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. As a reminder, this conference is being recorded today, Thursday, January 30, 2020. I would now like to turn the conference over to Steve Weber. Please, go ahead.

Thank you. Good afternoon, and thank you for joining FICO's first quarter earnings call. I'm Steve Weber, Vice President of Investor Relations; and I'm joined today by our CEO, Will Lansing; and our CFO, Mike McLaughlin. 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 those 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 30, 2021. And now, I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our first quarter earnings call. I'd say we're off to a good start, delivering growth across our portfolio and also delivering innovation. In our first quarter, we reported revenues of $299 million, an increase of 14% over the same period last year. We delivered $55 million of GAAP net income, up 37%; and GAAP earnings of $1.82, up 38%. On a non-GAAP basis, the $1.80 earnings per share was up 24% from last year. And we delivered free cash flow growth as well, up 27% from fiscal 2019. On the software side of our business, the innovation we're bringing to market is gaining traction among companies eager to use analytics-driven decisioning to solve their most difficult problems. At FICO World in November, we hosted more than 1,400 attendees, representing 600 companies from 62 countries. During the conference, our solution specialists held close to 1,100 consultations. We sat down with customers and potential customers to understand their business issues and explain and demonstrate how FICO's advanced analytics, digital decisioning, and dynamic workflows can transform their business. The innovation on display at FICO World continues to translate into robust sales in our software business. We had another good bookings quarter at $112 million. The $49 million of DMS bookings was the second largest quarter, after last quarter's $61 million, in FICO's history. That means we've booked about $110 million in DMS business in the last two quarters. I'm convinced we're developing software at the same time demand is emerging for analytic-based decisioning software. In our Scores business, we had another good quarter. Scores were up 34% in the quarter versus the prior year. On the B2B side, revenues were up 46% over the prior year. Our B2C revenues were up 11% versus the first quarter of 2019. We continue to see strength throughout the Scores marketplace. We also announced some innovations in our Scores business, the release of the FICO Score 10 Suite. The suite has two new scores. FICO Score 10 relies on credit bureau data and is consistent with previous FICO Score versions that are in the market today. It reflects a normal model development cadence, extending features that were introduced in FICO Score 8 and FICO Score 9. FICO Score 10 is designed to be backward-compatible with previous Score versions. FICO Score 10T incorporates a broader set of credit bureau data, including trended data, which captures unique aspects of the consumer's financial profile over time. While the blueprint design is similar, it uses new characteristics to enhance predictive power. Both FICO Score 10 and FICO Score 10T demonstrate greater predictive power over all previous versions of the FICO Score and were developed on recent data sets. By adopting the FICO Score 10 Suite, a lender can reduce the number of defaults in its portfolio by as much as 10% among newly originated bank cards, 9% among newly originated auto loans compared to using FICO Score 9. The reduction in default is even higher for newly originated mortgage loans at 17% compared to the version of the FICO Score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers. We believe this type of innovation, which we've developed with significant feedback from the lending community, will significantly increase performance and allow the industry to expand loans and revenue while not increasing losses. We will continue to update you on this and other score innovations that we'll announce in the coming months. I'll talk more about how we see the year playing out, but first, I'll turn the call over to Mike for further financial details.

