Fair Isaac Corporation (NYSE:FICO) Q3 2023 Earnings Call Transcript

Fair Isaac Corporation (NYSE:FICO) Q3 2023 Earnings Call Transcript August 2, 2023

Fair Isaac Corporation misses on earnings expectations. Reported EPS is $3.59 EPS, expectations were $5.3.

Operator: Greetings, and welcome to the Fair Isaac Corporation Quarterly Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, August 2, 2023. I’d now like to turn the conference over to Steve Weber. Please go ahead.

Steven Weber: Good afternoon, and thank you for joining FICO’s third quarter earnings call. I’m Steve Weber, FICO’s 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 the 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.

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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 August 2, 2024. And with that, I’ll turn the call over to Will Lansing.

William Lansing: Thanks, Steve, and thank you, everyone, for joining us for our third quarter earnings call. On the Investor Relations section of our website, we posted slides that offer financial highlights for our third quarter. I am pleased to report we delivered another exceptional quarter with record revenue and profitability and strength throughout our business. Today, I’ll talk about this quarter’s results and our increased guidance for the full fiscal year. As you can see on Page 2 of the presentation, we reported record revenues of $399 million, an increase of 14% over the same period last year. We delivered $129 million of GAAP net income and GAAP earnings of $5.08 per share, growing 38% and 41%, respectively, over the prior year.

On a non-GAAP basis, net income was $143 million, with earnings per share of $5.66, representing year-over-year growth of 24% and 27%. We continue to deliver strong results throughout the business. Scores revenue was a record $202 million, up 13% in the quarter versus the prior year. As you can see on Page 6 of the presentation, B2B revenues were up 24%, driven primarily by increased originations revenues. Mortgage originations revenues were up 135% versus last year. Auto origination revenues were up 5%. Credit card, personal loan and other origination revenues were up 2%. On B2C, revenues were flat with last quarter and down 11% versus the same period last year. That was due to difficult comps. In our Software business, we continue to drive growth with FICO Platform, which provides the power of analytics and AI to enable smarter business decisions at scale.

You can see on Page 7, we delivered overall ARR growth of 20%, a significant milestone for us, and platform ARR growth of 53%. This represents our 15th straight quarter of platform ARR growth in excess of 40%. We continue to drive strong net retention rates as our customers continue to increase volumes and find new use cases. Overall NRR increased to 117%, as shown on Page 8. Legacy off-platform NRR was 109% as volumes grew in many of our customers. Platform NRR was 142% due to expanded use cases driven by 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, we had another quarter of double-digit growth, with ACV bookings up 13% over the same period last year. We continue to see a strong pipeline of opportunities and are seeing strong demand for FICO Platform.

We had first-hand confirmation of the critical nature of FICO Platform at our recent FICO World Conference. This is a 3-day event, and it attracted customers for more than 60 countries where they shared best practices, learned about the latest in AI and advanced analytic innovations and learned new approaches for digital transformation. We talked about how FICO Platform can design, build and deliver AI-powered hyper-personalized customer journeys across every touch point and with every interaction. Personally, I enjoyed the opportunity to meet our customers and hear from them how we’re working together to optimize their most difficult decisions. One customer said, “I knew the FICO Platform had potential to help transform our business from a decision-making perspective, but I’m now blown away by the scope of the platform and communications capabilities.” Another customer told us, “FICO doesn’t sell software, you sell intelligence.

That’s way more valuable.” And yet another customer simply said, “We either do this now or we fail forever.” I’m proud of our technological excellence and the team that supports our customers to transform their business. Finally, I’d like to say a few words about our partnership with Chelsea Football Club, where we’re working together to empower students, adults and communities across the U.S. with financial literacy tools and knowledge to make informed credit decisions that last a lifetime. We are hosting fundamental workshops in partnership with the U.S. Soccer Foundation to empower the younger generation with the essential credit knowledge to jump-start their credit journeys. Financial literacy correlates with better outcomes in education, but we know that the playing field is not always equal.

