Q4 2021 Fair Isaac Corp Earnings Call

November 10, 2021

Greetings and welcome to the Fair Isaac Corporation quarterly earnings call.

During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press. The one followed by the four new telephone should you require operator assistance at any time, Please press star zero.

As a reminder, this conference is being recorded today Wednesday November 10th 2021, I'd now like to turn the conference over to Steve Weber. Please go ahead.

Thank you.

Good afternoon, everyone and thank you for joining <unk> 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 prior quarter in order to facilitate 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, 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 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 in the Investor Relations page of the company's website at FICO dot com or on the SEC's website at SEC Gov.

A replay of this webcast will be available through November 10, 2022.

And with that I'll turn the call over to will Lansing. Thanks.

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 am pleased to report that our Q4 capped another terrific year, a year in which we posted record revenues earnings and cash flows.

And we were able to do this despite headwinds in fiscal 'twenty, one due to a shift in the timing of revenue recognition for term license subscription sales.

And the sale of two product lines in our software business and the managed and deliberate decline in our software professional services revenues.

<unk>, two and three show some financial highlights from our fourth quarter.

We reported revenues of $335 million in Q4, and $1 $32 billion of revenue for the fiscal year.

We were able to grow our full year revenue. Despite these negative revenue factors.

We delivered $86 million of GAAP net income in the quarter and GAAP earnings of $3 per share.

For the full fiscal year, we delivered $392 million of GAAP net income of $13.40 of earnings per share, which includes the gain of $100 million on product client asset sales and business divestiture.

On a non-GAAP basis Q4, net income was $112 million up 15% and earnings per share of $3 92.

Was up 21% from the prior quarter prior year quarter.

Full year non-GAAP net income was $383 million up 31% over last year and non-GAAP EPS of $13 seven was up 34% over the previous year.

We continue to deliver strong free cash flow growth as well Q4 free cash flow was $90 million.

Bringing the fiscal year total to $416 million up 21% from the previous year.

In fiscal 2021, we continued our commitment to shareholder return buying back $882 million of stock during the year.

We increased our leverage by about $425 million compared to year end fiscal 'twenty.

But our adjusted leverage ratio remains a modest two seven times.

We view FICO shares is the best use of our excess cash at this time and expect to continue to aggressively buyback shares in the coming year.

We had another solid year and are making steady progress on our strategic initiatives.

And our score segment, our diversification of verticals has enabled us to continue to drive growth even as various sector slowdown.

Scores were up 10% in the quarter versus the prior year and up 24% for the full year as you can see on page seven of the presentation.

On the <unk> side revenues were up 2% in the quarter versus the prior year, which had a one time royalty true up adjusting for that revenues were up about 15% for the quarter and 21% for the full year.

As expected we saw a slowdown in mortgage originations volumes and revenues were down about 18% year over year.

Auto origination revenues were up 19% and card and personal loan origination revenues were up 45%.

We are seeing particular strength in the card and personal loan space from our customers, including Fintech.

The year over year pricing increases we implemented in fiscal 'twenty. One also had a positive impact on overall <unk> revenues.

Our BDC revenues were up 32% versus the prior year quarter and 42% for the full year compared to 2020, we.

We saw strong growth through both our own myfico dot com products as well as through our partner channels.

In next year's guidance, which I'll discuss in greater detail later, we expect the scores business to grow about 6% Theres been no change in our strategy or approach to special pricing.

Accordingly special pricing increases consistent with the past several years are not included in this guidance.

While we expect these price increases to have an impact consistent with those of the last several years, because it's difficult to estimate the timing and the magnitude of the impact we remain conservative in how we issue our guidance relative to such increases.

Turning to our software business.

As we have mentioned in recent quarters, we have been developing new financial metrics that provide more visibility into the recurring revenue generated by our subscription based SaaS and on Prem software and the retention and growth of our existing software customers.

Beginning this quarter, we are pleased to unveil our revised software reporting structure and these new metrics micro Boston will go into much more detail in his remarks, but let me give you just a few highlights first we reevaluated our operating segments to better align with how we assess performance and allocate resources, we merged our legacy applications and decision.

Management software segments into a single software segment, we continue to report the score segment, which is unchanged from past reporting.

We also changed the classification of revenue from transactional and maintenance professional services and license to on premises and SaaS software professional services and scores to better align with our business strategy and peer reporting practices.

You'll also find in our 10-K this year, our first reporting of annual recurring revenue or <unk>, which provides visibility into the growth trajectory of our software business.

Without the variability that comes with the upfront revenue recognition required by ASC 606 for on Prem subscription sales.

We are also disclosing dollar based net retention rate and annual contract value of software bookings.

Another big change will be talking about is the split of our software revenue between our on platform and off platform products will give the splits for revenue for IRR and for dollar based net retention.

Revenue, we believe it is important to focus on the progress of our on platform offerings as is the central strategy of our software business.

As in prior years, we will continue to focus on investing in our software platform in fiscal 'twenty, one we divested assets that could not be easily migrated to the platform and reallocated resources to accelerate platform development and our go to market efforts by allocating the resources strategically and efficiently, we expect to spur growth and achieve scale.

While effectively managing our operating expenses.

I am happy with the progress we made in 2021 and I'm optimistic about what lies ahead in 2022 and beyond we will continue to allocate our resources to areas of the highest strategic importance and will continue to focus on long term shareholder value.

