Greetings and welcome to the Fair Isaac Corporation Quarterly Earnings Call. As a reminder, this conference is being recorded, Thursday, April 27, 2023. I'd now like to turn the conference over to Steve Weber. Please go ahead.

Good afternoon and thank you for joining FICO's second 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 the 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 those 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 on 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 April 27, 2024. And now I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our second quarter earnings call. We have posted some slides in the Investor Relations section of our website that highlight the financial results from our second quarter. I am pleased to share that we continue to achieve strong results with record revenue and growth across our business. Today, I will discuss this quarter's results and our outlook for the remainder of the year. As shown in our presentation, we reported revenues of $380 million, reflecting a 6% increase from the same period last year. We achieved $102 million in GAAP net income and GAAP earnings of $4 per share. On a non-GAAP basis, net income was $121 million, with earnings per share of $4.78. In our Scores segment, we had a record quarter with $198 million in revenue, up 8% compared to the prior year. B2B revenues increased by 16%, primarily due to higher originations revenue. Mortgage originations revenues rose by 90%, while auto originations revenues were up by 13%. Revenues from credit card, personal loans, and other originations were up by 12%. Our B2C revenues continue to face challenging comparisons; although they were slightly up from last quarter, they decreased by 8% compared to the same period last year. In our Software division, our FICO platform leverages analytics and AI to support smarter business decisions at scale. We focus on enhancing client experiences by predicting, analyzing, and optimizing customer interactions in real-time, leading to better decisions that foster trust and loyalty through personalized experiences. The strong results we are achieving reflect the high demand for these solutions. Our overall ARR grew by 17%, with platform ARR increasing by 60%. This marks our 14th consecutive quarter of platform ARR growth exceeding 40%. Our customers are continuing to increase volumes and find new applications, as illustrated by our net retention rates. Overall, our net retention rate was 114%. Legacy platform net retention rate reached 105%, with volume increases among many customers. The platform net retention rate was a remarkable 146%, driven by the success of our land and expand strategy. We also observe strong demand for our Software, with ACV bookings up 16% year-over-year. We have a robust pipeline of opportunities as we assist our customers in making strategic, mission-critical decisions during their digital transformation journeys. Finally, I would like to briefly discuss our upcoming FICO World customer event next month. Attendees will explore how to create and deliver highly personalized customer experiences across all touchpoints. They will have the opportunity to schedule meetings with FICO's top experts to discuss innovative solutions and best practices for addressing business challenges. The event will feature presentations from leading financial service providers from North America, Latin America, Europe, and Asia Pacific. We will unveil new products, FICO score alternative data innovations, software capabilities on the FICO platform, and our main solutions for AI-driven decisions. Additionally, we will announce a new partnership and introduce other FICO solutions. We will provide more insights about the event next quarter and discuss how leading financial service providers are leveraging the FICO platform to develop innovative solutions for business challenges. I will have some final remarks, including an update on our guidance, shortly. But first, let me turn the call over to Steve for more financial details.

