Fair Isaac Corporation (FICO) Q4 2022 Earnings Report, Transcript and Summary

Greetings, and thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question and answer session. [Operator Instructions] This conference is being recorded Wednesday, November 9, 2022. And now I'd like to turn the conference over to Steve Weber, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining FICO's fourth quarter earnings call. I'm Steve Weber, Vice President of Investor Relations and I'm joined today by our CEO, Will Lansing; and our CFO, Mike McLaughlin. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate an 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. These statements involve many uncertainties, including the impact of COVID-19 on macroeconomic conditions and the Company's business, operations and personnel, that could cause actual results to differ materially. Information concerning these uncertainties is contained in the Company's filings with the SEC in particular in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company's earnings release and 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 the 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 November 9, 2023. And now, I will turn the call over to Will Lansing.

Thanks, Steve. And 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'm pleased to report that we had a very good quarter which completed an outstanding year with record revenues, record earnings, and record cash flows. We easily exceeded our guidance in all areas even after a mid-year raise. Pages 2 and 3 show some financial highlights from our fourth quarter. We reported revenues of $349 million in fourth quarter and $1.38 billion of revenue for the fiscal year. We delivered $91 million of GAAP net income in the quarter and GAAP earnings of $3.55 per share. For the full fiscal year, we delivered $374 million of GAAP net income and $14.18 of earnings per share. On a non-GAAP basis, Q4 net income was $112 million and earnings per share were $4.40. Full year non-GAAP net income was $454 million, up 19% over last year, and non-GAAP EPS of $17.22 was up 32% over the previous year. We continue to deliver strong free cash flow growth as well. Q4 free cash flow was $144 million, bringing the fiscal year total to $503 million up 21% from the previous year. Our strong cash flow allowed us to be especially aggressive in returning capital to shareholders through our share buybacks. In fiscal 2022, we repurchased nearly 2.7 million shares at an average price of $409 per share. In our Software segment, we delivered $175 million of revenue, up 5% from last year. We continue to drive growth in this segment, particularly on our platform. As shown on Page 7, total ARR was up 9% and the platform ARR grew 52%. We continued to deliver strong NRR as well, demonstrating our land and expand strategy as customers increase their total usage. Total NRR for the quarter shown on Page 8 was 107%. Platform NRR was 128% and we continue to see strong demand for our technology from new customers. Our ACV bookings as shown on Page 9, were up 14% over last year. We continue to focus on our state-of-the-art FICO platform, it truly is NextGen decisioning technology. It allows customers to use advanced analytics to optimize interactions with their consumers. In our Scores segment, we're seeing a continuation of the trend for the last several quarters. Mortgage originations have continued to decline and in Q4 accounted for just 11% of our Scores revenue and 5% of total company revenues. Auto originations revenues remained relatively stable with originations flat with last quarter and up 20% versus last year, primarily due to pricing. Card and personal loan originations continue to perform well with originations revenues up 37% over last year. Total Scores revenues were up 3% in the quarter versus the prior year and up 8% for the full year as you can see on Page 6. On the B2B side, revenues were up 6% in both the quarter and for the full year. This is a strong result considering the rapid and dramatic rise of interest rates and their impact on the mortgage market. On the B2C side, revenues were down 3% in the quarter due to a slowdown in new customer subscriptions on our myFICO platform and up 11% for the full year. I will discuss next year's guidance in greater detail later where we expect the Scores business to grow about 7%. We also expect the special pricing initiatives for 2023 to have an additional impact beyond our guided numbers consistent with those over the last several years. Although it's difficult to estimate the timing and magnitude of the impact. Finally, as you are aware, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac have completed their validation and approval of new credit score models. I'm pleased the process has concluded and that the FICO Scores has again been approved for using conforming mortgages by the enterprises. This decision means that FICO Score 10T will be required to be used when available, as classic FICO is today for each conforming mortgage delivered to the enterprises. The latest release of our flagship FICO score, FICO Score 10T delivers increased predictive power while preserving the trusted and proven FICO score minimum scoring criteria. These improvements in predictive power can help mortgage lenders safely avoid unexpected credit risk and better control default rates. The decision from the FHFA is the culmination of a multiyear process set out by both congressional and administrative regulation. We look forward to additional guidance from the FHFA and the enterprises on the timeline and the implementation process. I'm also pleased to report that in our fourth quarter we signed a multi-year extension with the large bureau partner in the consumer Scores space. I have some final comments and provide our fiscal '23 guidance in a few minutes. But first, let me turn the call over to Mike for further financial details.