I'll have some final comments in a moment provide our fiscal 'twenty two guidance.

But first let me just turn the call over to Mike for further financial details.

Thanks will and good afternoon, everyone. As you may have already seen in our 10-K and the financial highlights presentation posted to the FICO Web site, we have made significant enhancements to our financial reporting this quarter, including the introduction of new metrics in both our scores and software segments will briefly previewed these metrics and I will take some extra time on this call to provide more details on what.

We are disclosing and what new insights these numbers provide.

As Paul said, we had a strong finish to our fiscal year and we are well positioned as we enter fiscal 2022.

Revenue for the fourth quarter was $335 million, a decrease of 11% over the prior year due primarily to a reduction in upfront recognition of term license revenues for on Prem software sales.

The sale of our collections and recovery product line in June and lower professional services revenue in our software segment, our full year revenue of $1 32 billion was up 2% over last year.

In our scores segment revenues were $169 million up 10% from the same period last year.

<unk> revenue was up 2% over the prior year as you may recall last year's fiscal fourth quarter included a onetime a royalty true up that did not recur. This year adjusting for this one time true up <unk> revenue was up about 15% this quarter.

<unk> revenues were up 32% from the same period last year, both Myfico dot com and partner revenues grew significantly.

One of the new financial metrics, we are adding to our 10-K and 10-Q disclosures going forward is a breakdown of our scores segment revenues between <unk> and <unk> components.

For the full year scores revenues were $654 million up 24% from last year.

As well previewed we have merged our applications in decision management segments into a new software segment software segment revenues in the fourth quarter over $166 million down 25% versus the same period last year full year software revenues were $662 million down 14% from the previous year This quarterly and full year <expletive>.

Klein was due to reduced upfront license revenue recognition reduced professional services revenue and the divestitures of our collection recovery products I will spend a few minutes discussing each of these three factors and their impact on FY 'twenty one results.

At the start of fiscal 2021, we shifted the timing of revenue recognition for on premise term license subscription deals as a result, we now recognise less upfront license revenue and more revenue ratably over the term of each contract. The net impact was lower license revenue in our software segment of about $12 million in Q4 and about 34 million.

For the full year versus what it would have been under our prior sales model to help show the impact of upfront revenue recognition of on Prem term licensed software sales. We have added a new table in the 10-K that breaks out our on premise and SaaS software revenue into revenue recognized at a point in time versus revenue recognition.

Ignite over the contract term.

Turning to professional services. We have previously explained how we are deemphasizing low margin non strategic services engagement as expected. This has resulted in lower <unk> revenues.

Revenues were down 35% in Q4 compared to the prior year quarter and 20% for the full year professional services continue to be an important part of our business, helping our customers implement our software and realize the most value from it over time, we expect to see additional modest declines in our services revenues over the next few quarters after which we.

It to return to a growth trajectory in line with our on premise and SaaS revenues.

The third factor negatively impacting reported revenues. This period was the divestiture of the collections and recovery product line in June as well as the sale earlier in the year of our enterprise security score and the sale of certain assets to a joint venture we established in China to help understand the impact of these divestitures. We have added additional details to the financial highlights presentation.

<unk> posted on our Investor Relations website in that presentation, you will find reconciliations of our revenue in prior periods. Excluding these divestitures.

This quarter, 81% of our total company revenues were derived from our Americas region, Our EMEA region generated 14% and the remaining 5% was from Asia Pacific The Americas region, which we will use in our financials going forward is simply a combination of our North America and Latin America regions.

We mentioned in our call last quarter that we are planning that we were planning to introduce a number of new financial metrics for our software segment. We are pleased to introduce those metrics. This quarter you will find a full description of these new metrics in the 10-K and on page eight of our financial highlights presentation.

Let me take a few minutes to briefly walk you through each new metric.

The first of these is annual recurring revenue or <unk>, which measures the underlying performance of our subscription based software contracts.

As defined as the annualized revenue run rate of on premise and SaaS software agreements with any quarterly reporting period and as such it is different from the timing and amount of revenue recognized in any given period.

All components of our software licensing and subscription arrangements that are not expected to recur primarily perpetual licenses are excluded we calculate <unk> as the quarterly recurring revenue run rate for slide by four.

The second metric is annual contract value or ACD bookings. This replaces our previously disclosed bookings metric, which was based on total contract value, including the value of professional services ACB bookings is the average annualized value of software contracts signed in the current reporting period that generate current and future.

On premise and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other revenues that are nonrecurring in nature. We also exclude the value of professional services sales.

For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACD bookings.

The third metric is dollar based net retention rate or <unk>, a measure of our success in retaining and growing revenue from our existing customers to calculate dollar based net retention rate for any period, we compare the IRR at the end of the prior comparable period, we call it the base.

To the IRR from that same cohort of customers at the end of the current quarter retained IRR then we divide the retained by the base IRR to arrive at the dollar based net retention rate. Our calculation includes the positive impact among this cohort of customers of selling additional products price increases and increases in usage based fees.

And the negative impact of customer attrition price decreases and decreases in usage based fees during the period.

It is important to note that our disclosed <unk> dollar based net retention rate and ACD bookings numbers for the current quarter and all prior quarters exclude revenues and bookings from our divested assets to make period to period comparisons more.

Fourth as mentioned briefly above weird exploding the amount of our software segment revenue that is recognized at a point in time versus recognized over the contract term. This helps provide an understanding of a key factor that drives the differences between reported software revenue and <unk> from period to period.