Thank you. As Will said, we delivered another very good quarter in both our Scores and Software segments. Total revenue for the second quarter was around $380 million, an increase of 6% over the prior year or 7% when adjusted for divestitures. In our Scores segment, revenues were $198 million, up 8% from the same period last year. B2B Scores revenues were up 16% 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 90% from the same quarter last year. Our originations revenues were up 13%. And credit card, personal loan and other originations revenues were up 12% over last year. B2C Scores revenues were down 8% from the same period last year, as Will explained, due to difficult comparisons. As a reminder, that was an area that experienced outsized growth during the refinancing boom and peak in our third quarter of fiscal '22 and was up about 1% this quarter versus the first quarter of fiscal '23. Software segment revenues in the second quarter were $182 million, up 5% from the same period last year, where we had a significant upfront license revenue quarter. Software revenues recognized over time were $136 million or 74% of total Software revenues. License revenues recognized upfront or at a point in time were $19 million this quarter and represented 11% of Software revenues. Our professional services revenues were $27 million, representing 15% of total Software revenues. In the second quarter, 84% of total company revenues were derived from our Americas region. Our EMEA region generated 11%, and the remaining 5% were from Asia Pacific. Our Software ARR in the second fiscal quarter of 2023 was $613 million, a 17% increase over the prior year quarter. Our platform ARR was $152 million, up 60% from last year and represented 25% of our total second quarter ARR compared with 18% last year. Our nonplatform ARR also grew nicely and was $461 million in the first quarter, up 7%. As a reminder, all of our ARR numbers have been adjusted for divestitures. Our dollar-based net retention rate in the quarter was 114% overall versus 109% last year. Our platform customers continue to show very strong net expansion from follow-on sales of new use cases and from increased usage. The net retention rate for the platform was 146% in the second quarter. Our nonplatform customers' software usage increased this quarter due to increased volumes and price increases. The nonplatform NRR was 105%. We had another good quarter of Software sales with annual contract value bookings of $23.3 million versus $20.2 million in the prior year, an increase of 16%. As a reminder, ACV bookings include only the annual value of Software sales, excluding professional services. Turning to expenses for the quarter. Our total operating expenses were $221 million this quarter versus $205 million in the prior year and $205 million in Q1. Much of the increase was due to salary increases, which took effect in December and expenses that occurred throughout the quarter. We also had approximately $10 million of nonrecurring expenses from a number of small items that were incurred this quarter. We will have some one-time expenses from our FICO World event in the third quarter, but we do expect a run rate in the back half of the year to increase slightly from the current levels. Our non-GAAP operating margin, as shown on our Reg G schedule, was 49% for the quarter, the same as our first quarter of FY '23. GAAP net income this quarter was $102 million, down 3% from the prior year quarter, where we again had a large upfront license deal. GAAP EPS of $4 was up 1% from the prior year. Our non-GAAP net income was $121 million for the quarter, down 2% versus the first quarter last year and non-GAAP EPS was $4.78, up 2% from the prior year. The effective tax rate for the quarter was 26%. We expect our full year 2023 recurring tax rate to be approximately 25% to 26%. The resulting net effective tax rate is estimated to be about 24% to 25%. Free cash flow for the quarter was $88 million for the trailing 12 months. Free cash flow was $439 million. At the end of the quarter, we had $167 million in cash and marketable investments. Our total debt at quarter end was $1.92 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 debt balances in future periods. Turning to return of capital. We bought back 170,000 shares in the second quarter at an average price of $684 per share. At the end of the quarter, we had $335 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 fiscal '23 and our revised full year guidance.

Thank you, Steve. As I said in my opening remarks, we continue to deliver strong results, and I have confidence in our team as we move forward. Our Scores business continues to deliver strong growth even in a volatile macro environment. As I've said in the past, our diversification through different credit verticals means we're less dependent on specific types of lending, which is very important in a rising rate environment. On the Software side, we continue to prove that the market demand for the FICO platform is strong and growing. We're delivering valuable technology to customers looking to use the latest analytics and AI technology to optimize their consumer interactions and revolutionize their businesses through digital transformation and, importantly, to do it at scale and with low latency. As always, we're focused on execution and remain committed to delivering value to our shareholders and visibility into our progress. Finally, today, we're raising our full year guidance as we enter the back half of our fiscal year. There's still a great deal of uncertainty in the markets we serve, but we have line of sight to much of our revenue and are confident that we can raise our guidance accordingly. We are raising our full year revenue guidance to $1.48 billion. We're also increasing our GAAP and non-GAAP net income guidance. GAAP net income is now expected to be $406 million. GAAP earnings per share is now expected to be $16.15. Non-GAAP net income is now expected to be $489 million. Non-GAAP EPS is $19.45. And with that, let's turn the call back to Steve for Q&A.