Thanks, Will. And good afternoon, everyone. As Will summarized we had another exceptional fiscal year and we are pleased with our momentum as we head into fiscal 2023. Total revenue for the fourth quarter was $349 million, an increase of 4% over the prior year. Our full year revenue of $1.38 billion was up 5% over last year and up 8% when adjusted for the divestitures we completed in fiscal 2021. In our Scores segment, revenues for the quarter were $174 million, up 3% from the same period last year. B2B revenue was up 6% with growth in our auto scores and credit card and personal loans scores more than compensating for continued declines in mortgage score revenues. Our B2C revenue was down 3% from the same period last year, due primarily to the impact of fewer new subscribers on our myFICO.com platform, a trend we highlighted on last quarter's earnings call. For the full year, Scores revenues were $707 million up 8% from last year despite sizable headwinds in the mortgage origination space. Software segment revenues in the fourth quarter were $175 million, up 5% versus the same period last year. Full year software revenues were $671 million, up 1% from the previous year and up 9% after adjusting for our 2021 divestitures. This quarter 82% of total company revenues were derived from our Americas region, which includes both North America and Latin America. Our EMEA region generated 11% and 7% was from Asia-Pacific. Our Software ARR at the end of the fourth quarter was $569 million, a 9% increase over the prior year quarter. Our platform ARR was $114 million, representing 20% of our total fourth quarter ARR, and a growth rate of 52% versus the prior year. Our non-platform ARR was $455 million in the fourth quarter, which was 1% higher than the prior year. Our dollar-based net retention rate in the quarter was 107% overall, our non-platform customer's software usage continues to be mature and relatively stable with retention this quarter at 100%. Our platform customers are showing a very strong net expansion from land and expand follow on sales and increased usage. The dollar-based net retention rate for platform was 128% in the fourth quarter versus 143% in the prior year. Our software ACV bookings for the quarter were $30 million versus $26 million in the prior year. ACV bookings increased for the full year to $86 million versus $63 million in FY '21. As a reminder, ACV bookings include only the annual value of new software sales excluding professional services. Turning now to our expenses for the quarter, total operating expenses were $215 million this quarter versus $219 million in the prior year. In fiscal 2022, our expenses benefited from a number of factors, including savings from divested businesses, headcount reduction actions taken at the end of FY '21, somewhat elevated employee attrition, and significant operational efficiencies achieved in our software segment. While we will continue our focus on expense efficiency in fiscal 2023, we expect our total expenses to trend up modestly in the coming year. Our non-GAAP operating margin as shown on our Reg G schedule was 47% for the quarter and 48% for the full year. We delivered non-GAAP margin expansion of 800 basis points for the full fiscal year. GAAP net income this quarter was $91 million up 6% from the prior year quarter. Our non-GAAP net income was $112 million for the quarter and materially consistent with the same quarter last year. For the full year, GAAP net income was $374 million compared with $392 million last year. As a reminder, last year's GAAP net income included a gain of $100 million on product line asset sales and business divestitures. GAAP net income for fiscal 2022 was $454 million up 19% from the prior year. The effective tax rate for the full year was 21% including $9 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. We expect our FY 2023 recurring tax rate to be approximately 25% to 26%, that expected recurring tax rate is before any excess tax benefit and other discrete items. The resulting net effective tax rate is estimated to be about 24% in FY '23. Free cash flow for the quarter was $144 million. For the full year, free cash flow was $503 million up 21% from last year's $416 million. At the end of the quarter, we had $159 million in cash and marketable investments. Our total debt at quarter end was $1.85 billion, with a weighted average interest rate of 4.4%. As you recall, we issued $550 million in senior notes last December, locking in a fixed rate of 4%. Currently, about 70% of our total debt is fixed rate. Our floating rate debt is pre-payable at any time giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances if it is financially advantageous for us to do so in future periods. Turning to return of capital, we bought back 120,000 shares in the fourth quarter at an average price of $468 per share. In fiscal 2022, we repurchased a total of 2,678,000 shares at an average price of $409 per share for a total of $1.1 billion. The Board approved a new $500 million authorization in October and we continue to view share repurchases as an attractive use of cash. With that, I will turn it back over to Will for his thoughts on FY '23.