And finally, we are breaking out our on premise and SaaS software revenues.

And dollar based net retention rate into platform and non platform components.

The shift of our software solutions and capabilities to the FICO platform is our number one strategic goal in our software segment. This new disclosure provides significant additional visibility into our progress.

Taken together, we believe these metrics significantly enhanced investor visibility into our software segment, specifically IRR and dollar based net retention rate show, how we are retaining and growing our subscription based customer relationships and our platform disclosure shows the size growth and expansion potential of the FICO platform.

Now let me give you a few highlights on what these new metrics show this quarter.

Our software <unk> in the fourth quarter was $524 million, a 7% increase over the prior year, our platform <unk> was $75 million, representing 14% of our total fourth quarter, <unk> and a growth rate of 58% versus the prior year.

Our non platform <unk> was $449 million in the first and the fourth quarter, which was 1% higher than the prior year.

Customers are showing very strong net expansion from land and expand follow on sales and increased usage. The dollar based net retention rate for platform was 143% in the fourth quarter up from 116% in the prior year.

Excluding divested product lines and businesses, our software ACB bookings for the quarter were $25 8 million versus $28 9 million in the prior year.

Bookings increased for the full year to $62 8 million versus $58 $3 million in FY 'twenty representing growth of about 8% year over year. As a reminder, ACB bookings include only the annual value of software sales excluding professional services.

Turning now to our expenses for the quarter total operating expenses were $219 million. This quarter. This included an $8 million restructuring charge, primarily associated with reductions in our professional services delivery staff and rationalization of resources following our collections and recovery divestiture.

Our non-GAAP operating margin as shown on our Reg G schedule was 45% for the quarter at 40% for the full year, we delivered non-GAAP margin expansion of 600 basis points for the full year.

GAAP net income this quarter was $86 million up 45% from the prior year quarter. Our non-GAAP net income was $112 million for the quarter up 15% from the same quarter last year.

For the full year GAAP net income was 392 million, which included a gain of $100 million on product line asset sales and business divestiture non-GAAP net income was $383 million up 31% from the prior year.

The effective tax rate for the full year was 17%, including 24 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock Awards, we expect our FY 2021 recurring tax rate to be approximately 25% to 26%.

That expected recurring tax rate is before any excess tax benefits and other discrete items, the resulting net effective tax rate is estimated to be about 24% for the year.

Free cash flow for the quarter was $90 million for the full year free cash flow was $416 million up 21% from last years $343 million at the end of the quarter, we added $195 million in cash on the balance sheet.

Our total debt at quarter end was $1 $2 6 billion with a weighted average interest rate of three 3% in October we amended our credit agreement to allow for the issuance of a $300 million term loan with our bank group increased our total bank capacity to $900 million. We used the proceeds of the term loan to reduce the draw on our revolving line of credit.

Turning to return of capital we bought back 845000 shares in the fourth quarter at an average price of $446 per share in fiscal 2021, we repurchased a total of $1 million 877000 shares at an average price of $470 per share for a total of 882 million.

At the end of September we had about $173 million remaining on the board repurchase authorization and continue to view share repurchases as an attractive use of cash.

With that I'll turn it back over to will for his thoughts on fiscal point to thanks, Mike as we move into fiscal 'twenty. Two I believe we are well positioned for the year ahead.

And our software business, we continued to solidify and add functional capabilities to our platform and.

And we remain committed to becoming the preeminent provider of Decisioning analytics, we are committed to pursuing growth opportunities and improving our efficiency.

In our scores business, we continue to innovate and find new ways to add value for our customers and benefit from the diversification that comes from the broad usage through the various credit verticals.

We enter the new year with more visibility than last year and as such are again, providing guidance for fiscal 'twenty two as shown on page 15 of the presentation.

We are guiding revenues of about $1 $350 million, an increase of about 3% versus fiscal 'twenty, one on an as reported basis and about 6% when adjusted for the divestitures we.

We are guiding GAAP net income of approximately $318 million.

Earnings per share of approximately $11 29.

Non-GAAP net income of 397 million and non-GAAP earnings per share of $2014 12.

I'll turn the call back over to Steve and then we'll take your questions.

Thanks will this prepares our prepared this concludes our prepared remarks, and we're ready now to take your questions. Operator, Please open the lines.

Certainly.

Thank you.

If you would like to register a question. Please press the one followed by the four on your telephone you will hear a <unk> probe to acknowledge that request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the <unk> III.

And our first question comes from George Tong with Goldman Sachs. Your line is open.

Hi, Thanks, good afternoon.

You are guiding to scores revenue growth up 6% next year that excludes any special pricing increases could.

Could you talk about what the assumptions are in factors are that go into your 6% growth outlook.

It's a continuation we break it down into the pieces and we look at mortgage we look at auto we look at card we look at pre screen. So we look at all those pieces and put estimates on that we use industry forecast to inform those estimates although.

So we're not always exactly on top we form our own views.

And that's basically how we do it that's how we get to the 6%.

So in combination.

It combines both volume increases based on based on industry and price increases as well.

Okay got it so there is some measure of underlying pricing increase in there.

Yes.

Okay.

I mean, the honest as EPS API kinds of ink just to be clear is CPI kind of increases.

Not including the strategic price increases right.

And George I would add I would add to that.

