Q3 2022 Fair Isaac Corp Earnings Call

August 3, 2022

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 August three 2022, I would now like to turn the call over to Steve Weber. Please go ahead Sir.

Thank you.

Good afternoon, everyone and thank you for joining cycles third quarter earnings call.

Ever 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.

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 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 <unk> dot com or on the SEC's website at SEC Gov.

Play of this webcast will be available through August three 2023, and now I'll turn the call over to will Lansing.

Thanks, Steve and thank you everyone for joining us for our third quarter earnings call.

We posted some slides with our results on the Investor Relations section of our website I'll be referencing some of those slides during our presentation today.

I will go over the results of our third fiscal quarter and discuss what we're seeing in the markets we serve.

We again delivered very strong results in an uncertain marketplace, which demonstrates the resiliency of our business model and the value proposition we deliver.

As you can see on page two of the presentation, we reported revenues of $349 million.

An increase of 3% over the same period last year.

Or 7% when adjusted for last year's sale of our collections and recovery products.

We delivered $93 million of GAAP net income and GAAP earnings of $3 61 per share up 21% and 36% respectively. When adjusted for last year's gain on sale on.

On a non-GAAP basis, net income was $116 million up 17%.

And earnings per share of $4 47 was up 32% from last year.

Our scores business continues to perform well despite headwinds in the mortgage market.

Scores were up 4% in the quarter versus the prior year as you can see on page six of the presentation.

On the <unk> side revenues were up 3%.

Mortgage continues to be the headwind as originations have declined as interest rates rise mortgage originations revenues were down 25% versus last year.

Mortgage origination revenues now account for about 12% of our scores revenues and 6% of our total company revenues.

Excluding mortgage total <unk> revenues were up about 12% versus last year.

Auto origination revenues were up 12% in credit card and personal loan originations revenues were up 37%.

We also had double digit year over year increases in our Prescreened scores.

On the BDC side revenues were up 7% from the previous year.

The slowdown in growth came primarily in our direct Myfico Dot Com channel, where we are seeing fewer new customers coming online our partner channel, which includes paid in premium components continues to drive double digit growth.

And our software segment, we delivered $170 million of revenue up 2% from last year and 11% after adjusting for the divestiture.

As you know over several quarters, we've talked about the demand for our platform and how we see substantial growth opportunities.

As shown on page seven total <unk> was up 9% and the platform IRR again grew at a remarkable 60%.

Our net retention rate is also very strong as our existing customers continue to expand their usage.

<unk> for the quarter shown on page eight was 108%.

Platform NR was 135%.

We also had a very good quarter with new sales, our ACB bookings as shown on page nine was up 64% over last year.

We're extremely excited about the continued growth potential for our FICO platform and that excitement was shared by our customers at our recent FICO World Conference.

The three day event hosted in May was an opportunity to finally connect face to face with our clients partners and industry experts and colleagues to reinforce FICO vision and commitment to client success.

We hosted 750 FICO clients from leading banks financial services firms auto finance companies insurance providers and telcos event in Orlando included 90 breakout sessions as well as hundreds of individual strategic consulting engagements all designed to help our customers identify how FICO can enable them to accelerate and achieve.

Their goals with the FICO platform.

It was also a great opportunity here from FICO customers with nearly 70 clients presenting during breakout sessions sharing the success stories and lessons learned.

FICO World 22 was an essential moment, where we had the opportunity to explain and demonstrate our platform strategy directly to our most strategic clients.

Clients rated this FICO world the best FICO World of all past events and we've already seen a surge in registrations for the next FICO world to be held May 13 through 16 in Hollywood, Florida.

I'll have some final comments in a few minutes, but first let me turn the call back over to Mike for financial details. Thanks.

Thanks, Bill and good afternoon, everyone. We delivered another quarter of strong results and remain confident that we can deliver on the increased guidance, we issued last quarter.

Revenue from the third quarter was $349 million, an increase of 3% over the prior year or 7% after adjusting for the divestiture of our collections and recovery product line last June .

In our scores segment revenues were $179 million up 4% from the same period last year <unk> scores revenue was up 3% over the prior year as Walt mentioned, we continue to see a decline in mortgage origination revenues, which were down 25% from the same quarter last year. However, other parts of the portfolio continued to be strong.

<unk> credit card and personal loan originations revenues were up 37% and originations revenues in auto originations revenues were up 12% and we continue to see nice growth in our Prescreened scores, which is a good sign for continued strength in credit card originations.

B to C scores revenues were up 7% from the same period last year, driven by strong growth from our partner channel.

