Greetings and welcome to the Fair Isaac Corporation Quarterly Earnings Call. As a reminder, this conference is being recorded, Wednesday, November 8, 2023. I'd now like to turn the conference over to Dave Singleton, Vice President, Investor Relations. Please go ahead.

Good afternoon and thank you for joining FICO's fourth 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. On this call, management will also discuss results in comparison with the prior quarter to facilitate an understanding of the run rate of our 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. A replay of this webcast will be available through November 8, 2024. Now I'll turn the call over to our CEO, Will Lansing.

Thanks, Dave. Thank you, everyone, for joining us for our fourth quarter earnings call. In the Investor Relations section of our website, we've posted some slides that we'll be referencing during our presentation today. I am pleased to report we had a strong quarter, which completed another outstanding year with record annual revenues and record earnings, meeting the guidance that we raised last quarter. Page 2 shows financial highlights from our fourth quarter. We reported fourth quarter revenues of $390 million, up 12% over the prior year; and $1.514 billion of revenue for the fiscal year, up 10% versus the prior year. We delivered $101 million of GAAP net income in the quarter and GAAP earnings of $4.01. For the full fiscal year, we delivered $429 million in GAAP net income, which equates to $16.93 of earnings per share. On a non-GAAP basis, Q4 net income was $127 million with earnings of $5.01 per share. Full year non-GAAP net income was $500 million, up 10% over last year with $19.71 of non-GAAP earnings per share, which is up 14% versus the prior year. We continue to deliver strong free cash flow with a record $163 million in our fourth quarter. For the full year, we delivered $465 million of free cash flow. We continue to return capital to our shareholders through buybacks. In fiscal 2023, we repurchased 615,000 shares at an average price of $659 per share. In our scores segment, as you can see from Page 6, our fourth quarter revenues were $196 million, up 12% versus the prior year. For the full year, our revenues were $774 million, up 10% versus last year. On the B2B side, the current quarter revenues were up 21% versus the prior year and up 18% for the full year. This is a strong result, considering the impact of rising interest rates on loan origination volumes. On the B2C side, the current quarter revenues were down 6% versus the prior year and down 8% for the full year due to difficult comps. Fourth quarter mortgage origination revenues were up 147% versus the prior year and accounted for 24% of our scores revenues and 12% of our total company revenues. Auto origination revenues were up 2%, while credit card and personal loan origination revenues were down 2% versus the prior year. We continue to innovate in scores. We're happy to see traction with our latest score, FICO Score 10 T. This quarter, we announced that Movement Mortgage, a top 10 retail mortgage lender, has become an early adopter of FICO Score 10 T. They're using it to analyze their nonconforming loans in conjunction with the classic FICO Scores. As a first-in-market user of FICO Score 10 T, Movement Mortgage will work with FICO to share early-use insights for nonconforming products to help the mortgage industry understand the benefits of the most predictive credit score in the space. Movement Mortgage's use of FICO Score 10 T will provide opportunities to evaluate risk more efficiently in credit positioning. The improvements in the predictive power of FICO Score 10 T can help lenders avoid unexpected credit risk and better control default rates while making more competitive credit offers to more consumers. A more predictive score will help project cash flows with more precision, potentially increasing the value of securitized assets on the secondary market. In our software segment, we delivered $194 million in Q4 revenue, up 11% from last year. We delivered $740 million in fiscal year revenue, up 10% 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 shown on Page 7, total ARR was up 22% with platform ARR growing 53% and non-platform ARR growing 14%. Total NRR for the quarter shown on Page 8 was 120% with platform NRR at 145% and non-platform NRR at 111%. We continue to see strong demand from new customers. Our total ACV bookings for the year were $94 million, up 10% year-over-year. There continues to be strong demand for our FICO Platform. We've built a strong pipeline of prospects interested in using this advanced decisioning technology to optimize interactions with our consumer customers. And we continue to be recognized for our technology. Chartis ranked FICO #1 for innovation and risk management technology for the seventh consecutive year, and we're in the top 5 as a risk and compliance technology provider for the second year in a row. Forrester identified FICO as a leader in AI decisioning platform, and Juniper Resources awarded FICO Platform the Future Digital Award for Banking Innovation of the Year. I'll highlight the fiscal year 2024 guidance in just a few minutes. But first, let me turn the call back to Steve for further financial details.

