DBRS Assigns Rating of BBB (low), Stable, to Fair Isaac Corporation

DBRS Limited (DBRS) has today assigned an Issuer Rating and a Senior Unsecured Notes rating of BBB (low) to Fair Isaac Corporation (FICO or the Company). Both trends are Stable. The rating reflects the Company’s well-entrenched market position, its large recurring revenue stream and its strong free cash flow-generating capacity. The rating also considers FICO’s competitive markets and the moderate concentration of its product offering and client base.

FICO is a leading provider of analytical software and tools that allow its clients to manage risk, protect against fraud and optimize operations. The Company was the first mover into the consumer credit-scoring market and its FICO® Score has the number one market share and is deeply embedded in the lending systems of the largest financial institutions in the United States. FICO has developed and acquired software products that have successfully complemented its scoring product, enhancing its value proposition with its clients and opening opportunities for growth. These products include solutions in customer account management, fraud detection and rules management.

FICO’s revenues have increased steadily to $828 million in the last 12 months (LTM) period ended Q3 F2015 from $606 million in F2010. The increase in revenue is based mainly on organic growth, but also on acquisitions (most notably Adeptra for $121 million). Organic growth has been driven by increases in fraud management solutions (Falcon), optimization and rules management tools sales (Blaze). Sales in the Scores segment have remained relatively stable since the financial institution consolidation during the financial crisis and have ranged from $170 million to $190 million annually. EBITDA margins have declined in recent years toward 25% from 30%, mainly as a result of increased investment in cloud computing and Software as a Service (SaaS). The majority of the Company’s costs consist of employee salaries related to developing and implementing FICO’s products as well as corporate selling, general and administrative. As such, FICO’s EBITDA has risen to $198 million in the LTM period ended Q3 F2015 from $157 million in F2010.

FICO’s financial profile is supported by the Company’s very strong free cash flow-generating capacity. Cash flow from operations has tracked growth in operating income, increasing to $159 million for the LTM ended Q3 F2015 from $116 million in F2010. Capital expenditures (capex) and dividends are modest relative to operating cash flow and have cumulatively accounted for an annual outflow of approximately $15 million to $30 million over the last five years. As a result, free cash flow before changes in working capital increased to $132 million for the LTM ended Q3 F2015 versus $95 million in F2010. FICO has used its free cash flow to complete approximately $200 million of acquisitions and to repurchase shares.

Prior to F2014, the Company mainly used internally generated funds to finance share repurchases; however, FICO has since borrowed almost $200 million of incremental debt to fund approximately $300 million of share repurchases. As a result, balance-sheet debt has increased to $648 million from $470 million at the end of F2013. This contributed to lease-adjusted debt-to-EBITDA, lease-adjusted EBITDA interest coverage and free cash flow as a percentage of debt to weaken to 3.52 times (x), 6.0x and 17.3% from 2.58x, 6.2x, and 20.4%, respectively, at the end of F2013. DBRS notes that the Company’s net debt-to-EBITDA has historically remained in the range of 2.0x to 2.2x (metric currently sits at 2.9x).

DBRS believes that FICO’s earnings profile will continue to improve steadily within the current rating category over the medium term, reflecting growth in all three of the Company’s operating segments. DBRS expects that revenues will surpass $850 million in F2016, driven by an expansion of the Company’s offerings to smaller clients using cloud-based solutions and SaaS in the Applications segment as well as many new potential applications for the Company’s rules management products in the Tools segment as companies seek to automate practices. In the Scores segment, DBRS anticipates revenues to improve moderately based on increases in demand for FICO® Scores to consumers via the Company’s commercial partnership with Experian plc. DBRS believes that EBITDA margins will recover from the temporarily depressed level in the LTM ended Q3 F2015 and improve in the longer term, mainly because of the benefits of operating leverage. As such, DBRS forecasts that EBITDA will approach $235 million in F2016.

DBRS expects FICO’s financial leverage to improve in the near term to a level more consistent with the current rating category as a result of the growth in operating income and as the Company directs some of its free cash flow toward debt reduction. DBRS anticipates that cash flow from operations will continue to track operating income and capex and dividends to remain modest. As such, DBRS forecasts free cash flow before changes in working capital to remain strong and increase to approximately $160 million in F2016. Through F2016, DBRS expects FICO to use its free cash flow toward debt reduction and for share repurchases and/or acquisitions. This, combined with EBITDA growth, should result in lease-adjusted debt-to-EBITDA below 3.3x and EBITDA interest coverage above 6.5x in six to 12 months, consistent with the current rating category. Furthermore, DBRS notes that the Company has the ability and willingness to further deleverage to its historical range of 2.0x to 2.2x net debt-to-EBITDA within 18 months, which would strengthen its position in the current rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Consumer Products Industry, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.