UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission File Number 1-11689

Fair Isaac Corporation

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		94-1499887 (I.R.S. Employer Identification No.)
901 Marquette Avenue, Suite 3200 Minneapolis, Minnesota (Address of principal executive offices)		55402-3232 (Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

     The number of shares of common stock outstanding on July 31, 2010 was 41,710,784 (excluding 47,145,999 shares held by the Company as treasury stock).

 

 

TABLE OF CONTENTS

		PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			34
Item 4.		Controls and Procedures			35
		PART II — OTHER INFORMATION
Item 1.		Legal Proceedings			36
Item 1A.		Risk Factors			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3.		Defaults Upon Senior Securities			46
Item 4.		[Reserved]			46
Item 5.		Other Information
Item 6.		Exhibits			46
Signatures					47
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 i

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

						September 30,
		June 30, 2010				2009
		(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents		$	112,612			$	178,157
Marketable securities available for sale, current portion			129,173				139,673
Accounts receivable, net			107,804				101,742
Prepaid expenses and other current assets			22,223				22,986
Total current assets			371,812				442,558
Marketable securities available for sale, less current portion			19,015				61,371
Other investments			11,074				11,074
Property and equipment, net			31,421				34,340
Goodwill			660,804				667,640
Intangible assets, net			29,050				38,255
Deferred income taxes			30,867				38,100
Other assets			8,354				10,550
Total assets		$	1,162,397			$	1,303,888
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	8,520			$	8,593
Accrued compensation and employee benefits			31,421				28,139
Other accrued liabilities			35,459				38,183
Deferred revenue			45,234				39,673
Current maturities on long-term debt			8,000				—
Total current liabilities			128,634				114,588
Revolving line of credit			245,000				295,000
Senior notes			267,000				275,000
Other liabilities			14,647				19,031
Total liabilities			655,281				703,619
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($0.01 par value; 1,000 shares authorized; none issued and outstanding)			—				—
Common stock ($0.01 par value; 200,000 shares authorized, 88,857 shares issued, 42,271 and 48,156 shares outstanding at June 30, 2010 and September 30, 2009, respectively)			423				482
Paid-in-capital			1,103,784				1,106,292
Treasury stock, at cost (46,586 and 40,701 shares at June 30, 2010 and September 30, 2009, respectively)			(1,501,111	)			(1,375,400	)
Retained earnings			932,168				886,324
Accumulated other comprehensive loss			(28,148	)			(17,429	)
Total stockholders’ equity			507,116				600,269
Total liabilities and stockholders’ equity		$	1,162,397			$	1,303,888

See accompanying notes to condensed consolidated financial statements.

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Quarter Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
		(in thousands, except per share data)
Revenues:
Transactional and maintenance		$	115,902			$	119,534			$	344,709			$	362,646
Professional services			25,541				28,400				75,704				87,792
License			13,886				8,084				30,132				28,375
Total revenues			155,329				156,018				450,545				478,813
Operating expenses:
Cost of revenues (1)			45,316				48,160				132,476				160,655
Research and development			19,176				18,364				57,403				55,409
Selling, general and administrative (1)			57,077				50,290				165,977				157,519
Amortization of intangible assets (1)			2,683				3,219				8,918				9,622
Restructuring			—				(237	)			—				8,711
Loss on sale of product line assets			—				2,993				—				2,993
Total operating expenses			124,252				122,789				364,774				394,909
Operating income			31,077				33,229				85,771				83,904
Interest income			393				936				1,439				3,836
Interest expense			(5,462	)			(6,086	)			(16,293	)			(19,771	)
Other income, net			701				503				1,347				1,651
Income from continuing operations before income taxes			26,709				28,582				72,264				69,620
Provision for income taxes			8,771				10,443				23,648				21,263
Income from continuing operations			17,938				18,139				48,616				48,357
Loss from discontinued operations			—				—				—				(363	)
Net income		$	17,938			$	18,139			$	48,616			$	47,994
Basic earnings per share:
Continuing operations		$	0.40			$	0.37			$	1.05			$	0.99
Discontinued operations			—				—				—				—
Total		$	0.40			$	0.37			$	1.05			$	0.99
Diluted earnings (loss) per share:
Continuing operations		$	0.40			$	0.37			$	1.04			$	0.99
Discontinued operations			—				—				—				(0.01	)
Total		$	0.40			$	0.37			$	1.04			$	0.98
Shares used in computing earnings per share:
Basic			44,446				48,835				46,171				48,707
Diluted			44,885				48,986				46,561				48,777

See accompanying notes to condensed consolidated financial statements.

