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Fair Isaac Corporation (FICO)Senior Analyst: Cole SecorJunior Analysts: Arjun Aggarwal, Matthew Cohen, Aditi Dass, Kirstin Fong, Matthew Soriento
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BUY
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IndustryDefinitionBusinessesthatdevelopsoftwaretodetectfraudulentpaymentsmadetoclients.Thesoftwarealsoprotectsagainstfraudulentpayments.
Supportthedetection,analyticsandmanagementoffraudacrossusers,accounts,products,processesandchannels
Monitorandanalyzeuseractivityandbehaviorattheapplicationlevel
Watchwhattranspiresinsideandacrossaccounts
Analyzebehavioramongrelatedusers,accountsorotherentities
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LifeCycleStage:Growth
Agrowthof30.5%forthepast8yearsisagoodsignofthefuture.
RegulationLevel:Light
Governmentstrugglestokeepupwiththerapidlychangingindustry.
RevenueVolatility:Medium
Uncertaintiessurroundingcontractsandpricingposeriskstorevenue.
Globalization:Medium
ChinaandIndiaarebecomingbiggerplayers.
TechnologyChange:High
Thecontinuingcompetitionbetweenfraudsterandfirmdrivesinnovation.
CompetitionLevel:High
Companiesofanysizecancompeteformarketshare.
IndustryOverview
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IndustryOverview
020040060080010001200140016001800
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
IndustryRevenue
Revenue($m)
30.5%CAGR
15.5%CAGR
Source:Bloomberg,IBISWorld,YahooFinance
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MarketSegmentation§ Thefinancialsectorrepresents
thelargestmarketsegment– Includescommercialbanks,
retailbanks, andbrokeragefirms
§ Publicsectorisanother largecontributortomarketrevenue– Rangesfromnationalsecurityto
welfare
§ Informationsectoraccountsforthethirdlargestsegmentofrevenue– Continued growthasmoreand
morecompaniesmovedataintodigitalforms
§ InsuranceandHealthcaresectorwidelyusesfrauddetectionsoftwaretodetectfraudulentclaims
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MainCompetitors
MarketCap:$3.72B MarketCap:$2.87B
MarketCap:$2.75BMarketCap:$3.01B
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CompanyOverview
§ Useanalyticstohelpbusinessesautomate,improveandconnectdecisionsacrosstheirenterprise,anapproachwecommonlyrefertoasdecisionmanagement.
§ Applications:Pre-configureddecisionmanagementapplicationsdesignedforaspecifictypeofbusinessproblemorprocess.
§ Tools:Composedofanalyticanddecisionmanagementsoftwaretools.
§ Scores:Business-to-business scoringsolutions andservices,ourmyFICO® solutionsforconsumers,andassociatedprofessionalservices
Applications63%
Scores25%
Tools12%
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TotalE-CommerceSalesGrowth
§ Aselectronicpaymenttransactionvolumesincreasewithconsumers increasinglyusingtheinternetforadiverserangeofservices,suchasonlineshopping,onlinetradingandonlinebanking,theriskoftheftandfraudovertheinternetrises.
§ ExtremelystrongcorrelationbetweenE-CommercevolumeandFICOrevenuegrowthsince2011– R2 of.96273
§ FICO® BigDataAnalyzer§ FICO® DataManagement
IntegrationPlatform– Streaminganalyticsandreal-time
distributedprocessing platform.
Thefrauddetectionindustrywillcontinue togrowastheamountofE-Commercetrafficvolume increases.
Years PercentGrowth2006- 2007 26%2007- 2008 10%2008- 2009 32%2009- 2010 10%2010- 2011 26%2011- 2012 19%2012- 2013 10%
CAGR:19.06%*
*Since2006
Source:Bloomberg,IBISWorld,YahooFinance
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ApplicationsSegmentOp.Income
§ Growthhasslowed from12.2%in2013§ $22mRevenueGrowth,$31.9m Cost
Growth– Company isexpectingthecoststoleveloff
§ Drivenbyhighersalariesandanincreaseinthecostofprofessionaldeliveries
§ Partiallyoffsetbyanincreaseinsalesofhigher-marginsoftwareproducts
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100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
ApplicationsGrowth
ApplicationsOpIncome
Astartlingslow-downinthecompany’scashcowsegmentmustbewatchedclosely.
