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Fair Isaac Corporation

Incorporated under the laws of the State of Delaware, Fair Isaac Corporation (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions. FICO provides a range of analytical solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.

In this Quarterly Report on Form 10-Q, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “the Company.”

Principles of Consolidation and Basis of Presentation

We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the applicable accounting guidance. Consequently, we have not necessarily included all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 . The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.

As discussed in New Accounting Pronouncements below and Note 13, effective October 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, “ Leases (Topic 842) ” and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”) using the modified retrospective approach, under which financial results reported in prior periods were not restated.  As a result, the condensed consolidated balance sheet as of March 31, 2020 is not comparable with that as of September 30, 2019. See our Annual Report on Form 10-K filed with the SEC on November 8, 2019 for lease policies that were in effect in prior periods before adoption of Topic 842.

The condensed consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectability of accounts receivable; the appropriate levels of various accruals; labor hours in connection with fixed-fee service contracts; the amount of our tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Topic 842, which requires the recognition of operating lease assets and lease liabilities on the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new standard, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

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In the first quarter of fiscal 2020, we adopted Topic 842 using the “Comparatives Under 840 Option” approach to transition. In accordance with the standard, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Topic 842 provided a package of practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing leases. We elected to apply the package of practical expedients, and did not elect the hindsight practical expedient in determining the lease term for existing leases as of October 1, 2019.

Adoption of Topic 842 did not result in the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $ 89.8 million and $ 98.9 million , respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged. We expect the impact of adoption to be immaterial to our consolidated statements of income and comprehensive income and consolidated statements of cash flows on an ongoing basis. As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting. See Note 13 for additional information regarding our accounting policy for leases and additional disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, “ Intangibles—Goodwill and Other (Topic 350): Internal-Use Software ” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means that it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We do not believe that adoption of ASU 2018-15 will have a significant impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “ Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ” and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We do not believe that adoption of Topic 326 will have a significant impact on our consolidated financial statements.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

 

•	Level 1 - uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. Our Level 1 assets are comprised of money market funds and certain marketable securities. We do not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of March 31, 2020 and September 30, 2019 .

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Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. We do not have any assets that are valued using inputs identified under a Level 2 hierarchy as of March 31, 2020 and September 30, 2019 . We measure the fair value of the Senior Notes (as defined in Note 7) based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.

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Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We do not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of March 31, 2020 and September 30, 2019 .

The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2020 and September 30, 2019 :

March 31, 2020	Active Markets for Identical Instruments (Level 1)				Fair Value as of March 31, 2020
	(In thousands)
Assets:
Cash equivalents (1)	$	25,166			$	25,166
Marketable securities (2)	19,544				19,544
Total	$	44,710			$	44,710
September 30, 2019	Active Markets for Identical Instruments (Level 1)				Fair Value as of September 30, 2019
	(In thousands)
Assets:
Cash equivalents (1)	$	28,901			$	28,901
Marketable securities (2)	20,222				20,222
Total	$	49,123			$	49,123

(1)	Included in cash and cash equivalents on our condensed consolidated balance sheets at March 31, 2020 and September 30, 2019 . Not included in these tables are cash deposits of $ 83.8 million and $ 77.5 million at March 31, 2020 and September 30, 2019 , respectively.

(2)	Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities on our condensed consolidated balance sheets at March 31, 2020 and September 30, 2019 .

For the fair value of our derivative instruments and senior notes, see Note 3 and Note 7, respectively.

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters and six-month periods ended March 31, 2020 and 2019 .

We use derivative instruments to manage risks caused by fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to protect the value of foreign-currency-denominated receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. We principally utilize foreign currency forward contracts, which enable us to buy and sell foreign currencies in the future at fixed exchange rates and economically offset changes in foreign exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro, and Singapore dollar.

Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months .

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The following tables summarize our outstanding foreign currency forward contracts, by currency, at March 31, 2020 and September 30, 2019 :

	March 31, 2020
	Contract Amount								Fair Value
	Foreign Currency				USD				USD
	(In thousands)
Sell foreign currency:
Euro (EUR)	EUR	10,000			$	11,004			$	—
Buy foreign currency:
British pound (GBP)	GBP	21,781			$	27,000			$	—
Singapore dollar (SGD)	SGD	10,274			$	7,200			$	—

	September 30, 2019
	Contract Amount								Fair Value
	Foreign Currency				USD				USD
	(In thousands)
Sell foreign currency:
Euro (EUR)	EUR	10,800			$	11,723			$	—
Buy foreign currency:
British pound (GBP)	GBP	5,200			$	6,400			$	—
Singapore dollar (SGD)	SGD	5,798			$	4,200			$	—

The foreign currency forward contracts were entered into on March 31, 2020 and September 30, 2019 , respectively; therefore, their fair value was $ 0 on each of these dates.