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)

																						Accumulated
		Common Stock																				Other				Total
						Par				Paid-in-								Retained				Comprehensive				Stockholders’				Comprehensive
		Shares				Value				Capital				Treasury Stock				Earnings				Loss				Equity				Income
		(In thousands)
Balance at September 30, 2009			48,156			$	482			$	1,106,292			$	(1,375,400	)		$	886,324			$	(17,429	)		$	600,269
Share-based compensation			—				—				13,235				—				—				—				13,235
Exercise of stock options			266				3				(5,208	)			8,810				—				—				3,605
Tax effect from share-based payment arrangements			—				—				(3,966	)			—				—				—				(3,966	)
Repurchases of common stock			(6,298	)			(63	)			—				(139,465	)			—				—				(139,528	)
Issuance of ESPP shares from treasury			1				—				(15	)			46				—				—				31
Issuance of restricted stock to employees from treasury			146				1				(6,554	)			4,898				—				—				(1,655	)
Dividends paid			—				—				—				—				(2,772	)			—				(2,772	)
Net income			—				—				—				—				48,616				—				48,616			$	48,616
Unrealized loss on investments			—				—				—				—				—				(326	)			(326	)			(326	)
Cumulative translation adjustments			—				—				—				—				—				(10,393	)			(10,393	)			(10,393	)
Balance at June 30, 2010			42,271			$	423			$	1,103,784			$	(1,501,111	)		$	932,168			$	(28,148	)		$	507,116			$	37,897

See accompanying notes to condensed consolidated financial statements.

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended June 30,
		2010				2009
		(In thousands)
Cash flows from operating activities:
Net income		$	48,616			$	47,994
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization			23,762				29,052
Share-based compensation			13,235				15,342
Deferred income taxes			689				3,660
Tax effect from share-based payment arrangements			(3,966	)			(7,297	)
Excess tax benefits from share-based payment arrangements			(1,052	)			(121	)
Net amortization of premium on marketable securities			1,668				601
Provision for doubtful accounts, net			(234	)			499
Loss on sale of product line assets			—				2,993
Net loss on sales of property and equipment			658				103
Changes in operating assets and liabilities, net of disposition effects:
Accounts receivable			(7,852	)			35,251
Prepaid expenses and other assets			815				925
Accounts payable			24				(864	)
Accrued compensation and employee benefits			3,453				(624	)
Other liabilities			693				(10,390	)
Deferred revenue			3,516				7,222
Net cash provided by operating activities			84,025				124,346
Cash flows from investing activities:
Purchases of property and equipment			(12,746	)			(11,283	)
Cash proceeds from sale of property and equipment			50				—
Cash proceeds from sale of product line assets			2,182				1,000
Purchases of marketable securities			(71,749	)			(110,723	)
Proceeds from maturities of marketable securities			122,573				107,495
Distribution from cost method investees			—				1,300
Net cash provided by (used in) investing activities			40,310				(12,211	)
Cash flows from financing activities:
Payments on revolving line of credit			(50,000	)			—
Proceeds from issuances of common stock under employee stock option and purchase plans			1,981				2,822
Dividends paid			(2,772	)			(2,923	)
Repurchases of common stock			(137,497	)			—
Excess tax benefits from share-based payment arrangements			1,052				121
Net cash provided by (used in) financing activities			(187,236	)			20
Effect of exchange rate changes on cash			(2,644	)			(1,487	)
Increase (decrease) in cash and cash equivalents			(65,545	)			110,668
Cash and cash equivalents, beginning of year			178,157				129,678
Cash and cash equivalents, end of year		$	112,612			$	240,346
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds		$	13,374			$	20,910
Cash paid for interest		$	20,519			$	24,861

See accompanying notes to condensed consolidated financial statements.

1. Nature of Business

   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 and healthcare organizations.

     In these condensed consolidated financial statements, FICO is referred to as “we,” “us,” “our,” or “FICO”.

   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 in this Form 10-Q all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements in this Form 10-Q 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 year ended September 30, 2009. 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.

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

   Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include, but are not limited to, assessing the following: the recoverability of accounts receivable, goodwill and other intangible assets, software development costs and deferred tax assets; the benefits related to uncertain tax positions, the determination of the fair value of share-based compensation, the ability to estimate hours in connection with fixed-fee service contracts, the ability to estimate transactional-based revenues for which actual transaction volumes have not yet been received and the determination of whether fees are fixed or determinable and collection is probable or reasonably assured.