Thanks, Will, and good afternoon, everyone. FICO's total revenue for the quarter was $299 million, an increase of 14% over the prior year. Breaking that down into our reported segments, our applications revenues were $152 million, up 3% from the same period last year. This increase in revenue was driven by higher professional services revenues as well as higher usage-based software revenues. Software applications bookings for the quarter were $56 million, down 6% from last year. In our Decision Management Software segment, Q1 revenues were $31 million, up 8% over the same period last year. This increase was primarily due to services and usage-based revenues in our Decision Management platform. DMS bookings were $49 million in Q1, up 56% from the previous year, which, as Will pointed out, is the second highest booking quarter in this segment's history at FICO. Finally, our Scores segment revenues were $115 million, up 34% from the same period last year. The B2B portion of our Scores segment was up 46% over the same period last year, and B2C revenues were up 11% from last year. We had strong volumes throughout the Scores vertical and also signed an annual licensing deal worth several million dollars that was all recognized in the first quarter due to the new ASC 606 accounting rules. In our first quarter, 76% of total revenues were derived from our Americas region. Our EMEA region generated 16%, and the remaining 8% was from Asia Pacific. Looking at our revenue by type for the quarter, recurring revenues derived from transactional and maintenance sources represented 74% of total revenues. Consulting and implementation revenues were 15% of total revenues, and software license revenues were 11% of the total. Revenues derived from our cloud-delivered software-as-a-service products were $74 million for the quarter, which included $57 million in transactional software revenues and $17 million in professional services, an increase of 16% from the previous year in total. Bookings for the quarter totaled $112 million, up 5% from last year. These bookings generated $16 million of current period revenue, a 14% yield. SaaS bookings were $37 million for the quarter, down 16% from the previous year. Our operating expenses totaled $247 million in this quarter, up $11 million from the prior quarter; due primarily to expenses associated with FICO World in November and increased personnel costs. We also incurred about $3 million in restructuring costs related to headcount reduction actions taken during the first quarter. Our non-GAAP operating margin, as shown in our Reg G schedule, was 27% for the quarter. GAAP net income this quarter was $55 million, up 37% from the prior year. Our non-GAAP net income was $54 million for the quarter, up 23% from the same quarter last year. As you will see from our non-GAAP reconciliation, we had a large reduction to income tax expense this quarter of $22 million or $0.73 per share associated with excess tax benefits, resulting from stock-based compensation activities. This left us with an effective tax rate of negative 31%. As we said last quarter, we expect our effective tax rate, inclusive of excess tax benefits, to be around 16% to 17% for the fiscal year. FICO's free cash flow for the quarter was $54 million compared to $42 million in the same period last year. Free cash flow for the trailing four quarters was $248 million. Turning to the balance sheet, at the end of the quarter, we had $111 million in cash. This is up $5 million from last quarter due to cash generated from operations, partially offset by $60 million in share repurchases. Our total debt face value today is at $930 million, including $95 million outstanding on our revolving line of credit. Our debt has a weighted average interest rate of 4.57%. During the quarter, we issued $350 million of callable notes, which will mature in 2028. The fixed rate on those new notes is 4%. Proceeds of the notes were used to repay a portion of the revolving credit facility. We anticipate drawing on the revolving credit facility to pay for the $85 million maturity of senior notes that is coming due in July. And turning to return of capital, we bought back 168,000 shares in the first quarter at an average price of $356 per share. Total cash used for buybacks, as I mentioned, in the quarter, was $60 million. At the end of the December quarter, we had about $160 million remaining on the board repurchase authorization. And finally, we are confirming our previously issued full year financial guidance for fiscal 2020. With that, I'll turn it back over to Will for his thoughts on FY 2020.

Thanks, Mike. As I said in my opening remarks, I believe we're well positioned for success as we move into 2020 and beyond. Our Scores business continues to excel, and we work hard to get feedback from lenders and regulators to make sure we provide analytics to protect the safety and soundness of lending decisions. On the software side, we're producing higher bookings and building a backlog of recurring transactional revenue. We continue to look for innovative ways to serve our customers and improve efficiency in our business. We do all of it with an eye toward building shareholder value. I'll now turn the call back over to Steve for Q&A.

Thanks, Will. This concludes our prepared remarks, and we will now take your questions. Operator, please open the lines.

Thank you very much. One moment please for our first question, and it comes from the line of Bill Warmington with Wells Fargo. Your line is open.

Good evening, everyone.

Hey, Bill.

So the first question I wanted to ask was about the strong license revenue on the Scores side of the business. You normally don't see a lot of license revenue in Scores, and just want to ask for some detail on that?

Bill, I wouldn't read too much into it. We did one larger deal and the way it was structured was as a license, and so we got a disproportionate pop there, but I would not read too much into that.

Okay. And then on the Scores business, you guys have talked about special price increases. We've seen a couple over the past two years in mortgage and in auto. Have you guys implemented a special price increase in January? And if so, maybe you could talk a little bit about it?

Yes, we have. And it's just gone into effect, and so we really haven't had an opportunity to read the results yet.

Okay. Are you feeling good about it so far?

Well, I always feel good about our business.

Is it perhaps in the credit card portion of the business?

Some credit card is affected, yes.