Gain (losses) on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following: 

	Quarter Ended March 31,								Six Months Ended March 31,
	2020				2019				2020				2019
	(In thousands)
Gains (losses) on foreign currency forward contracts	$	( 2,194	)		$	720			$	( 1,049	)		$	316

Amortization expense associated with our intangible assets is reflected as a separate operating expense caption — amortization of intangible assets — and is excluded from cost of revenues and selling, general and administrative expenses within the accompanying condensed consolidated statements of income and comprehensive income. Amortization expense consisted of the following:  

	Quarter Ended March 31,								Six Months Ended March 31,
	2020				2019				2020				2019
	(In thousands)
Completed technology	$	463			$	494			$	1,038			$	988
Customer contracts and relationships	658				1,009				1,798				2,017
Trade names	38				—				75				—
Non-compete agreements	43				—				87				—
Total	$	1,202			$	1,503			$	2,998			$	3,005

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Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2020 was as follows:

Year Ending September 30,	(In thousands)
2020 (excluding the six months ended March 31, 2020)	$	1,987
2021	3,622
2022	3,334
2023	1,317
2024	917
	$	11,177

The following table summarizes changes to goodwill during the six months ended March 31, 2020 , both in total and as allocated to our segments:

	Applications				Scores				Decision Management Software				Total
	(In thousands)
Balance at September 30, 2019	$	588,614			$	146,648			$	68,280			$	803,542
Foreign currency translation adjustment	1,006				—				102				1,108
Balance at March 31, 2020	$	589,620			$	146,648			$	68,382			$	804,650

The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at March 31, 2020 and September 30, 2019 :

	March 31, 2020				September 30, 2019
	(In thousands)
Property and equipment	$	184,539			$	172,075
Less: accumulated depreciation and amortization	( 125,048		)		( 119,048		)
	$	59,491			$	53,027

We have a  $ 400 million unsecured revolving line of credit with a syndicate of banks that expires on May 8, 2023 with an option to increase it by another $ 100 million . Proceeds from the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions and the repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on (i) a base rate, which is the greater of (a) the prime rate, (b) the Federal Funds rate plus 0.500 % and (c) the one-month LIBOR rate plus 1.000 % , plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0 % to 0.875 % and for LIBOR borrowings ranges from 1.000 % to 1.875 % , and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a maximum consolidated leverage ratio of 3.25 on an average trailing four-quarter basis, subject to a step up to 3.75 following certain permitted acquisitions; and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes (as defined in Note 7) in July 2020, upon which maintaining a minimum interest coverage ratio of 3.00 . The credit agreement also contains other covenants typical of unsecured facilities. As of March 31, 2020 , we had $ 124.0 million in borrowings outstanding at a weighted average interest rate of 2.277 % and were in compliance with all financial covenants under this credit facility.

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On July 14, 2010, we issued $ 245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The outstanding 2010 Senior Notes’ weighted average interest rate is 5.6 % and the weighted average maturity is 10.0 years . The 2010 Senior Notes require interest payments semi-annually and contain certain restrictive covenants, including the maintenance of a maximum consolidated net debt to consolidated EBITDA ratio of 3.00 and a minimum fixed charge coverage ratio of 2.50 . We were in compliance with all financial covenants under the 2010 Senior Notes as of March 31, 2020 .

On May 8, 2018, we issued $ 400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25 % per annum and will mature on May 15, 2026 .

On December 6, 2019, we issued $ 350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”). We have used the net proceeds to repay a large portion of the outstanding balance on our revolving credit facility. The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00 % per annum and will mature on June 15, 2028 .

The purchase agreements for the 2010 Senior Notes, as well as the indentures for the 2018 Senior Notes and 2019 Senior Notes contain certain covenants typical of unsecured obligations.

The following table presents the face values and fair values for the Senior Notes at March 31, 2020 and September 30, 2019 :

	March 31, 2020								September 30, 2019
	Face Value (*)				Fair Value				Face Value (*)				Fair Value
	(In thousands)
The 2010 Senior Notes	85,000				85,255				85,000				86,121
The 2018 Senior Notes	400,000				402,000				400,000				428,000
The 2019 Senior Notes	350,000				331,625				—				—
Total	$	835,000			$	818,880			$	485,000			$	514,121

(*) The carrying value of the Senior Notes was reduced by the net debt issuance costs of $ 11.4 million and $ 5.2 million at March 31, 2020 and September 30, 2019 , respectively.