   Adoption of Recent Accounting Pronouncements

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuances, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We adopted this guidance on January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us with the reporting period beginning October 1, 2011. Other than requiring additional disclosures, adoption of this new guidance does not have a material impact on our financial statements.

     In October 2009, the Financial Accounting Standards Board (“FASB”) issued two new accounting standards that removed certain tangible products from the scope of software revenue recognition guidance and altered the accounting for revenue arrangements with multiple deliverables. The new guidance narrows the definition of products subject to software accounting rules to exclude certain tangible products that contain software and non-software elements that function together to deliver the combined product’s essential functionality. As such, certain products that were previously accounted for under the scope of software revenue recognition guidance will no longer be accounted for as software. In addition, the guidance amended the accounting standards for multiple deliverable

revenue arrangements to: (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

     We elected to early adopt this accounting guidance and we have applied these standards to all applicable revenue arrangements entered into or materially modified beginning October 1, 2009. The adoption of these standards had an immaterial effect on our revenues, pre-tax income, net income and earnings per share during the three and nine months ended June 30, 2010.

     When a sales arrangement contains multiple deliverables we allocate revenue to each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or ESP if neither VSOE nor TPE is available. VSOE is generally limited to the price charged when the same or similar product is sold separately. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE for the product or service. We define VSOE as a median price of recent standalone transactions that are priced within a narrow range, as defined by us. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. It may be difficult for us to obtain sufficient information on competitor pricing to substantiate TPE and therefore we may not always be able to use TPE.

     When we are unable to establish selling price using VSOE or TPE, we use ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a standalone basis. Our determination of ESP involves weighting several factors based on the specific facts and circumstances of each arrangement. The factors include, but are not limited to, geographies, market conditions, gross margin objectives, pricing practices and controls and customer segment pricing strategies and the product lifecycle. We analyze selling prices used in our allocation of arrangement consideration on an annual basis, or more frequently if necessary. Selling prices will be analyzed more frequently if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.

     Each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting under the guidance if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a general right of return relative to delivered products. Revenue from multiple element arrangements is allocated to the software and non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In circumstances where we cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purposes of performing this allocation.

     We do not expect the adoption of this guidance will result in a change in our units of accounting or in how we allocate arrangement consideration to our units of accounting. In addition, we do not anticipate material changes in the pattern and timing of revenue recognition nor do we expect a material effect on our condensed financial statements in periods subsequent to adoption. However, the new guidance may facilitate our efforts to optimize our offerings due to better alignment between the economics of an arrangement and the accounting. This may lead to engaging in new go-to-market practices in the future. In particular, we expect that the new accounting standards will enable us to better integrate products and services without VSOE into existing offerings and solutions. As these go-to-market strategies evolve, we may modify pricing practices in the future which could result in changes in selling prices, including both VSOE and ESP.

     On October 1, 2009 we adopted new guidance on the accounting for business combinations. The guidance states that business combinations will result in all assets and liabilities of an acquired business being recorded at their fair values including contingent assets and liabilities. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. This guidance has been applied to all acquisitions contemplated subsequent to October 1, 2009.

     In December 2007, the FASB issued new accounting guidance on non-controlling interests in consolidated financial statements. The guidance clarifies that a non-controlling or minority interest in a subsidiary is considered an ownership interest and, accordingly, requires all entities to report such interests in subsidiaries as equity in the consolidated financial statements. We adopted this guidance on October 1, 2009. The adoption of this guidance had an immaterial effect on our consolidated financial statements.

     On October 1, 2009, we adopted the authoritative guidance on fair value measurement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Adoption of the new guidance did not impact our consolidated financial statements.

     On October 1, 2009, we adopted new accounting guidance for measuring liabilities at fair value. This guidance clarifies that the quoted price for an identical liability is a Level 1 measurement when no adjustments to the quoted price are necessary. If quoted prices for identical liabilities are not available, the guidance provides valuation techniques to be used in determining the fair value of the liability. The adoption of this standard did not impact our consolidated financial statements during the three and nine months ended June 30, 2010.

