Fair Isaac Corporation (NYSE:FICO) Q1 2024 Earnings Call Transcript

Fair Isaac Corporation (NYSE:FICO) Q1 2024 Earnings Call Transcript January 27, 2024

Fair Isaac Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode, afterwards we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this conference is being recorded, Thursday, January 25, 2024. It is now my pleasure to turn the conference over to David Singleton. Please go ahead.

Dave Singleton: Good afternoon, and thank you for joining FICO’s first quarter earnings call. I’m Dave Singleton, Vice President of Investor Relations, and I’m joined today by our CEO, Will Lansing; and our CFO, Steve Weber. Today, we issued a press release that describes financial results compared to the prior year. And on this call, management will also discuss results in comparison with the prior quarter to facilitate an understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the Company’s filings with the SEC, particularly in the Risk Factors and Forward-Looking Statements portion 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 the 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 Schedule G are available on the Investor Relations page of the Company’s website at fico.com or on the SEC’s website at sec.gov. And a replay of this webcast will be available through January 25, 2025. Now I’ll turn the call over to our CEO, Will Lansing.

Will Lansing: Thanks, Dave, and thank you everyone for joining us for our first-quarter earnings call. In the Investor Relations section of our website, we posted some financial highlights slides that we’ll be referencing during our talk today. I am so pleased to report that we had a great start to our fiscal year with double-digit growth in revenue, net income, and EPS versus last year. It was a solid quarter and we’re well-positioned for our fiscal 2024. And as shown on page two of the first quarter financial highlights, we reported first quarter revenues of $382 million, up 11% over last year. We delivered $121 million of GAAP net income in the quarter, up 24% and GAAP earnings of $4.80 per share, up 25% from the prior year.

On a non-GAAP basis, quarter one net income was $121 million, with earnings of $4.81 per share, up 12% and 13% respectively. We delivered free cash flow of $121 million in our first quarter, up 32% versus prior year. We continue to return capital to our shareholders through buybacks. In quarter one, we repurchased 78,000 shares at an average price of $915 per share. This month we exhausted the remainder of the 2022 repurchase authorization and we announced a new $500 million authorization this week. In our scores segment, as you can see from page six, our first quarter revenues were $192 million, up 8% versus the prior year. On the B2B side, the current quarter revenues were up 12% versus the prior year. This is a strong result considering the impact of higher interest rates on loan origination volumes and also the Latin America license renewal that we had in Q1 of 2023.

On the B2C side, the current quarter revenues were down 3% versus the prior year. First quarter mortgage origination revenues were up 188% versus the prior year. Auto originations were down 3%. Credit Card, Personal Loan, and Other Originations revenues were down 5% versus the prior year. We continue to see traction with our latest score FICO Score of 10T. So you’ll recall, last quarter we announced that Movement Mortgage was an early adopter of FICO 10T. This quarter, we announced the CrossCountry Mortgage, which is the nation’s number three retail mortgage lender will use FICO 10T to analyze these non-conforming loans. They are the first lender-originating loans to be issued in a mortgage-backed security based exclusively on the FICO Score of 10T.

These clients in addition to others have signed up to demonstrate to investors and rating agencies and other stakeholders, a real-world example of the improved predictive performance offered by FICO Score 10T. In our Software segment, we delivered $190 million in quarter one revenue, up 14% from last year. We continue to drive strong growth in ARR and NRR through our land and expand strategy, with expand driven by increased customer usage. As you can see on page seven, total ARR was up 18% with platform ARR growth growing 43%, and non-platform ARR growing 11%. Total NRR for the quarter shown on page eight was 114% with platform NRR at 136% and non-platform NRR at 125%. We do continue to see strong demand from our new customers. Our total ACV bookings for the quarter were $18 million, a good result after a particularly strong fourth quarter.

We continue to have a robust pipeline of opportunities, particularly with FICO Platform offerings. We’ve expanded our FICO Platform reach both by geography and by customer type. In December, we launched FICO Platform with an event in India and we’ve already had several early adopters looking to expand to multiple use cases. In the U.K., StepChange Debt Charity, a market leader will use the FICO Platform to provide individual outcomes to consumers seeking to become debt-free. Our biggest opportunity near-term continues to be in North America, where banks are focused on digital transformation and understand the value of FICO Platform, where data-driven analytics allow hyper-personalized decisioning and consumer interactions on a real-time basis.

We continue to innovate and bring new capabilities to the FICO Platform and work with new customers to demonstrate value and with existing customers to expand use cases. Our innovation will be highlighted at this year’s FICO World Event, which will take place in San Diego in April. I’ll add more on that later, but for now, let me turn the call over to Steve for further financial details.

