Fair Isaac Corp (Nasdaq:FICO) is best known for its FICO scores, which are compiled and created from information collected from the three major credit reporting agencies of Equifax (NYSE:EFX), TransUnion and Experian plc. This three-headed monster is attempting to move into FICO's profitable turf through a competing VantageScore service, but so far Fair Isaac has been able to fend off the advance and remains a compelling investment opportunity.
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Recent Results
Earlier this month Fair Isaac announced full-year results that saw total revenues fall 15.3% to $630.7 million on weakness in all four primary operating segments. The most marked decline was professional services that provides consulting and data management services, accounted for 17.6% of sales and logged a 24.8% decrease. Scoring solutions, which contains the flagship FICO score products, logged a 16.1% fall in sales to account for 20.9% of the total while strategy machine solutions also struggled, posting a 12.7% decrease and contributing 53.7% of sales. Strategy solutions target industries such as retail, financial services and healthcare firms to help clients better analyze and manage data for their own underlying clients. Fair Isaac counts 91 of the top 100 financial institutions and the top 10 property and casualty firms, such as Citigroup (NYSE:C), Travelers (NYSE:TRV), and Allstate (NYSE:ALL), in the U.S. as clients. The smallest segment at 7.8% of sales is analytic software tools and saw a minor 5.5% decline in the top line on lower software licenses.

Reigning In Costs
The company proved able to reign in costs, but it wasn't able to fully offset the significant drop in sales. As a result, earnings from continuing operations fell 18.3% to $1.34 per diluted share. Operating cash flow fell a less severe 4.7% while a 38.7% drop in capital expenditure allowed free cash flow generation to improve slightly to $141.7 million, or approximately $2.90 per diluted share.

Outlook
Management stopped short of providing quarterly earnings guidance, but did detail that it "expects to grow year-over-year GAAP earnings per share by a high single-digit percentage in fiscal 2010 compared to fiscal 2009, with relatively flat results in the first half of the year compared to the prior year, and stronger performance in the latter half of fiscal 2010." Analysts are currently calling for fiscal 2010 earnings of $1.46 per share and a slight 0.7% dip in sales to $626.2 million.

Bottom Line
Analysts expect Equifax to log a mid single-digit sales decline for its current fiscal year and earnings of $2.29 per share, which would represent a year-over-year decline of close to 8%. Despite the near-term struggles, both firms remain profitable and boast double-digit returns on invested capital. Fair Isaac's is slightly higher at over 16%. Each company should see improved top-line visibility in the near term as financial institutions and other clients start spending again in sympathy with an economic recovery. Longer-term trends remain a bit murky as they have had to diversify out of their core credit score businesses to keep growth chugging along. However, at current share price levels both companies are worth keeping an eye on as appealing plays in the credit reporting industry. (For additional reading, check out A Brief History of Credit Rating Agencies.)

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Tickers in this Article: FICO, EFX, C, TRV, ALL

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