     In May 2008, the FASB issued new guidance on the accounting for convertible instruments that may be settled in cash upon conversion. The guidance requires that proceeds from the issuance of convertible debt instruments be allocated between debt (at a discount) and an equity component. The debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. We adopted this guidance on October 1, 2009. The guidance changed the accounting treatment for our Senior Convertible Notes, which were issued in August 2003; however, the only retrospective adjustment to our financial statements is a reclassification between equity accounts. The guidance does not require retrospective adoption if the instruments were not outstanding during any of the periods presented in the annual financial statements for the period of adoption, or if restatement would only lead to a reclassification between its opening equity accounts for periods presented in the annual financial statements. As a result, the adoption of this guidance did not impact our consolidated financial statements.

     On October 1, 2009, we adopted new guidance to be used in determining the useful life of intangible assets. The guidance amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This new guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. The adoption of this guidance did not affect our consolidated financial statements.

2. Goodwill and Intangible Assets

     As discussed in Note 7, effective October 1, 2009, we completed an entity-wide reorganization, which resulted in a change in our segments. Goodwill of $12.9 million previously attributable to our former Professional Services segment was reassigned to our remaining segments based on the relative fair values of those segments. In addition, goodwill of $54.9 million was reclassified from the Applications segment to our Scores segment based on the relative fair value of our business-to-consumer business. We completed an assessment of any potential goodwill impairment for reporting units impacted by this new structure and determined that no impairment existed. The following table summarizes changes to goodwill during fiscal 2010, both in total and as allocated to our operating segments.

										Tools
		Applications								(Previously
		(previously				Scores				Analytical
		Strategy				(previously				Software				Professional
		Machines)				Scoring)				Tools)				Services				Total
		(In thousands)
Balance at September 30, 2009		$	501,855			$	87,108			$	65,812			$	12,865			$	667,640
Segment reorganization (see note 7)			(48,215	)			59,540				1,540				(12,865	)			—
Foreign currency translation adjustment			(5,637	)			—				(1,199	)			—				(6,836	)
Balance at June 30, 2010		$	448,003			$	146,648			$	66,153			$	—			$	660,804

     Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption within the accompanying condensed consolidated statements of income, consisted of the following:

		Quarter Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
		(In thousands)
Cost of revenues		$	1,337			$	1,704			$	4,787			$	5,090
Selling, general and administrative expenses			1,346				1,515				4,131				4,532
		$	2,683			$	3,219			$	8,918			$	9,622

     Cost of revenues reflects our amortization of completed technology and selling, general and administrative expenses reflects our amortization of other intangible assets. Intangible assets (excluding goodwill) were $29.1 million and $38.3 million, net of accumulated amortization of $105.5 million and $107.7 million, as of June 30, 2010 and September 30, 2009, respectively.

     Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2010, was as follows (in thousands):

Fiscal year
Remainder of fiscal 2010		$	1,973
2011			7,658
2012			6,081
2013			4,094
2014			2,407
Thereafter			6,837
		$	29,050

3. Restructuring Expenses

     The following table summarizes our restructuring accruals for certain FICO facility closures. The current portion and non-current portion is recorded in other accrued current liabilities and other long-term liabilities, respectively, within the accompanying condensed consolidated balance sheets. These balances are expected to be paid by fiscal 2018.

		Accrual at				Expense				Cash				Expense				Accrual at
		September 30, 2009				Additions				Payments				Reversals				June 30, 2010
		(In thousands)
Facilities charges		$	3,771			$	—			$	(1,631	)		$	—			$	2,140
Less: current portion			(1,361	)															(744	)
Non-current		$	2,410															$	1,396

     There were no restructuring expenses incurred during the three and nine months ended June 30, 2010.

     During the first quarter of fiscal 2009, in connection with our reengineering initiative, we incurred net charges totaling $8.1 million consisting mainly of $5.9 million for severance costs associated with the reduction of 255 positions throughout the Company and $2.6 million associated with vacating excess leased space. In addition, we reversed $0.4 million of accrued expenses as a result of a favorable lease termination agreement that we entered into for office space that was previously vacated. During the quarter ended March 31, 2009, we recognized a $1.2 million charge due to unfavorable sublease arrangements we entered into for office space previously vacated. The charge was offset by a $0.4 million reduction in other restructuring liabilities. During the quarter ended June 30, 2009 we reversed $0.2 million of accrued expenses as a result of a favorable lease termination agreement. Cash payments for the severance costs were paid during fiscal 2009.

