Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2024 FICO Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Singleton. Please go ahead.

Good afternoon, and thank you for attending FICO's third 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 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 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. And a replay of this webcast will be available through July 31, 2025. Now I will turn the call over to our CEO, Will Lansing.

Thanks, Dave, and thank you, everyone, for joining us for our third quarter earnings call. In the Investor Relations section of our website, we posted some financial highlights slides that we will be referencing during our presentation. Today, I'll talk about this quarter's results and our increased guidance for the full fiscal year. We continue to deliver strong quarterly results, including impressive growth in our ACV bookings and free cash flow. As shown on Page 2 of the third quarter financial highlights, we reported Q3 revenues of $448 million, up 12% over the last year. We delivered $126 million of GAAP net income in the quarter, down 2% and GAAP earnings of $5.05 per share, down 1% from the prior year. On a non-GAAP basis, Q3 net income was $156 million with earnings of $6.25 per share, up 9% and 10%, respectively. We had a difficult comp in year-over-year net income as Q3 of 2023 included an $8.5 million one-time reimbursement of third-party data implementation costs as well as a $9.5 million reduction in income tax expense associated with the valuation of our R&D credits. We delivered record free cash flow of $206 million in our third quarter and $551 million over the last four quarters. We continue to return capital to our shareholders through buybacks. In Q3, we repurchased 196,000 shares at an average price of $1,293 per share, and we announced a new Board authorization for $1 billion of share repurchase. In our Scores segment on Page 6 of the presentation, our third quarter revenues were $241 million, up 20% versus the prior year. Breaking that down, in B2B, current quarter revenues were up 27% versus the prior year. In B2C, the current quarter revenues were down 2% versus the prior year. Third quarter mortgage originations revenues were up 80% versus the prior year. Mortgage origination revenue accounted for 49% of B2B revenue and 39% of total Scores revenue. Auto originations revenues were down 3%, while credit card, personal loan and other originations revenues were down 7% versus the prior year. We continue to drive strong adoption for FICO Score 10-T for non-GSE mortgages. Based on 2023 firm reported data, clients with over $126 billion in annualized mortgage originations and about $380 billion in eligible mortgage portfolio servicing have signed up for the FICO Score 10-T. Firms are using FICO 10-T to make credit decisions, delivered to investors and for securitization. FICO 10-T for conforming mortgages will be rolled out based on the timeline of the FHFA's implementation of enterprise credit score requirements. In our Software segment, we delivered $206 million in Q3 revenue, up 5% from last year, driven mainly by growth in SaaS software, partially offset by a decline in professional services. 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 10%, with platform ARR growing 31% and non-platform ARR growing 3%. Total NRR for the quarter was 108%, with platform NRR at 124% and non-platform NRR at 101%. Our total ACV bookings for the quarter were an impressive $27.5 million. We continue to drive more FICO platform SaaS bookings, which aligns with our strategy. We expect this trend to continue as our recent FICO World event has been a catalyst for driving pipeline growth, especially for the FICO platform. I'm very proud of the strength of our software business, both the industry-leading technology as well as our remarkable team. This quarter, we secured another award for our FICO platform, the business intelligence platform of the year from Data Breakthrough. In July, Nikhil Behl was promoted to EVP for software, leading all technology and go-to-market functions. Nikhil has been instrumental in strengthening our brand value, reputation with customers and regulators, strategic competitive positioning for FICO scores and FICO platform and market-leading business growth. We continue to excel in our Scores business as well. Our team is focused on innovation to provide new ways to add value for our customers. FICO scores a tool that market participants rely on to make many crucial decisions, including prequalifying, underwriting, pricing, ensuring, securitizing, rating, selling, assessing capital requirements, assessing prepayment risk and determining collection strategies. The FICO Score has long been freely chosen because it's trusted as the most predictive and reliable independent credit score, enabling lenders to fairly expand credit access to more consumers. The FICO Score was widely adopted because it democratized and expanded access to credit while simultaneously underpinning the safety and soundness of the market. It's worth pointing out that over half of the mortgage market is not conforming and also overwhelmingly uses FICO scores. The FICO Score is provided and will continue to provide tremendous value to the credit ecosystem. As part of our ongoing commitment to industry-leading credit decision-making, we've made significant commitments to financial knowledge and financial inclusion. We've once again partnered with Chelsea Football Club, both men's and women's teams, and U.S. Soccer Foundation for the field of financial empowerment summer tour. The goal is to build excitement for and access to financial education and resources to help more people, including the next generation of fans, make more informed credit decisions. As part of the campaign, FICO hosts free score a better future fundamentals, financial education workshops for students from traditionally underserved communities. Students improve financial literacy and have the opportunity to attend a Chelsea football game. I'll talk about our outlook for the balance of the year, including our increased guidance after Steve provides further financial details.

