Company Overview: Fair Isaac Corporation (NYSE: FICO) offers software and data management products and services that enable businesses to automate and connect decisions. Companies use its innovative solutions in over 120 countries to secure 2.6 billion payment cards from fraud, assist consumers in obtaining credit, and ensure that millions of airlines and rental cars arrive at their destinations on time. FICO holds over 200 US and foreign patents on its technologies, which it offers to businesses in financial services, telecommunications, health care, retail, and other industries.

FICO Details

Key Takeaways from FY21 (ended September 30, 2021)

• Slight Growth in Revenue: In FY21, the company's revenue amounted to USD 1.32 billion, representing a 1.70% increase year-over-year from USD 1.29 billion in FY20, driven by growth in the Scores segment.
• Improvement in Operating Income: Its operating income for the year amounted to USD 505.49 million (including a USD 100.14 million pre-tax gain on the sale of its Debt Collections and Recovery product line), a 70.79% improvement from USD 295.97 million in FY20.
• Increase in Net Income: The net income for FY21 was USD 392.08 million vs. USD 236.41 million reported in FY20, representing diluted earnings per share (EPS) of USD 13.40.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On December 14, 2021, FICO announced that it had priced a private offering of USD 550.0 million (same class as its USD 350 million) aggregate principal amount of 4.00% senior notes due 2028. Proceeds from this issue will be utilized to repay the revolving credit facility and pay related fees and expenses.
• FICO Falcon Fraud Manager, a real-time solution that combines predictive analytics and artificial intelligence, and TenS, a proprietary Sistemas Crticos platform, announced the launch of BSafe Platform SaaS on December 9, 2021. It combines the fraud prevention technologies of FICO Falcon Fraud Manager and TenS on the Cloud for any company/institution, regardless of size or industry.
• On November 30, 2021, FICO's board approved a new share buyback program to repurchase and cancel up to USD 500 million of shares.
• On November 16, 2021, FICO announced that OTP Group, one of the largest independent financial services providers in Central and Eastern Europe, is implementing FICO Originations Solution as its standard system for approving retail credit applications across its European businesses as part of a digital transformation strategy. 

Segment-Wise Revenue for FY21: Its revenue-generating operating segments are Scores and Software.

• Scores: This includes B2B (business-to-business) scoring solutions and services and B2C (business-to-consumer) scoring solutions and professional services. Total Scores revenue for FY21 increased to USD 654.15 million from USD 528.55 million in FY20.
• Software: This segment comprises decision management applications for marketing, account origination, fraud, financial crimes compliance, collections, and insurance claims management, and others. It also includes analytic and decision management software tools for customized decision management applications. Total revenue for FY21 amounted to USD 662.39 million, compared to USD 766.02 million in FY20.

Balance Sheet & Liquidity Position

• Improvement in Cash Balance: The company exited FY21 with a cash balance of USD 195.35 million, 24.12% more than USD 157.39 million at the end of FY20.
• Surge in Cashflow from Operations: Net operating cash inflow in FY21 was USD 423.82 million vs. USD 364.92 million in FY20.
• Increase in Debt: FICO's total outstanding debt amounted to USD 1.26 billion at FY21 end, 50.88% more than the reported total debt of USD 834.44 million as of September 30, 2020.

Key Metrics: In FY21, FICO's EBITDA and operating margins were 33.2% and 38.4%, higher than the industry median of 9.7% and 0.5%, respectively. Net margin stood at 29.8% vs. industry median of -4.1%.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 40.30% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Co., N.A. hold the maximum stake in the company at 10.11% and 8.67%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Dependence on the Banking Sector: Sales to the banking industry accounted for 89% of the company's revenue in FY21. As a result, any disruption to this industry that could result in the bankruptcy or credit deterioration of financial institutions, many of which are FICO's customers, could decline FICO's revenue and results of operations.
• Customer Concentration: FICO relies on a limited customer base and has agreements with three major credit reporting agencies to generate a significant proportion of its revenue. These customers are much larger than FICO and hence have more negotiating leverage.
• Distributor Relationships: Distributors such as Experian, TransUnion, and Equifax, among others, sell the majority of the company's products and services. It could be harmful to FICO's business if these distributors fail to perform their duties on favourable terms.

Outlook

• Looking forward, FICO expects to generate revenue of USD 1.35 billion in FY22. It also anticipates a net income of USD 318 million and 397 million on GAAP and non-GAAP basis.
• For FY22, GAAP EPS is estimated at USD 11.29, with non-GAAP EPS of USD 14.12.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last twelve months, FICO corrected 20.49%. The stock is currently trading close to the mid-point of its 52-week range of USD 342.89 to USD 553.97. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its market dominance in the fintech space, robust profitability margins, and global market presence. We have taken peers like Black Knight, Inc. (NYSE: BKI) and Envestnet, Inc. (NYSE: ENV). Considering the decent bottom-line performance, strategic growth initiatives, various new customer announcements, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 415.00, up 0.67% as of December 20, 2021, at 10:42 AM ET.

FICO Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.