10-Q 1 fico10-qq22016.htm FICO 10-Q Q2 2016 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).
 



TABLE OF CONTENTS
 
 



i


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.

1


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.


2



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

 

 
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.


3


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.

4


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.


5


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:

6


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:

7


 
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):

8


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.

9


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
 
 
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: 

10


 
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: 

11


 
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



12


 
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.

13


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.


14


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

15


 
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
 %



16


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.

17


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.

18


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
 %


19


 
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.

20


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.

21


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. 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 the retroactive extensions of the U.S. Federal Research and Development Credit.
Operating Income
The following tables set forth certain summary information on a segment basis related to our operating income for the quarters and six months ended March 31, 2016 and 2015:

22