Thanks, Will, and good afternoon everyone. As Will mentioned, we had another good quarter with total revenues of $448 million, an increase of 12% over the prior year. Score segment revenues for the quarter were $241 million, up 20% from Q3 of 2023. B2B revenues were up 27%, driven primarily by mortgage origination revenues. Our B2C revenues were down 2% versus the prior year due to volume declines in our on myFICO.com business. Software segment revenues in the third quarter were $206 million, up 5% versus Q3 of 2023. On-prem and SaaS software revenue grew 7% year-over-year, while professional services declined 9%. This quarter, 85% of total company revenues were derived from our Americas region, which is the combination of our North America and Latin America regions. Our EMEA region generated 10% of revenues and the Asia Pacific region generated 5%. Our total software ARR was $710 million, a 10% increase over the prior year. Platform ARR was $215 million, representing 30% of our total Q3 '24 ARR, up from 25% of total in Q3 of 2023. Platform ARR grew 31% versus the prior year, while non-platform ARR grew 3% to $495 million this quarter. Our platform land and expand strategy continues to be successful. Our dollar-based net retention rate in the quarter was 108%. Platform NRR was 124% while our non-platform NRR was 101%. Platform NRR was driven by a combination of new use cases and increased usage. Our software ACV bookings for the quarter were $27.5 million. As a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Our expenses for the quarter - total operating expenses were $258 million this quarter versus $220 million in the prior year, an increase of 16% year-over-year and 8% versus the prior quarter. Our third quarter included our FICO World event and a true-up for our annual incentive rewards, and we expect Q4 expenses to be down modestly from our Q3 run rate. As Will noted, the prior year includes an $8.5 million one-time reimbursement of third-party data implementation costs and a reduction to income tax expense of $9.5 million associated with the valuation of our R&D tax credits. Our non-GAAP operating margin, as shown in our Reg-G schedule was 52% for the quarter, compared with 51% in the same quarter last year. GAAP net income this quarter was $126 million, down 2% from the prior year's quarter. Our non-GAAP net income was $156 million, with a quarter up 9% from the prior year's quarter. The effective tax rate for the quarter was 24.5%. We believe that our fiscal year 2024, net effective tax rate is expected to be around 22%, while our recurring tax rate is expected to be around 26%. The recurring tax rate is before any excess tax benefit and other discrete items. Free cash flow for the quarter was $206 million, a 69% increase from the previous year. The trailing 12-month free cash flow was $551 million compared to $467 million in the prior quarter. At the end of the quarter, we had $199 million in cash and marketable investments. Our total debt at quarter end was $2.13 billion with a weighted average interest rate of 5.3%. Currently, 61% 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. During the quarter, we secured a $450 million term loan and used those proceeds to reduce our revolving line of credit and to provide additional debt capacity. Turning to return of capital. We bought back 196,000 shares in the third quarter at an average price of $1,293 per share. That exhausted the existing board authorization, which was approved in January, and we have just announced a new Board authorization for $1 billion. 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 the year and the increase in our full year guidance.

Thanks, Steve. We are executing on our strategy. Our customers are delighted with our innovative products. Our execution is generating strong financial results, including impressive ACV bookings, record free cash flow, and an increase in FICO platform and FICO 10-T adoption. The business is strong. I'm pleased to report that today, we're again raising our full year guidance as we enter the fourth quarter of our fiscal year. We're raising our full year revenue guidance to $1.70 billion. GAAP net income is now expected to be $500 million with GAAP earnings per share of $19.90. Non-GAAP net income is now expected to be $582 million, with non-GAAP earnings per share of $23.16. With that, I'll turn it back to Dave, and we'll open up the Q&A session.

