Fair Isaac Corp Q1 FY2024 Earnings Call

Greetings, and welcome to the Fair Isaac Corporation quarterly earnings call. As a reminder, this conference is being recorded on Thursday, January 25, 2024.

Good afternoon, and thank you for joining FICO's first quarter earnings call. I'm Dave Singleton, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing; and our CFO, Steve Weber. Today, we issued a press release that describes financial results compared to the prior year. And on this call, management will also discuss results in comparison with the prior quarter to facilitate an understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the Risk Factors and Forward-Looking Statements portion of such filings. Copies are available from the SEC, from the FICO website, or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and 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 January 25, 2025. Now I will turn the call over to our CEO, Will Lansing.

Thanks, Dave, and thank you, everyone, for joining us for our first quarter earnings call. In the Investor Relations section of our website, we posted some financial highlight slides that we'll be referencing during our talk today. I am so pleased to report that we had a great start to our fiscal year with double-digit growth in revenue, net income and EPS versus last year. It was a solid quarter, and we're well-positioned for our fiscal 2024. As shown on Page 2 of the first quarter financial highlights, we reported first quarter revenues of $382 million, up 11% over last year; we delivered $121 million of GAAP net income in the quarter, up 24%; and GAAP earnings of $4.80 per share, up 25% from the prior year. On a non-GAAP basis, quarter 1 net income was $121 million, with earnings of $4.81 per share, up 12% and 13%, respectively. We delivered free cash flow of $121 million in our first quarter, up 32% versus the prior year. We continue to return capital to our shareholders through buybacks. In quarter 1, we repurchased 78,000 shares at an average price of $915 per share. This month, we exhausted the remainder of the 2022 repurchase authorization, and we announced a new $500 million authorization this week. In our Scores segment, our first quarter revenues were $192 million, up 8% versus the prior year. On the B2B side, the current quarter revenues were up 12% versus the prior year. This is a strong result considering the impact of higher interest rates on loan origination volumes and also the Latin America license renewal that we had in Q1 of 2023. On the B2C side, the current quarter revenues were down 3% versus the prior year. First quarter mortgage originations revenues were up 188% versus the prior year. Auto originations were down 3%. Credit card, personal loan, and other originations revenues were down 5% versus the prior year. We continue to see traction with our latest score, FICO Score 10 T. This quarter, we announced that CrossCountry Mortgage, which is the nation's #3 retail mortgage lender, will use FICO 10 T to analyze its nonconforming loans. They are the first lender of originating loans to be issued in a mortgage-backed security based exclusively on the FICO Score 10 T. In our Software segment, we delivered $190 million in quarter 1 revenue, up 14% from last year. We continue to drive strong growth in ARR and NRR through our land-and-expand strategy, with expand driven by increased customer usage. As you can see on Page 7, total ARR was up 18% with platform ARR growing 43% and nonplatform ARR growing 11%. Total NRR for the quarter was 114%, with platform NRR at 136% and nonplatform NRR at 108%. We've expanded our FICO Platform reach both by geography and by customer type. In December, we launched FICO Platform with an event in India, and we've already had several early adopters looking to expand to multiple use cases. Our biggest opportunity near term continues to be in North America, where banks are focused on digital transformation and understand the value of the FICO Platform, where data-driven analytics allow hyper-personalized decisioning and consumer interactions on a real-time basis. Our innovation will be highlighted at this year's FICO World event, which will take place in San Diego in April. I'll have more on that later. But for now, let me turn the call over to Steve for further financial details.

Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another very good quarter with total revenue of $382 million, an increase of 11% over the prior year, or 12% when adjusted for last year's divestiture. Scores segment revenues for the quarter were $192 million, up 8% from Q1 of 2023. B2B revenues were up 12% driven by mortgage originations revenues. Our B2C revenues were down 3% versus the prior year due to declines in our myFICO business, partially offset by our licensed B2C business. Scores segment revenues in the first quarter were $190 million, up 14% versus Q1 of 2023 or 17% when adjusted for the divestiture. Our current quarter expenses are a 3% increase from the prior quarter. Our non-GAAP operating margin was 48% for the quarter. GAAP net income this quarter was $121 million, up 24% from the prior year's quarter. Free cash flow for the quarter was $121 million, a 32% increase on the previous year. At the end of the quarter, we had $197 million in cash and marketable investments. Our total debt at quarter end was $1.96 billion. We continue to view share repurchases as an attractive use of cash.

Thanks, Steve. I am excited about our traction as we continue to drive more innovation than ever. In the Scores business, our financial inclusion efforts continue as we launched a FICO Score aimed at helping Ukrainian refugees displaced through the war have access to credit. Additionally, we added our third historically Black college and university, Delaware State University, as part of our FICO Educational Analytics Challenge. In the Software business, we added 20 new enhancements to the FICO Platform and expanded our patent footprint to over 220 patents by adding 10 patents related to digital decisioning, fraud detection, machine learning, and responsible AI. And this innovation will be on display at FICO World 2024, where we will showcase how FICO truly supercharges our clients' digital transformations. We'll highlight successful clients and demonstrate the power of the FICO Platform.

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

Please open the lines.

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

Yes. I think it's not so much seasonal, more that deals move around. The pipeline is the strongest it has ever been and the most mature it's ever been. We're actually feeling really good about the pipeline. In terms of what to expect at FICO World, we'll highlight the latest innovations from FICO and have many customers sharing the value they're getting from the FICO Platform, creating a space for best practices to be shared.

Great. And then switching on the Scores side. I wonder if anything has changed as it relates to your volume expectations for 2024.

We're very comfortable with our guidance and see volumes roughly where we expected. I wouldn't say that we're caught in any way by a little uptick in rates. There's no question that we will benefit tremendously as volumes increase when rates come down, which we anticipate within the year and next year.

Can you talk a little bit about the pipeline of new clients? The pace at which new clients are bringing on ARR has been slowing for a number of quarters now. Could you provide any color on your ability to bring on new clients at this point?

We have not had any challenges bringing on new clients. As our penetration goes up, we will capture more of our target enterprise customer base, and more growth will come from existing customers. It takes time to onboard, which doesn't always show up instantly, but we continue to land new customers.

When we start with a new customer, the lead time is longer than for existing customers. But we still signed new deals with many new customers or new use cases with existing customers.

Can you walk us through how we should think about the expense spend in Software? Looks like it ticked up sequentially, maybe a little higher than we thought.

We're making investments for growth, particularly on the R&D side to add functionality and cybersecurity. You'll probably continue to see expenses trend up through the year as we bring more people on, but not dramatically.

We're comfortable with where the margins are, and our expenses are running in line with what we expect. Incremental revenue should fall through to the bottom line, but we do reevaluate whether we want to devote some portion of that to additional resources for more rapid development.

In terms of mix of revenue, it looks like there's a lower amount of professional services, which usually impacts expenses. How should we think about the relationship here?

The professional services piece is unique and is largely driven by internal resources. The costs don't go away even if they are not working on billable deals. We're downplaying this aspect generally.

Any update on the mortgage volume growth? Did you provide that for the first quarter of '24?

No, we typically don't break out the different components in terms of volumes. You can get those from third-party sources.

Could you clarify the growth in B2B Scores last quarter and the factors contributing to that slowdown?

The slowdown is primarily due to the Latin America license and lower mortgage volumes. Outside of originations, growth was slight but not significant.

Could you provide what percentage of your Scores revenue was mortgage in the quarter?

We didn't provide that information this quarter, so I don’t have that number readily available.

At this time, there are no more questions in the queue. I will now conclude the call. Thank you for your participation and ask that you please disconnect your lines.