Tycho software segment revenues in the third quarter were $170 million up 2% versus the same period last year or 11% after adjusting for the divestiture of our collections and recovery business.

Software license revenue recognized upfront or at a point in time was $21 million to us was $20 million in the quarter compared to $13 million in the same period last year. As a reminder, these point in time revenues are result of GAAP accounting rules that require us to recognize upfront a portion of the total contract value of multiyear.

Year on premise software license subscription sales and renewal point.

Point in time revenues will vary from quarter to quarter, driven primarily by the mix of on premise versus SaaS subscription sales. It's important to note that our <unk> metric is not impacted by these point in time revenue accounting rules.

As expected we continue to see lower software professional services revenues those revenues were $27 million this quarter up slightly from last quarter, but down 24% from the same period last year much of it due to last year's divestiture.

This quarter, 84% of total company revenues were derived from our Americas region, Our Asia Pacific region generated 5% and the remaining 11% was from EMEA.

Our software.

At the end of the third fiscal quarter of 2022 was $561 million, a 9% increase over the prior year quarter. Our platform business continues to perform extremely well platform <unk> was $108 million, representing 19% of our total third quarter <unk> with a growth rate of 60% versus the <unk>.

Higher year are non platform <unk> was $453 million in the quarter up 1% from the prior year.

As a reminder, our reported <unk> and related metrics exclude all revenues from divestitures in prior periods.

Our dollar based net retention rate in the quarter was 108% overall again, we're seeing exceptional performance in our platform business as customers continue to expand their usage.

Dollar based net retention rate for platform was 135% in the third quarter.

Our non platform customers with software uses continues to mature and relatively stable with a net retention rate of 101% this quarter.

Software sales were again strong this quarter with annual contract value bookings of $19 million versus $11 6 million in the prior year, an increase of 64%. Our ACD bookings include only the annual recurring value of software sales excluding professional services.

Turning now to our expenses for the quarter total operating expenses were $208 million this quarter up slightly from our second quarter. We expect expenses to continue to increase modestly in our fourth quarter.

Our non-GAAP operating margin as shown on our Reg G schedule was 49% for the quarter, we delivered non-GAAP op margin expansion of 1000 basis points over the same period last year.

GAAP net income this quarter was $93 million and our GAAP EPS was $3 61.

Which was down from last year, when we had a $93 million pre tax gain on sale of our collections and recovery product line.

Our non-GAAP net income was $116 million for the quarter up 17% from the same quarter last year.

The effective tax rate for the quarter was 23%, we expect our FY 2022 recurring tax rate to be approximately 25% before any excess tax benefits and other discrete items.

<unk> net effects of tax rate is estimated to be about 24%.

Free cash flow for the quarter was $115 million up 16% from the same period last year for the trailing 12 month period free cash flow was $449 million.

At the end of the quarter, we had $182 million in cash and investments.

Total debt at quarter end was 196 billion with a weighted average interest rate of 386%.

Turning to return of capital we bought back 735000 shares in the third quarter at an average price of $384 per share.

At the end of June we had about $119 million remaining on the current board authorization and continue to view share repurchases as an attractive use of cash.

With that I'll turn it back over to well for his thoughts on the rest of FY 'twenty two.

Thanks, Mike as I said in my opening remarks, I am pleased with our ability to continue to deliver strong results and how we can meet our customer needs while working in the best interest of our shareholders.

We continue to deliver mission critical software and analytics to customers.

As the financial services industry continues to navigate the impacts of economic volatility the need for precision through advanced analytics has never been more important lenders are seeking more ways to assess risk and opportunity in real time to inform decision, making and we have the technology and expertise to deliver best in class solutions.

Our scores business continues to provide lenders with time tested analytics that help manage risk throughout the consumer lending market and the use of those scores throughout the many different lending markets means we're not highly leveraged at specific types of lending more customers on.

On the software side, we continue to drive remarkable platform IRR NRI growth, demonstrating a strong market appreciation and appetite for our latest Decisioning technology.

Finally, as you know, it's our practice to provide only annual guidance. So it is not our policy to raise guidance in our fourth quarter I am pleased to say we are reiterating our full year guidance that we raised last quarter. We remain confident their world. We are well positioned to meet or beat the numbers, we have presented and look forward to discussing our fiscal 'twenty three expectations.

When we release our results next quarter.

Turn the call back to Steve for Q&A.

Thanks will.

This concludes our prepared remarks, and we're now ready to take any questions you may have.

Operator, please open the line.

Thank you very much if you would like to register a question. Please press. The one followed by the four on your telephone you will hear three tone prompt 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 three when skin to register a question. Its one four on your telephone keypad.