We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.

There were no restructuring expenses incurred during the quarter ended March 31, 2020. During the six-month period ended March 31, 2020, we incurred $ 3.1 million in employee separation costs due to the elimination of 69 positions throughout the Company. We expect that cash payment for all the employee separation costs will be paid by the end of our fiscal 2020.

There were no restructuring expenses incurred during the quarter and six-month period ended March 31, 2019.

The following table summarizes our restructuring accruals related to facility closures and employee separation. The balances at March 31, 2020 and September 30, 2019 were classified as current liabilities and recorded in other accrued liabilities within the accompanying condensed consolidated balance sheets.

	Accrual at				Expense Additions				Cash Payments				Adjustment (*)				Accrual at
	September 30, 2019																March 31, 2020
	(In thousands)
Facilities charges	$	1,378			$	—			$	—			$	( 1,378	)		$	—
Employee separation	—				3,104				( 2,956		)		—				148
	1,378				$	3,104			$	( 2,956	)		$	( 1,378	)		148

(*) Upon adoption of Topic 842, accrued lease exit obligations of $ 1.4 million were reclassed to operating lease liabilities.

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Effective Tax Rate

The effective income tax rate was 6.7 % and 16.5 % during the quarters ended March 31, 2020 and 2019 , respectively, and ( 8.5 )% and 4.9 % during the six months ended March 31, 2020 and 2019 , respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The effective tax rates for the six months ended March 31, 2020 and 2019 were both impacted by the recording of excess tax benefits relating to stock awards that vested in December of both years. In addition, stock exercises during the quarter ended March 31, 2020 resulted in an additional increase in excess tax benefits.

The total unrecognized tax benefit for uncertain tax positions is estimated to be $ 7.1 million and $ 5.8 million at March 31, 2020 and September 30, 2019 , respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. We have accrued interest of $ 0.5 million and $ 0.3 million related to unrecognized tax benefits as of March 31, 2020 and September 30, 2019 , respectively.

The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and six-month periods ended March 31, 2020 and 2019 :  

	Quarter Ended March 31,								Six Months Ended March 31,
	2020				2019				2020				2019
	(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
Net Income	$	58,288			$	33,381			$	113,209			$	73,388
Denominator - share:
Basic weighted-average shares	29,194				29,074				29,109				29,017
Effect of dilutive securities	791				1,185				967				1,280
Diluted weighted-average shares	29,985				30,259				30,076				30,297
Earnings per share:
Basic	$	2.00			$	1.15			$	3.89			$	2.53
Diluted	$	1.94			$	1.10			$	3.76			$	2.42

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 13,000 and 15,000 options excluded for the quarter ended March 31, 2020 and 2019, respectively. There were approximately 14,000 and 7,000 options excluded for the six months ended March 31, 2020 and 2019, respectively.

We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.

 

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Applications . This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, collections and insurance claims management — as well as associated professional services. These applications are available to our customers as on-premises software, and many are available as hosted, software-as-a-service (“SaaS”) applications through the FICO ® Analytic Cloud or third-party public clouds, such as those provided by Amazon Web Services (“AWS”).

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Scores. This segment includes our business-to-business scoring solutions, our myFICO ® solutions for consumers and associated professional services. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions are distributed through major credit reporting agencies, as well as services through which we provide our scores to clients directly.

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Decision Management Software. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our FICO ® Decision Management Suite, as well as associated professional services. These tools are available to our customers as on-premises software or through the FICO ® Analytic Cloud or third-party public clouds, such as those provided by AWS.

Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate broad-based incentive expense, share-based compensation expense, restructuring expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets, nor capital expenditures where depreciation amounts are allocated to the segments from their internal cost centers as described above.