Thanks, Will. This concludes our prepared remarks, and we're ready now to take any questions you may have. Operator, please open the line.

And your first question comes from the line of Faiza Alwy with Deutsche Bank.

Wanted to talk about the updated revenue guidance of $1.48 billion. Can you walk us through sort of what's changed? Are there areas of the business where you're feeling more positive about versus are there areas where you've maybe changed your view around?

I think that it's not so much that things have changed, but with six months behind us, we have more confidence in our expectations. We tend to be conservative in our guidance, so we are officially stating that we feel comfortable with the direction things are headed. There are no real surprises, and nothing dramatically different.

Okay. Understood. Maybe just a follow-up on expenses. Steve, I know you mentioned something about $10 million of expenses that were more onetime in nature this quarter. Just walk us through sort of what your expectations are for the back half of the year again on expenses.

We had several factors contributing to this quarter's performance, some of which may continue throughout the year. We opted to allocate more for incentives than usual, which we typically reserve for the third quarter. Our sales events were successful, and we had additional adjustments that are normally distributed throughout the year, but we experienced more in this quarter. Looking ahead, we have FICO World in our third quarter, which will bring about certain expenses. We anticipate that expenses in the latter half of the year may align with those from the second quarter or even decrease in the fourth quarter, as there are no significant one-time events expected at that time. A lot of this is connected to our revenue, and while it appears there’s a substantial change, it’s not as significant as it seems because it's the result of several one-time occurrences occurring in this quarter.

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

Will, just a broad macro comment, especially since you're raising your guidance. Just a lot of your peers don't seem to be too worried about the incremental pressure from the bank failures and so forth, but I just wanted to see if you had any unique insight from what you're seeing and how you assess the risks here.

I wish I had unique insights to share with you. As you know, our revenues often lag behind the bureaus and are not a leading indicator. However, we have stabilized sequentially from last quarter to this quarter and appear to be moving upward slightly, which is a positive sign. That said, I wouldn't claim that we at FICO have any special insight into the future. Currently, we haven't felt any negative impacts and are not sensing any fallout.

Got it. Okay. That's helpful. And then just on the originations revenues, I think we all have a good sense from the bureaus on the mortgage volumes. But I was just hoping you could give us some color on what auto, card and personal loan debt from a volume perspective this quarter.

Yes. They were both up. Auto was up a little, not a lot, but it was up year-over-year and current results. We don't need all the details at the moment, but they were both up at least modestly.

Your next question comes from the line of Kyle Peterson with Needham.

Just wanted to touch on the software side of the business. The ARR, particularly in the platform side, looks really strong this quarter and acceleration at least in terms of the year-on-year growth rate compared to last quarter. I just want to see if you guys could dive into what drove that acceleration, especially kind of in an environment where I think there's a lot of speculation. The bank IT budgets could tighten just with all the ongoing volatility in the market.

It's a great question, Kyle. The environment for IT spending and software may be a bit softer, but that's not the case for us. The positive aspect is that our offerings, especially our platform, are crucial for our major customers. As a result, they are not facing the same level of cancellations and pressures as some other software products. In fact, we have noticed a slight shortening of our sales cycle. We are also seeing ongoing growth in existing platform sales, and we encounter less competition than one might expect. Most competition is from in-house solutions, as there aren’t many competitors offering products that match ours. Our platform is significantly more powerful and comprehensive in meeting customer needs, making it a less competitive environment and more of a strategic purchase. That's what we are observing, and we have not experienced any slowdown despite the overall software spending climate.

Got it. That's helpful. And then maybe just a follow-up on the software side of the business, particularly the talent side of things. I know historically, you guys have kind of been a bit supply constrained per se, kind of having a hard time selling seats in some key roles. Has it gotten any easier, given some of the labor market changes, call it, in the last six to eight months, particularly in white-collar tech per se? I just wanted to see if it's got a little easier and maybe a part of that contributing to higher expenses.

