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

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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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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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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

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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