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

Thank you. And our first question is going to come from the line of Faiza Alwy with Deutsche Bank. Your line is open. Please go ahead.

Yes. Hi. Thank you so much. So I wanted to start with the software business and just ask you if you could comment on the selling environment. If there's any change from a macro perspective, anything new or different you're hearing from your customers? And then I know at FICO World, we had talked about improvement of the platform and talking about the decomposition of the platform. So just give us a sense of if there's any update there and any additional color?

FICO World is always and was this year the biggest pipeline generating event that we have. And so we came out of FICO World with a very, very healthy pipeline. I would say that the selling environment has not changed that much over the last year or so. And I would also emphasize that increasingly, customers are buying FICO software as a strategic move. And so it's a very considered purchase. And it's not just like going out and finding a point solution to a small problem. It's a bigger thing than that. And that hasn't changed. That's kind of the new way of operating.

Got it. Thank you. And then just a question on mortgage revenues. You obviously had very strong growth in the quarter. I'm curious how volume trended in the quarter? I know you don't give a breakdown, but was it in line with your expectations? Are there any dynamics you're seeing around soft fold where I believe lenders have the option to go to one or two bureaus like that? Are you seeing an impact on volumes from that and just the general environment around more...

Our mortgage volumes are a lagging indicator relative to other mortgage data that you have. Our mortgage volumes are down versus a year ago; they're pretty much flat versus last quarter. And then none of that is particularly surprising.

All right. Thank you so much.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Surinder Thind with Jefferies. Your line is open. Please go ahead.

Thank you. First question on just the guidance raise. It implies revenues are going to be down roughly $10 million quarter-over-quarter. Just any color there? I know you normally are conservative in the guide, but just can you do the walk for us from Q3 to fiscal...

Yes. So we are pretty conservative with the way we guide. So we want to make sure that a lot of the scores, we don't have much control over, right? So we don't really know what's going to happen there. I would say that generally, the fourth quarter is a little lighter seasonally for mortgage. Mortgage volumes aren't as high, typically, than as they are in the spring. So there might be some volume decline there, but a lot of it just depends on the environment which we don't have a lot of visibility to.

Thank you. And then in terms of just when I think about the non-platform business here. The NRR was 101%. That's the slowest pace of growth in about 2 years. So any color there that you can help with? Is there some movement of revenues from non-platform to platform at this point? How should we think about that?

I wouldn't say that it's cannibalization if that's what your question is getting at. We're pretty pleased with our classic offerings with 101% NRR. We've been trying to manage that business in this relatively flat way, and we're pleased that it's turning out that way. But as you can see, the growth is on the expand side on the platform. It's, we don't let the market tell us what it wants, but we're not displeased with the way it's shaking out.

Yes. And I would say, I mean, we had higher numbers last year. And at the time, we said there were some things driving that. Some of it was some of the CPI increase that we had. And we had some advantages last year from some FX as well. And we knew that we're not going to maintain this year. So it's kind of what we thought was going to happen. It would settle more to around 100%.

Okay. Thank you. I'll get back in the queue for additional questions.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Scott Wurtzel with Wolfe Research. Your line is open. Please go ahead.

Hey, good afternoon, guys, and thank you for taking my questions. I wanted to start on the auto origination side. Revenue was down 3% versus modestly up last quarter. Just wondering, similar to how you did a mortgage, maybe comment on the volumes there and how they trended versus last quarter?

Yes, volumes were relatively flat, but there really is a mix shift. So we had more of a mix shift to more market share in the peers that are a little bit less price for us. Unit cost is a little bit lower. So that's really the difference between the volume and the revenue. So the price per score went down slightly because of a mix shift.

Got it. That's helpful. And then on the software side, on the platform ARR, I mean, I think it's pretty good to see the sort of rate of deceleration moderate from Q2 to Q3 at sort of this low 30s level. I mean, do you kind of see this as a sort of sustainable growth rate for platform ARR over the near to medium term here?