Thanks, Mike. As we enter our fiscal 2023, I'm excited about our prospects and opportunities that lie ahead. We have an incredible set of assets and a business model that can produce predictable solid results even in a turbulent macro environment. Our FICO platform continues to experience phenomenal growth as we find a receptive audience for best-in-class decisioning that our panelists deliver. Our Scores business continues to deliver industry-standard risk management products that are especially critical in uncertain economic times. And the recent FHFA decision ensures that we'll be a critical component in the mortgage process for many years to come. The successful deal signings we had in fiscal '22, as well as prudent planning and management, give us confidence, we will have another successful year in fiscal '23. We are providing full year guidance as shown on the presentation. Regarding revenues of approximately $1.475 billion, an increase of 7% versus fiscal 22. We are guiding GAAP net income of approximately $401 million, an increase of 7.5%. GAAP earnings per share of approximately $16, an increase of 13%. Non-GAAP net income of $487 million and non-GAAP earnings per share of $19.42, increases of 7.5% and 13% respectively. With that, I'll turn it back over to Steve and we'll take questions.

Thanks, Will. This does conclude our prepared remarks. And we're now ready to take any questions you may have. Operator, please open the lines.

[Operator Instructions] We do have a question from the line of Kyle Peterson with Needham & Company. Please go ahead. Your line is open.

This is actually Sam Salvas on for Kyle today. Thanks for taking the questions, and nice results here. I wanted to start out on the software side of the business. It seems like things are still going well here. But wanted to get a sense if you guys could talk a little bit more about demand here, maybe specifically on the international side, are you guys seen any deals get pushed out or any deals being downsized given the current macro environment?

We are not seeing deals pushed out nor are we seeing deals downsized. It's probably worth noting that we have a fairly long sales cycle, it's approximately a year long. And so it's long enough in our view. But we have not seen softness. No, I think that the current solutions and offerings particularly around the platform are really strategic. And the - and our customers see them that way and it's a higher-level decision. And so whatever financial pressure our customers may be under, our deals with them seem not to be affected.

Got it. Okay. That's helpful. Thank you. And then just a quick follow-up. I was wondering if you guys could talk a little bit more about the volumes you guys have been seeing on the Scores side of the business, as far as the different segments? And maybe talk a little bit about how you guys are feeling about credit card and mortgage, auto as we head into 2023? Thanks.

Hi, Sam, it's Mike. As in past quarters, we don't disclose volumes precisely. But also as in past quarters, I can tell you that the volumes we saw are pretty consistent with what you have seen if you've been watching the third-party data out there from either the NBA or J.D. Power or credit card issuers themselves. Mortgage has declined for us in volume in a quantity consistent with what you can see from some of those data points. Auto was more or less flat both on a quarter-over-quarter and year-over-year basis, again consistent with external reporting. And on the credit card side, growth continued to be strong on a year-over-year basis. It was more or less flat on a quarter-over-quarter basis but consistent with the market. In terms of how we feel going forward, we don't make predictions about volumes in those sectors, we don't have economists that don't necessarily consider ourselves experts in forecasting that kind of consumer behavior. But I think you can have some confidence that our volumes will pretty much track the overall market as it has in past quarters.

Next question is from Ashish Sabadra with RBC Capital Markets. Please go ahead. Your line is open.

This is John filling in for Ashish. Maybe just a follow-up on the ACV bookings, 14% was very strong. Is there anything that's driving that strength or is this more of seasonal element? Thanks.

Well, we have a lot of quarter-to-quarter variability in the ACV bookings as you can see from our data. And our ACV bookings tend to be fourth quarter weighted. This year was a little less fourth quarter weighted than the last year. So I would encourage you to look at the year - at the full year comparison, not so much the quarter-over quarter because one quarter doesn't make a trend. Our year-over-year growth in ACV bookings as we talked about over 30%, and it reflects the underlying strength in a variety of areas of our business, our platform business, our customer communication business, as well. And the guidance that we have for next year is not heroic in terms of the amount of new ACV bookings we need to deliver relative to the past year.

Great. Thank you. And then maybe just quickly, could you give us some more color on the slow-down in marketing, and as well as the shift to freemium and how it's weighed on B2C? And perhaps how we could think about B2C revenue growth going forward? Thanks.

Yes. What do you mean by slowdown in marketing?

So just based on some of our math, it looks like we might have a slowdown in marketing and account management, but we might be a bit off there. Is that the case?