Thanks, Will, and good afternoon, everyone. We had another outstanding fiscal year, and we are excited about our momentum as we head into fiscal 2024. As Will mentioned, total revenue for the quarter was $390 million, an increase of 12% over the prior year. Full year revenue of $1.514 billion was up 10% over last year. Scores revenues for the quarter were $196 million, up 12% from Q4 of 2022. B2B revenues were up 21% driven by mortgage originations as other areas within B2B were relatively flat to the prior year. Our B2C revenues were down 6% versus the prior year due to primarily our myFICO.com business, where our B2C partner business was relatively flat compared to the prior year. For the full year, scores revenues were $774 million, up 10% from the prior year, despite sizable headwinds in the mortgage origination market. Software segment revenues in the fourth quarter were $194 million, up 11% versus Q4 of 2022, with full year software revenues of $740 million, up 10% from the previous year. This quarter, 85% of total revenues were derived from our Americas region, which is a combination of our North America and Latin American regions. Our EMEA region generated 9% and the Asia Pacific region delivered 6%. Our total software ARR was $669 million, a 22% increase over the prior year. Platform ARR was $173 million, representing 26% of our Q4 ARR, up from 21% in Q4 of 2022. Platform ARR grew 53% versus the prior year, while non-platform ARR grew 14% and ended the year at $496 million. Our customers continue to show very strong net expansion from land-and-expand follow-on sales and increased usage. Our dollar-based net retention rate in the quarter was 120% for the total software business. Platform NRR was 145% versus 129% in the prior year, while our non-platform NRR was 111% versus 101% in the prior year. Non-platform was driven by customers' increased usage and some CPI increases. Our software ACV bookings for the quarter were $28 million versus $29 million in the prior year. And as a reminder, Q4 of 2022 contained one very large deal. ACV bookings increased 10% for the full year to $94 million versus $85 million in the prior year. And as a reminder, 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 $224 million this quarter versus $215 million in the prior year, an increase of 4%. For the full year, our expenses were $871 million versus $835 million in the prior year, also an increase of 4%. In fiscal 2024, we maintain our focus on efficiencies and are committed to prioritizing resources to our most strategic initiatives. In the next year, we'll be focused on investment to accelerate development and distribution of FICO Platform. We also plan to invest in cyber securities to continue to remain a top standard for both the protection of our clients and the FICO assets. The incremental investment is relatively modest and built into our guidance. Our non-GAAP operating margin, as shown in our Reg G schedule, was 51% both for the quarter and the full year. We delivered non-GAAP margin expansion of 300 basis points for the full fiscal year. GAAP net income this quarter was $101 million, up 12% from the prior year quarter. Our non-GAAP net income was $227 million for the quarter, up 30% from the prior year quarter. For the full year, GAAP net income was $429 million, up 15% from last year. And non-GAAP net income for the current year was $500 million, up 10% from last year. The effective tax rate for the full year was 22%, including $13 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards, and $9 million reduction associated with the valuation of our R&D tax credits. We expect our fiscal 2024 effective tax rate to remain around 22%, while our recurring tax rate is expected to be around 26%. Again, the recurring tax rate is before any excess tax benefits and other discrete items. Free cash flow for the quarter was a record breaking $163 million. For the full year, the free cash flow was $465 million. At the end of the quarter, we had $170 million in cash and marketable investments. Our total debt at quarter end was $1.86 billion with a weighted average interest rate of 5.1%. Currently, about 70% 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. As Will said, we bought back 136,000 shares in the fourth quarter at an average price of $859 per share. In fiscal 2023, we repurchased 615,000 shares at an average price of $659 per share for a total of $406 million. At the end of the quarter, we had $121 million remaining on the current Board authorization, and we continue to view share repurchases as an attractive use of cash.

Thanks, Steve. As we enter fiscal 2024, I remain excited about our future. Both our software and scores businesses are best in class, and our continued investment will accelerate our competitive advantage. We continually look for ways to build our brand and expand our outreach. Last quarter, I talked about our financial literacy efforts. Today, I'd like to discuss the launch of the FICO Educational Analytics Challenge. This program, which we've created for students at historically black colleges and universities, features remote mentoring from FICO data scientists and in-person lectures by FICO's Chief Analytics Officer, Dr. Scott Zoldi. The FICO Educational Analytics Challenge is a program created to help promote diversity in data science, engineering and technology. Today, we announced the departure of Stephanie Covert, who has led our software business. Stephanie was instrumental in driving FICO software growth and platform transformation, and we wish her well in her future endeavors. Before we open for questions, I'll review our fiscal '24 guidance. While we don't break out our segments, we do expect growth in both our scores and software segments. As with prior years, we expect the pricing initiatives in fiscal '24 to have an additional impact beyond our guided numbers. And because of uncertainty in volumes, it's difficult to estimate the timing and magnitude of that impact. Our fiscal 2023 bookings, strong pipeline, recurring revenues and diversified product portfolio give us considerable visibility into fiscal 2024. So today, we're guiding double-digit growth for both revenue and earnings, as shown on Page 13 of the presentation. We're guiding revenues of about $1.675 billion, an 11% increase versus last year. We are guiding GAAP net income of approximately $490 million, an increase of 14%; GAAP EPS of approximately $19.45, an increase of 15%; non-GAAP net income of about $566 million, an increase of 13%; and non-GAAP earnings per share of about $22.45, an increase of 14%. With that, I'll turn the call back to Dave, and we'll take some questions.