We believe that the current growth rate is sustainable. While it may vary over time, we are confident in maintaining this level. A strong quarter like this, with new deals being signed, will positively impact our annual recurring revenue in the future. However, our visibility remains limited since it largely depends on how quickly our customers adopt the platform and their usage levels. Nonetheless, we see significant growth potential, and we are optimistic about maintaining these levels.

Great. Thanks, guys.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Kyle Peterson with Needham. Your line is open. Please go ahead.

Great. Thanks. Good afternoon, guys. I just wanted to start out on software, particularly the bookings looked pretty nice on an ACV basis, come a lot of the prior quarters. So how should we think about some of the implementation cycles and kind of when some of those bookings will start to translate to revenue here?

It's a long sales cycle, lasting up to 400 days, but it doesn't take as long to go live once everything is settled. The revenue impact will typically show up in the following year, which is the simplest way to consider it.

Yes. And it does depend on the customer, how sophisticated they are, how ready they are. But yes, I mean, if you sign deals now, in the next 6 to 9 months, you should start seeing a flow-through on that.

Got it. That's very helpful. I would like to follow up on the potential rate cuts, whether later this year or next year. Could you explain some of the different sensitivities? I understand that your business has changed quite a bit compared to previous cycles. Specifically, during the first one to two rate cuts, what impacts should we be aware of if those actually happen?

We're already seeing a little bit of an uptick in refis and it's not exactly a gigantic leap of faith that as rates come down, we'll see volumes go up. We fully anticipate that. Your guess is as good as ours as to the timing of the rate cuts. We would hope to see some rate cuts towards the end of this year and next year and volumes go up with that.

All right, that's helpful. Thanks, guys.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of George Tong with Goldman Sachs. Your line is open. Please go ahead.

Hi. Thanks. Good afternoon. Within the Scores business, card and personal loan revenue fell 7% in the quarter, which is a little bit better than the 9% decline in the prior quarter. Can you talk about some of the trends you're seeing among subprime or lower tier consumers that may be impacting card and personal loan performance and also talk about overall bank lending conditions?

Yes. I mean the subprime markets obviously seem the biggest pullback, which is not surprising, right? You're late in the credit cycle; you have a lot more uncertainty, and that's kind of where you see that happen first. Bank by bank, it kind of varies depending on what they're looking at and what kind of campaigns they might be running. But we see banks being relatively conservative with new originations. And I think we're kind of waiting to see what happens and see what the economic environment looks like. So it's really not surprising. We saw probably a little over a year ago, strong growth there when mortgage started to slow down and rates started to go up, we saw strong growth there. But now I think there's just more uncertainty in the market, and they're just kind of being more cautious in their originations.

Got it. That's helpful. And then switching to the software side, software operating margins contracted about 430 bps year-over-year in the quarter. Can you talk about some of the reasons behind that...

It's almost completely around that reimbursement we had last year. So that was a big number we had, and that was all on the software side. So that's the driver of that.

And so as that laps, when would you expect to flip to margin expansion in the software business?

We anticipate some margin expansion in the next quarter because we incurred certain costs at FICO World this quarter that won't carry over. As a result, our costs are expected to decrease next quarter, leading to improved margins. These costs are significant enough that they can influence the margin for any given quarter, particularly in the case of FICO.

Got it. Very helpful. Thank you.

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Ashish Sabadra with RBC. Your line is open. Please go ahead.

Thanks for taking the question. Just on the software revenue growth, particularly the on-prem and SaaS. And within that, when I look at software recognized over the contract term, the growth there moderated. How should we think about the growth profile there?

Yes, much of this is due to the Omega growth and the increase in non-platform revenue compared to last year. That contributes significantly, and the platform side is also experiencing substantial growth. Looking ahead, we expect these growth rates to be more likely sustained, although as the figures increase, maintaining 50% growth becomes tougher; however, we are pleased with the 30% growth on the platform front and believe we can exceed 100% on non-platform revenue. We are satisfied with that as well.