4. Sale of Product Line Assets

     In June 2009, we sold the assets associated with our LiquidCredit^® for Telecom (“LCT”) and RoamEx^® product lines. LCT and RoamEx solutions were included primarily in our Applications segment. The LCT sale, which was for $3.5 million, included a $0.5

million receivable for post-closing working capital adjustments. The RoamEx sale, which was for $2.7 million, included a $1.4 million escrow balance and a $0.3 million receivable for post-closing working capital adjustments. All amounts included in escrow and applicable post-closing working capital adjustments were received in fiscal 2010. Revenues attributable to the LCT and RoamEx product lines were $5.0 million and $15.7 million during the three and nine months ended June 30, 2009.

5. Composition of Certain Financial Statement Captions

		June 30, 2010				September 30, 2009
		(In thousands)
Property and equipment		$	214,896			$	206,068
Less: accumulated depreciation and amortization			(183,475	)			(171,728	)
		$	31,421			$	34,340

6. Earnings Per Share

     The following reconciles the numerators and denominators of basic and diluted earnings per share (“EPS”):

		Quarter Ended June 30,								Nine Months Ended June 30,
		2010				2009				2010				2009
		(In thousands, except per								(In thousands, except per
		share data)								share data)
Numerator for diluted and basic earnings per share — income from continuing operations:		$	17,938			$	18,139			$	48,616			$	48,357
Denominator — shares:
Basic weighted-average shares			44,446				48,835				46,171				48,707
Effect of dilutive securities			439				151				390				70
Diluted weighted-average shares			44,885				48,986				46,561				48,777
Earnings per share from continuing operations:
Basic		$	0.40			$	0.37			$	1.05			$	0.99
Diluted		$	0.40			$	0.37			$	1.04			$	0.99

     The computation of diluted EPS for the quarters ended June 30, 2010 and 2009, excludes options to purchase approximately 4,731,000 and 6,579,000 shares of common stock, respectively, and for the nine months ended June 30, 2010 and 2009, excludes options to purchase approximately 5,001,000 and 7,597,000 shares of common stock, respectively, because the options’ exercise prices exceeded the average market price of our common stock in these periods and their inclusion would be antidilutive.

7. Segment Information

     Effective October 1, 2009, we implemented an organizational restructuring resulting in a consolidation of our current operating segment structure from four segments to three. In addition, we changed our segment operating income reporting measure to exclude certain corporate general and administrative expenses. Previously, corporate expenses, which mainly include finance, legal and human resource related expenses, were allocated to the segments. In addition, amortization expense is no longer allocated to the individual segments. All periods presented have been restated to reflect these changes. The new segments are as follows:

•

Applications. This segment includes the former Strategy Machine SolutionsTM segment, excluding our myFICO® solutions for consumers, and associated professional services. Our Applications products are pre-configured Decision Management applications designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and insurance claims management.

	•		Scores. This segment includes our business-to-business scoring solutions, our myFICO® solutions for consumers (previously included in the Strategy MachineTM Solutions segment) 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.
	•		Tools. This segment includes the former Analytic Software Tools segment and associated professional services. The Tools segment is composed of software tools that clients can use to create their own custom Decision Management applications.

     The former Professional Services segment, which represents delivery and integration services, has been included within the applicable segment to which the services relate and is no longer its own segment.

     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 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 or capital expenditures; rather, depreciation amounts are allocated to the segments from their internal cost centers as described above.

The following tables summarize segment information for the three and nine months ended June 30, 2010 and 2009:

		Quarter Ended June 30, 2010
														Unallocated
														Corporate
		Applications				Scores				Tools				Expenses				Total
		(In thousands)
Segment revenues:
Transactional and maintenance		$	62,939			$	46,153			$	6,810			$	—			$	115,902
Professional services			21,500				352				3,689				—				25,541
License			6,991				—				6,895				—				13,886
Total segment revenues			91,430				46,505				17,394				—				155,329
Segment operating expense			(68,003	)			(15,907	)			(15,409	)			(18,397	)			(117,716	)
Segment operating income		$	23,427			$	30,598			$	1,985			$	(18,397	)			37,613
Unallocated share-based compensation expense																			(3,853	)
Unallocated amortization expense																			(2,683	)
Operating income																			31,077
Unallocated interest income																			393
Unallocated interest expense																			(5,462	)
Unallocated other income, net																			701
Income before income taxes																		$	26,709
Depreciation expense		$	3,753			$	333			$	540			$	325			$	4,951