Steve Weber: Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another very good quarter with total revenue of $382 million, an increase of 11% over the prior year or 12% when adjusted for last year’s divestiture. Scores segment revenues for the quarter were $192 million, up 8% from Q1 of 2023. B2B revenues were up 12% driven by mortgage origination revenues. Our growth would have been higher if not for the Latin American license revenue, which we’ll talk about in Q1 of 2023 that did not recur this year. Our B2C revenues were down 3% versus the prior year due to declines in our myFICO business, partially offset by our license B2C business. Scores segment revenues in the first quarter were $190 million, up 14% versus Q1 of 2023, or 17% when adjusted for the divestiture.

This quarter, 83% of total company revenues were derived from our Americas region, which is a combination of our North America and Latin American regions. Our EMEA region generated 10% of revenues and the Asia-Pacific region delivered 7%. Our total software ARR was $688 million, an 18% increase over the prior year. Platform ARR was $190 million, representing 28% of our total Q1 ’24 ARR, up from 23% of total Q1 ’23 ARR. Platform AAR grew 43% versus the prior year, while non-platform ARR grew 11% to $497 million this quarter. Our platform, land and expand strategy continues to be very successful. Our dollar-based net retention rate in the quarter was 114% versus 110% last year. Platform NRR was 136% versus 130% in the prior year. While our non-platform NRR was 108% versus 103% in the prior year.

Non-platform ARR growth was driven by customers increased usage and CPI price increases. Our software ACV bookings for the quarter were $18.3 million versus $21.5 million in the prior year. We view this as a successful sales quarter coming off a record quarter in our fourth quarter of ’23. Remember that ACV bookings include only the annual value of software sales and exclude professional services. Turning now to our expenses for the quarter, total operating expenses were $231 million this quarter versus $205 million in the prior year. Our current quarter expenses are a 3% increase from the prior quarter, which was $224 million. As we indicated last quarter, we maintain our focus on investment to accelerate development and distribution of the FICO Platform.

And as a reminder, our incremental investment is relatively modest and is already built into our guidance. Our non-GAAP operating margin as shown in our Reg G schedule was 48% for the quarter. GAAP net income this quarter was $121 million, up 24% from the prior year’s quarter. Adjusting for excess tax benefit and the prior year Siron divestiture, our year-over-year GAAP net income grew 14%. Our non-GAAP net income was $121 million for the quarter, up 12% from the prior year’s quarter. The effective tax rate for the quarter was 7% and included $24 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. In the prior year, the excess tax benefit was $10 million. We believe that our fiscal year 2024 net effective tax rate will be around 22%, while our recurring tax rate is expected to be around 26%.

Again, the recurring tax rate is before any excess tax benefit and other discrete items. Free cash flow for the quarter was $121 million, a 32% increase on the previous year. The trailing 12-month free cash flow was $494 million compared to $465 million in the prior year. At the end of the quarter, we had $197 million in cash in marketable investments. Our total debt at quarter end was $1.96 billion with a weighted average interest rate of 5.2%. Currently, 66% of our total debt is fixed rate. Our floating debt is pre-payable at any time and gives us the flexibility to use free cash flow to reduce outstanding floating debt balances in future periods. Turning to return of capital, we bought back 78,000 shares in the first quarter at an average price of $915 per share.

At the end of the quarter, we had $49 million remaining on the board authorization and as Will mentioned, we subsequently bought additional shares in January, exhausting the authorization, and this week we announced the new $500 million repurchase 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 final thoughts.

Will Lansing: Thanks, Steve. I am excited about our traction as we continue to drive more innovation than ever. In the Scores business, our financial inclusion efforts continue as we launched a FICO score aimed at helping Ukrainian refugees displaced through the war have access to credit. Additionally, we added our third historically black college and university, Delaware State University, as part of our FICO Educational Analytics Challenge. This is a program created to help promote diversity in data science, engineering, and technology. In the software business, we added 20 new enhancements to the FICO platform and expanded our patent footprint to over 220 patents by adding 10 patents related to digital decisioning, fraud detection, machine learning, and responsible AI.

And this innovation will be on display at FICO World 2024, where we will showcase how FICO truly supercharges our clients digital transformations. At this four-day event, which takes place in April, we’ll bring together industry professionals from around the world to connect, share best practices, and learn how FICO enables organizations to power customer connections at scale. We will highlight successful clients and demonstrate the power of the FICO platform, enabling companies to operationalize analytics, become more composable, and make better decisions at scale. With that, I’ll turn the call back to Dave and we’ll open up the Q&A session.

Dave Singleton: Thanks, Will. This concludes our prepared remarks and we’re now ready to take questions. Operator, please open the lines.

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Q&A Session

Operator: Thank you so much. [Operator Instructions] And our first question is from the line of Faiza Alwy from Deutsche Bank. Please go ahead.

Faiza Alwy: Yes. Hi, thank you. Good afternoon. So, I first wanted to ask about software. You touched on this a little bit, but give us a bit more color on the software pipeline? As you said, you do have FICO World coming up, so what are some of the new things that we should watch for? And as part of that, if you can address some seasonality in the business, because we had a bit of a step down in ARR, so talk a bit about what your expectations are for ARR as we move through the year? Is the step down more seasonal, or should we expect sort of more of a structural slowdown?