I would say that we have not faced any challenges in attracting talent to FICO, not in the past, not last year, and not this year, even during tight employment periods. Yes, there are some salary and cost pressures, but that's more reflective of last year than the current situation. We have had no issues at all with attracting or retaining talent. We offer our engineers and staff highly challenging roles, allowing them to work on critical industry issues, and they appreciate that. Aside from what Steve mentioned regarding salary and stock compensation and bonuses, I wouldn't say there is any significant pressure on our hiring.

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

I'd like to start with a question on the Scores B2C side of the business. It looked like revenues were sequentially flat quarter-over-quarter versus the declines that you've seen in the last couple of quarters. Any color there in terms of the dynamic? Does it look like things have stabilized at this point and then maybe in terms of the new additions versus the number of people that are rolling off? Any color there?

I think things have stabilized. It feels like they've stabilized. For myFICO, we've had some success with a free program. And I think for our partners, volumes are stabilizing. So I think that's kind of the general picture there.

Fair enough. And then in terms of just the dollar-based NRR, obviously, there was a material acceleration in the figure from 130% last quarter to 146% this quarter. That reverses the slowing trend that we had been seeing. Can you provide some additional color there? How much of that is sensitivity to FX? And then how much of that is just like the international business there?

Yes. Very little of it is attributable to currency fluctuations. You've got to remember, this is a fairly small number of customers. So a customer coming out and really expanding their use cases can have a pretty dramatic impact when they do that. So I mean you're going to have volatility in both that number and ARR number. But I mean we're seeing pretty much consistent growth with our customers. As they start to use it, they find additional use cases and they drive more volume. So we're really encouraged by that.

When I consider the new clients you've been adding to the platform or the new use cases, that growth has consistently been in the mid-teens range. This was the case last year and remains true this year, as well as throughout most of 2022. It seems there is minimal impact from macroeconomic factors. You mentioned that there might not be much sensitivity due to the platform's importance. Could you elaborate on the discussions you’re having with new clients regarding your quotes? What does the pipeline currently look like? Are the conversions we are observing now stemming from conversations a year ago, or how should we understand the current pipeline?

The pipeline is stronger than ever, and we're not relying on last year's leads. I believe the future looks just as promising as the present. Our discussions have become more strategic, as we're engaging with key decision-makers such as Chief Digital Officers, Digital Transformation Officers, C-suite executives, CIOs, and Chief Risk Officers. The nature of the conversation has elevated, and this trend is ongoing. One aspect that sets our sales approach apart is that we offer something unique that the industry is eager for. Companies want a comprehensive view of their customers to optimize every interaction by leveraging all the available data for smarter engagement. This is crucial for the industry, and leading banks and lenders are already advancing down this path, recognizing that we provide the right solution. Additionally, the return on investment is quick. Unlike past software sales that involved lengthy sales cycles and installations with payback periods stretching over two to three years, our offerings can yield returns in less than a year. It's straightforward to begin using our services without committing to a large-scale project. Clients can start with just a single portfolio and a few use cases, assess the results, and then scale up. This ease of initial adoption allows customers to trial our solutions, often leading to satisfied clients who then choose to expand their use. The combination of rapid ROI, strong customer referrals, and the strategic nature of our offerings are driving our progress.

Your next question comes from the line of George Tong with Goldman Sachs.

With fiscal 2Q now complete, you have visibility into the flow-through of your Scores special pricing increases. Can you discuss the traction of your special pricing increases? And how much of it is reflected in your updated guidance?

If you're asking whether there are any special pricing in addition to the guidance we provided, I would say yes, there is, but we don't quantify it. There's enough uncertainty that we'll understand what the special pricing is at the end of the year when the numbers are calculated. In short, there is some special pricing above the guidance we've shared today, but I wouldn't want to quantify it at this moment.

Yes. And George, you follow the point out if you realize we're conservative with the way we guide, and we don't want to put the final point on anything. So we can provide more context when we can, but this is pretty much consistent with what we've done in the past years.