		Quarter ended June 30, 2009
														Unallocated
														Corporate
		Applications				Scores				Tools				Expenses				Total
		(In thousands)
Segment revenues:
Transactional and maintenance		$	67,991			$	44,832			$	6,711			$	—			$	119,534
Professional services			24,077				472				3,851				—				28,400
License			2,491				—				5,593				—				8,084
Total segment revenues			94,559				45,304				16,155				—				156,018
Segment operating expense			(65,298	)			(12,914	)			(14,294	)			(19,614	)			(112,120	)
Segment operating income		$	29,261			$	32,390			$	1,861			$	(19,614	)			43,898
Unallocated share-based compensation expense																			(4,694	)
Unallocated amortization expense																			(3,219	)
Unallocated restructuring expense																			237
Unallocated loss on sale of product line assets																			(2,993	)
Operating income																			33,229
Unallocated interest income																			936
Unallocated interest expense																			(6,086	)
Unallocated other income, net																			503
Income before income taxes																		$	28,582
Depreciation expense		$	4,946			$	484			$	533			$	473			$	6,436

		Nine Months Ended June 30, 2010
														Unallocated
														Corporate
		Applications				Scores				Tools				Expenses				Total
		(In thousands)
Segment revenues:
Transactional and maintenance		$	194,376			$	129,181			$	21,152			$	—			$	344,709
Professional services			62,583				1,411				11,710				—				75,704
License			14,239				—				15,893				—				30,132
Total segment revenues			271,198				130,592				48,755				—				450,545
Segment operating expense			(201,525	)			(45,386	)			(43,298	)			(52,412	)			(342,621	)
Segment operating income		$	69,673			$	85,206			$	5,457			$	(52,412	)			107,924
Unallocated share-based compensation expense																			(13,235	)
Unallocated amortization expense																			(8,918	)
Operating income																			85,771
Unallocated interest income																			1,439
Unallocated interest expense																			(16,293	)
Unallocated other income, net																			1,347
Income before income taxes																		$	72,264
Depreciation expense		$	11,257			$	1,013			$	1,583			$	991			$	14,844

		Nine Months Ended June 30, 2009
														Unallocated
														Corporate
		Applications				Scores				Tools				Expenses				Total
		(In thousands)
Segment revenues:
Transactional and maintenance		$	206,683			$	136,262			$	19,701			$	—			$	362,646
Professional services			70,697				1,229				15,866				—				87,792
License			11,164				—				17,211				—				28,375
Total segment revenues			288,544				137,491				52,778				—				478,813
Segment operating expense			(205,596	)			(44,176	)			(45,965	)			(62,504	)			(358,241	)
Segment operating income		$	82,948			$	93,315			$	6,813			$	(62,504	)			120,572
Unallocated share-based compensation expense																			(15,342	)
Unallocated amortization expense																			(9,622	)
Unallocated restructuring expense																			(8,711	)
Unallocated loss on sale of product line assets																			(2,993	)
Operating income																			83,904
Unallocated interest income																			3,836
Unallocated interest expense																			(19,771	)
Unallocated other income, net																			1,651
Income before income taxes																		$	69,620
Depreciation expense		$	14,946			$	1,368			$	1,650			$	1,466			$	19,430

8. Fair Value Measurements

     In fiscal 2009, we adopted guidance for financial assets and liabilities and for non-financial assets and liabilities that we recognize or disclose at fair value on a recurring basis (at least annually). These include cash equivalents, available-for-sale marketable securities and our derivative financial instruments. We adopted the remaining aspects of the fair value measurement standard relative to nonfinancial assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis, prospectively effective October 1, 2009.

     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 securities are comprised of money market funds and certain equity securities.
	•		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. Our Level 2 securities are comprised of U.S. government, municipal and corporate debt obligations that are generally held to maturity.
	•		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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

     The following table represents financial assets that we measured at fair value on a recurring basis at June 30, 2010 and September 31, 2009:

		Active Markets for				Significant Other
		Identical Instruments				Observable Inputs				Fair Value as of
		(Level 1)				(Level 2)				June 30, 2010
Assets:
Cash equivalents (1)		$	55,499			$	—			$	55,499
U.S. corporate debt (2)			—				20,544				20,544
Non U.S. corporate debt (2)			—				37,476				37,476
U.S. government obligations (2)			—				64,783				64,783
Municipal obligations (2)			—				21,453				21,453
Marketable securities (3)			3,932				—				3,932
Total		$	59,431			$	144,256			$	203,687
		Active Markets for				Significant Other
		Identical Instruments				Observable Inputs				Fair Value as of
		(Level 1)				(Level 2)				September 30, 2009
Assets:
Cash equivalents (1)		$	113,468			$	—			$	113,468
U.S. corporate debt (2)			—				11,697				11,697
Non U.S. corporate debt (2)			—				38,977				38,977
U.S. government obligations (2)			—				119,031				119,031
Municipal obligations (2)			—				27,579				27,579
Marketable securities (3)			3,760				—				3,760
Total		$	117,228			$	197,284			$	314,512

Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing applies to our Level 1 investments. To the extent quoted prices in active markets for assets or liabilities are not available, the valuation techniques used to measure the fair values of our financial assets incorporate market inputs, which include reported trades, broker/dealer quotes, benchmark yields, issuer spreads, benchmark securities and other inputs derived from or corroborated by observable market data. This methodology applies to our Level 2 investments. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period. During the three and nine months ended June 30, 2010 there were no transfers of financial instruments between classification levels.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As previously discussed, we adopted the provisions of the fair value measurement accounting and disclosure guidance related to non-financial assets and liabilities recognized or disclosed at fair value on a nonrecurring basis on October 1, 2009. Assets and liabilities subject to this new guidance primarily include goodwill and indefinite-lived intangible assets measured at fair value for impairment

assessments, long-lived assets measured at fair value for impairment assessments and non-financial assets and liabilities measured at fair value in business combinations. The adoption of this new guidance did not affect our financial position, results of operations or cash flows for the periods presented.

9. Derivative Financial Instruments

     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 accounts receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their functional currency. 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 currency exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro and Canadian dollar.

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

     The following table summarizes the fair value of our derivative instruments and their location in the consolidated balance sheet:

June 30, 2010

(In thousands)

Assets

Liabilities

Derivatives not designated as hedging instruments

Balance Sheet Location

Amount

Balance Sheet Location

Amount

Foreign currency forward contracts

Other current assets

$

—

Other current liabilities

$

—

     The following table summarizes our outstanding forward foreign currency contracts, by currency at June 30, 2010 and September 30, 2009:

		June 30, 2010
		Contract Amount								Fair Value
		Foreign
		Currency				US$				US$
		(In thousands)
Sell foreign currency:
Canadian dollar (CAD)		CAD	1,125			$	1,065			$	—
Euro (EUR)		EUR	5,680				6,967				—
Buy foreign currency:
British pound (GBP)		GBP	3,473				5,200				—

		September 30, 2009
		Contract Amount								Fair Value
		Foreign
		Currency				US$				US$
		(In thousands)
Sell foreign currency:
Canadian dollar (CAD)		CAD	1,100			$	1,022			$	—
Euro (EUR)		EUR	6,100				8,908				—
Japanese yen (JPY)		JPY	61,000				679				—
Buy foreign currency:
British pound (GBP)		GBP	2,866				4,600				—

     The forward foreign currency contracts were all entered into on June 30, 2010 and September 30, 2009, respectively; therefore, the fair value was $0 on that date.

     Gains (losses) on derivative financial instruments are recorded in our consolidated statements of income as a component of other income, net. These amounts are shown for the quarter and nine months ended June 30, 2010 and 2009 in the table below:

		Quarter Ended				Quarter Ended
		June 30, 2010				June 30, 2009
		(In thousands)
Foreign currency forward contracts		$	644			$	1,638

		Nine Months				Nine Months
		Ended June 30,				Ended June 30,
		2010				2009
		(In thousands)
Foreign currency forward contracts		$	520			$	(1,254	)

10. Income Taxes

     Effective Tax Rate

     Our effective tax rate was 32.8% and 36.5% during the quarters ended June 30, 2010 and 2009, respectively, and 32.7% and 30.5% during the nine months ended June 30, 2010 and 2009, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year.

     The effective tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The increase in our effective tax rate year over year was due to changes in the foreign and domestic earnings mix and the expiration of the Federal Research and Development credit.

     The total unrecognized tax benefit for uncertain tax positions at June 30, 2010 is estimated to be approximately $12.1 million compared to $18.6 million as of September 30, 2009. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income. As of June 30, 2010, we have accrued interest of $1.1 million related to the unrecognized tax benefits.