Okay. So you're talking about the Scores side of the business and sale of our Scores used for marketing or pre-screening purposes, is that correct?

Yes. That would be great.

Okay. Got you. Yes, as with last quarter, we've seen a flattening of the growth in the sale of that type of Score, the pre-screening of pre-score sale. In fact. it was down a little bit this quarter on a quarter-over-quarter basis. And we do think it's somewhat of a leading indicator as to how much credit particularly credit card and personal loan, credit lenders want to extend in future periods. We've never analyzed precisely how predictive it is consistent with what we're seeing in the macro, the demand for that kind of a score was down a little bit on a quarter-over-quarter basis for us.

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

This is Brendan on for Manav. Just wanted to ask on guidance. 7% growth for Scores. Obviously, didn't quite you have this quarter and there is some macro - certainly more macro concerns for next year. You talk about flattening in marketing and that can be a leading indicator. It seems like there are some negatives, but at the same time, it's pretty good - it's a pretty good, pre-year guidance, and, of course, that doesn't include pricing. So I guess what gives you the confidence for that and whether the puts and takes driving that 7%?

Yes, good question. So just starting with the special pricing. The special pricing is in addition to our guidance, it's not in that 7% exactly. It's really - think of it as being consistent with past years and outside of our guidance because we can't really predict the timing and so on. With respect to within the guidance, the 7%, we have a fairly significant CPI increase there which in years past has been there as well but it was always a much smaller number. This year we're talking about a reasonably significant number which is driving a fair bit of that. And also, I would say that mortgages it's a smaller piece of our business. And so we feel pretty good about the overall mix.

Okay. And then looking at how that translates down to the bottom line, pretty good EPS number. Is there - is it - could you comment any on margins or I guess you guys have commented on expenses. But is it just you expect a strong flow through and or is there something else contemplated, it seem like the EPS was a good amount above net income and I don't know if it's that - like the growth rate. I don't know if that's just from the repurchases in the back half of this year or if you can detail about that.

It's a bit of both. I mean so, we're clearly holding the line on expenses, but it's also a smaller share count, they're both contributors.

Yes. I mean, just to add to that. We expect to grow revenues faster than expenses, it's kind of that simple. And we have reduced share count by such a degree that the EPS growth is going to be faster than net income growth.

Okay. And there is no - are there any repurchases assumed in '23 in that number?

Yes. We anticipate repurchasing shares at a pace more or less consistent with our free cash flow generation for the year.

Our next question is from Surinder Thind with Jefferies. Please go ahead. Your line is open.

Thank you. Following up on the - perhaps the first question that was asked about the demand environment in software. Can you provide any color in terms of the new conversations that you might be having with clients given that the sales cycle is long obviously, there is an ability to kind of take advantage of that linked period. But what about new conversations? Are you able to kind of bring new clients to the table to start those conversations? Or how should we be thinking about that part of the pipeline -

Yes. We absolutely are. So we think of our target market as the top 200 financial institutions globally. And our penetration there is around 15%, little over 30 customers signed through the platform. And so our conversation takes two forms. One is, let's talk to the other 85% of our target market that has not yet signed up for the platform, as well as expansion opportunities with the ones who already have. And both of those kind of conversations are going on, and very successfully.

Got it. That's helpful. And then on the B2C piece, any additional color you can provide there in terms of - it sounds like, the weakness I guess within the myFICO.com parts. Any color on how the revenues are trending within your relationship partner?

So consumer B2C does have - does move in sympathy with mortgage volumes because as you know consumers tend to sign-up for that kind of subscription, with contemplating mortgages when they are wondering what their FICO score is going to be for them when they go out and get financing. So as mortgage volumes go down so to - with a little bit of a lag with so to do our B2C myFICO volumes. Our volumes are - they're good, they're down a little bit, they're good. And same with our partners, our partners are - they're doing okay.

Fair enough. And then in terms of just, when we kind of breakdown the guidance on - into kind of the Scores and suffer for next year, it looks like you're looking for about roughly equal growth. You've talked about the CPI component. Is there also an anticipation of just volume growth here or how should we think about the mix at this point in terms of - it seems like right now card remains quite strong and you can argue that auto is probably near trough, so maybe there is improvement there. But how are you generally - what kind of an environment is kind of baked into those assumptions? Is it just a little bit of a continuation of what we're currently seeing or how should we think about the various macro factors that might influence the underlying assumptions there?