And then aside from guidance, just in terms of what's the receptivity and what's the traction of your special pricing increases?

Well, we publish the new prices, and then they are implemented. If we were to experience any loss of customers due to the pricing, we would likely start to notice it now, but we certainly haven't observed anything like that.

Perfect. Very helpful. And then secondly, you mentioned auto and card volumes are up modestly. Can you describe what you're seeing with origination volumes from a trend perspective? How are they trending? I mean things getting better? Are they stable?

Yes. Card origination is probably trending down. I mean it's very hot at the end of last year. But it's probably trending down a little bit. But auto has bounced around a lot. It's been pretty stable throughout the last couple of years. But pricing, you're probably getting data from industry sources that you're not going to get from us.

Your next question comes from line of Ashish Sabadra with RBC Capital Markets.

Steve, maybe a quick clarification when you talked about the expense growth in the back half of the year. Is that increasing in the back half of the year? Is that excluding the $10 million onetime in the second quarter? Or doesn't include that?

On a run rate basis, we will likely remain close to the $10 million mark, which may be at the higher end of our expectations. The level of our expenses largely depends on whether our revenue exceeds our guidance. This is tied to some specific products. You can analyze our guidance to infer the expected expenses for the latter half of the year. Personnel costs increased by 6%, but this rise was not solely due to increases in payroll and headcount; it included adjustments for incentives in both the U.S. and other regions. There are also several one-time factors contributing to the $10 million figure. Therefore, there is significant variability in that number, and I don't want anyone to assume that our expenses are increasing dramatically.

That's very helpful color. Maybe just a quick question on the FHFA press release that came out on March 23. It mentioned that it currently estimates the buyer credit implementation could occur by the first quarter of 2024. I was just wondering if you had any thoughts on the implementation.

Your guess is as good as ours. It has always seemed like a somewhat aggressive timetable to us, but time will tell whether it happens on that timeline or later. However, one could envision it taking place within the announced timeframe.

Your next question comes from the line of Jeff Meuler with Baird.

So Software looks great. I look forward to seeing you at FICO World, I guess, next month. I do have another question on the guidance methodology. I just want to make sure I'm understanding it correctly. I think you said, Will, that you took a similar approach to prior years. There was another question, and it didn't sound like the environment is all that different from what you were expecting. But the magnitude of the increase this year was obviously quite a bit less, at least at the EPS line than some prior years, what you did during Q2. So I'm not understanding if, like, you're holding back more of the pricing benefit this year given uncertainty or if there's offsets in volumes, you mentioned card getting worse or just anything like that? Or is this a pretty full view of the calendar '23 special pricing impact similar to what you've incorporated in prior years with a little bit of conservatism?

Yes, I think it's probably more conservatism than we've had in the past because of so much uncertainty. I mean you go back a couple of years early, pulling guidance completely. So I mean there's a lot of uncertainty there. We have a fair amount now as well, but we're obviously dealing in a pretty volatile environment where a lot of our peers are funding their guidance. So we're trying to be as prudent as possible.

Got it. And then just can you comment on free cash flow? I get that it could be lumpy quarter-to-quarter. I think we have a couple quarters in a row now where it's a bit lower. So just what's going on there? Or any sense of when you'd expect that to normalize?

I think it'll probably normalize in the back half of the year. I think what happens is you see it both in our accounts receivable. So I think as our Score revenue jumps up, it hits the receivables, and that takes a while to flow through to cash. So a lot of that is fairly late in the quarter. So I think you'll probably see a lot more flow through next quarter. There's nothing changing in any of that. So I mean if you look at it over the entire period, you'll see a normalization.

And there are no further questions. I'll turn the call back to your presenters for closing remarks. Thank you.

All right. Thank you all for joining today, and we look forward to speaking with you again soon. Thank you. This ends the call.

And that does conclude the conference call for today. We thank you very much for your participation. You may now disconnect your lines.