The following tables summarize segment information for the quarters and six-month periods ended March 31, 2020 and 2019 :

	Quarter Ended March 31, 2020
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	97,789			$	127,610			$	15,303			$	—			$	240,702
Professional services	35,134				819				11,952				—				47,905
License	7,356				719				11,289				—				19,364
Total segment revenues	140,279				129,148				38,544				—				307,971
Segment operating expense	( 111,456		)		( 15,660		)		( 47,354		)		( 33,785		)		( 208,255		)
Segment operating income (loss)	$	28,823			$	113,488			$	( 8,810	)		$	( 33,785	)		99,716
Unallocated share-based compensation expense																	( 22,788		)
Unallocated amortization expense																	( 1,202		)
Operating income																	75,726
Unallocated interest expense, net																	( 11,254		)
Unallocated other expense, net																	( 2,008		)
Income before income taxes																	$	62,464
Depreciation expense	$	4,553			$	141			$	1,158			$	108			$	5,960

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	Quarter Ended March 31, 2019
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	97,074			$	102,363			$	12,342			$	—			$	211,779
Professional services	35,981				901				13,673				—				50,555
License	8,760				1,139				6,001				—				15,900
Total segment revenues	141,815				104,403				32,016				—				278,234
Segment operating expense	( 111,643		)		( 16,167		)		( 40,384		)		( 39,506		)		( 207,700		)
Segment operating income (loss)	$	30,172			$	88,236			$	( 8,368	)		$	( 39,506	)		70,534
Unallocated share-based compensation expense																	( 20,482		)
Unallocated amortization expense																	( 1,503		)
Operating income																	48,549
Unallocated interest expense, net																	( 10,008		)
Unallocated other expense, net																	1,433
Income before income taxes																	$	39,974
Depreciation expense	$	4,662			$	132			$	972			$	229			$	5,995

	Six Months Ended March 31, 2020
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	196,626			$	235,056			$	29,394			$	—			$	461,076
Professional services	69,157				1,083				21,690				—				91,930
License	26,674				8,147				18,648				—				53,469
Total segment revenues	292,457				244,286				69,732				—				606,475
Segment operating expense	( 227,466		)		( 33,372		)		( 97,999		)		( 67,995		)		( 426,832		)
Segment operating income (loss)	$	64,991			$	210,914			$	( 28,267	)		$	( 67,995	)		179,643
Unallocated share-based compensation expense																	( 45,933		)
Unallocated amortization expense																	( 2,998		)
Unallocated restructuring and acquisition-related																	( 3,104		)
Operating income																	127,608
Unallocated interest expense, net																	( 21,022		)
Unallocated other income, net																	( 2,227		)
Income before income taxes																	$	104,359
Depreciation expense	$	8,902			$	257			$	2,144			$	333			$	11,636

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	Six Months Ended March 31, 2019
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	194,239			$	187,184			$	24,549			$	—			$	405,972
Professional services	67,443				1,602				22,318				—				91,363
License	27,792				1,300				14,063				—				43,155
Total segment revenues	289,474				190,086				60,930				—				540,490
Segment operating expense	( 219,241		)		( 29,649		)		( 79,946		)		( 68,760		)		( 397,596		)
Segment operating income (loss)	$	70,233			$	160,437			$	( 19,016	)		$	( 68,760	)		142,894
Unallocated share-based compensation expense																	( 42,336		)
Unallocated amortization expense																	( 3,005		)
Operating income																	97,553
Unallocated interest expense, net																	( 19,684		)
Unallocated other income, net																	( 739		)
Income before income taxes																	$	77,130
Depreciation expense	$	9,459			$	257			$	1,961			$	462			$	12,139

Information about disaggregated revenue by product deployment methods was as follows:

	Quarter Ended March 31, 2020
Reportable Segments	On-Premises				SaaS				Scores				Total				Percentage
	(Dollars in thousands)
Applications	$	76,341			$	63,938			$	—			$	140,279			46	%
Scores	—				—				129,148				129,148				42	%
Decision Management Software	28,847				9,697				—				38,544				12	%
Total	$	105,188			$	73,635			$	129,148			$	307,971			100	%

	Quarter Ended March 31, 2019
Reportable Segments	On-Premises				SaaS				Scores				Total				Percentage
	(Dollars in thousands)
Applications	$	81,311			$	60,504			$	—			$	141,815			51	%
Scores	—				—				104,403				104,403				38	%
Decision Management Software	25,725				6,291				—				32,016				11	%
Total	$	107,036			$	66,795			$	104,403			$	278,234			100	%

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	Six Months Ended March 31, 2020
Reportable Segments	On-Premises				SaaS				Scores				Total				Percentage
	(Dollars in thousands)
Applications	$	162,319			$	130,138			$	—			$	292,457			48	%
Scores	—				—				244,286				244,286				40	%
Decision Management Software	52,526				17,206				—				69,732				12	%
Total	$	214,845			$	147,344			$	244,286			$	606,475			100	%

