of exchange rate changes on cash
(2,325
)
 
(8,238
)
Increase (decrease) in cash and cash equivalents
32,035

 
(20,717
)
Cash and cash equivalents, beginning of period
86,120

 
105,075

Cash and cash equivalents, end of period
$
118,155

 
$
84,358

Supplemental disclosures of cash flow information:
 
 
 
Income taxes refunds (payments), net
$
836

 
$
(31,122
)
Cash paid for interest
$
19,143

 
$
22,835

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
3,566

 
$
733

Unsettled repurchases of common stock
$
4,351

 
$
—

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 March 2016, the Financial Accounting Standards Board (“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.
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.

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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 May 19, 2016, we acquired 100% of the equity of QuadMetrics, Inc. (“QuadMetrics”) for $5.7 million in cash. QuadMetrics is a provider of enterprise security assessment analytics. We expect that this acquisition will help accelerate our efforts to provide a suite of complementary cyber-related analytics solutions to market. QuadMetrics 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.
We recorded $2.0 million of intangible assets, which are being amortized using the straight-line method over a weighted average useful life of approximately 4.0 years. We allocated $3.9 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 June 30, 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 June 30, 2016 and September 30, 2015.
The following tables represent financial assets that we measured at fair value on a recurring basis at June 30, 2016 and September 30, 2015:

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June 30, 2016
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of June 30, 2016
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
440

 
$
440

Marketable securities (2)
10,645

 
10,645

Total
$
11,085

 
$
11,085

 
 
 
 
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 June 30, 2016 and September 30, 2015. Not included in these tables are cash deposits of $117.7 million and $85.7 million at June 30, 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 June 30, 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 June 30, 2016 and September 30, 2015:

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June 30, 2016
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
1,000

 
$
774

 
$
—

Euro (EUR)
EUR 
4,850

 
$
5,387

 
$
—

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
4,580

 
$
6,150

 
$
—

 
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 June 30, 2016 and September 30, 2015, 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, net, and consisted of the following: 
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Gains (losses) on foreign currency forward contracts
$
(1,018
)
 
$
548

 
$
(2,273
)
 
$
209

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 June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Cost of revenues
$
1,805

 
$
1,919

 
$
5,552

 
$
5,656

Selling, general and administrative expenses
1,681

 
1,680

 
5,021

 
4,390

 
$
3,486

 
$
3,599

 
$
10,573

 
$
10,046


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 $150.1 million and $154.2 million as of June 30, 2016 and September 30, 2015, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2016, was as follows (in thousands):

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Year Ended September 30,
 
2016 (excluding the nine months ended June 30, 2016)
$
3,429

2017
12,968

2018
6,388

2019
5,873

2020
3,626

Thereafter
4,928


$
37,212

The following table summarizes changes to goodwill during the nine months ended June 30, 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

Addition from acquisitions
3,857

 
—

 
—

 
3,857

Adjustment related to prior acquisitions
283

 
—

 
—

 
283

Foreign currency translation adjustment
(14,885
)
 
—

 
(1,803
)
 
(16,688
)
Balance at June 30, 2016
$
586,020

 
$
146,648

 
$
69,534

 
$
802,202

6. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at June 30, 2016 and September 30, 2015: 
 
June 30,
2016
 
September 30,
2015
 
(In thousands)
Property and equipment
$
122,687

 
$
109,860

Less: accumulated depreciation and amortization
(81,581
)
 
(71,652
)
 
$
41,106

 
$
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 June 30, 2016, we had $225.0 million in borrowings outstanding at a weighted average interest rate of 1.836%, 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 June 30, 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 June 30, 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 June 30, 2016 and September 30, 2015. The fair value of the Senior Notes was $397.8 million and $401.6 million as of June 30, 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.
 
