Fair Isaac Corporation (NYSE:FICO) Q1 2023 Earnings Call Transcript

Fair Isaac Corporation (NYSE:FICO) Q1 2023 Earnings Call Transcript January 27, 2023

Operator: Greetings, and thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. This conference is being recorded Thursday, January 26, 2023. And now I’d like to turn the conference over to Steve Weber. Please go ahead.

Steve Weber: Good afternoon, and thank you for joining FICO’s first quarter earnings call. I’m Steve Weber, Interim CFO, and I’m joined today by our CEO, Will Lansing. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning these uncertainties is contained in the Company’s filings with the SEC, in particular, in the risk factors and forward-looking statements portions of such filings.

Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company’s earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the Company’s website at fico.com or on the SEC’s website at sec.gov. A replay of this webcast will be available through January 26, 2024. Now I’ll turn the call over to Will Lansing.

William Lansing: Thanks, Steve, and thank you, everyone, for joining us for our first quarter earnings call. In the Investor Relations section of our website, we’ve posted some slides that we will be referencing through our presentation today. I’m pleased with the results we delivered in our first fiscal quarter. Even in these uncertain economic times, the resilience of our assets and the execution of our team allow us to deliver steady growth in both revenues and earnings and value to our shareholders. Page 2 shows financial highlights from our first quarter. We reported revenues of $345 million in Q1, up 7% from the prior year. Our GAAP net income of $98 million was up 15% over the prior year and GAAP EPS of $3.84, up 24%.

On a non-GAAP basis, Q1 net income was $108 million, up 6% from the prior year, and earnings per share of $4.26 were up 15% from the prior year quarter. Overall, we are off to a very good start in our fiscal 2023. In Scores, revenues were up 5% over the same period last year, as you can see on Page 6 of the presentation. B2B revenues were up 11% in the quarter versus the prior year, driven by unit price increases, increased volumes in card and personal loan originations, and also by a license renewal in Latin America. In the U.S., auto originations revenues were up 24% and card and personal loan originations revenues were up 19%. We continue to see reduced mortgage origination volumes for the U.S. market, where revenues were down about 40% year-over-year.

The fiscal 2023 price increases we talked about last quarter take effect primarily in January. So we expect to see much of the impact in our second fiscal quarter. As always, it’s difficult to estimate the timing and magnitude of the impact. Our B2C revenues were down 6% versus the prior year quarter as we continue to see difficult comps in our myFICO business due to the economic climate and especially because of the higher interest rates and lower number of consumers preparing for mortgages. In our software business, we continue our focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. Overall software numbers look strong, and platform numbers continue to be exceptional. As you can see on Page 7, we delivered overall ARR growth of 11% and platform ARR growth of 46%.

Our ARR, our DBNRR and our ACV numbers are adjusted for the Siron divestiture. And again, our customers continue to find new use cases, as you can see from our net retention rates shown on Page 8. Overall, net retention rate was 110%, and platform net retention is 130%, continuing to demonstrate the success of our land-and-expand strategy, and we continue to see strong demand for our software. As you can see on Page 9, our ACV bookings were up 31% over the same period last year, and we continue to see a strong pipeline of opportunities as customers look to FICO to deliver strategic mission-critical decisioning. Earlier this week, I had the opportunity to attend our annual sales meeting, where I met with colleagues from around the world to discuss best practices, current trends and especially how our customers view our offerings.

I heard firsthand how customers were looking at FICO to help solve their most difficult decisions and how those customers were increasingly finding new ways to use the FICO platform throughout their businesses. I don’t think there’s ever been a time at FICO where the team has been so excited about the opportunities ahead of us. And I share that excitement. I came away with a renewed appreciation for our unique technological capabilities and the incredible team that we have taking it to the market. Finally, as I’ve often said, we are committed to becoming the preeminent platform player in decisioning analytics. The strategic focus has allowed us to exit some non-strategic products and services over the last few years. In November, we announced we had reached an agreement to transition our Siron compliance business to our partner, IMTF.

