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

Good afternoon and thank you for joining FICO's second quarter earnings call. I'm Steve Weber, Interim CFO, and I'm joined today by our CEO, Will Lansing. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate the understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning those uncertainties is contained in the company's filings with the SEC, in particular, in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC on the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the company's website at fico.com or on the SEC's website at sec.gov. A replay of this webcast will be available through April 27, 2024. And now I'll turn the call over to Will Lansing.

Thanks, Steve, and thank you, everyone, for joining us for our second quarter earnings call. On the Investor Relations section of our website, we posted some slides that offer financial highlights of our second quarter. I am pleased to report that we continue to deliver strong results with record revenue and growth throughout our business. Today, I'll talk about this quarter's results and our expectations for the rest of the year. As you can see on Page 2 of the presentation, we reported revenues of $380 million, an increase of 6% over the same period last year. We delivered $102 million of GAAP net income and GAAP earnings of $4 per share. On a non-GAAP basis, net income was $121 million with earnings per share of $4.78. On the Scores side of the business, we continue to perform well. Scores delivered a record quarter with $198 million of revenue, up 8% in the quarter versus the prior year, as you can see on Page 6. On the B2B side, revenues were up 16% driven primarily by increased originations revenues. Mortgage originations revenues were up 90% versus last year. Auto originations revenues were up 13%. Credit card, personal loan and other originations revenues were up 12%. Our B2C revenues continue to face difficult comps, and while up slightly versus last quarter, were down 8% versus the same period last year. In our Software business, our FICO platform provides the power of analytics and AI to enable smarter business decisions at scale. We're focused on helping clients maximize the customer experience by predicting, analyzing and optimizing customer interactions in real time to make better customer decisions across the enterprise. These better decisions build trust and loyalty by delivering hyper-personalized experiences through holistic customer management. And the strong results we're delivering demonstrated in…

Thank you. As Will said, we delivered another very good quarter in both our Scores and Software segments. Total revenue for the second quarter were around $30 million -- $380 million, an increase of 6% over the prior year or 7% when adjusted for divestitures. In our Scores segment, revenues were $198 million, up 8% from the same period last year. B2B Scores revenues were up 16% over the prior year driven by increased originations revenues. We drove revenue increases in mortgage, auto and credit card, personal loan and other originations. This quarter, mortgage originations revenues were up 90% from the same quarter last year. Our originations revenues were up 13%. And credit card and personal loan and other originations revenues were up 12% over last year. B2C Scores revenues were down 8% from the same period last year, as Will explained, due to difficult comps. As a reminder, that was an area that experienced outsized growth during the refinancing boom and peak in our third quarter of fiscal '22 and was up about 1% this quarter versus the first quarter of fiscal '23. Software segment revenues in the second quarter were $182 million, up 5% from the same period last year where we have -- and as a reminder, last year, we had a significant upfront license revenue quarter. Software revenues recognized over time were $136 million or 74% of total Software revenues. License revenues recognized upfront or at a point in time where -- or $19 million this quarter and represented 11% of Software revenues. Our professional services revenues were $27 million, representing 15% of total Software revenues. In the second quarter, 84% of total company revenues were derived from our Americas region. Our EMEA region generated 11%, and the remaining 5% were from Asia Pacific. Our Software…

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

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

[Operator Instructions] And your first question comes from the line of Faiza Alwy with Deutsche Bank.

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

Well, I think that it's not so much that things have changed as -- with the benefit of half a year behind us, we have more confidence in what we expected. And so we're able -- as you know, we're typically conservative in our guidance. And so we're really just stating officially that we're comfortable with the direction that things are headed. There's not really any surprises there, and there's not any dramatic changes.

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

Yes. So we had a number of things that -- a lot of that may take place throughout the year. A lot of it has kind of happened this quarter. We included a little bit more for incentives, which we typically probably don't do to the third quarter. So we did that now. We had the success our sales events. We had a few other kind of true-up things that typically happen throughout the year, but we got more in this quarter. So the rest of the year, I mean, we have FICO World coming in our third quarter. So that's -- there's an expense associated with that. But we expect that, if anything, the expenses in the back half of the year will probably be similar to our second quarter or potentially even drift down in the fourth quarter because there aren't any onetime events there. A lot of that stems on the revenue we did, too. So -- but we don't -- it looks like there's a step function here, but it's not as much as it probably as it looks like on the surface because it's an aggregation of a lot of onetime happening in 1 quarter.

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

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

I wish that I had unique insight to share with you. As you know, our revenues tend to lag the bureaus. They tend to lag -- and so we're not a leading indicator. What we do see is sequentially from last quarter to this quarter, we've stabilized, and we seem to be moving upward a little bit. So that's a positive sign. But I wouldn't say that I have -- that we, FICO, have any kind of unique insight into the future. We certainly haven't felt any fallout right now. We're not sensing any fallout.

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

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

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

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

Yes. It's a good question, Kyle. And certainly, the backdrop for IT spending and software is a little softer. There's -- but not for us. So the good news is that our offerings, particularly our platform offering, but our software offerings are so critical. And so March, a part of kind of the strategic future for our big customers that they're not getting the same kind of cancellation and squeeze that some other software products are. We're -- in fact, we've seen our sales cycle shortening a little bit. We see continued expansion of existing sales of platform. And we're actually running into less competition out there than one might expect. Most of the competition comes from homegrown. There's not really competitors out there who have offerings that are on a par with ours. Our platform offering is so much more powerful and fully featured and what the customer needs that it tends to be a less competitive kind of situation and much more of a strategic buy. And so that's really what we're seeing. And so no, we have not slowed down in spite of the software spending environment.