Accrual at
 
Cash
Payments
 
Accrual at
 
September 30, 2015
 
 
June 30, 2016
 
(In thousands)
Facilities charges
$
12,995

 
$
(2,354
)
 
$
10,641

Employee separation
2,405

 
(2,405
)
 
—

 
15,400

 
$
(4,759
)
 
10,641

Less: current portion
(5,570
)
 
 
 
(3,980
)
Non-current
$
9,830

 
 
 
$
6,661

10. Income Taxes
Effective Tax Rate
The effective income tax rate was 30.4% and 34.7% during the quarters ended June 30, 2016 and 2015, respectively and 27.2% and 28.9% during the nine months ended June 30, 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 $6.2 million and $4.6 million at June 30, 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 June 30, 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 nine months ended June 30, 2016 and 2015: 

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Table of Contents

 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
 
 
 
 
Net Income
$
34,987

 
$
19,906

 
$
77,344

 
$
53,183

Denominator - share:
 
 
 
 
 
 
 
Basic weighted-average shares
31,149

 
31,118

 
31,201

 
31,465

Effect of dilutive securities
1,164

 
1,245

 
1,136

 
1,183

Diluted weighted-average shares
32,313

 
32,363

 
32,337

 
32,648

Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.12

 
$
0.64

 
$
2.48

 
$
1.69

Diluted
$
1.08

 
$
0.62

 
$
2.39

 
$
1.63

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 no options excluded for the quarters ended June 30, 2016 and 2015. There were approximately 12,003 and 179,850 options excluded for the nine months ended June 30, 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 nine months ended June 30, 2016 and 2015: 

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Quarter Ended June 30, 2016
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
82,925

 
$
59,781

 
$
11,180

 
$
—

 
$
153,886

Professional services
36,560

 
822

 
6,922

 
—

 
44,304

License
22,080

 
527

 
17,981

 
—

 
40,588

Total segment revenues
141,565

 
61,130

 
36,083

 
—

 
238,778

Segment operating expense
(92,532
)
 
(14,321
)
 
(30,476
)
 
(29,240
)
 
(166,569
)
Segment operating income
$
49,033

 
$
46,809

 
$
5,607

 
$
(29,240
)
 
72,209

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(13,404
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,486
)
Operating income
 
 
 
 
 
 
 
 
55,319

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(6,781
)
Unallocated other income, net
 
 
 
 
 
 
 
 
1,752

Income before income taxes
 
 
 
 
 
 
 
 
$
50,290

Depreciation expense
$
2,961

 
$
211

 
$
947

 
$
354

 
$
4,473


 
Quarter Ended June 30, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
79,731

 
$
54,255

 
$
10,709

 
$
—

 
$
144,695

Professional services
31,009

 
615

 
6,374

 
—

 
37,998

License
16,394

 
884

 
9,395

 
—

 
26,673

Total segment revenues
127,134

 
55,754

 
26,478

 
—

 
209,366

Segment operating expense
(90,228
)
 
(14,736
)
 
(28,554
)
 
(20,773
)
 
(154,291
)
Segment operating income (loss)
$
36,906

 
$
41,018

 
$
(2,076
)
 
$
(20,773
)
 
55,075

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(12,166
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,599
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(2,256
)
Operating income
 
 
 
 
 
 
 
 
37,054

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,360
)
Unallocated other income, net
 
 
 
 
 
 
 
 
770

Income before income taxes
 
 
 
 
 
 
 
 
$
30,464

Depreciation expense
$
3,734

 
$
258

 
$
834

 
$
621

 
$
5,447



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Nine Months Ended June 30, 2016
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
244,659

 
$
174,263

 
$
32,779

 
—

 
$
451,701

Professional services
95,405

 
2,682

 
19,711

 
—

 
117,798

License
43,559

 
1,303

 
31,171

 
—

 
76,033

Total segment revenues
383,623

 
178,248

 
83,661

 
—

 
645,532

Segment operating expense
(267,924
)
 
(42,580
)
 
(82,890
)
 
(75,184
)
 
(468,578
)
Segment operating income
$
115,699

 
$
135,668

 
$
771

 
$
(75,184
)
 
176,954

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(41,704
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(10,573
)
Operating income
 
 
 
 
 
 
 