We closed that transaction in December. While we are proud of the work and the innovation at the FICO team put into Siron to make it an industry-leading solution, we believe we are better positioned if we dedicate our focus and our resources to expanding the capabilities and market penetration of FICO platform. I’ll have some final comments in a few minutes, but first, let me turn the call back to Steve for more financial detail. Thanks.

Steve Weber: As Will said, we delivered another solid quarter in both our Scores and Software segments. Total revenues for the first quarter were $345 million, an increase of 7% over the prior year and slightly ahead of our internal plan. In our Scores segment, revenues were $178 million, up 5% from the same period last year. B2B Scores revenues were up 11% over the prior year. As has been the case for several quarters, mortgage originations revenues were down from the previous year. This quarter, those revenues were down 40% from the same quarter last year and 29% from Q4. But again, that was offset by growth in other areas. Credit card and personal loan originations revenues were up 19% over last year, and auto originations revenues were up 24%.

We also renewed a multi-year license, which had a positive impact on the quarter. B2C Scores revenues were down 6% from the same period last year, and we expect B2C revenues to be down modestly from current levels throughout the rest of the fiscal year. Software segment revenues in the first quarter were $167 million, up 9% versus the same period last year. Software revenues recognized over time were $133 million or 80% of total software revenues. License revenues recognized upfront or at any point in time, were $12 million this quarter and represented 7% of software revenues. Our professional services revenues were $22 million, representing 13% of total software revenues. This quarter, 85% of total company revenues were derived from our Americas region.

Our EMEA region generated 9%, and the remaining 6% were from Asia Pacific. Our software ARR in the first fiscal quarter of 2023 was $583 million, an 11% increase over the prior year quarter. Our platform ARR was $133 million, up 46% last year and represented 23% of our total first quarter ARR compared with 17% last year. Our non-platform ARR was $450 million in the first quarter, up 4% when adjusted for divestitures. Our dollar-based net retention rate in the quarter was 110% overall versus 109% last year. Our platform customers continue to show very strong net expansion from land-and-expand follow-on sales and increased usage. The net retention per platform was 130% in the fourth quarter. Our non-platform customer software usage has matured and relatively stable with retention this quarter at 103%.

Software sales were again strong this quarter with annual contract value bookings at $21.5 million versus $16.4 million in the prior year, an increase of 31%. And as a reminder, ACV bookings include only the annual value of software sales, excluding professional services. Turning now to our expenses for the quarter. Total operating expenses were $205 million this quarter versus $207 million in the prior year and $215 million in Q4. While we continue to focus on expense efficiency, we do expect our total expenses to trend up in FY 2023 from salary increases and modest headcount increases. Our non-GAAP operating margin, as shown on our Reg G schedule, was 49% for the quarter, representing a 400 basis point non-GAAP margin expansion versus the same period last year.

GAAP net income this quarter was $98 million, up 15% from the prior year quarter. Our non-GAAP net income was $108 million for the quarter, up 6% from the same quarter last year. The effective tax rate for the quarter was 17% and included $10 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. We expect our full-year fiscal 2023 recurring tax rate to be approximately 25% to 26%. That expected recurring tax rate is before any excess tax benefits or other discrete items. The resulting net effective tax rate is estimated to be about 24%. Free cash flow for the quarter was $92 million. For the trailing 12 months, free cash flow was $471 million. At the end of the quarter, we had $166 million in cash and marketable investments.

Our total debt at quarter end was $1.92 billion with a weighted average interest rate of 4.9%. Currently, about 67% of our total debt is fixed rate. Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods. Turning to return of capital. We bought back 180,000 shares in the first quarter at an average price of $418 per share. We have $451 million remaining on the current Board authorization, and we continue to view share repurchases as an attractive use of cash. And with that, I’ll turn it back to Will for his thoughts on the rest of FY 2023.

William Lansing: Thanks, Steve. I’m really pleased with our Q1 results. I’m pleased with the progress we’re making on strategic initiatives, and I’m pleased with our positioning for the balance of fiscal 2023. Our Scores business continues to deliver growth even in a turbulent market. As I said in the past, our diversification across different credit verticals means that we are not dependent on one specific type of lending. On the software side, our platform strategy continued to drive strong results. The strategic mission-critical nature of our decisioning FICO platform means that customers are not delaying purchases and implementations. This is evident in the 13 straight quarters of 40-plus percent of platform ARR growth and the continued strong net retention rate of current customers.