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

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

I would like more details on the expected revenues and earnings per share for 2024. You mentioned that origination volumes have been slower and there appears to be some tightening. However, it seems you are optimistic about growth in the scores business. Additionally, it looks like you are implementing some incremental pricing in the mortgage sector. Can you provide more insight into how you are considering these factors of volume and pricing across the different verticals?

So what our forecast reflects is lower volumes than last year, so a decline versus last year, and roughly flat volumes from the level we're at today. That's how we think about the volume side. And as you know, we take price action for CPI, and sometimes in excess of CPI, every year. And so this year is no different.

Okay. Understood. And then I'm curious on the expense side. Steve, I think you made some mention around moderate increase in expenses. Give us an idea of how we should think about expense growth in 2024.

Yes, it is quite modest. When you develop your model, you’ll notice some added expenses, but not significantly. A lot of it is about reprioritization. We are focusing on investing in software. We are allocating substantial funds to the platform as we have in the past and also investing in security to ensure maximum safety. So overall, it remains relatively modest. However, we are indeed increasing our investments compared to what we've observed in the past few years.

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

You typically set your rate card in your scores business in the beginning of September. After your scores prices were set, did you notice a negative inflection in credit volumes in September and October, particularly among sub-prime consumers? And if you did, do you believe your scores pricing increases next year are as high as they need to be to sustain your growth momentum?

Yes. I mean that's a good question, George. The volatility on the card side can be pretty dramatic and it could be pretty short-lived. So I mean nothing surprised us beyond what we saw coming, right? The sub-prime has been trending down for quite a while. So there's nothing that happened in September that kind of caught us by surprise. So we're satisfied that we have the right rate card in place.

Great. That's good to hear. And then secondly, software ARR growth accelerated to 22% in the quarter from 20% in the prior quarter. Can you elaborate on your overall software platform strategy and the traction that you're seeing with clients?

Yes. The software strategy is progressing as anticipated. We continue to engage with enterprise platform customers. We now have 55 of the top 300 financial services customers globally using our platform, specifically 55 enterprise customers who are utilizing multiple use cases. If we consider how many have adopted the platform overall, that number exceeds 100. Thus, we have a solid presence in the market. As I have mentioned before, we anticipate that the expansion aspect of our strategy will be significantly larger than the initial acquisition. We establish the business and then our clients discover various new ways to leverage the platform. Typically, the revenue from expansion surpasses the revenue from the initial acquisition, and this trend has persisted. This is a key factor in our ongoing success.

And your next question comes from the line of Ashish Sabadra with RBC Capital Markets.

Just wanted to follow up on that point on the non-platform business. We've seen some pretty robust acceleration there compared to historical levels. There was a call-out on increased usage as well as CPI base pricing. On the usage front, I was wondering if you could provide any incremental color. Is there more modules that are adopted, more feature functionality? And how do we think about this sustainability of this accelerated growth in the non-platform side?

I would say that most of that is from transaction volume growth. We do invest in features and functionality in our historical products and our legacy products. And so it is all about keeping them up-to-date and useful to our customers. Again, as we've discussed in the past, many of these solutions go into a customer of lending institution. And they might go in for a 3-year term initially, but they're typically renewed again at the 3-year mark and again at the next 3-year mark. And we can have these solutions operating for 12 years or more. And so it's incumbent on us to maintain the features and functionality, make sure the security is good and the functionalities that our customers want. We do all that. So we're pretty proud of our classic products. But I would say that the increase that you're seeing is largely just volume-related.

That's very helpful color. And maybe just switching to the special pricing for scores for next year. Our understanding was that mortgage fees were different for Tier 1, Tier 2 and Tier 3 institutions. And there's a potential for the Tier 1, Tier 2 to start paying the same cycle fees as Tier 3 for fiscal year '24. Is that assumption appropriate? I was wondering if you can comment on that.

Yes. We really don't go into the detail around the pricing within the segment. We have studied it, and I think that the price increases that we put into the segment are what are fair and appropriate for the market. We're pretty comfortable we've done the right thing, but we don't go into a lot of detail on that.

Your next question comes from the line of Seth Weber with Wells Fargo Securities.