First question will come from Manav Patnaik with Barclays. Your line is open.

Thank you good evening.

I just wanted to touch on that last point, you made where you said you are kind of.

To meet the guidance, but I was hoping you could just walk us through some of the moving pieces given it sounds like maybe mortgage goodbye with my FICO Duck.

And anything else that perhaps EBITDA growth, the better and maybe some comments on pricing in there as well.

Well I mean pricing is really a discussion for for next year I mean, the pricing is baked in for this year.

And those really are the puts and takes I mean, we've got mortgage headwind and everything else is pretty strong.

Our next question will come from the line of Kyle Peterson with Needham Your line is open.

Hey, good afternoon, guys I appreciate you guys taking my question.

Just wanted to have a question on <unk>.

Where.

Results are really strong, especially on the <unk> side this quarter for platform.

Have you guys seen any change whether it's in longer sales cycles are clients looking at particularly down gauging deals with some recessionary fears perking up here.

No no we really have not I would say that.

The it spending in the financial services industry seems to be on track and Hasnt moved a whole lot sales.

Sales cycles have not gotten any longer they are the same which is not as either short, but they are there.

What they've always been.

And so I would say no change.

Understood. That's really helpful. And then I guess just following up on the expense run rate.

It showed some really good margin leverage this quarter. Despite having your conference you guys said that you know expenses up modestly next quarter what are the biggest drivers of <unk>.

Expenses here is it just higher personnel.

Cost just given the tight labor market or are there any other investments that you guys are making just a couple of them right now.

Couple of things.

Going back to a little bit more of the pre COVID-19 travel expense that is starting just starting to kick in again.

And I would just say that.

Our hiring attrition.

Attrition is more or less where it's always been but I think it's taking us a little longer to backfill than in years past, it's a tight market out there.

Understood Thanks, guys nice quarter.

Thank you.

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

Hi, guys.

A question about the ACB bookings here, it's a third consecutive quarter.

A really strong number.

Any color or commentary there additional to what you've kind of said on the call in the sense that I think the expectation is is that.

Relative to where expectations were.

You guys are well ahead of that in there also tends to be seasonality next quarter. So how should we think about that has there been any pull forward or should we just expect a normal seasonality as well.

So ACB bookings as you know is a new metric reported externally.

We've been tracking it internally longer than that of course, and we set high goals for ourselves for this year in terms of new sales and we're on track to hit us.

There isn't.

Material amount of pull forward or any that I can put.

Put my finger on.

That has happened this quarter or quarters before ACB.

ACB bookings is a.

Pretty good metric because it doesn't have the revenue acceleration.

Dynamics or distortions that you see with other metrics.

And we do expect Q4 to be good in terms of ACD bookings.

It has it usually is.

Fair enough and then in terms of the professional services.

They had been declining for a while I think last quarter, you talked about them kind of bottoming.

And then there was a meaningful uptick this quarter I mean, I realize it's not.

A large number but it still was a bigger uptick than I was anticipating any color there or what kind of drives the run rate, there where should that kind of balanced out.

Yeah, I think it was my prediction as you correctly pointed out last quarter that we.

We may have reached the bottom I think that's demonstrated or at least we have one quarters data point that that is the case.

When we shifted our strategic focus away from lower margin professional services.

To focus more of our go to market and energy is an annual recurring software we saw significant decline in the bookings of new professional services.

Once we made that decision.

It takes a while for those bookings to work their way through revenues because we in any given quarter.

Three or four quarters of backlog of professional services that we continue to work our way through so.

You can see from the outside but we saw our professional services new bookings go down pretty rapidly when we made the policy change.

That decline in bookings stabilized about four three to four quarters ago. So the bookings are no longer declining and it took a few quarters for the PS revenues to catch up and.

Hit this as you say the new normal so this kind of $25 million a quarter is probably a pretty good expectation in the near term.

Helpful and then a question or color on the.

The <unk> part of the business you talked about continued double digit growth with your partner.

Essentially seeing a slowdown in growth at Myfico Dot com.

Any color there in terms of.

Is it is it simply the net new additions number are you seeing a bit more perhaps turnover at <unk> dot com.

Any color you can provide there it's.

It's really the net new additions.

It has to do with the fact that we see spike in that business when people are out mortgage shopping and so as mortgage mortgage volumes fall off.

<unk>.

Subscribe to that in smaller numbers.

Got it okay. Thank you that's it for me.

And as a brief reminder, 12 to register a question. It is one four on your telephone keypad. The next question comes from the line of George Tong with Goldman Sachs. Your line is open.