 
124,677

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(20,320
)
Unallocated other income, net
 
 
 
 
 
 
 
 
1,853

Income before income taxes
 
 
 
 
 
 
 
 
$
106,210

Depreciation expense
$
8,413

 
$
573

 
$
2,582

 
$
986

 
$
12,554


 
Nine Months Ended June 30, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
238,597

 
$
145,006

 
$
31,185

 
—

 
$
414,788

Professional services
90,500

 
2,369

 
18,273

 
—

 
111,142

License
47,923

 
2,257

 
29,915

 
—

 
80,095

Total segment revenues
377,020

 
149,632

 
79,373

 
—

 
606,025

Segment operating expense
(274,157
)
 
(42,246
)
 
(86,080
)
 
(62,145
)
 
(464,628
)
Segment operating income (loss)
$
102,863

 
$
107,386

 
$
(6,707
)
 
$
(62,145
)
 
141,397

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(32,762
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(10,046
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(2,256
)
Operating income
 
 
 
 
 
 
 
 
96,333

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(22,283
)
Unallocated other income, net
 
 
 
 
 
 
 
 
771

Income before income taxes
 
 
 
 
 
 
 
 
$
74,821

Depreciation expense
$
10,948

 
$
702

 
$
2,424

 
$
1,973

 
$
16,047


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Table of Contents

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.
14. Subsequent Events
In July 2016, our Board of Directors approved a new stock repurchase program following the termination of a similar program that was approved in August 2014. The new program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.


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Table of Contents

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 36% and 38% of total consolidated revenues for the quarters ended June 30, 2016 and 2015, respectively, and 35% and 39% of total consolidated revenues for the nine months ended June 30, 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 69% and 66% of our revenues were derived from within this industry during the quarters ended June 30, 2016 and 2015, respectively, and 72% and 67% of our revenues were derived from within this industry during the nine months ended June 30, 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 64% and 69% of our revenues during the quarters ended June 30, 2016 and 2015, respectively. Arrangements with transactional or unit-based pricing accounted for approximately 70% and 68% of our revenues during the nine months ended June 30, 2016 and 2015, respectively.


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Table of Contents

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 $55.3 million and $124.7 million during the quarter and nine months ended June 30, 2016, respectively, from $37.1 million and $96.3 million during the quarter and nine months ended June 30, 2015, respectively, a 49% increase quarter over quarter and a 29% increase year-to-date period over period. Our operating margin increased to 23% from 18%, a 31% increase quarter over quarter and increased to 19% from 16%, a 22% 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 nine months ended June 30, 2016, we repurchased approximately 0.3 million shares at a total repurchase price of $32.1 million and 1.0 million shares at a total repurchase price of $100.5 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 June 30, 2016
$
78.8

 
28
%
 
19

 
28

Quarter Ended June 30, 2015
$
60.2

 
27
%
 
11

 
21

Nine Months Ended June 30, 2016
$
297.7

 
33
%
 
44

 
NM(a)

Nine Months Ended June 30, 2015
$
209.4

 
45
%
 
39

 
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 29% and 25% of total bookings for the quarters ended June 30, 2016 and 2015, respectively. Professional services bookings were 44% and 49% of total bookings for the quarters ended June 30, 2016 and 2015, respectively. License bookings were 27% and 26% of total bookings for the quarters ended June 30, 2016 and 2015, respectively.
Transactional and maintenance bookings were 38% and 25% of total bookings for the nine months ended June 30, 2016 and 2015, respectively. Professional services bookings were 44% and 49% of total bookings for the nine months ended June 30, 2016 and 2015, respectively. License bookings were 18% and 26% of total bookings for the nine months ended June 30, 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 nine months ended June 30, 2016 and 2015:
 
Quarter Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2016
 
2015
 
2016
 
2015
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
141,565

 
$
127,134

 
59
%
 
61
%
 
$
14,431

 
11
%
Scores
61,130

 
55,754

 
26
%
 
26
%
 
5,376

 
10
%
Tools
36,083

 
26,478

 
15
%
 
13
%
 
9,605

 
36
%
Total
$
238,778

 
$
209,366

 
100
%
 
100
%
 
29,412

 
14
%
 
 
 