Got it. That's helpful. And then maybe just a follow-up on the software side of the business, particularly the talent side of things. I know historically, you guys have kind of been a bit supply constrained per se, kind of having a hard time selling seats in some key roles. Has gotten any easier, given some of the labor market changes, call it, in the last 6 to 8 months, particularly in white-collar tech per se? I just wanted to see if it's got a little easier and maybe a part of that contributing to higher expenses.

I'd say that we have never had any trouble attracting talent to FICO, not years ago, not last year, not this year, not even when times are tight, when employment is very tight. Yes, there are some salary and cost pressure. And I'd say that's more a year ago than today, but we have had no issues whatsoever with attracting talent or retaining talent for that matter. I think that we offer our engineers and our people super challenging roles. They're working on industries mediating critical stuff, and they like it, and we've been able to track great talent that way. I wouldn't -- with the exception of what Steve mentioned from a salary and stock comp expense standpoint, bonus standpoint, I wouldn't say that there's disproportionate pressure on conferencing or anything like that.

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

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

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

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

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

And then one follow-on in terms of -- when I think about the new clients that you've been adding to the platform or the new use cases, that's consistently been growing at about a mid-teens pace. That was true last year. That was true this year. It was true through most of 2022. So it doesn't seem like there's really any impact from macro. You've kind of quantified it as there's maybe not a lot of sensitivity there given the importance of the platform. But can you discuss the conversations you're having with the new clients in terms of how you're quoting them? And what does that pipeline look like at this point? Like the conversions that you're seeing or that we're seeing now, is that conversations from last year? Or how -- when I say last year, meaning a year ago. Or how should we think about that in the current pipeline?

I would say the pipeline is as strong as it has ever been. So it's not like we're working off old pipeline from last year. I think that the future is every bit as bright as the present. So I would just -- I'd lay that out there. The conversations are strategic. So we're operating at a higher level in our customers. We're talking to Chief Digital Officer, the Digital Transformation Officer, the C-suite, the CIO, the Chief Risk Officer. The conversation has been elevated, and that continues to be the case. And I think the couple of things to distinguish our sales approach here are, one, we have something that nobody else has, which the industry very much wants. They want to be able to have this certain industry view of the customer and optimize every interaction and leverage all the data that they know about every consumer to make the smartest kind of an interaction we possibly can. And that's been imperative for the industry. And certainly, the biggest and most forward-thinking banks and lenders are already well down this path, and they see that we have the right offering for that. The other thing is the payback is very rapid. So unlike some of the software that we sold in the past were it'd be a long sales cycle and then it would be a long install and then the payback might take a couple, three years, and then it would get -- the license would be renewed for another three years and another three years. I would say that was kind of the typical software kind of approach five years ago. Today, the payback is extremely rapid. It can be within a year. It could be less than a year. And so what -- and it's very easy to get started. You don't have to commit to a monster project to get started. You can start with one portfolio with one or two or three use cases, see how it goes and then expand from there. And as a result, it's very easy for our customers to give it a try. And when they do it, they try it, and they fall in love with it, and then they expand. And so I think between the very rapid ROI, the very strong references we get from our customers who talk to our would-be customers and the strategic nature, I think those are all the things that are powering us.

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

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

If you're asking is there any special pricing on top of the guidance that we've provided, if that's what you're asking, I would say yes, there is, but we don't quantify it. I mean we really -- there's enough uncertainty out there that we'll know what the special pricing is at the end of the year when the numbers are counted. So I would -- the short version is there is some special pricing above the guidance that we've provided today, but I wouldn't want to quantify it today.

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

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

Well, they go through. We wind up publishing the new prices, and then they go through, and they flow through. And if there were -- if we were to face attrition because of the pricing, I suppose we would start to learn about it now, but we certainly haven't seen anything like that.

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

Yes. Card origination is probably trending down. I mean it's very hot at the end of last year -- next calendar year. It's probably trending down a little bit. But auto has bounced around a lot. It's been pretty stable throughout the last couple of years. But pricing, you probably [indiscernible] data from industry sources that you're going to get from us. And again.

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

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

No. On a run rate basis, we'll probably be pretty flat to that $10 million or maybe that's probably the high end of what it would be, again, but a lot of kind of how much [indiscernible] get revenue over beyond our guidance. There's some products associated with that. But you can kind of back in on your model, if you take our guidance and see what's the implied expenses in the back half of the year. But personnel was up 6%. I think the personnel were not all that obviously is payroll increase and headcount expansion, so we had some true-ups of some incentives both in the U.S. and other parts of the world. So there's a little bit of -- and we have a number of different kind of onetime things that kind of gets that to $10 million number. So there's a lot of noise in the number. I don't want people to think that our expenses are ramping up that dramatically.

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

Your guess is as good as ours. It has always seemed like a somewhat aggressive timetable to us, but time will tell whether it happens at that time or later. But -- and one could imagine that it could happen on the time frame that's been announced.

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

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

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

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

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

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

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

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