Hi, Thanks, good afternoon.

We provided revenue performance across mortgage autos in card and personal loans can you describe how price and volume trends contributed to performance in those categories.

Price played a part.

And I think if you look at the externally available.

Numbers for performance in those three categories.

Our volume.

Elevations were similar.

Similar to what you would think they would be if you looked at things like J D power or the NBA or the result of the bureaus that reported in the last one.

Weaker week and a half.

I would say as we said last quarter that the.

The mortgage decline in terms of units has been pretty consistent with what we expected it would be.

For the year when we set.

That guidance and then revised it.

Last quarter autos.

<unk> been a little worse than we expected, but our revised guidance bakes in that change and then.

Credit card and others as those volumes are doing really nicely.

As we expected so.

We are tracking the market pretty closely as best we can tell in terms of volumes.

Got it.

With respect to your software business.

Tonnage of.

Our our that moving on platform continues to tick higher can you lay out what internal goals you have for where you would like to see the mix.

Our on platform versus off platform over the next over the near to medium term.

We don't have a forced mix.

We aggressively go after as much new platform business and expansion platform business as we can get so that is a strategic priority for us.

At the same time, we have.

So many customers who are involved with our legacy solutions and rely on us for that and renew those.

Those deals.

That we continue to invest in features and functionality there and I think from our perspective as long as as long as thats neutral to growing very modestly we're thrilled and even if it were shrinking a little bit it probably wouldn't bother us very much but we're pretty happy with the mix the way it is.

With dramatic growth on the platform side and kind of flat growth.

The legacy side.

Great. Thank you.

Our next question comes from the line of Jeff Mueller with Baird. Your line is open.

Yeah. Thank you good afternoon.

B to B scores, what's the typical lag from what the euro.

The inquiry to one that's recognized.

<unk> by FICO as revenue.

Six weeks.

Well, yes.

It looks like you're seeing some acceleration in <unk>.

Card growth relative to last quarter.

Your delta versus industry credit inquiries with the mortgage.

Was a little bit wider this quarter than it was last quarter. So just trying to understand to what extent, that's a timing difference or if there's.

Some other factor that's accounting for that.

Yes, Jeff there really isn't a timing difference with one caveat the last month of the quarter.

The data that we get from the bureaus by the time, we need to finalize it for closing the books.

Is.

Is tentative and subject to revision I guess I would say and so we have to make some estimates and accruals based on judgment and lots of past experience as to what that will be so occasionally there will be a little bit of a true up when we get the final data in there, but it's not material, it's not an explanation to the dynamic that.

You see in the data you just cited there it's real time for June with.

As I say what that asterisk.

Okay.

And then on my cyclical so I understand it correctly, it's still growing year over year.

Is that correct.

It's play, it's more or less flat on a.

On a quarter to quarter basis, which means it's still growing on a year over year basis, but if you look at the last.

The last couple of quarters as will mentioned, we're seeing a lot less net new.

Probably because less people are shopping for mortgages.

And that leads us to be cautious about the next couple of quarters.

Understood yet the whole industry is seeing a much softer direct channel I think that's you're up year over year and flat sequentially.

Pretty significantly outperforming the industry direct channel.

And then just on FICO World.

Great to hear the registrations and that Youre doing it again.

In may of next year.

How is the pipeline build by the badge and that was a pretty significant pipeline <unk> event for you itself a little bit like the coming out party for platform and you haven't had it for a few years. So I would think that it's actually a pretty big needle mover relative to the last couple of years.

If you can just talk about pipe built coming out of the cycle.

Yes, that's exactly right so by Hill World as several days of our showcasing our worse.

But really the.

The heavy relationship building occurs in these consultations sessions, where we sit down with clients individually and really work through what we can do for them in the pipeline that comes out of cycle World is phenomenal.

Okay. Thank you.

And our next question comes from the line of Ashish Sabedra with RBC capital markets. Your line is open.

Hi, This is John filling in for Ashish can you just talk about the slowing total software growth in the quarter. Thanks.

Yeah.

Well, it's slowed by.

A relatively small amount and I would attribute that to.

Normal quarter to quarter variability if you look at the eight plus quarters that we were.

<unk> for that metric when we introduced it in November you can see that that kind of quarter to quarter variation is.

Commonplace, so it's not a reflection of anything fundamental I wouldn't say.

Understood. Thank you.

And that does conclude the Q&A session for today, Mr. Weber I will turn the call back to you. Please continue with your presentation or closing remarks. Thank you.

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

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

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Q3 2022 Fair Isaac Corp Earnings Call

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