Okay. Okay. Switching over to the software part of the business. Today, all of your APIs are inward-facing, meaning that your internal developers are using those tools to build applications on the DMS platform. Is the plan to make those APIs available externally? And if so, what kind of time frame?

Bill, that is a great question. A lot of insight in that question. We very much plan to turn our APIs so that they're outward-facing, eventually. That's probably, realistically, an 18 to 24-month time frame before we can do that. The advantage of it, the strategy behind it is that we're taking our solutions, which are mostly financial services-oriented, and getting them onto the platforms that we have multi-tenant, standardized, highly configurable solutions with real returns to scale. When we can turn the APIs outward, a bunch of good things happen. First, we can enlist partners to do customization beyond the API so that it's not our job. It becomes that of VARs and resellers and others who help us to get that done. Second, we'll be able to move into verticals beyond financial services, where we don't have a salesforce but where there's an appetite. That's true for all B2C companies. Any B2C company that wants to get into data-driven decisioning and optimizing their consumer interactions, which tend to benefit from our platform. The outward-facing APIs will let them have vertical custom kinds of solutions based on our platform. But it's very much our strategy. Frankly, it's an inflection point for our software business when we achieve that.

And then I just wanted to ask a question on the SaaS bookings, on the $37 million, that those were down on a year-over-year basis. Is that CCS impact? Or is something else impacting that?

Bill, it's Mike. There's nothing particularly noteworthy in terms of where that shortfall is relative to typical bookings pattern. It's a reflection of the fact that bookings are relatively lumpy in our business and this is our seasonally slowest quarter in terms of bookings. As you know, it's typically kind of high teens to 20% of full year bookings that come in, in the first quarter. So if you combine a relatively lumpy business, i.e., lots of large deals with the smallest sample set being the lowest seasonal quarter, just the chances for an aberration that doesn't have sort of long-term statistical significance are high. And that's how you should think about this. We continue to feel good about how that business is growing in terms of external demand and booking pipeline. So I think it's just a one-off this quarter.

Yes. And then last question for me, if I could. The FICO 10 and the FICO 10T, your thoughts on when the GSEs are going to actually adopt those?

Boy, that's a little hard to say. We certainly expect these scores to be in the consideration set.

Our next question comes from the line of Manav Patnaik with Barclays. Your line is open.

Thank you, good evening guys. Just to follow-up on the Scores pricing, I know you said some card and you did something in January. But is the mortgage and auto pieces that you did in the prior two years, are those fully cycled through, or are there incremental opportunities still there?

I think you should think of them as being fully cycled through, to use your words. It's been in place for a while now.

Okay. On the B2C side, 11% is a solid result. Is it well diversified or does it reflect specific relationships? I would appreciate any additional insights on the trends you're observing.

Yes, it's broadly diversified. There isn't really a single reason that stands out, but it involves both our platform and the third-party relationships we maintain.

Got it. And then just, Mike, maybe on the margin front, hoping maybe if you could just help us with the moving pieces there like how much of it was maybe the FICO World impact to your point, timing and lumpiness in software, obviously, can be all over the place. How should we think about the progression through the course of the year?

Yes, we mentioned at the end of last quarter that 2020 would be a year focused on improving margins. In this quarter, we incurred a small restructuring charge due to headcount reduction, but the financial benefits from this won't be seen until the second quarter and later. However, we do anticipate those benefits will materialize. Additionally, we held FICO World this quarter, which also contributed to the restructuring expenses. If we exclude these factors, around 4% of our operational expense growth was attributable to them. Although our operational expenses are still growing at a double-digit rate, it's slower than our revenue growth. As the year progresses, we expect to achieve greater operating leverage, meaning the gap between revenue growth and expense growth should increase, but the impact hasn't yet been visible in the first quarter.

Okay. Got it. Thank you guys.

Our next question comes from Jeff Meuler with Baird. Your line is open.

Yeah. Thank you. Can you just remind me, it's the company's typical methodology to adjust the full year guidance as warranted past the second quarter for special pricing as a bit more time has passed. We shouldn't read anything into just maintaining this guidance in terms of the implementation of how the special pricing as the implementation is going on that front, correct?

We don't really have a schedule for adjusting guidance. The guidance that we give at any point in time is our best estimate of where we're going to be. And so the guidance that we have in place is what we believe to be the guidance.

