In its 10-K, Fair Isaac (FICO +2.18%) describes itself by saying it enables its clients to "leverage the use of big data and mathematical algorithms" to predict consumer behavior. The company, most famous for its proprietary FICO Score used by the credit industry, has seen its share price rocket more than 92% year to date and about 184% over the past three years, crushing the S&P 500's returns. Given the stock's recent track record, it came as no surprise when the market reacted favorably to the company's third quarter.
Let's take a closer look.
FICO: The raw numbers
| Metric | Q3 2019 | Q3 2018 | Change (Decline) |
|---|---|---|---|
| Revenue | $314.3 million | $255.0 million | 23.3% |
| Adjusted EPS | $2.50 | $1.43 | 75% |
| Free cash flow | $60.8 million | $72.0 million | (15.5%) |
| Bookings | $109 million | $120 million | (9%) |
Data source: Fair Isaac Corporation.
Fair Isaac is best known for providing its FICO scores to credit-issuing institutions, where they are used in 95% of all domestic lending decisions. Image source: Getty Images.
What happened with Fair Isaac this quarter?
- All three of its primary business segments saw double-digit revenue growth.
- Applications, the company's largest division, consists of software applications designed for specific uses, such as fraud or insurance claims. Applications saw revenue rise to $165.6 million, a 19% increase year over year.
- Scores, which houses all the company's scoring solutions, experienced annual revenue growth of 27%, as the segment's sales increased to $115.1 million.
- Decision-management software revenue grew to $33.5 million, a 31% increase over last year's third quarter. This segment provides customers with tools to build out their own decision-management applications.
- In Q3, the company bought back approximately $59 million in shares, exhausting its buyback program. In response, the board of directors approved a new $250 million share repurchase program, representing almost 2.5% of the company's market cap.
- Bookings rose to $109 million, representing a 9% decrease year over year, but with recurring revenue bookings increasing 18% over last year's total.
What management had to say
CEO Will Lansing seemed pleased with the results. In the conference call following the quarterly earnings release, he highlighted the company's budding cloud partnership with Equifax (EFX 1.70%) as a reason for continued optimism:
We're also making progress on data-decision cloud partnership with Equifax that we announced back in March. Our teams are working together to bring three products to market. First, a connected platform integrating our Decision Management Solution with Equifax's extensive data. Second, our suite of AML [anti-money-laundering] and KYC [know your customer] technology will use Equifax's differentiated data to offer a full-service best-in-class compliance offering. And third, a pre-screen ... integrates FICO's Marketing Solutions products with Equifax's consumer data to deliver our direct marketing solution. We'll keep you posted on progress we're making with this exciting partnership.
Looking forward
The company reiterated its 2019 full-year revenue and earnings guidance, expecting $1.14 billion in revenue and $7.12 in adjusted earnings per share. Based on its 2019 guidance, Fair Isaac's shares trade at an adjusted forward P/E of over 50, making purchasing shares an expensive proposition.
Particularly important for FICO shareholders to watch is how incoming CFO Michael McLaughlin will adjust to his new role after a career at many investment banks. He replaces 15-year Fair Isaac veteran Mike Pung, who will stay through the end of the year to assist with the transition.