For the last several quarters, you've mentioned a shortening of the sales cycle. I'm curious if you're still observing that trend and if you could provide some insight into the differences between the U.S. and international markets.

We are seeing shortening. I mean the sales cycle a year ago was over a year long. And today, it's 2/3 of that. We're very happy with that progress. There's a lot of reasons for it, but it's kind of the cumulative effect of us moving out the process and scaling up, and things are going faster. I'd also say that the demand is really hot for our offering. The customers are really interested and they're in a hurry to get it going. And it's pretty easy for us to get it up and live. So all those things have contributed to a shorter sales process. And I would say that's true overseas as well as in the U.S.

Okay. Going back to the expenses for a moment, the software expenses for the fourth quarter were a bit higher than we anticipated. Does this already account for the new investments you mentioned, or will these investments be additional to the fourth quarter run rate?

Yes, it may be somewhat incremental. We have some one-time expenses, particularly related to incentives in the fourth quarter that are increasing. Many of our employees are in software, which will result in slightly higher expenses. However, our run rate is not expected to increase significantly from our exit rate at the end of the fourth quarter.

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

Can you give us any sense of what you included in the guidance versus what you held back around pricing? For instance, last year, I think you talked about the original guide had the CPI-like pricing increases, but it didn't have the specialty increases. Just any way to help us kind of like understand what's assumed versus what could still be on the come?

Yes. Jeff, I know you'd love for us to put a number on it. And you know us, we never do. And so it's not going to happen today either. The way we think about it is we look at the volumes, we make our forecast built around the volumes. We put on a CPI increase, and then we put what some people call special pricing, but we have some additional increases beyond CPI. And then because the timing of those is uncertain, we leave some of that out of the guidance. So call our guidance conservative. It's designed to reflect the fact that we just don't know how quickly the full-price effect will be ramped into our numbers. And so I hesitate to put any kind of a number on it for you. Is it safe to think about it the way we have in years past? Yes. So think about it the way we do it every year. We haven't changed our methodology.

No, I would say the only change is that there's probably more volatility in terms of volumes than in the past. So I mean, if you could tell me what the interest rate is going to be in 6 or 9 months, I could give you a better idea. But I don't think anybody knows that.

That's right. Okay. And then I guess I was surprised to see the departure of Stephanie just given how well software has been doing for a while now. Can you just comment on just any, I guess, reasoning why there's a change now, when you expect to have a new leader announced, if they're likely to come as an internal promotion, external? Just any perspective on that would be helpful.

Yes, Stephanie has done an excellent job with us and contributed significantly to FICO and especially to the software business. She has chosen to explore other professional opportunities, and we wish her the best in that. FICO produces a lot of talent, and Stephanie is not the first person to leave us. We have a very strong team, and I am confident that our software business will continue to operate smoothly. I will take over the leadership of the software business directly, as I did prior to Stephanie's leadership. I feel quite comfortable with that. There is a possibility that we may have another leader besides me in the future, but that is not the plan at the moment. For now, I will manage it, and we'll see how things develop.

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

Will, just on the software side, I mean, a lot of good numbers this quarter. You talked a lot about the visibility going into next year. So maybe just help us in terms of the '24 guidance. How should we think about the components of the software growth in there?

The software business is experiencing robust double-digit growth similar to the scores business. It remains strong, and we have not seen any deceleration in our platform growth rates, which have been extremely high. While we understand that growth cannot continue indefinitely, we expect this momentum to persist for a considerable period. There is substantial demand, and our pipeline this year is even stronger than last year. Therefore, we are very optimistic.

Manav, the business has evolved significantly from when we relied on term licenses. Now, a substantial portion of our revenue is visible because these deals are already signed; we are just in the implementation phase. We anticipate increasing recurring revenue in the upcoming quarters. We have a clear view of that. Additionally, many team members are working closely with customers to enhance their usage, reducing our reliance on securing deals by the end of the quarter to bring in revenue.

Got it. Steve, can you discuss the assumptions behind the EPS guidance, specifically regarding share count? I don't think you considered additional buybacks, interest expense, or other factors that could vary from year to year.

Yes. I mean the share count, it's anybody's guess. So we kind of try to leave that relatively flat because that's just kind of upside for us. The interest expense, we've actually done a pretty good job of paying down a little bit of debt on the revolver, so we're saving a little bit there. We don't have any big plans to really pay that down. We'll probably be maintaining that debt or depending on how the market works, we're sometimes opportunistic if there's a market downturn. So we're basically planning on that to be relatively flat, but we'll react as we always do, depending on what the market conditions look like.

And there are no further questions. I'll turn the call back to Dave Singleton for closing remarks. Thank you very much.

Thanks, everyone, for attending the call, and a great year.

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