Okay. And then can you just help me on the application, transaction and maintenance performance in the quarter? It was pretty muted growth, the lowest year-over-year it's been in a while. Just anything about end market transaction activity, timing factors, just any reason why there would be slower growth there?

I think the best way to think about it is it's by design. If you take a step back and you look at the transition that we're making from license on-premise software business, which was what we were historically and predominantly, to our future state of multi-tenant standardized configurable platform business, there's an in-between stage. The in-between stage, which is strategically impure but important competitively, is to provide our solutions in the cloud, even if they're single-tenant hosted. We're not willing to abandon our customers' needs for having some of those solutions in the cloud. What we do is we take that business even though it's lower margin business, because we think it's strategic. We want to keep competitors out and satisfy our customers. The balance we strike in our software business is that there is more business available in this in-between space than we care to do. So we basically meet the demand that we think is appropriate to satisfy our strategic customer needs without overdoing it. That's how we think about a lower revenue growth rate in the short term.

Got it. And then just last, you've had a competitor call out some, I guess, bookings delays in the U.K. just given the macro concerns, Brexit concerns. Just any comment on, if you're seeing something similar or how the U.K. is going for you? Thanks.

Not really. Our EMEA business, our U.K. business is fine.

And the next question comes from the line of Surinder Thind with Jefferies. Your line is open.

Good afternoon. I'd like to start a question about the FICO Score 10 Suite. Can you talk a little bit about the benefit of providing the FICO 10 Score versus the 10T in the sense that at face value, obviously, 10T comes across as a superior score, but then it sounds like FICO 10 was introduced for backwards compatibility? Is that the primary way that clients will be thinking about it? And how should we be thinking about the reason why it's important?

Yeah, I think that's a good characterization of the difference. The goal is always to have a more predictive score to help lenders make better decisions. We have a regular cadence of updating our scores every several years. FICO Score 10 is timely for the update from FICO 9. It is completely backward-compatible. So it's the same reason codes, and although the weighting of some of the factors is different, it can be used interchangeably in some sense with FICO 9. With FICO 10T, we're using different data sets, the trended data, and we've introduced some additional reason codes. What that does is it makes it not so backwards-compatible, but it does provide better predictiveness for certain kinds of things. So that's the right way to think about it is backward compatibility versus not.

Understood, from a client perspective, how much more effort would it take to transition to FICO 10T? I assume this will set the standard moving forward since there likely won't be another generation without a completely different set of FICO Scores. It seems important to maintain compatibility from 10T and beyond.

Every lender is different and what you see is different. Lenders have different adoption rates for new scores. We still have FICO 9 out there. We have FICO 8 and earlier scores that are still very much in use. It’s up to the lender to decide at what pace they want to change the scores that they use. For Fintechs and startups and brand-new customers, they tend to gravitate to the latest and greatest, which would be 10 and 10T.

That's helpful. Regarding the earlier discussion on software revenues, you mentioned that there is some natural volatility. This quarter, in particular, is typically the weakest of the year. Can you also provide some insight into the software margins for the year? Is the objective to maintain them roughly flat compared to last year, or how should we consider them in relation to the overall company margins?

I think flat is safe. We take it as we go here. We're now trying to focus on matching expenses and revenue growth, so that we don't have big changes in margin one way or the other. Maybe we'll do a little better than that or a little worse. That depends on how the factors in the year shake out.

Understood, and then one final follow-up question. I think one of the more anticipated product launches is going to be the new Falcon suite towards the end of the year. As you roll that product suite out, how should we think about the strategy around that? Is the idea to migrate as many existing users over to that platform? Or is it to let the natural client upgrade cycle run its course? Maybe target as many new users for that platform as possible? Any additional color would be helpful. Thank you.

I would say it's more of the latter. Our customers decide their rate and pace of upgrades. Our software tends to go in and stay in for quite a long time. It has a long shelf life. We're not pushing customers to migrate early or quickly. If they want to do it right away, great. If they want to take their time, that's also okay. Certainly, for new customers, we're going to be pushing them in the direction of our latest and greatest products.

And Mr. Weber, there are no further questions at present time. I'll turn the call back to yourself. Thank you.

Thank you. This concludes today's call. Thank you all for joining. Goodbye.

We thank you for your participation. And ask that you please disconnect your lines.