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Fair Isaac Corporation's Q4 Earnings Jump 26%

The company best known for the FICO credit score, Fair Isaac Corporation (NYSE: FICO), reported that it earned $50.5 million in its fiscal fourth quarter, up 26% from the year-ago period. Higher prices for its core credit-scoring products and wins in cloud services helped drive the year-over-year increase in profit.

Fair Isaac Corporation's Q4: By the numbers

The table below shows Fair Isaac's performance based on several key metrics in the fourth quarter.

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Total revenue

$297.8 million

$253.2 million

10%

Operating income

$70.1 million

$60.8 million

15%

Net income

$50.5 million

$40.0 million

26%

Diluted EPS

$1.64

$1.25

31%

Data source: Fair Isaac.

Fair Isaac's results for the fourth quarter were impacted by some one-time items. The company said it realized a pretax gain of $10 million ($0.23 per share after taxes) related to the sale of a minority investment. It also took a $5.8 million ($0.22 per share) loss related to the Tax Cuts and Jobs Act. Conveniently, these two items roughly canceled out.

Image source: Fair Isaac Corporation.

What happened this quarter

Here are the major themes that played into Fair Isaac's fourth quarter:

  • FICO is proving there are many ways to package and sell a credit score. Fair Isaac's credit scores business is a cash cow, generating the highest margins of any of its products and services. This quarter, the company said scores revenue increased 29% year over year, with business-to-business scores revenue rising 38%. Because there are minimal marginal costs in this business, each incremental dollar of revenue flows almost directly to pretax profit.
  • FICO's applications segment, the largest by revenue, reported a 4% year-over-year increase in revenue to $156 million. Revenue derived from decision-management software increased 1% to $31 million in the third quarter.
  • A shift toward recurring revenue continued. FICO said that roughly 74% of revenue in fiscal 2018 was recurring in nature, up from 70% in fiscal 2017. The company reported $134 million of "bookings" in the fourth quarter, which is essentially the total future value of agreements for services it signed during the quarter.
  • Fair Isaac is cannibalizing its share count with repurchases. During the full fiscal year, Fair Isaac repurchased 1.9 million shares, reducing its share count by 6%. The company still has $200 million of unused repurchase capacity granted by its board of directors.

Looking ahead

Fair Isaac issues guidance on several key metrics every year. The table below summarizes its guidance for 2019 and compares it to the company's actual results in 2018.

Metric

2019 Guidance

2018 Actual

Forecasted Change

Revenue

$1.125 billion

$1.032 billion

9%

GAAP net income

$168 million

$142 million

18%

GAAP EPS

$5.53

$4.57

21%

Non-GAAP net income

$209 million

$194 million

8%

Non-GAAP EPS

$6.88

$6.23

10%

Data source: FICO earnings release.

Management offered some additional information about its guidance on the conference call, suggesting that its guidance looks for a 10% increase in scores revenue, driven by small changes in pricing and larger increases in volume.

Mike Pung, Fair Isaac's chief financial officer, said on the conference call that "a lot of the growth that we've built into the guidance number is frankly coming from deals that we have signed this year that have not gone live yet," referring to the growth in the scores business.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fair Isaac. The Motley Fool has a disclosure policy.

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