Acquisitions Lift Fair Isaac's Fiscal 3Q

Fair Isaac FICO reported good headline numbers for its fiscal third quarter, but a deeper look shows some issues. Reported revenue rose 15% year over year, but all but 1 percentage point of this growth was attributable to acquisitions. The applications segment was the lead top-line performer, buoyed by the acquisitions of Adeptra and CR Software. Further, the company said it is seeing the sales cycle with North American banks lengthen and modestly lowered its full-year guidance as a result. Operating margins excluding one-time items and amortization fell to 21.2% from 24.1%, as the acquired businesses generate lower margins. While the company expects margins to improve as it realizes synergies and expands the acquired businesses, it is worth noting that these businesses appear to only benefit the top line at this point. In our view, the relatively lackluster organic growth supports our thesis that the long-term growth prospects for Fair Isaac are fairly modest, and the growth rates implied by the current stock price are overly optimistic. We will maintain our fair value estimate and moat rating.