One in 5 U.S. teenagers lack basic financial literacy skills. Around 74% of teams aren’t confident in their financial knowledge. We’re working on tackling this financial education gap to get more young people in the game. In each of the 5 cities that Chelsea is playing this summer, we’re working with local partners to bring teenagers from traditionally underserved communities to these fundamentals, workshops that are held on or near game day. The students will have an opportunity to attend the Chelsea football game taking place in their city. For the wider community in these cities, FICO is also hosting Score a Better Future Credit Education events, which are free to the public and will provide local residents with knowledge and tools to gain better insight into their financial health and understanding of their FICO Scores.

We know that FICO Scores have allowed much more equitable access to credit, and we’re committed to helping educate consumers about processes to foster broader institution. I’ll have some final comments, including an increase in our guidance, in a few minutes. But first, let me turn the call back to Steve for further details.

Steven Weber: Thank you. As Will said, we delivered another very strong quarter in both our Scores and Software segments. Total revenues for the third quarter were $399 million, an increase of 14% over the prior year. In our Scores segment, revenues were $202 million, up 13% from the same period last year. B2B Scores revenues were up 24% over the prior year, driven by increased originations revenues. We drove revenue increases in mortgage, auto and credit card personal loan and other originations. This quarter, mortgage originations revenues were up 135% from the same quarter last year; auto originations revenues were up 5%; and credit card, personal loan and other origination revenues were up 2% over last year. B2B Scores revenues were down 11% from the same period last year, again, due to difficult comps.

B2C revenues have been relatively flat throughout FY ’23. Software segment revenues in the third quarter were $197 million, up 16% versus the same period last year. Software recognized over time were $147 million or 74% of total Software revenues. License revenues recognized upfront or at a point in time were $25 million this quarter and represented 13% of Software revenues. Our professional services revenues were $25 million, also representing 13% of total Software revenues. In the third quarter, 87% of total revenues were derived from our Americas region, our EMEA region generated 8%, and 5% were from Asia Pacific. Our software ARR in the third fiscal quarter of 2023 was $646 million, a 20% increase over the period the prior year. Our platform ARR was $164 million, up 53% from last year and represented 25% of our total third quarter ARR compared with 20% last year.

Our nonplatform ARR also grew very well and was $482 million in the third quarter, up 11%. And as a reminder, all of our ARR numbers have been adjusted for the divestitures we’ve made. Our dollar-based net retention rate in the quarter was 117% overall versus 109% last year. We continue to show very strong net expansion from our platform customers due to follow-on sales of new use cases and from increased usage. The DB NRR for platform was 142% in the third quarter. Our nonplatform customer software usage also increased this quarter due to increased volumes and CPI increases. The nonplatform NRR was 109%. We had another good quarter of software sales with ACV or annual contract value bookings of $21 million versus $19 million in the prior year, an increase of 13%.

And as a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Total operating expenses in the third quarter were $222 million this quarter versus $208 million in the prior year and $221 million in Q2. Third quarter expenses included our FICO World event in May and a onetime reimbursement of third-party data implementation costs that were previously incurred in the previous quarter. Our non-GAAP operating margin, as shown in our Regulation G schedule, was 53% for the year, a 400 basis point improvement over the previous year. GAAP net income this quarter was $129 million, up 38% from the prior year quarter and included a noncash reduction to income tax expense of $9.5 million associated with the valuation of our R&D tax credits.

GAAP EPS of $5.08 was up 41% from the prior year. Our non-GAAP net income was $143 million for the quarter, up 24% versus the same quarter last year. And the non-GAAP EPS was $5.66, up 27% from the prior year. The effective tax rate for the quarter was 18% and included the adjustment to the valuation of the R&D credit I mentioned earlier. We expect our Q4 recurring tax rate to be approximately 25% to 26%. That expected recurring tax rate is before any excess tax benefit or other discrete items. Free cash flow for the quarter was $122 million. For the trailing 12 months, free cash flow was $446 million. At the end of the quarter, we had $195 million in cash and marketable investments. Our total debt at the quarter end was $1.93 billion, with a weighted average interest rate of 5.1%.

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 130,000 shares in the third quarter at an average price of $753 per share. At the end of the quarter, we had $237 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 ’23 and an increase in our full year guidance.