	Six Months Ended March 31, 2019
Reportable Segments	On-Premises				SaaS				Scores				Total				Percentage
	(Dollars in thousands)
Applications	$	170,906			$	118,568			$	—			$	289,474			54	%
Scores	—				—				190,086				190,086				35	%
Decision Management Software	49,334				11,596				—				60,930				11	%
Total	$	220,240			$	130,164			$	190,086			$	540,490			100	%

Information about disaggregated revenue by primary geographical markets was as follows:

	Quarter Ended March 31, 2020
Reportable Segments	North America				Latin America				Europe, Middle East and Africa				Asia Pacific				Total
	(In thousands)
Applications	$	78,900			$	9,672			$	34,271			$	17,436			$	140,279
Scores	123,249				2,619				1,720				1,560				129,148
Decision Management Software	21,007				5,917				6,920				4,700				38,544
Total	$	223,156			$	18,208			$	42,911			$	23,696			$	307,971

	Quarter Ended March 31, 2019
Reportable Segments	North America				Latin America				Europe, Middle East and Africa				Asia Pacific				Total
	(In thousands)
Applications	$	87,226			$	6,670			$	33,238			$	14,681			$	141,815
Scores	100,491				1,368				1,472				1,072				104,403
Decision Management Software	16,600				3,327				7,173				4,916				32,016
Total	$	204,317			$	11,365			$	41,883			$	20,669			$	278,234

	Six Months Ended March 31, 2020
Reportable Segments	North America				Latin America				Europe, Middle East and Africa				Asia Pacific				Total
	(In thousands)
Applications	$	164,366			$	19,189			$	74,055			$	34,847			$	292,457
Scores	233,446				2,903				3,258				4,679				244,286
Decision Management Software	36,594				10,250				14,185				8,703				69,732
Total	$	434,406			$	32,342			$	91,498			$	48,229			$	606,475

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	Six Months Ended March 31, 2019
Reportable Segments	North America				Latin America				Europe, Middle East and Africa				Asia Pacific				Total
	(In thousands)
Applications	$	168,175			$	24,923			$	65,800			$	30,576			$	289,474
Scores	182,564				1,882				3,006				2,634				190,086
Decision Management Software	30,424				8,552				13,297				8,657				60,930
Total	$	381,163			$	35,357			$	82,103			$	41,867			$	540,490

Contract Balances

We record a receivable when we satisfy a performance obligation prior to invoicing if only the passage of time is required before payment is due or if we have an unconditional right to consideration before we satisfy a performance obligation. We record a contract asset when we satisfy a performance obligation prior to invoicing but our right to consideration is conditional. We record deferred revenue when the payment is made or due before we satisfy a performance obligation.

Receivables at March 31, 2020 and September 30, 2019 consisted of the following:  

	March 31, 2020				September 30, 2019
	(In thousands)
Billed	$	199,102			$	206,714
Unbilled	146,226				127,651
	345,328				334,365
Less: allowance for doubtful accounts	( 5,248		)		( 2,568		)
Net receivables	340,080				331,797
Less: long-term receivables *	( 32,773		)		( 34,370		)
Short-term receivables *	$	307,307			$	297,427

(*) Short-term receivables and long-term receivables were recorded in accounts receivable, net and other assets, respectively, within the accompanying condensed consolidated balance sheets.

Contract assets balance at March 31, 2020 and September 30, 2019 was immaterial.

Deferred revenue primarily relates to our maintenance and SaaS contracts billed annually in advance and generally recognized ratably over the term of the service period. Significant changes in the deferred revenues balances during the six months ended March 31, 2020 and 2019 were as follows:

	Six Months Ended March 31, 2020
	(In thousands)
Deferred revenues at September 30, 2019	$	116,320
Revenue recognized that was included in the deferred revenues balance at the beginning of the period	( 75,148		)
Increases due to billings, excluding amounts recognized as revenue during the period	80,382
Deferred revenues at March 31, 2020	$	121,554

(*) Deferred revenues at September 30, 2019 included current portion of $ 111.0 million and long-term portion of $ 5.3 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets. Deferred revenues at March 31, 2020 included current portion of $ 114.4 million and long-term portion of $ 7.2 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets.

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Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to provide customers with financing or to receive financing from our customers. Examples include multi-year on-premises licenses that are invoiced annually with revenue recognized upfront, and invoicing at the beginning of a SaaS subscription term with revenue recognized ratably over the contract period.

Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This does not include:

•	Revenue that will be recognized in future periods from usage-based royalty from license sales;

•	SaaS transactional revenue from variable considerations that will be recognized in the distinct service period during which it is earned; and

•	Revenue from variable considerations that will be recognized in accordance with the “right-to-invoice” practical expedient, such as fees from our professional services billed based on a time and materials basis.