Just sorry to interrupt just looking across those segments, we do our best to predict volumes for the three major parts of our <unk> business. Just like you probably do we don't have a crystal ball, but I can say that our expectations for mortgage are in line with what you would find from third party forecasters and likewise, we expect.

Modest, but positive growth in the auto and <unk>.

Credit card and other segments.

Okay, Yes, that's.

That's helpful that was.

Extra color I was hoping to get and then what the extra salt software disclosures I guess, if we dive into our performance.

The percentage of beta or that's on platforms at 14%.

Nearly double what it was about two years ago.

What are your expectations for for how that continues to tick higher.

What's embedded in your 2022 guide and how would you expect that trajectory to just perform.

In the years ahead.

We see the platform side of <unk> growing at over 50%.

And overall, if you just do the math on our guidance the 6% total revenue growth is approximately equal in terms of percentage between the software and scores business.

So if you expect very strong continued growth in the platform business, we think our off platform is going to be.

Relatively flat.

Okay. So 50% is a good run rate growth to apply to the platform.

That's right.

Got it thank you.

Our next question comes from Surinder <unk> with Jefferies. Your line is open.

Thank you.

As a follow up to the.

Question and more specifically the net revenue retention rate of 143% for the platform can you talk about the sales process and how that works for the client in terms of.

With the client initially buys and kind of what the upsell is in kind of the timing of the upsell works.

Sure.

Obviously, it varies and it varies from from client to client.

Typically we put the platform in with US specific number of use cases and in very specific ideas about how the platform will be used and what problem is being solved.

Increasingly is being put in with a view to being able to provide additional solutions later on.

And what we're seeing a classic land and expand strategy and what we're seeing is thats working with our with our current platform customers and.

And the ones that have gone in.

Less recently, we're seeing expansion, we're seeing new uses new ways of using the platform and and so which is what's really informing that that 143%.

Our retention rate.

That's helpful. And then in terms of just bringing on new clients onto the platform can you talk a little bit about the conversations you're having there.

And what is kind of taking to get them across the finish line and the timelines generally involved.

The timeline is a little bit longer than historic our historic 270 day sales cycle with with our older applications.

But.

What's happening is.

It's a bigger deal at the client.

It's being brought in as part of a broader strategy is being brought in with a view to using it to really interact with consumer customers strategically.

And so it is a bigger more complicated conversation.

But it's all it's we're.

We're kind of in the middle of it we're right in the middle of the way our clients want to interact with our consumer customers.

We're seeing we're seeing ourselves pop up in their strategy presentations.

Got it and just.

Kind of a technical question on the accounting part of the year or maybe is there a kind of a volume component to it in the sense that there is a head count of the number of people that are on they're all else equal.

Our usage.

Im not im not following the head count part of it.

Are you talking about.

Our contracts that are usage based as opposed to based on minimums per year.

The combination of minimums versus usage based so let's say.

Our use case has.

Our lender has I don't know $10 million million accounts or something like that as a use case or wind down of that.

And then obviously that number can change so are there kind of bands or how does that work.

Yes.

But the volatility might be so.

Yes, it's a good question so our contracts have both many have minimums.

Many have usage components, some have minimum with usage, if you exceed a certain amount of volume or use cases are accounts.

What we do is if it's minimums thats what goes in the IRR unless and until that customer exceeds the minimums and then that additional.

Run rate is added to <unk> in the period in which that occurs.

If it's a purely usage based contract some of our customer communication services contracts. For example are based on the number of messages that are sent in cases, where fraud is identified or what have you.

There we estimate once the solution has been installed and is running and has shown a stabilized usage rate. We then use that as the <unk>.

That we will enter into the quarter's results if that usage goes up or down in future quarters, we adjust accordingly does that makes sense.

Yes, that's actually very helpful. So thank you that's it for me.

Next question comes from Kyle Peterson with Needham Your line is open.

Good evening guys. Thanks for taking the questions.

I wanted to touch on the margins.

Obviously came in really strong this quarter I know, it's been a lot of moving pieces with.

Deemphasize professional services and <unk>.

Our divestiture.

I just wanted to get.

Any thoughts on what your assumptions would be unlike the sustainability of operating margins in line with what we saw this quarter.

There isn't anything structural that has changed or we expect to change in the <unk>.

Quarters ahead in fiscal 'twenty, two versus what you've seen in recent quarters other than the fact that we expect to return to traveling so if you look at the expense breakdown in our supplemental materials.

I think we've spent a half million bucks on <unk> in Q4, that's going to go back up to a more normal rate or at least that's what we're projecting.

Professional services is that decline so that's a low gross margin business. Therefore, a high cost of goods sold business.

The cost of goods sold declines.

Those revenues go down.

But otherwise in terms of what we're investing in R&D.

And go to market and G&A.

Nothing dramatic has changed in our forecast versus our historical other than we've taken out a lot of expense from the divestitures.

Got it that's helpful and then.

Just a follow up on the BDC side. The performance continues to be really impressive for scores is this something that you guys think you can keep growing.

Kind of above above trend. It seems like you guys are putting up significantly faster faster growth than what we're seeing with some of the other players in the space.

I think that Theres a lot of strength in the FICO brand and I think that Theres a lot of strength in the operating and management acumen of our <unk> team, so doing better than others. I think you could expect that we will we be able to repeat year over year performance in the third.

I guess I can't promise that I think we're more likely to be something closer to our quarter to quarter growth.

Okay.

Helpful. Thanks, guys.