William Lansing: Thanks, Steve. As we finish our fiscal 2023 year, I am extremely pleased with the progress we’ve made in advancing our strategic initiatives. And I’m bullish on both of the segments of our business. Our Scores business continues to deliver strong growth, and we’re dedicated to innovation to face industry challenges in the years to come. And our Software business, through FICO Platform, is enabling customers to use the latest analytics and AI technology to optimize their consumer interactions. Finally, today, we’re again raising our full year guidance as we enter the final quarter of our fiscal year. We are raising our full year revenue guidance to $1.5 billion. We are also increasing our GAAP and non-GAAP net income guidance.

GAAP net income is now expected to be $428 million. GAAP earnings per share is now expected to be $16.90. Non-GAAP net income is now expected to be $500 million. Non-GAAP EPS is expected to be $19.70. And I’ll now turn the call back to Steve, and we’ll take some Q&A.

Steven Weber: Thanks, Will. This does conclude our prepared remarks, and we are ready now to take your questions. Operator, please open the lines.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Manav Patnaik with Barclays.

Manav Patnaik: I was hoping, I guess, for my first question, if you would just help us walk through how you thought about the guidance changes. It looked like — I mean, obviously, you raised it, but it didn’t seem like it was the full extent of the beat. So just curious what you’re assuming for the last quarter and the variability quarter-to-quarter, I suppose.

Steven Weber: Yes. You know how we — Manav, of how we’re pretty conservative with the way we guide. And we don’t want to be in a situation where we feel like we have to close deals in the last week of the quarter to hit a number. So if we can get a better deal pushing into next year, we’re obviously willing to do that. So we’re pretty conservative, and we don’t go out and limit any of this. We typically don’t guide quarter-to-quarter. As you know, we typically guide full year, and we will update in the middle of the year. So it’s a big deal for us to raise guidance with 1 quarter to go, but we thought we pretty much had to. So you can take it how you want. But I mean, we are pretty conservative with where we guide.

Manav Patnaik: Okay. Fair enough. And then obviously the… .

Steven Weber: And I will say just one more thing, Manav.

Manav Patnaik: Sure.

Steven Weber: Manav, I will say that we did have some — a fair amount of onetime license revenue this quarter that we probably may or may not have in the fourth quarter. So we don’t want to count on that.

Manav Patnaik: Yes. Fair enough. Okay. And then just on the Scores business, I mean the mortgage origination numbers speak for your pricing efforts there. But can you just tell us where we are on card, auto and the other stuff, like in terms of the pricing strategy there?

Steven Weber: So I mean, they all had some pricing increases this year, probably more in line with CPI. In terms of volumes, mortgage is still down. We’re seeing the same decreases that the bureaus are reporting. Auto was relatively flat year-over-year. And card’s actually down a little bit. The originations this quarter are actually down a little bit. So we don’t go into a lot more detail now, but you can kind of back into what — we see the same things that the bureaus see in terms of volumes.

Operator: And your next question comes from the line of Faiza Alwy with Deutsche Bank.

Faiza Alwy: So I wanted to follow up first on the Software side of the business. You mentioned onetime licensing revenue. And maybe I missed that, but talk to us more about like what drove that? And I know you said you’re not counting on that for 4Q. But what were some of the drivers around that?

Steven Weber: We had some renewals. We had 1 fairly large renewal. If you look at our point-in-time revenue, it was $25 million this quarter. That’s a little bit more than we have been trending. So it’s not that sizable, but that’s a number that can have some variability from quarter-to-quarter. So I think it was $20 million a quarter before that. So those things happen when they happen, and we don’t want to be put in a position where we have to have them happen in specific quarters. So we’re cautious with where we guide. And that’s not much of our business anymore. It used to be 20-plus percent of our business, now it’s 10%. So actually, it’s less than 10%. So it’s a small part of the business, but it’s still a meaningful number when you’re looking at 1 quarter.

Faiza Alwy: Okay. Okay. And so my next question is generally around the Scores business. So with only 1 quarter left, we’re looking ahead to next year, and I know you’re sort of getting to the time where you start talking about pricing for next year. So curious how you’re thinking about that. There’s obviously a lot of changes that are supposed to happen in the mortgage space, in particular. So talk to us about any initial thoughts you might have around pricing.

William Lansing: It really is a little bit early for us to talk about pricing. We’re still thinking that through. But I think you can anticipate that there will be continued increases in price, where we think that the market warrants it, where the value we’re providing demands it. And in terms of significant changes to the structure of the market and the structure of our pricing, we don’t anticipate that.