We are confident we have the best-in-class capabilities in an emerging marketplace that’s poised for sustained growth. I’m confident we have the correct strategy and a strong team in place to deliver on the remarkable opportunities ahead. As always, we remain focused on execution, and we are committed to delivering outstanding value for our shareholders. As a reminder, when we announced our CFO transition, we also reiterated our guidance with an adjustment for the transition of the Siron Compliance Solution to our partner. So we are guiding revenues of $1.463 billion, GAAP net income of $401 million, GAAP EPS of $16, non-GAAP net income of $487 million, and non-GAAP EPS of $19.42. I’ll turn the call back to Steve, and we’ll be taking questions.

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Q&A Session

Steve Weber: Thanks, Will. This concludes our prepared remarks, and we are now ready to take your questions. Operator, please open the line.

Operator: And we have a question from the line of George Tong with Goldman Sachs. Please go ahead. Your line is open.

George Tong: Hi. Thanks. Good afternoon. When you presented your fiscal 2023 guidance last quarter, you had assumed Scores revenue growth of 7% composed entirely of pricing increases and flat origination volumes. One quarter into fiscal 2023, does that assumption still hold on your end? Or are you seeing anything that could challenge those trends?

William Lansing: I think the assumption still holds. The future remains uncertain, but right now, the assumption holds. We think we’re right on track.

George Tong: Great. Switching to the software side. ARR year-over-year growth accelerated in fiscal 4Q from fiscal 3Q, and you mentioned in your prepared remarks that customer demand remains strong. Can you, overall, just elaborate on the overall spending environment for enterprise software? And if you’re seeing any second derivative slowdown in spend?

William Lansing: So as I mentioned, I think that because the platform software is so mission-critical, it’s a little bit less subject to our customers pulling in their budgets and pulling in their spend. So there’s no question that there is budget pressure out there. I mean everyone is under budget pressure. But the kinds of solutions we provide with the platform are such a perfect fit for the strategic needs of some of these customers that it’s something that just can’t wait. And so when the customers adopt a platform, it’s a transformation of their business really, and it’s not the kind of thing that’s easy to put off. The other thing I would say is we’re demonstrating incredibly rapid return on investment. And we have testimonials from customers with amazing returns, within year returns.

And that word is getting around. Our customers are finding out that this stuff pays for itself within a year. And as a result, we have not seen any slowdown in the spend on our platform business.

George Tong: Very helpful. Thank you.

Operator: Our next question is from Surinder Thind with Jefferies. Please go ahead. Your line is open.

Surinder Thind: Thank you. I’d like to start with a question on the Scores business. Can you provide any other additional color on kind of the licensing deals or the magnitude of that? When I kind of think about what volumes were, the B2B revenues came in a bit higher than I was anticipating. So any color on how licensing deals compare this year to last year in terms of the revenue impact?

William Lansing: I would say that the license deal that we referenced is kind of par for the course. We get these deals from time to time, renewal deals, sometimes they’re bigger renewal deals. They happen every year. We can’t really predict what quarter they happen in, and so we get a little bit of lumpiness there, and that’s what we’ve got here.

Surinder Thind: Got it. And then in terms of the B2C business. I think you mentioned that maybe you’re expecting some modestly lower revenues on a go-forward basis. Is the expectation just of sequential declines on a quarter-over-quarter basis throughout the year at this point? Or any color that you can help us provide on how to think about the amount of drag that perhaps there might be on a go-forward basis?

Steve Weber: Yes. Surinder, this is Steve. It’s relatively modest that we see right now. I mean, a piece of that business is, as you know, there is a partner side and then the myFICO side. The myFICO side has been challenged by the economic environment, right. In fact that people and I getting pay mortgages, if mortgages increase in the spring and breaking them down and that increase that our business will probably pick back up again. But it looks right now, we’re projecting it to be a little bit less than it is today, but we’re not expecting to be.