And as a brief reminder to register a question. It is one four on your telephone keypad. The next question comes from Ashish Sabedra with RBC capital markets. Your line is open.

Hi, This is Joe mazzoli filling in for Ashish, maybe just a quick one on the PTP revenues I know there was a onetime impact.

With adjusted out would be around 15% how should we think about these moving forward, especially going into kind of 'twenty two.

Okay.

Kind of one timers happen periodically it is kind of part of the business, we do audits and true ups every few years with different channel partners and so can you expect them to continue yes, there will be things like that they're a little bit unpredictable.

But but it is part of the business.

Understood. Thank you and then maybe just a quick follow up.

Do you see the software business evolving over time, maybe over a longer term perspective, just as we kind of wrap our heads around these new metrics, what could be a longer term growth rate or any type of things that investors should be essentially two thank you.

Okay with the caveat that this is not guidance.

I would say look at our platform grow 50%.

Platform growth, which tells you that we have something there that the market wants.

We have a large number a large number of 19 enterprise customers large customers who have adopted the platform.

And many more in the pipeline.

And what we're seeing is that the combination of.

Conversion substitution of platform solutions for more historical solution, but it's also growth. It's also new stuff and so over time and it could be a very long time, but over time, you'll see our software transition from our older solutions to platform solutions.

And the platform solutions piece is growing a lot faster so will our growth rate go up yes. It almost certainly will go up as we do more and more of our total software business on the platform.

So if you.

If today is 6%.

I would just extrapolated out from 6% upward and I don't know how many years it will take but we will be in double digits. Eventually.

Great that's very helpful. Thanks again.

And Mr. Weber as there are no further questions.

Alright. Thank you all for joining today's call and we look forward to speaking with you again soon this concludes the call.

And that will conclude the conference call for today, we thank you very much for your participation you may now disconnect.

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Greetings and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four new telephone.

If you require operator assistance at any time, Please press star zero.

As a reminder, this conference is being recorded today Wednesday November 10th 2021, I'd now like to turn the conference over to Steve Weber. Please go ahead.

Thank you.

Good afternoon, everyone and thank you for joining <unk> 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 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 1095, those 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.

The earnings release and regulation G schedule are available in the Investor Relations page of the company's website at <unk> dot com or on the SEC's website at SEC Gov.

A replay of this webcast will be available through November 10, 2022.

And with that I'll 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 am pleased to report that our Q4 capped another terrific year, a year in which we posted record revenues earnings and cash flows.

And we were able to do this despite headwinds in fiscal 'twenty, one due to a shift in the timing of revenue recognition for term license subscription sales.

And the sale of two product lines in our software business and the managed and deliberate decline in our software professional services revenues.

Pages, two and three show some financial highlights from our fourth quarter.

We reported revenues of $335 million in Q4, and $1 $32 billion of revenue for the fiscal year.

We were able to grow our full year revenue. Despite these negative revenue factors.

We delivered $86 million of GAAP net income in the quarter and GAAP earnings of $3 per share.

For the full fiscal year, we delivered $392 million of GAAP net income of $13.40 of earnings per share, which includes the gain of $100 million on product line asset sales and business divestiture.

On a non-GAAP basis Q4, net income was $112 million up 15% and earnings per share of $3 92.

Was up 21% from the prior quarter prior year quarter.

Full year non-GAAP net income was $383 million up 31% over last year and non-GAAP EPS of $13 seven was up 34% over the previous year.

We continue to deliver strong free cash flow growth as well Q4 free cash flow was $90 million, bringing the fiscal year total to $416 million up 21% from the previous year.

In fiscal 2021, we continued our commitment to shareholder return buying back $882 million of stock during the year.

We increased our leverage by about $425 million compared to year end fiscal 'twenty.

But our adjusted leverage ratio remains a modest 2.07 times.

We view FICO shares is the best use of our excess cash at this time and expect to continue to aggressively buy back shares in the coming year.

We had another solid year, and we're making steady progress on our strategic initiatives.

In our scores segment, our diversification of verticals has enabled us to continue to drive growth even as various sector slowdown.

Scores were up 10% in the quarter versus the prior year and up 24% for the full year as you can see on page seven of the presentation.

As expected we saw a slowdown in mortgage originations volumes and revenues were down about 18% year over year.

Auto origination revenues were up 19% and card and personal loan origination revenues were up 45%.

We are seeing particular strength in the card and personal loan space from our customers, including Pentax or.

The year over year pricing increases we implemented in fiscal 'twenty. One also had a positive impact on overall <unk> revenues.

Our BDC revenues were up 32% versus the prior year quarter and 42% for the full year compared to 2021.

We saw strong growth through both our own myfico dot com product as well as through our partner channels.

In next year's guidance, which I'll discuss in greater detail later, we expect the scores business to grow about 6% Theres been no change in our strategy or approach to special pricing.

Accordingly special pricing increases consistent with the past several years are not included in this guidance. While we expect these price increases to have an impact consistent with those of the last several years, because it's difficult to estimate the timing and the magnitude of the impact we remain conservative in how we issue our guidance relative to such increases.

Turning to our software business.

And the retention and growth of our existing software customers. Beginning this quarter. We're pleased to unveil our revised software reporting structure and these new metrics, Mike Mclaughlin will go into much more detail in his remarks, but let me give you just a few highlights first we reevaluated our operating segments to better align with how we assess performance and allocate resource.

