DBRS Confirms Fair Isaac Corporation at BBB (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes rating of Fair Isaac Corporation (FICO or the Company) at BBB (low) with Stable trends. The confirmation is based on the previously expected strong operating performance and moderate debt reduction in F2016, resulting in credit metrics that are more appropriate for the BBB (low) rating category. The ratings continue to reflect the Company’s well-entrenched market position, its large recurring revenue stream and its strong free cash flow-generating capacity. The ratings also consider FICO’s competitive markets and the moderate concentration of its product offering and client base.

FICO’s earnings profile continued to improve in F2016, evidenced by strong revenue growth and margin expansion. Revenue grew to $878 million during the last 12 months (LTM) ended June 30, 2016, from $839 million in F2015. Revenue growth was driven by the Scores segment as an existing agreement with Experian plc (Experian) made FICO® scores available to its customers on Experian.com and consumer credit continued to strengthen in the United States. EBITDA margins improved to 25.8% for the LTM ended June 30, 2016, from 24.2% in F2015 because of one-time costs incurred in F2015 and the benefits of operating leverage. As a result, EBITDA increased to $227 million during the LTM ended June 30, 2016, from $203 million in F2015. The Company continued to generate strong levels of free cash, which was used to repurchase shares and repay some maturing debt. At June 30, 2016, lease-adjusted debt-to-EBITDAR, lease-adjusted EBITDA coverage and free cash flow as a percentage of debt (after dividends and before changes in working capital) improved to 2.95 times (x), 7.19x and 23.0%, respectively, compared with 3.29x, 6.16x and 18% at the end of F2015.

DBRS believes that FICO’s earnings profile will improve further within the current rating category and expects that revenues will surpass $900 million in F2017. In the Scores segment, DBRS believes that demand for FICO Scores from consumers will continue to be spurred by the Company’s partnership with Experian. Sales in the Tools segment are expected to grow rapidly based on new potential applications for FICO’s rules management products and booked contracts where revenues have yet to materialize. DBRS believes that EBITDA margins will improve modestly because of the benefits of operating leverage. As such, DBRS forecasts EBITDA to surpass $240 million in F2017.

DBRS expects the Company’s financial leverage to improve modestly and remain appropriate for the current rating. DBRS believes that free cash flow after dividends and before changes in working capital will increase to $180 million in F2017 as capital expenditures and dividends remain modest. DBRS expects FICO to continue to use its free cash flow toward share repurchases and to pursue small tuck-in/tack-on acquisitions. Stable debt levels, combined with growth in operating income, should result in modest improvement in credit metrics. Gross debt-to-EBITDA below 3.3x and EBITDA interest coverage above 6.5x are considered to be consistent with the current rating.

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.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

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