By:
Derek Gross, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
•Fair Isaac Corporation (NYSE:FICO) is a provider of products,
services, and solutions designed to optimize business decision making
processes. The company utilizes what they describe as ‘predictive analytics’ to
forecast consumer behavior, evidenced by their widely known FICO Score within
the insurance and credit industries.
• AS FICO’s fiscal 2018
year ended in September, the company grew both revenues and net income by 11%.
Diluted EPS increased 15% from $3.98 in 2017 to $4.57 in 2018. The company has
continued its consistent margins and has benefited from top-line growth in the
industry.
• Cloud technology and the
Scores segment continue to be a major
drivers behind growth. FICO expects roughly 50% growth in cloud bookings, and
the Scores segment has seen revenue
growth of 29% over the last year, accounting for roughly one third of total
revenue.
• FICO continues to buy
back shares through its stock repurchase program. In FY 2018, the company spent
$336.9 million to purchase 1.9 million outstanding shares, and expects to spend
an additional $199.3 million on stock repurchases. FICO discontinuance of
dividend payments took full effect in 2018. Moving forward, the company will
use excess cash for share repurchases.
Key
points:
FICO posted another
strong quarter and year ending in September, 2018. Both revenue and net income
grew by 11% in FY 2018, and revenue and net income were up 10% and 26% over the
last quarter versus last year. Additionally, FICO has grown both its basic and
diluted 2018 EPS by 15.1% and 14.8%, respectively. Quarterly EPS beat analyst
estimates by roughly 24%.
FICO continues to
dominate the industry, and has demonstrated that there is still room for
growth. End customers of FICO products include 98 of the largest 100 domestic
financial institutions and 9 of the top 10 domestic insurers. The Applications and Scores segments (the two largest segments comprising 90% of
revenue) each grew by 6% and 29% over the past year. These two segments
continue to be major drivers behind growth.
The Applications segment has been fueled by advances in cloud
technology that have expanded total addressable market size. FICO has begun to
pursue what they describe as a ‘cloud-first strategy’ as they look to expand
and prioritize product selection utilizing the cloud. In 2018, cloud revenues
reached a record high of $241.5 million, an increase of 19% from 2017. The Scores segment continues to show
impressive growth. Although not compatible with FICO cloud solutions, Scores revenue continues to be the
highest growing of FICO’s three segments. FICO continues to innovate this
segment, introducing the UltraFICO score allowing more accessibility and
control to end consumers in the credit scoring process.
FICO is able to
reasonably estimate future financial performance through bookings, or contracts
signed in the current reporting period that generate future revenue streams.
From these reported numbers, it is clear that cloud revenues are expected to
have continued growth (49% increase in cloud bookings). Additionally,
management expects revenue growth of 9% and net income growth of 18% in 2018.
The company is currently
using its excess cash to repurchase shares from the public. Over the past year,
FICO spent $336.9 million on stock repurchases and plans to spend an additional
$199.3 million. Cutting dividends was a necessary step to implement the share
repurchase program, as the company believes this is a better way to return
value to shareholders. Do not expect dividends in the near future from this
stock.
What
has the stock done lately?
On September 11th,
2018, FICO hit an all-time high at an intraday price of $241.10. Since then,
the stock has lost 20.4% of its value, partially fueled by a correction in the
technology sector. Over the last 3 months, the stock has declined 11.7%. As
technology stocks are highly cyclical, FICO will likely continue to ride the
wave of tech sector conditions as a whole in the short term.
Past
Year Performance:
Despite being hit hard
recently, FICO is still up 25.7% over the past year. The company has posted
impressive growth in both sales and revenues over the last 3 quarters, which
have been the catalyst of the past year’s appreciation in price. FICO’s
transition into cloud based solutions have increased the company’s total
addressable market and continue to drive customer acquisition growth in
industries once thought to have become saturated, such as insurance and
banking. Although the stock has lost significant value over the past couple of
weeks, I still like the long term outlook and I expect a rebound in the near
future.
Source:
FactSet
My
Takeaway:
Despite the overall market
correction in October and the tech sector being pulled down by poor performance
from giants such as Amazon and Apple, FICO still maintains a strong position in
the industry and expects solid growth over the next several years. The
expansion of FICO’s cloud capabilities will allow them to expand their product
mix and win new deals. Although some might say FICO has reached peak market
share (evidenced by the dominance in the financial and insurance industries),
the company’s innovation in the scores segment and cloud solutions (the company
expects continued ~50% annual growth in cloud bookings) will expand their
addressable market. I’m willing to bet these catalysts will propel FICO back
closer to what it was trading around two months ago in the $220-$230 range.
Source:
FactSet
