Company Overview: Fair Isaac Corporation (NYSE: FICO) is a predictive analytics and decision management software company. Its unique solutions are used by businesses in over 120 countries to protect 2.6 billion payment cards from fraud, help people get credit, and to ensure millions of airplanes and rental cars are in the right place at the right 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 Q3FY21 (ended June 30, 2021)

• Growth in Revenue: In Q3FY21, the company's revenue amounted to USD 338.18 million, representing a 7.79% increase year-over-year from USD 313.73 million, resulting from higher sales volumes under its Scores segment.
• Improvement in Operating Income: Its operating income for the quarter amounted to USD 194.38 million (including a USD 92.8 million pre-tax gain on the sale of its Debt Collections and Recovery product line), a 134.56% improvement from USD 82.87 million in Q3FY20.
• Increase in Net Income: The net income for Q3FY21 was USD 151.20 million vs. USD 64.08 million reported in Q3FY20, representing diluted earnings per share (EPS) of USD 5.18.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On August 18, 2021, FICO's board approved an open-ended USD 500 million common stock repurchase program.
• On August 06, 2021, it announced the award of 13 new patents for fraud, artificial intelligence (AI), machine learning (ML), and decision management platforms. This brings FICO's total to 204 US and foreign patents, with 85 pending patent applications.
• The Poland-based debt management company, Ultimo SA, stated on July 19, 2021, that it would use FICO's collections treatment optimization to identify the most effective collections strategy for each borrower.
• On June 28, 2021, the company announced that Slovenska sporitelna, Slovakia's most prominent commercial bank, chose FICO's Decision Optimizer to develop data-driven lending strategies for its cash loan portfolio management.
• The company stated on June 16, 2021, that Switzerland's PostFinance will now use FICO's Falcon Platform to manage suspicious behaviour on its customers' accounts and help protect nearly 3 million debit cards from fraud.
• On June 07, 2021, FICO closed the sale of its Collection and Recovery business to Constellation Software Inc. The gain recognized from the sale amounted to USD 92.8 million.

Segment-Wise Revenue for Q3FY21: Its revenue-generating operating segments are Applications, Scores, and Decision Management Software.

• Applications: This segment includes decision management applications for marketing, account origination, fraud, financial crimes compliance, collections, and insurance claims management, and others. Total revenue for the quarter amounted to USD 133.21 million, compared to USD 141.46 million in Q3FY20.
• Scores: This comprises business-to-business (B2B) scoring solutions and services, business-to-consumer (B2C) scoring solutions and associated professional services. Total Scores revenue for Q3FY21 increased to USD 172.20 million from USD 131.55 million in Q3FY20.
• Decision Management Software: This segment offers analytic and decision management software tools for customized decision management applications. Total revenue for Q3FY21 was USD 32.77 million vs. USD 40.72 million reported in Q3FY20.

Revenue by Segment; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Improvement in Cash Balance: The company exited Q3FY21 with a cash balance of USD 237.61 million, 50.97% more than USD 157.39 million at the end of FY20.
• Cashflow from Operations: Net operating cash inflow in Q3FY21 was USD 100.59 million vs. USD 106.87 million in Q3FY20.
• Increase in Debt: FICO's total outstanding debt amounted to USD 1.06 billion at Q3FY21 end, 26.63% more than the reported total debt of USD 834.44 million as of September 30, 2020.

Key Metrics: In Q3FY21, FICO's EBITDA and operating margins were 31.9% and 57.5%, higher than the industry median of 8.7% and 2.1%, respectively. Net margin stood at 44.7% vs. industry median of -3.6%. In addition, its return on invested capital for the quarter was 14.2%, compared to 5.9% for Q3FY20.

Profitability Metrics; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 41.67% 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 9.96% and 8.51%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Revenue Concentration: FICO generates a significant amount of revenues from its scoring solutions, fraud solutions, customer communication services, customer management solutions, and decision management software. Its revenues may be affected if any of these solutions and services fail to perform well.
• Dependence on the Banking Sector: The company derived 86% of its FY20 revenues from sales to the banking industry. Hence, any disruption to this industry, which may lead to 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: It depends on a relatively small customer group and contracts with three major credit reporting agencies to generate a substantial portion of revenues. These customers are significantly larger than FICO and hence, have greater bargaining power.
• Distributor Relationships: Most of the company's products and services are sold via distributors such as Experian, TransUnion, and Equifax, among others. If these distributors fail to perform their functions on favorable terms, it could be detrimental to FICO's business.

Outlook

• Going forward, FICO anticipates that the cash inflow from its future operations, along with its existing cash balance and available borrowings at the end of Q3FY21, will be enough to manage its working capital and general corporate requirements.
• In addition, it also stated that it has no major debt obligations maturing in the next 12-months.

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 three months, FICO corrected ~16.68%. The stock is currently close to the mid-point of its 52-week range of USD 380.00 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 high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the product revenue and customer concentration, dependence on its distributors, and sales from the banking sector. We have taken peers like Black Knight Inc. (NYSE: BKI) and Vonage Holdings Corp. (NASDAQ: VG). Considering the decent top and 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 421.24, down ~3.00% as of September 20, 2021, at 1:10 PM 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 unfavorable movement in the stock prices.