 
 
 
 
Period-to-Period
 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Percentage
Segment
2016
 
2015
 
2016
 
2015
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
383,623

 
$
377,020

 
59
%
 
62
%
 
$
6,603

 
2
%
Scores
178,248

 
149,632

 
28
%
 
25
%
 
28,616

 
19
%
Tools
83,661

 
79,373

 
13
%
 
13
%
 
4,288

 
5
%
Total
$
645,532

 
$
606,025

 
100
%
 
100
%
 
39,507

 
7
%



17
Table of Contents

Quarter Ended June 30, 2016 Compared to Quarter Ended June 30, 2015

Applications
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
82,925

 
$
79,731

 
$
3,194

 
4
%
Professional services
36,560

 
31,009

 
5,551

 
18
%
License
22,080

 
16,394

 
5,686

 
35
%
Total
$
141,565

 
$
127,134

 
14,431

 
11
%
Applications segment revenues increased $14.4 million primarily due to a $7.6 million increase in our fraud solutions, a $5.3 million increase in our originations solutions, and a $3.0 million increase in our customer communications services, partially offset by a $2.5 million decrease in our customer management solutions. The increase in fraud solutions was primarily attributable to an increase in license revenue mainly driven by one large multi-year license transaction. The increase in originations solutions was primarily attributable to an increase in services and 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. The decrease in customer management solutions was primarily attributable to a decrease in license revenue.


Scores
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
59,781

 
$
54,255

 
$
5,526

 
10
 %
Professional services
822

 
615

 
207

 
34
 %
License
527

 
884

 
(357
)
 
(40
)%
Total
$
61,130

 
$
55,754

 
5,376

 
10
 %
Scores segment revenues increased $5.4 million due to an increase of $4.0 million in our business-to-business scores revenue and $1.4 million in our business-to-consumer services revenue. The increase in business-to-business scores was primarily attributable to an increase in our transactional scores driven by new originations, account management, and prescreen. The increase in business-to-consumer services was primarily attributable to an increase in direct sales generated from the myFICO.com website.
During the quarters ended June 30, 2016 and 2015, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 17% and 18%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.
Tools 
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
11,180

 
$
10,709

 
$
471

 
4
%
Professional services
6,922

 
6,374

 
548

 
9
%
License
17,981

 
9,395

 
8,586

 
91
%
Total
$
36,083

 
$
26,478

 
9,605

 
36
%

18
Table of Contents

Tools segment revenues increased $9.6 million primarily attributable to an increase in license revenue, largely driven by one large multi-year license transaction.

Nine Months Ended June 30, 2016 Compared to Nine Months Ended June 30, 2015
 
Applications
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
244,659

 
$
238,597

 
$
6,062

 
3
 %
Professional services
95,405

 
90,500

 
4,905

 
5
 %
License
43,559

 
47,923

 
(4,364
)
 
(9
)%
Total
$
383,623

 
$
377,020

 
6,603

 
2
 %
Applications segment revenues increased $6.6 million primarily due to a $7.1 million increase in our customer communication services, a $3.7 million increase in our originations solutions, and a $3.7 million increase in our compliance solutions, partially offset by a $5.2 million decrease in our fraud solutions and a $5.2 million decrease in our marketing solutions. 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 originations solutions was primarily attributable to an increase in services revenue. The increase in compliance solutions was primarily attributable to our acquisition of TONBELLER in January 2015. The decrease in fraud solutions was primarily attributable to a decrease in software revenues mainly driven by decreased number of large multi-year license deals occurring during the nine months ended June 30, 2016. The decrease in marketing solutions was primarily attributable to a decrease in services and transactional revenues.