We merged our legacy applications and decision management software segments into a single software segment. We continue to report the score segment, which is unchanged from past reporting.

We also changed the classification of revenue from transactional and maintenance professional services and license to on premises and SaaS software professional services.

And scores to better align with our business strategy and peer reporting practices.

You'll also find in our 10-K this year, our first reporting of annual recurring revenue or <unk>, which provides visibility into the growth trajectory of our software business.

Without the variability that comes with the upfront revenue recognition required by ASC 606 for on Prem subscription sales.

We are also disclosing dollar based net retention rate and annual contract value of software bookings.

The other big change will be talking about is the split of our software revenue between our on platform and off platform products.

We'll give the splits for revenue for IRR and for dollar based net retention.

Revenue, we believe it is important to focus on the progress of our on platform offerings as is the central strategy of our software business.

While effectively managing our operating expenses.

Happy with the progress we made in 2021 and I'm optimistic about what lies ahead in 2022 and beyond we'll continue to allocate our resources to areas of the highest strategic importance and will continue to focus on long term shareholder value.

I'll have some final comments in a moment provide our fiscal 'twenty two guidance, but first let me just turn the call over to Mike for further financial details.

Thanks will and good afternoon, everyone. As you may have already seen in our 10-K and the financial highlights presentation posted to the FICO website, we have made significant enhancements to our financial reporting this quarter, including the introduction of new metrics in both our scores and software segments will briefly previewed these metrics and I will take some extra time on this call to provide more details on what we are.

Disclosing and what new insights these numbers provide.

As <unk> said, we had a strong finish to our fiscal year and we are well positioned as we enter fiscal 2022 total.

Total revenue for the fourth quarter was $335 million a decrease of 11% over the prior year due primarily to a reduction in upfront recognition of term license revenues for on Prem software sales the.

The sale of our collections and recovery product line in June and lower professional services revenue in our software segment, our full year revenue of $1 32 billion was up 2% over last year.

Our scores segment revenues were $169 million up 10% from the same period last year <unk> revenue was up 2% over the prior year as you may recall last year's fiscal fourth quarter included a onetime a royalty true up that did not recur. This year adjusting for this one time true up <unk> revenue was up about 15% this quarter.

<unk>.

<unk> revenues were up 32% from the same period last year, both mifi could dot com and partner revenues grew significantly.

One of the new financial metrics, we are adding to our 10-K and 10-Q disclosures going forward is a breakdown of our scores segment revenues between <unk> and <unk> components.

For the full year scores revenues were $654 million up 24% from last year.

As well previewed we have merged our applications and decision management segments into a new software segment software segment revenues in the fourth quarter were $166 million down 25% versus the same period last year.

Full year software revenues were $662 million down 14% from the previous year. This quarterly and full year decline was due to reduced upfront license revenue recognition reduced professional services revenue and the divestitures of our collection recovery products I will spend a few minutes discussing each of these three factors and their impact.

On FY 'twenty one results.

Recognize over the contract term.

Turning to professional services. We have previously explained how we are deemphasizing low margin non strategic services engagement as expected. This has resulted in lower <unk> revenues.

<unk> revenues were down 35% in Q4 compared to the prior year quarter and 20% for the full year.

Professional services continued to be an important part of our business, helping our customers implement our software and realize the most value from it over time, we expect to see additional modest declines in our services revenues over the next few quarters after which we expect it to return to a growth trajectory in line with our on premise and SaaS revenues.

<unk> posted on our Investor Relations website.

In that presentation, you will find reconciliations of our revenue in prior periods. Excluding these divestitures.

Let me take a few minutes to briefly walk you through each new metric.

The first of these is annual recurring revenue or <unk>, which measures the underlying performance of our subscription based software contracts.

As defined as the annualized revenue run rate of on premise and SaaS software agreements within a quarterly reporting period and as such it is different from the timing and amount of revenue recognized in any given period.

Second metric is annual contract value or ACD bookings. This replaces our previously disclosed bookings metric, which was based on total contract value, including the value of professional services ACB bookings is the average annualized value of software contracts signed in the current reporting period that generate current and.

Future on premise and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other revenues that are nonrecurring in nature. We also exclude the value professional services sales.

Were renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACD bookings.

And the negative impact of customer attrition price decreases and decreases in usage based fees during the period.

Fourth as mentioned briefly above we are disclosing the amount of our software segment revenue that is recognized at a point in time versus recognized over the contract term. This helps provide an understanding of a key factor that drives the differences between reported software revenue and <unk> from period to period.

And finally, we are breaking out our on premise and SaaS software revenues.

And dollar based net retention rate into platform at non platform components, the shift of our software solutions and capabilities to the FICO platform is our number one strategic goal in our software segment. This new disclosure provides significant additional visibility into our progress.

Taken together, we believe these metrics significantly enhanced investor visibility into our software segment, specifically <unk> and dollar based net retention rate show, how we are retaining and growing our subscription based customer relationships and our platform disclosure shows the size growth and expansion potential of the FICO platform.

Now let me give you a few highlights on what these new metrics show this quarter.

Our software <unk> in the fourth quarter was $524 million, a 7% increase over the prior year, our platform <unk> was $75 million, representing 14% of our total fourth quarter, IRR and a growth rate of 58% versus the prior year.

Our non platform <unk> was $449 million in the first and the fourth quarter, which was 1% higher than the prior year.

