Saturday, December 1, 2018

A Current AIM Program Small Cap Equity Holding: Fair Isaac Corporation (FICO) by: Derek Gross. "Growth Prospects Proving To Be More Than Fair"

Fair Isaac Corporation (FICO, $191.92): “Growth Prospects Proving To Be More Than Fair”
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.


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