That's very helpful. Thanks.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Simon Clinch with Redburn Atlantic. Your line is open. Please go ahead.

Hi, thank you for taking my question. I wanted to revisit the 3% growth in the platform software annual recurring revenue. I was wondering if you could provide a bit more detail on why you believe this is a sustainable level of growth and perhaps elaborate on that for us.

We had a strong quarter with new bookings, and our installed base is growing rapidly. When we install for most customers, they seek new ways to utilize our platform, which is reflected in our net retention rate. That number continues to perform well, and we are adding more business to it. While we can't make any guarantees, we have numerous data points and anecdotal evidence suggesting that we will maintain this growth trajectory.

Thanks for that. Could you elaborate on the pricing strategy within the software business? Last year, you mentioned that on the non-platform side, there was a noticeable increase due to inflation. I'm curious about how you plan to approach pricing, its value, and considerations for the future.

Our current approach to software pricing focuses on making our software accessible and promoting adoption. While there may be opportunities for value pricing in our software business, our priority is to enable customers to use our software and subsequently grow revenue as their usage expands. Initially, customers utilize the platform for specific applications, and as they discover additional uses, our strategy is centered on empowering them to explore what they can achieve with the platform. We design our offerings to avoid the need for renegotiating contracts, allowing customers to increase their usage and, consequently, our revenue without extensive contractual processes. Our model is structured so that we benefit as customers choose to utilize more of the platform.

Thank so much. Appreciate it.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Jeff Meuler with Baird. Your line is open. Please go ahead.

Yeah, thanks. Instead of me getting to ask a question about cash flow this quarter, I just got to say congrats on the nice cash flow. Can you give us some perspective on the geographic kind of trends within software? And I guess it looks like America's revenue was down a little year over year. So any particular call outs? And then EMEA was up a lot. So just any mega wins in EMEA or any reason to think that you're at an inflection point there and it's really taking off.

You know, Jeff, I don't think that we have tremendous changes regionally. I wouldn't try to read too much into the data on a quarterly basis. We have strength of platform across all the regions. I think Asia Pacific was a little behind the other regions in terms of platform adoption, and there were some structural reasons for that. For example, AWS was not available in India before and now it is. But we're seeing adoption across all the regions. Yes, I would think some of what you see might see with the volatility is when we have that point-in-time license revenue, and that could skew things in one given quarter. But we've had a lot of adoption in the last year in North America, and we're starting to see a lot more interest in EMEA as well.

And then when you're calling out the FICO 10-T adoption and then the non-performing mortgage market, is that almost exclusively about upgrades from prior versions of the FICO score given how high your penetration is? Or are you finding, I guess, like incremental volume as part of that adoption?

It's a bit of both, but probably more of the upgrade.

Yes. I mean for the most part, everybody was using the traditional FICO scores and now they're just moving to the 10-T ahead of the adoption by the FHFA.

Okay. Thank you.

Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open. Please go ahead.

Thank you. Good evening. I just wanted to ask, Will, I think you tried to reference some of these in your prepared remarks, but in the face of some public criticism around the price of your scores, how is your approach of high process around the value of your score? Maybe the timing around which you get to that value has that changed at all?

Well, you've heard us say in the past, and I certainly continue to believe that what we charge for the FICO score has some public criticism around the price of your scores. I think anyone who actually studied the numbers and gets into the details of it, sees that the FICO scores are a tiny piece of the overall process, whether you're talking mortgage or any other kind of credit evaluation process. And so I would say no, no real change anticipated.

Okay. And then somewhat similarly, on the software side, I think you talked about that value proposition being unique and niche, et cetera. But we've heard obviously a lot of other software companies during earning season talk about the weak environment and the slowdown. It doesn't sound like you're seeing any of that, but anything you'd like to call out? Was there maybe some could it be a lag that you see some of these headwinds or perhaps you're not seeing that at all?

We're really not experiencing that. We've heard those concerns from others in the industry, but we haven't felt any impact ourselves.

Okay, fair enough. Thank you, guys.

Thank you. This will conclude today's question-and-answer session. Ladies and gentlemen, this will also conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day. Goodbye.