Revenue allocated to remaining performance obligations was $ 253.4 million as of March 31, 2020, of which we expect to recognize approximately 51 % over the next 18 months and the remainder thereafter.

We lease office space and data centers under operating lease arrangements, which constitute the majority of our lease obligations. We also enter into finance lease agreements from time to time for certain computer equipment. For any lease with a lease term in excess of 12 months, the related lease assets and liabilities are recognized on our condensed consolidated balance sheets as either operating or finance leases at the commencement of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components, and we have elected to combine these components together and account for them as a single lease component for all classes of assets. Leases with a lease term of 12 months or less are not recorded on our condensed consolidated balance sheets. Furthermore, we recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We use a collateralized incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of future payments. In calculating the incremental borrowing rates, we consider recent ratings from credit agencies and current lease demographic information. Our operating leases also typically require payment of real estate taxes, common area maintenance, insurance and other operating costs as well as payments that are adjusted based on a consumer price index. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

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The following table presents the lease balances within the condensed consolidated balance sheets:

	Balance Sheet Location		March 31, 2020
			(In thousands)
Assets
Operating leases	Operating lease right-of-use assets		$	87,142
Finance leases (*)	Property and equipment, net		9,517
Total lease assets			$	96,659
Liabilities
Current:
Operating leases	Other accrued liabilities		$	18,799
Finance leases	Other accrued liabilities		3,911
Non-current:
Operating leases	Operating lease liabilities		77,485
Finance leases	Other liabilities		5,952
Total lease liabilities			$	106,147

(*) Finance leases are recorded net of accumulated depreciation of $ 2.0 million .

The components of our operating and finance lease expenses were as follows:

	Quarter Ended   March 31, 2020				Six Months Ended March 31, 2020
	(In thousands)
Operating lease cost	$	6,518			$	11,926
Finance lease cost:
Depreciation of lease assets	811				1,268
Interest on lease liabilities	89				148
Short-term lease cost	( 256		)		807
Variable lease cost	846				1,820
Total lease cost	$	8,008			$	15,969

The following table presents weighted average lease term and weighted average discount rates related to our operating and finance leases:

	March 31, 2020
	Operating Leases			Finance Leases
Weighted average remaining lease term (in months)	68			32
Weighted average discount rate	3.85	%		3.87	%

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Supplemental cash flow information related to our operating and finance leases was as follows:

	Six Months Ended March 31, 2020
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow for operating leases	$	10,000
Operating cash outflow for finance leases	148
Financing cash outflow for finance leases	712
Lease assets obtained in exchange for new lease liabilities:
Operating leases	8,723
Finance leases	5,148

Future lease payments under our non-cancellable leases as of March 31, 2020 were as follows:

(In thousands)	Operating Leases				Finance Leases
Remainder of fiscal 2020	$	10,292			$	2,347
Fiscal 2021	22,929				3,727
Fiscal 2022	18,216				3,726
Fiscal 2023	17,301				560
Fiscal 2024	14,736				—
Fiscal 2025	8,354				—
Thereafter	15,226				—
Total future undiscounted lease payments	107,054				10,360
Less imputed interest	( 10,770		)		( 497		)
Total reported lease liability	$	96,284			$	9,863

In accordance with the prior guidance—ASC 840, Leases—our leases were previously designated as either capital or operating. Previously designated capital leases are now considered finance leases under the new guidance, Topic 842. The designation of operating leases remains substantially unchanged under the new guidance. The future minimum lease payments by fiscal year as determined prior to the adoption of Topic 842 under our previously designated capital and operating leases as disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, were as follows:

(In thousands)	Operating Leases				Capital Leases
Fiscal 2020	$	19,842			$	1,935
Fiscal 2021	19,969				1,934
Fiscal 2022	17,677				1,934
Fiscal 2023	16,940				—
Fiscal 2024	14,887				—
Thereafter	24,431				—
Total minimum lease payments	$	113,746			5,803
Less amount representing interest					( 379		)
Present value of minimum lease payments					$	5,424

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We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

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•	The health of the economy and economic trends in our customers’ industries;

•	Individual performance of our customers relative to their competitors; and

•	Regulatory and other factors that affect the business environment in which our customers operate.

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(1)	Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.

(2)	Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.

(a)	NM - Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.

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•	changes in the business analytics industry;

•	changes in technology;

•	our inability to obtain or use key data for our products;

•	saturation or contraction of market demand;

•	loss of key customers;

•	industry consolidation;

•	failure to successfully adopt cloud-based technologies;

•	failure to execute our selling approach; and

•	inability to successfully sell our products in new vertical markets.