Our dollar based net retention rate in the quarter was 106% overall, while our non platform customers software usage tends to be mature and relatively stable with retention hovering around 100% are platform customers are showing very strong net expansion from land and expand follow on sales and increased usage.

The dollar based net retention rate for platform was 143% in the fourth quarter up from 116% in the prior year.

Excluding divested product lines and businesses, our software ACB bookings for the quarter were $25 8 million versus $28 9 million in the prior year.

ACB bookings increased for the full year to $62 8 million versus $58 3 million in FY 'twenty representing growth of about 8% year over year.

As a reminder, ACB bookings include only the annual value of software sales excluding professional services.

Our non-GAAP operating margin as shown on our Reg G schedule was 45% for the quarter at 40% for the full year, we delivered non-GAAP margin expansion of 600 basis points for the full year.

GAAP net income this quarter was $86 million up 45% from the prior year quarter. Our non-GAAP net income was $112 million for the quarter up 15% from the same quarter last year.

For the full year GAAP net income was $392 million, which included a gain of $100 million on product line asset sales and business divestiture non-GAAP net income was $383 million up 31% from the prior year.

The effective tax rate for the full year was 17%, including $24 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock Awards, we expect our FY 2021 recurring tax rate to be approximately 25%, 26% that expected recurring tax rate is before any excess.

<unk> benefits and other discrete items, the resulting net effective tax rate is estimated to be about 24% for the year.

Free cash flow for the quarter was $90 million for the full year free cash flow was $416 million up 21% from last year's $343 million at the end of the quarter, we added $195 million in cash on the balance sheet.

At the end of September we had about $173 million remaining on the board repurchase authorization and continue to view share repurchases as an attractive use of cash.

With that I'll turn it back over to will for his thoughts on fiscal <unk>.

Thanks, Mike as we move into fiscal 'twenty, two I believe we are well positioned for the year ahead.

In our software business, we continued to solidify and add functional capabilities to our platform and.

And we remain committed to becoming the preeminent provider of Decisioning analytics, we are committed to pursuing growth opportunities and improving our efficiency.

We entered the new year with more visibility than last year and as such are again, providing guidance for fiscal 'twenty two as shown on page 15 of the presentation.

We are guiding revenues of about $1 $350 million, an increase of about 3% versus fiscal 'twenty, one on an as reported basis and about 6% when adjusted for the divestitures we.

We are guiding GAAP net income of approximately $318 million gap.

<unk> earnings per share of approximately $11 2009.

Non-GAAP net income of 397 million and non-GAAP earnings per share of $14 12.

I will turn the call back over to Steve and then we'll take your questions.

Thanks Welles this prepares our prepared this concludes our prepared remarks, and we're ready now to take your questions. Operator, Please open the lines.

Certainly.

Thank you.

If you would like to register a question. Please press the one followed by the four on your telephone you will hear a three pronged to acknowledge that request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the <unk> III.

And our first question comes from George Tong with Goldman Sachs. Your line is open.

Hi, Thanks, good afternoon.

Youre guiding to scores revenue growth up 6% next year that excludes any special pricing increases.

Could you talk about what the assumptions are in factors are that go into your 6% growth outlook.

It's a continuation we break it down into the pieces and we look at mortgage we look at auto we look at card. We look at pre screened so we look at all those pieces and put estimates on that we use industry forecast to inform those estimates.

So we're not always exactly on top we form our own views.

And that's basically how we do it that's how we get to the 6%.

So a combination.

It combines both volume increases based on based on industry and <unk>.

Nice increases as well.

Okay got it so there is some measure of underlying pricing increase in there.

Yes.

Okay.

And then your honest as EPS API kind of I think just to be clear is CPI kinds of increases not including the strategic price increase right right.

And George I would add I would add to that.

And just sorry to interrupt just looking across those segments, we do our best to predict volumes for the three major parts of our <unk> business, just like you'd probably do we don't have a crystal ball, but I can say that our expectations for mortgage are in line with what you would find from third party forecasters and likewise, we expect.

Modest, but positive growth in the auto and <unk>.

Credit card and other segments.

Okay, Yes, that's.

Thats helpful that was extra color I was hoping to get and then but the extra salt software disclosures I guess, if we dive into our performance.

The percentage of via our <unk> platform is at 14%.

Nearly double what it was about two years ago.

What are your expectations for for how that continues to tick higher.

What's embedded in your 2022 guide and how would you expect that trajectory to just perform.

In the years ahead.

We see the platform side of <unk> growing at over 50%.

And overall, if you just do the math on our guidance the 6% total revenue growth is approximately equal in terms of percentage between the software and scores business.

So if you expect a very strong continued growth in the platform business, we think our off platform is going to.

Relatively flat.

Okay. So 50% is a good run rate growth to apply to the platform fees.

That's right.

Got it thank you.

Our next question comes from Surinder <unk> with Jefferies. Your line is open.

Thank you.

As a follow up to the <unk> question and more specifically the net revenue retention rate of 143% for the platform can you talk about the sales process and how that works for the client in terms of.

What with the client initially buys and kind of what the upsell lies in how the timing of the upsell works.

Sure and obviously it varies and it varies from from client to client.

Typically we put the platform in with US specific number of use cases.

And very specific ideas about how the platform, we used and what problem is being solved but increasingly is being put in with a view to being able to provide additional solutions later on and what we're seeing a classic land and expand strategy.

And what we're seeing is thats working with our with our current platform customers and.