11. Revolving Line of Credit

     We have a $600 million unsecured revolving line of credit with a syndicate of banks that expires on October 20, 2011. Proceeds from the revolving line of credit 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 the Company’s common stock. Interest on amounts borrowed under the revolving line of credit is based on (i) a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus 0.50% or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to 0.55% and is determined based on our consolidated leverage ratio. In addition, we must pay utilization fees if borrowings and commitments under the revolving line of credit exceed 50% of the total commitment, as well as facility fees. The revolving line of credit contains certain restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage ratios. The revolving line of credit also contains covenants typical of unsecured facilities. As of June 30, 2010, we were in compliance with all covenants under this revolving line of credit and we had $245.0 million of borrowings outstanding at an interest rate of 0.8%. On July 14, 2010, we repaid all outstanding obligations under the revolving line of credit using proceeds from the issuance of $245 million of Senior Notes in a private placement to a group of institutional investors.

12. Senior Notes

     In May 2008, we issued $275 million of Senior Notes in a private placement to a group of institutional investors. The Senior Notes were issued in four series with maturities ranging from 5 to 10 years. The Senior Notes’ weighted average interest rate is 6.8% and the weighted average maturity is 7.9 years. The Senior Notes are subject to certain restrictive covenants that are substantially similar to those in the credit agreement for the revolving line of credit including maintenance of consolidated leverage and fixed charge

coverage ratios. The purchase agreement for the Senior Notes also includes covenants typical of unsecured facilities. As of June 30, 2010, we were in compliance with all covenants related to our Senior Notes.

13. Contingencies

     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 believe that none of these aforementioned claims or actions will result in a material adverse impact to our consolidated results of operations, liquidity or financial condition. However, the amount or range of any potential liabilities associated with these claims and actions, if any, cannot be determined with certainty. Set forth below are additional details concerning certain ongoing litigation.

Braun Consulting, Inc.

     Braun (which we acquired in November 2004) was a defendant in a lawsuit filed on November 26, 2001, in the United States District Court for the Southern District of New York (Case No. 01 CV 10629) that alleges violations of federal securities laws in connection with Braun’s initial public offering in August 1999. This lawsuit is among approximately 300 coordinated putative class actions against certain issuers, their officers and directors, and underwriters with respect to such issuers’ initial public offerings. As successor-in-interest to Braun, we entered into a Stipulation and Agreement of Settlement along with most of the other defendant issuers in this coordinated litigation, where such issuers and their officers and directors would be dismissed with prejudice, subject to the satisfaction of certain conditions, including approval of the Court. Under the terms of this Agreement, we would not pay any amount of the settlement. However, since December 2006, certain procedural matters concerning the class status have been decided in the district and appellate courts of the Second Circuit, ultimately determining that no class status exists for the plaintiffs. Since there is no class status, there could be no agreement, thus the District Court entered an order formally denying the motion for final approval of the settlement agreement.

     On April 2, 2009, a stipulation and agreement of settlement between the plaintiffs, issuer defendants and underwriter defendants was submitted to the United States District Court for the Southern District of New York for preliminary approval. This settlement requires no financial contribution from us. The Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement “fairness” hearing was held on September 10, 2009. The Court granted the plaintiffs’ motion for final approval of the settlement and certified the settlement classes on October 5, 2009. The Court determined that the settlement is fair to the class members, approved the settlement and dismissed, with prejudice, the case against the Company and its individual defendants. Notices of appeal of the opinion granting final approval have been filed. Due to the inherent uncertainties of litigation and because the settlement remains subject to appeal, the ultimate outcome of the matter is uncertain.

14. New Accounting Pronouncements Not Yet Adopted

     In June 2009, the FASB issued new accounting guidance related to the consolidation of variable interest entities. The guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We are in the process of determining what effect, if any, the adoption of this guidance will have on our consolidated financial statements.

15. Subsequent Events

     For the three and nine months ended June 30, 2010, we have evaluated subsequent events for potential recognition and disclosure through the date of this filing.

     On July 14, 2010, we issued $245 million of Senior Notes in a private placement to a group of institutional investors. The Senior Notes include a weighted average interest rate of 5.20% and a weighted average maturity of 8 years. Proceeds from the Senior Notes were used to repay the entire balance outstanding on our revolving line of credit. The Senior Notes were issued in four series as follows:

Series

Amount

Interest Rate

Maturity Date

E

$60 million

4.72

%

July 14, 2016

F

$72 million

5.04

%

July 14, 2017

G

$28 million

5.42

%

July 14, 2019

H

$85 million

5.59

%

July 14, 2020