Scores
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
174,263

 
$
145,006

 
$
29,257

 
20
 %
Professional services
2,682

 
2,369

 
313

 
13
 %
License
1,303

 
2,257

 
(954
)
 
(42
)%
Total
$
178,248

 
$
149,632

 
28,616

 
19
 %
Scores segment revenues increased $28.6 million due to a $17.0 million increase in our business-to-consumer services revenue and an $11.6 million increase 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 business-to-business scores was primarily attributable to an increase in our transactional scores driven by new account management, originations, and prescreen, as well as the resolution of under reported royalties from a prior period.
During the nine months ended June 30, 2016 and 2015, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 19% and 16%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.

19
Table of Contents

Tools 
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
32,779

 
$
31,185

 
$
1,594

 
5
%
Professional services
19,711

 
18,273

 
1,438

 
8
%
License
31,171

 
29,915

 
1,256

 
4
%
Total
$
83,661

 
$
79,373

 
4,288

 
5
%
Tools segment revenues increased $4.3 million attributable to an increase across all revenue types.
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 nine months ended June 30, 2016 and 2015:
 
Quarter Ended June 30,
 
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
$
238,778

 
$
209,366

 
100
 %
 
100
 %
 
$
29,412

 
14
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
66,384

 
66,202

 
28
 %
 
31
 %
 
182

 
—
 %
Research and development
26,417

 
25,610

 
11
 %
 
12
 %
 
807

 
3
 %
Selling, general and administrative
87,172

 
74,645

 
37
 %
 
36
 %
 
12,527

 
17
 %
Amortization of intangible assets
3,486

 
3,599

 
1
 %
 
2
 %
 
(113
)
 
(3
)%
Restructuring and acquisition-related
—

 
2,256

 
—
 %
 
1
 %
 
(2,256
)
 
(100
)%
Total operating expenses
183,459

 
172,312

 
77
 %
 
82
 %
 
11,147

 
6
 %
Operating income
55,319

 
37,054

 
23
 %
 
18
 %
 
18,265

 
49
 %
Interest expense, net
(6,781
)
 
(7,360
)
 
(3
)%
 
(3
)%
 
579

 
(8
)%
Other income, net
1,752

 
770

 
1
 %
 
—
 %
 
982

 
128
 %
Income before income taxes
50,290

 
30,464

 
21
 %
 
15
 %
 
19,826

 
65
 %
Provision for income taxes
15,303

 
10,558

 
6
 %
 
5
 %
 
4,745

 
45
 %
Net income
$
34,987

 
$
19,906

 
15
 %
 
10
 %
 
15,081

 
76
 %
Number of employees at quarter end
3,008

 
2,810

 
 
 
 
 
198

 
7
 %


20
Table of Contents

 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2016
 
2015
 
2016
 
2015
 
Period Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Revenues
$
645,532

 
$
606,025

 
100
 %
 
100
 %
 
$
39,507

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
190,875

 
203,493

 
29
 %
 
34
 %
 
(12,618
)
 
(6
)%
Research and development
75,896

 
72,588

 
12
 %
 
12
 %
 
3,308

 
5
 %
Selling, general and administrative
243,511

 
221,309

 
38
 %
 
36
 %
 
22,202

 
10
 %
Amortization of intangible assets
10,573

 
10,046

 
2
 %
 
2
 %
 
527

 
5
 %
Restructuring and acquisition-related
—

 
2,256

 
—
 %
 
—
 %
 
(2,256
)
 
(100
)%
Total operating expenses
520,855

 
509,692

 
81
 %
 
84
 %
 
11,163

 
2
 %
Operating income
124,677

 
96,333

 
19
 %
 
16
 %
 
28,344

 
29
 %
Interest expense, net
(20,320
)
 
(22,283
)
 
(3
)%
 
(4
)%
 
1,963

 
(9
)%
Other income, net
1,853

 
771

 
—
 %
 
—
 %
 
1,082

 
140
 %
Income before income taxes
106,210

 
74,821

 
16
 %
 
12
 %
 
31,389

 
42
 %
Provision for income taxes
28,866

 
21,638

 
4
 %
 
3
 %
 
7,228

 
33
 %
Net income