Will Lansing: Yeah, I think it’s not so much — well, just to take this in reverse order, not really a seasonal thing so much as it is. Deals move around and they move from quarter to quarter and I would say this quarter, some deals were pushed to next quarter. We don’t see that as a very big deal. I mean, not something that we’re focused on. The pipeline is the strongest it has ever been, and it’s also the most mature it’s ever been. So I would say in terms of the stages of the pipeline, we’re seeing more maturity within the pipeline than we have in years past. So we’re actually feeling really good about the pipeline. In terms of what to expect at FICO World? I think that you’ll have what we traditionally do, which is take you through the latest and greatest in innovation from FICO.

We are also going to see a lot of customers who are delighted to stand up in front of their peers and explain all the value that they’re getting out of the FICO Platform. So I think you’ll see just a lot of reference customers. And part of FICO World is not just a sales event for us. It’s really an event for our customers to help sell to one another because they wind up being our best references. And so it’s a place where best practices get passed around and there’s a lot of adoption of FICO technology there.

Faiza Alwy: Great. Thank you. And then just switching on the Scores side, I wonder if anything has changed as it relates to your volume expectations for 2024. There has been — since you last reported earnings and gave the guide, it seems like the overall environment might be trending a little bit better. There’s at least some more optimism. So I’m curious if anything was different as it relates to your expectations in the quarter itself and how you’re thinking about volumes going forward?

Will Lansing: So we’re very comfortable with our guidance and we continue to see volumes roughly where we expected, frankly. I’m not sure I agree with the view that there’s more optimism. I mean, rates have ticked up in mortgages recently. And so if anything, I guess I feel like the fall in rates might be slower than a lot of industry pundits had been forecasting. That said, as you know, FICO is always very conservative in our view about these things. And so I wouldn’t say that we’re caught in any way by a little uptick in rates or by slowness in rates coming down. There’s no question that we will benefit tremendously as volumes increase when rates come down, and we anticipate that within the year and within next year. But I would say right now, no change in our outlook.

Faiza Alwy: Great. Thank you so much.

Operator: And our next question is from the line of Surinder Thind with Jefferies. Please go ahead.

Surinder Thind: Thank you. So, Will, just another follow up question on the software business. Can you talk a little bit about, I guess, the pipeline when it comes to kind of new clients? When I do the math, it looks like the pace at which new clients are bringing on ARR has been slowing for a number of quarters now. Just any color on your ability to bring onboard new clients at this point?

Will Lansing: We have not had any challenges bringing on new clients. I mean, as our penetration goes up, we will have captured more and more of our target enterprise customer base and more and more of the growth will be from the expand part of the business, which is more use cases and more volume with existing customers. It does take some time to onboard, so it doesn’t always show up instantly. But I think what you’re going to see over time is a mix shift from land to expand. Although we’re not having any trouble landing, we continue to land new customers.

Steve Weber: Yeah, I would just say Surinder that, when we start over this really new, the lead time is longer on them than on an existing customer. So that’s why you’ll see some of that. But we still sign a lot of new deals with a lot of new customers, or at least different use cases with customers that are using some of our legacy products.

Surinder Thind: Got it. And then in terms of just the color around the margins in the software business at this point, when I kind of go through the numbers, sounds like you’ve built in all of what you kind of need for this year in terms of your guide. So does that mean that incremental revenues, should they show up, generally will drop to the bottom line or how should we think about things like that?

Will Lansing: Yeah, that’s a great question. I think in general that’s a fair statement. We’re pretty comfortable with where the margins are and our expenses are running in line with what we expect and what we forecast and what we planned for. And so what you said is largely right, incremental revenue should fall through to the bottom line. That said, as incremental revenue comes in, we do reevaluate whether we want to devote some portion of that to additional resource for more rapid development. So will 100% of it follow the bottom line? I don’t know. We’ll see.

Surinder Thind: Thank you.

Operator: And our next question is from the line of Manav Patnaik with Barclays. Please go ahead.

Manav Patnaik: Thank you. Good evening, gentlemen. Steve, maybe just to follow up on that, if you could help with the software kind of cadence around the operating expense. Looks like, it ticked up sequentially, maybe a little bit higher than we thought. But since everything’s running in line, can you just walk us through how we should think about the expense spend there?

Steve Weber: Yeah, so, I mean, we talked about that a little bit last quarter, that we’re making some investments. There’s a lot of growth here and we think there’s a lot more room for growth. And we’re doing some investment on the R&D side to add more functionality, and we’re doing some investment on cybersecurity as well. So there is some investment coming in there. There’s a lot of different moving parts this quarter because we had the end of the year bonuses that happened too. So that rolls in here as well. So you’ll probably continue to see the expenses trend up through the year as we bring more people on. We have about 100 more people today than we had a year ago, right? So we’re investing, like we said, in those specific areas, but you’ll see the expenses throughout the year trend up, but not really all that dramatically.