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•	our ongoing business may be disrupted and our management’s attention may be diverted by acquisition, transition or integration activities;

•	an acquisition may not further our business strategy as we expected, we may not integrate acquired operations or technology as successfully as we expected or we may overpay for our investments, or otherwise not realize the expected return, which could adversely affect our business or operating results;

•	we may be unable to retain the key employees, customers and other business partners of the acquired operation;

•	we may have difficulties entering new markets where we have no or limited direct prior experience or where competitors may have stronger market positions;

•

our operating results or financial condition may be adversely impacted by claims or liabilities we assume from an acquired company, business, product or technology, including claims by government agencies, terminated employees, current or former customers, former stockholders or other third parties; pre-existing contractual relationships of an acquired company we would not have otherwise entered into; unfavorable revenue recognition or other accounting treatment as a result of an acquired company’s practices; and intellectual property claims or disputes;

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we may fail to identify or assess the magnitude of certain liabilities or other circumstances prior to acquiring a company, business, product or technology, which could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition;

•	we may not realize the anticipated increase in our revenues from an acquisition for a number of reasons, including if a larger than predicted number of customers decline to renew their contracts, if we are unable to sell the acquired products to our customer base or if contract models of an acquired company do not allow us to recognize revenues on a timely basis;

•	we may have difficulty incorporating acquired technologies or products with our existing product lines and maintaining uniform standards, architecture, controls, procedures and policies;

•	our use of cash to pay for acquisitions may limit other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness;

•	to the extent we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and

•	we may experience additional or unexpected changes in how we are required to account for our acquisitions pursuant to U.S. generally accepted accounting principles, including arrangements we assume from an acquisition.

•	disruption of our ongoing business;

•	reductions of our revenues or earnings per share;

•	unanticipated liabilities, legal risks and costs;

•	the potential loss of key personnel;

•	distraction of management from our ongoing business; and

•	impairment of relationships with employees and customers as a result of migrating a business to new owners.

•	impairment of goodwill or intangible assets, or a reduction in the useful lives of intangible assets acquired;

•	amortization of intangible assets acquired;

•	identification of, or changes to, assumed contingent liabilities, both income tax and non-income tax related, after our final determination of the amounts for these contingencies or the conclusion of the measurement period (generally up to one year from the acquisition date), whichever comes first;

•	costs incurred to combine the operations of companies we acquire, such as transitional employee expenses and employee retention, redeployment or relocation expenses;

•	charges to our operating results to maintain certain duplicative pre-merger activities for an extended period of time or to maintain these activities for a period of time that is longer than we had anticipated, charges to eliminate certain duplicative pre-merger activities, and charges to restructure our operations or to reduce our cost structure; and

•	charges to our operating results resulting from expenses incurred to effect the acquisition.

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•	variability in demand from our existing customers;

•	failure to meet the expectations of market analysts;

•	changes in recommendations by market analysts;

•	the lengthy and variable sales cycle of many products, combined with the relatively large size of orders for our products, increases the likelihood of short-term fluctuation in revenues;

•	consumer or customer dissatisfaction with, or problems caused by, the performance of our products;

•	the timing of new product announcements and introductions in comparison with our competitors;

•	the level of our operating expenses;

•	changes in competitive and other conditions in the consumer credit, banking and insurance industries;

•	fluctuations in domestic and international economic conditions , such as those which have occurred as a result of the COVID-19 pandemic;

•	our ability to complete large installations, and to adopt and configure cloud-based deployments, on schedule and within budget;

•	acquisition-related expenses and charges; and

•	timing of orders for and deliveries of software systems.

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•	incur significant defense costs or substantial damages;

•	be required to cease the use or sale of infringing products;

•	expend significant resources to develop or license a substitute non-infringing technology;

•	discontinue the use of some technology; or

•	be required to obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available or might require substantial royalties or license fees that would reduce our margins.

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•	innovate by internally developing new and competitive technologies;

•	use leading third-party technologies effectively;

•	continue to develop our technical expertise;

•	anticipate and effectively respond to changing customer needs;

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•	initiate new product introductions in a way that minimizes the impact of customers delaying purchases of existing products in anticipation of new product releases; and

•	influence and respond to emerging industry standards and other technological changes.