And the ones that have gone in.

<unk> recently, we're seeing expansion, we're seeing new uses new ways of using the platform and and so which is what's really informing that 143%.

Our retention rate.

That's helpful. And then in terms of just bringing on new clients onto the platform can you talk a little bit about the conversations you're having there.

And what is kind of taking to get them across the finish line and the timelines generally involved.

The timeline is a little bit longer than historic our historic 270 day sales cycle with with our older applications.

Hi.

But.

What's happening is.

It's a bigger deal at the client.

It's being brought in as part of a broader strategy is being brought in with a view to using it to really interact with consumer customers strategically.

And so it is a bigger more complicated conversation.

But it's all it's we're kind of in the middle of it we're right in the middle of the way our clients want to interact with their consumer customers.

We're seeing we're seeing ourselves pop up in their strategy presentations.

Got it and just.

A kind of a technical question on the accounting part of the <unk>, maybe is there a kind of a volume component to it in the sense that there's a head count of the number of people that are on they're all else equal.

Our usage.

I'm not following the head count part of it.

Are you talking about use of our contracts that are usage based as opposed to based on minimums per year.

Yes, the combination of minimums versus usage based so let's say.

Our use case has.

Our lender has I don't know $10 million million accounts or something like that as a use case or was part of that and then.

And then obviously that number can change so are there kind of bands or how does that work.

Hi.

The volatility might be so.

Yes, it's a good question. So our contracts have both many have been amongst many have users components. Some have minimum with usage. If you exceed a certain amount of volume or use cases are accounts.

What we do is if it's minimums thats what goes in the IRR unless and until that customer exceeds the minimums and then that additional.

Run rate is added to <unk> in the period in which that occurs.

There we estimate once the solution has been installed and is running and has shown a stabilized usage rate. We then use that as the <unk>.

There are that we will enter into the quarter's results if that usage goes up or down in future quarters, we adjust accordingly does that makes sense.

Yes, thats actually very helpful. So thank you that's it for me.

Yeah.

Next question comes from Kyle Peterson with Needham Your line is open.

Good evening guys. Thanks for taking the questions.

Just wanted to touch on the margins.

It came in really strong this quarter I know, there's been a lot of moving pieces with <unk>.

<unk> professional services and the CNR divestiture, but just wanted to get.

Any thoughts on what your assumptions would be unlike the sustainability of operating margins in line with what we saw this quarter.

There isn't anything structural that has changed or we expect to change in the <unk>.

I think we've spent a half million bucks on <unk> in Q4, that's going to go back up to a more normal rate or at least thats what were projecting professionals.

Professional services is that declines thats, a low gross margin business. Therefore, a high cost of goods sold business.

The cost of goods sold declines.

So those.

Revenues go down.

But otherwise in terms of what we're investing in R&D.

And go to market and G&A.

Nothing dramatic has changed in our forecast versus our historical other than we've taken out a lot of expense from the divestitures.

Got it that's helpful and then.

Just a follow up on the BDC side. The performance continues to be really impressive for scores is there.

Something that you guys think you can keep growing.

Kind of above above trend. It seems like you guys are putting up significantly faster faster growth than what we're seeing with some of the other players in the space.

I think that Theres a lot of strength in the FICO brand and I think that Theres a lot of.

Strength in the operating and management acumen of our BDC team, so doing better than others. I think you could expect that we'd be able to repeat year over year performance in the <unk>.

I can't promise that I think we're more likely to be something closer to our quarter to quarter growth.

Okay.

Thanks, guys.

And as a brief reminder to register a question. It is one four on your telephone keypad. The next question comes from Ashish <unk> with RBC capital markets. Your line is open.

Hi, This is Joe mazzoli filling in for Ashish, maybe just a quick one on the PCB revenues I know there was a onetime impact.

If adjusted out would be around 15% how should we think about these moving forward, especially going into kind of the mix.

Those kinds of one timers happen periodically it is kind of part of the business, we do audits and true ups every few years with different channel partners and so can you expect them to continue yes, there will be things like that they're a little bit unpredictable.

<unk>.

But but it is part of the business.

Understood. Thank you and then maybe just a quick follow up how do you see the software business evolving over time, maybe over a longer term perspective, just as we kind of wrap our heads around these new metrics, what could be a longer term growth rate or any type of things that investors should be essentially two thank you.

Okay with the caveat that this is not guidance.

I would say look at our platform grow 50%.

<unk> growth, which tells you that we have something there that the market wants.

We have a large number a large number of 19 enterprise customers large customers who have adopted the platform.

And many more in the pipeline.

And what we're seeing is that the combination of.

Conversion substitution of platform solutions for more historical solution, but it's also growth what's also new stuff and so over time and it could be a very long time, but over time, you'll see our software transition from our older solutions to platform solutions.

And the platform solutions piece is growing a lot faster so will our growth rate go up yes. It almost certainly will go up as we do more and more of our total software business on the platform.

Yes.

So if.

If today is 6%.

I would just extrapolate out from 6% upward and I don't know how many years it will take but we will be in double digits. Eventually.

Great that's very helpful. Thanks again.

Yeah.

Okay.

And Mr. Weber there are no further questions.

Alright. Thank you all for joining today's call and we look forward to speaking with you again soon this concludes the call.

And that will conclude the conference call for today, we thank you very much for your participation you may now disconnect.

Q4 2021 Fair Isaac Corp Earnings Call

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