Source:Bloomberg,IBISWorld,YahooFinance
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PredictiveModeling
§ PredictiveModeling. FICO® ModelCentral– Representsunderlyingrelationships in
historicaldatainordertoexplainthedataandmakepredictionsorclassificationsaboutfutureevents.
– Rank-orderindividualsby likelyfutureperformance
– modelsthatdetectthelikelihoodofatransactionbeingfraudulent.
§ FraudDetectionsegmentgrew$17.3m§ Currentlya$2.74Billionindustry§ FICOiscapturing81%ofthe industry§ Predictedindustryrevenueof$9.2Bby2020§ 27.4% growthperyearfor5years
FICO19%
Competitiors81%
PredictiveModelingIndustry
FICOisdominating thepredictivemodeling industry.Theindustryexpectstogrow27%peryearforthenext5years.
Source:Bloomberg,IBISWorld,YahooFinance
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ChipInclusioninDebitandCreditCards
§ Thenewcreditanddebitsmartcardsuseanencryptedchipratherthanamagneticstripe,reducingelectronicpaymentfraud.
§ U.S.fraudrateexpectedtofollowCanada’sdramaticdecrease.
§ IndustrywillneedtorelyonacontinuinggrowthfromotherareasoffraudwithintheU.S.andCanada
§ “IneverycountrythathasswitchedtoEMVcards,onlinefraudhasjumped.”–Aite Group
§ UKsawa79%increase inonlinefraudoncechipswereintroduced.
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2008 2009 2010 2011 2012 2013
Canada'sDecreaseinRetailFraudSinceChips
DebitandCredit CardFraudLosses
Expon.(DebitandCredit CardFraudLosses)
Ascreditanddebitcardsincreasinglyusecomputerchipstheamountofretailfraudwilldecrease,butonline fraudwillspike.
OnlineFrauddrivingSoftwareapplicationsales.
Source:Bloomberg,IBISWorld,YahooFinance
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Discounted Cash Flow Valuation
§ 6.07%growth ratebasedonaverageof4analystestimates
§ Applicationsgrowthpushes top-lineearningswitha10.3%expectedrevenuegrowth rate
FICO’sstronggrowthpotentialyieldsagreatROIopportunity.
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ComparableCompaniesValuation
§ Medianusedforallthreemultiples§ FICOisslightlyovervaluedcompared tocompetitors
– Thisismostlybasedonthehighhopesmarketshaveforthefirm
§ FICOisaleading innovatorandthisispricedintotheirstockandshownbytheirhighmultiples
§ Weighted5%equallytopriceintheovervaluation
Source:Bloomberg,IBISWorld,YahooFinance
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Risks
§ Sufferfromdependency ononasmallnumberofcustomers forasignificantamountofprofit
§ Adecreaseingovernmentspendingposesasthreatasthepublicsectoraccountsfor 20%ofindustryprofit
§ Failuretocontinue integratingacquiredcompanieseasily– RecentlyacquiredTONBELLER
§ AfailureforhighR&Dinvestment inDecisionManagementStrategy Softwaretoprovidereturns
§ Ifsoftwarehasabasecodethathasbeenopensourced theymayhavetomaketheresultingsoftwareopensourced andfree
Thecompanyisatriskforindustry-widedownturns, aswellasgeneralmacroeconomicdeterioration.
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15.2%Potential Upside
Leading Innovator
ControlofHighGrowthSector
BUY
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BACKUPSLIDES
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SensitivityAnalysis
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FreeCashFlows
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CapitalAssetPricingModel
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SegmentRevenue
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IncomeStatement