•	in-house analytic and systems developers;

•	scoring model builders;

•	fraud and security management providers;

•	enterprise resource planning, customer relationship management, and customer communication and mobility solution providers;

•	business intelligence solutions providers;

•	credit report and credit score providers;

•	business process management and decision rules management providers;

•	process modeling tools providers;

•	automated application processing services providers;

•	data vendors;

•	neural network developers and artificial intelligence system builders;

•	third-party professional services and consulting organizations;

•	account/workflow management software providers;

•	software tools companies supplying modeling, rules, or analytic development tools; collections and recovery solutions providers; entity resolution and social network analysis solutions providers; and

•	cloud-based customer engagement and risk management solutions providers.

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•	Use of data by creditors and consumer reporting agencies (e.g., the U.S. Fair Credit Reporting Act);

•	Laws and regulations that limit the use of credit scoring models (e.g., state “mortgage trigger” or “inquiries” laws, state insurance restrictions on the use of credit-based insurance scores, and the E.U. Consumer Credit Directive);

•	Fair lending laws (e.g., the Equal Credit Opportunity Act and Regulation B, and the Fair Housing Act);

•

Privacy and security laws and regulations that limit the use and disclosure of personally identifiable information, require security procedures, or otherwise apply to the collection, processing, storage, use and transfer of protected data (e.g., the U.S. Financial Services Modernization Act of 1999, also known as the Gramm Leach Bliley Act; the General Data Protection Regulation (the “GDPR”) and country-specific data protection laws enacted to supplement the GDPR; the U.S. Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act; the Cybersecurity Act of 2015; the U.S. Department of Commerce’s National Institute of Standards and Technology’s Cybersecurity Framework; the Clarifying Lawful Overseas Use of Data Act; and identity theft, file freezing, security breach notification and similar state privacy laws);

•	Extension of credit to consumers through the Electronic Fund Transfers Act and Regulation E, as well as non‑governmental VISA and MasterCard electronic payment standards;

•

Laws and regulations applicable to secondary market participants (e.g., Fannie Mae and Freddie Mac) that could have an impact on our scoring products and revenues, including 12 CFR Part 1254 (Validation and Approval of Credit Score Models) issued by the Federal Housing Finance Agency in accordance with Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law 115-174), and any regulations, standards or criteria established pursuant to such laws or regulations;

•	Laws and regulations applicable to our customer communication clients and their use of our products and services (e.g., the Telemarketing Sales Rule, Telephone Consumer Protection Act and regulations promulgated thereunder);

•	Laws and regulations applicable to our insurance clients and their use of our insurance products and services;

•	The application or extension of consumer protection laws, including implementing regulations (e.g., the Consumer Financial Protection Act, the Federal Trade Commission Act, the Truth In Lending Act and Regulation Z, the Fair Debt Collection Practices Act, the Servicemembers Civil Relief Act, the Military Lending Act, and the Credit Repair Organizations Act);

•	Laws and regulations governing the use of the Internet and social media, telemarketing, advertising, endorsements and testimonials;

•	Anti-bribery and corruption laws and regulations (e.g., the Foreign Corrupt Practices Act and the UK Bribery Act 2010);

•	Financial regulatory standards (e.g., Sarbanes-Oxley Act requirements to maintain and verify internal process controls, including controls for material event awareness and notification);

•	Regulatory requirements for managing third parties (e.g., vendors, contractors, suppliers and distributors);

•	Anti-money laundering laws and regulations (e.g., the Bank Secrecy Act and the USA PATRIOT Act);

•	Financial regulatory reform stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the many regulations mandated by that Act, including regulations issued by, and the supervisory and investigative authority of, the Consumer Financial Protection Bureau; and

•	Laws and regulations regarding export controls as they apply to FICO products delivered in non-U.S. countries (e.g., Office of Foreign Asset Control sanctions, and Export Administration Regulations).

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•	general economic and political conditions in countries where we sell our products and services;

•	difficulty in staffing and efficiently managing our operations in multiple geographic locations and in various countries;

•	effects of a variety of foreign laws and regulations, including restrictions on access to personal information;

•	import and export licensing requirements;

•	longer payment cycles;

•	reduced protection for intellectual property rights;

•	currency fluctuations;

•	changes in tariffs and other trade barriers;

•	terrorism, war, natural disasters and pandemics, including the COVID-19 pandemic; and

•	difficulties and delays in translating products and related documentation into foreign languages.

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(1)	Includes 28,018 shares delivered in satisfaction of the tax withholding obligations resulting from the vesting of restricted stock units held by employees during the quarter ended March 31, 2020 .

(2)	In July 2019, our Board of Directors approved a stock repurchase program following the completion of our previous program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.

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