I think a fair way to think about it is a bit of a continuation of what we're currently seeing. So flattish, modest, very modest kind of growth and the balance is made-up with price.

Okay.

And the fact that we have a price lever makes a huge difference, it's part of why we have the confidence that we have.

And at this point in time, I assume the special pricing term sheets all of that's been communicated?

Yes. Although, it hasn't taken effect. Yes.

Okay. Correct. It will take effect I assume January 1. Correct?

For most, but not all customers. Yes.

Our next question is from George Tong with Goldman Sachs. Please go ahead. Your line is open.

Hi. Thanks. Good afternoon. In your guidance for next year, can you outline what you're assuming for B2C growth in the Scores business?

Yes. We don't want to get into too much detail around that. But consistent with Will's prior comment about more or less think about it as a continuation of the trends we're seeing. We've seen B2C down a little bit sequentially over the last couple of quarters and that's consistent with how we're thinking about the full year for '23.

Great. And then with respect to margins, how much of the margin expansion that you're forecasting for next year is going to come from Scores versus software? Are you expecting more contribution from one part of the business over the other or is it relatively equal benefit from both?

Sorry. Could you say again, I think I missed the first part of it?

Just trying to get a sense for how much of the margin expansion next year will be driven by software versus by Scores?

I see margin expansion. As we've talked about extensively in the past on the software - in the software business, our focus is on the platform and driving growth there. So we're not focused on dramatic margin improvement in the software business, we might have a little bit. But we're mostly focused on growth of the platform. In the Scores business, due to the gross margin nature of that business, relative to expense growth most of the dollar growth you see there, a lot of it falls to the bottom line. So in terms of contribution to operating margin expansion, it's weighted towards the Scores business for sure.

Our next question is from Jeff Meuler with Baird. Please go ahead. Your line is open.

Yes. Thank you. The multi-year extension with the large bureau partner, is that a B2C partnership or what was that? Was that something other than that?

No, that is the B2C partnership which as I think we shared in the past had a couple of more years to run. And what we've done is extended another few years beyond that. And so we now have a lot of certainty around when that B2C partnership looks like for many years to come.

Got it. And then for the CPI pricing in Scores, how is that implemented? Like is it formulaic tied to CPI or do you kind of dictate an amount that is influenced by CPI? Just want to understand how that takes effect.

It's more the latter. Because as you know the CPI numbers are constantly moving and we could pick a number that's a point in time number that would be exactly the CPI. We could pick a rolling number, we could do a historical number, we could do a projection. And so we never get it exactly right. So we think our best guess and put down a number, but it's our interpretation.

Okay. And then for the non-U.S. based clients in software how much of that is contracted in U.S. dollar? And to the extent to which it is, is there any market reaction in some of the markets where their currencies have been particularly weak relative to the dollar recently?

It's it is mostly U.S. dollars, and it's not a new thing for our customers to prefer to operate in their own currency and it's not a new thing for us to prefer to operate in U.S. dollars. So we kind of are where we are. And so yes, you can imagine that for them based on the strength of the dollar it's a little bit tougher. But we haven't changed our policies.

And that varies from geography to geography. So for example in Brazil, we're priced in Real for the most part. In the U.K., likewise pretty much priced in pounds, in the euro, it's mixed in sort of second and third world countries, it's dollar.

Got it. And then just last we have the K and we get the client comp disclosure. Just any comment on the number of large financial institutions. So I guess in the U.S. went down from 96 to 92, are those software or Scores clients or is there an impact from - I don't remember the exact timing of the collection and recovery divestiture. And then it looks like a good news story internationally. I don't know how much this is rounding, but going from two-thirds to three quarters. Just any comment on those our client count metric?

I wouldn't read too much into that, Jeff. In the U.S. consolidation is something that we can't control that often reduces just the number of logos we have. And any change in the names - the number of logos would primarily be a function of software. We don't - everybody uses the FICO score essentially, among the large financial institutions, so that doesn't change. But there is not a trend that I would read into that. Internationally, there we do see new logos because there's a lot more greenfield internationally for us than in the U.S.

I believe that's all the questions we have. I'll turn the call back over to Steve.

Thank you. Thank you, everyone, for joining. And we look forward to speaking with you again soon or at the earliest next quarter. Thank you.

That concludes the call for today. We thank you for your participation and ask that you please disconnect your line.