Q1 2023 Fair Isaac Corp Earnings Call

January 26, 2023

Speaker 2: .

Speaker 3: Greetings and thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during conference you need to reach an operator, please press star 0.

Speaker 4: This conference is being recorded Thursday, January 26, 2023. And now I'd like to turn the conference over to Steve Weber. Please go ahead.

Speaker 5: Good afternoon and thank you for joining FICO's first 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.

Speaker 6: 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.

Speaker 7: Those statements involve many uncertainties 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 FICA website or from our investor relations team.

Speaker 8: This call will also include statements regarding certain non-GAAP financial measures. Please refer to the company's earnings release and regulation sheet schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure.

Speaker 9: The earnings release and regulations you 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.

Speaker 10: Replay of this webcast will be available through January 26, 2024. Now I'll turn the call over to Will Lansing. Thanks, Steve, and thank you everyone for joining us for our first quarter earnings call. In the investor relations section of our website, we've posted some slides that we'll be referencing through our presentation today.

Speaker 11: I'm pleased with the results we delivered in our first fiscal quarter. Even in these uncertain economic times, the resilience of our assets and the execution of our team allow us to deliver steady growth in both revenues and earnings and value to our shareholders. Page 2 shows financial highlights from our first quarter.

Speaker 12: We reported revenues of 345 million in Q1 up 7% from the prior year. Our gap net income of 98 million dollars was up 15% over the prior year and gap EPS of $3.84 up 24%.

Speaker 13: On a non-GAAP basis Q1 net income was $108 million, up 6% from the prior year, and earnings per share of $4.26 were up 15% from the prior year quarter. Overall we are off to a very good start in our fiscal 2023. In scores, revenues were up 5% over the same period last year.

Speaker 14: In the US auto originations revenues were up 24% and card and personal loan originations revenues were up 19%. We continue to see reduced mortgage origination volumes for the US market, where revenues were down about 40% year over year. The fiscal 2023 price increases we talked about last quarter take effect primarily in January . So we

Speaker 15: especially because of the higher interest rates and lower number of consumers preparing for mortgages. In our software business, we continue our focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. Overall, software numbers look strong and platform numbers continue to be exceptional.

Speaker 16: As you can see on page 7, we delivered overall ARR growth of 11% and platform ARR growth of 46%. Our ARR, our DB NRR, and our ACB numbers are adjusted for the siren divestiture.

Speaker 17: And again, our customers continue to find new use cases, as you can see from our net retention rates shown on page 8. Overall, net retention rate was 110% and platform net retention is 130%, continuing to demonstrate the success of our land and expand strategy.

Speaker 18: and we continue to see strong demand for our software.

Speaker 19: As you can see on page 9, our ACV bookings were up 31% over the same period last year. And we continue to see a strong pipeline of opportunities as customers look to FICO to deliver strategic mission-critical decisioning.

Speaker 20: Earlier this week, I had the opportunity to attend our annual sales meeting where I met with colleagues from around the world to discuss best practices, current trends, and especially how our customers view our offerings. I heard firsthand how customers were looking to FICO to help solve their most difficult decisions and how those customers were increasingly finding new ways to use the FICO platform throughout their business.

Speaker 21: said, we're committed to becoming the preeminent platform player in decisioning analytics. The strategic focus has allowed us to exit some non-strategic products and services over the last few years. In November , we announced we had reached an agreement to transition our Siron compliance business to our partner IMTF.

Speaker 22: We closed that transaction in December . While we're proud of the work and the innovation that the FICO team put into Siron to make it an industry leading solution, we believe we are better positioned if we dedicate our focus and our resources to expanding the capabilities and market penetration of FICO platform. I'll have some final comments in a few minutes, but first let me turn the call back to Steve for more financial detail.

Speaker 23: Thanks. As Will said, we delivered another solid quarter in both our scores and software segments.

Speaker 24: Total revenues for the first quarter were $345 million, an increase of 7% over the prior quarter, and slightly ahead of our internal plan.

Speaker 25: In our score segment revenues were 178 million up 5% from the same period last year.

Speaker 26: B2B scores revenues were up 11% over the prior year. As has been the case for several quarters, mortgage origination revenues were down from the previous year. This quarter, those revenues were down 40% from the same quarter last year and 29% from Q4.

Speaker 27: But again, that was offset by growth in other areas.

Speaker 28: Credit card and personal loan originations revenues were up 19% over last year and auto originations revenues were up 24%. We also renewed a multi-year license which had a positive impact on the quarter.

Speaker 29: B2C scores revenues were down 6% from the same period last year. And we expect B2C revenues to be down modestly from current levels throughout the rest of the fiscal year.

Speaker 30: Software segment revenues in the first quarter were $167 million, up 9% versus the same period last year.

Speaker 31: Software revenues recognized over time were $133 million or 80% of total software revenues.

Speaker 32: License revenues recognized up front or at a point in time were $12 million this quarter and represented 7% of software revenues.

Our professional services revenues were $22 million, representing 13% of total software revenues.

This quarter, 85% of total company revenues were derived from our Americas region. Our Amiya region generated 9% and the remaining 6% were from Asia Pacific.

Our software ARR in the first fiscal quarter of 2023 was $583 million, an 11% increase over the prior year quarter.

Our platform ARR was $133 million, up 46% last year, and represented 23% of our total first quarter ARR, compared with 17% last year.

Our non-platform ARR was $450 million in the first quarter, up 4% when adjusted for divestitures.

Our dollar-based net retention rate in the quarter was 110% overall versus 109% last year.

Our platform customers continue to show very strong net expansion from Land and Expand, follow-on sales, and increased usage.

The net retention for platform was 130% in the fourth quarter.

Our non-platform customer software usage is mature and relatively stable with retention this quarter at 103%.

Software sales were again strong this quarter with annual contract value bookings at $21.5 million versus $16.4 million in the prior year, an increase of 31%. And 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 $205 million this quarter versus $207 million in the prior year and $215 million in Q4.

While we continue to focus on expense efficiency, we do expect our total expenses to trend up in FY23 from salary increases and modest headcount increases.

Our non-GAAP operating margin, as shown on our reg-sheet schedule, was 49% for the quarter, representing a 400 basis point non-GAAP margin expansion versus the same period last year.

Gap net income this quarter was $98 million, up 15% from the prior year quarter.

Our non-GAAP net income was $108 million dollars for the quarter up 6% from the same quarter last year.

The effective tax rate for the quarter was 17% and included $10 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards.

We expect our full year fiscal 2023 recurring tax rate to be approximately 25 to 26%.

That expected recurring tax rate is before any excess tax benefits or other discrete items.

The resulting net effective tax rate is estimated to be about 24%.

Free cash flow for the quarter was $92 million for the trailing 12 months. Free cash flow was $471 million.

At the end of the quarter, we had 166M dollars in cash and marketable investments.

Our total debt at quarter end was 1.92 billion dollars with a weighted average interest rate of 4.9 percent.

Currently, about 67% of our total debt is fixed rate.

Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods.

Turning to return of capital, we bought back 180,000 shares in the first quarter at an average price of $418 per share.

We have $451 million remaining on the current board authorization, and we continue to view share repurchases as an attractive use of cash.

And with that I'll turn it back to Will for his thoughts on the rest of FY23. Thanks Dave. I'm really pleased with our Q1 results. I'm pleased with the progress we're making on strategic initiatives and I'm pleased with our positioning for the balance of fiscal 2023. Our sports business continues to deliver growth even in a turbulent market. As I said in the past our diversification...

implementations. This is evident in the 13 straight quarters of 40 plus percent of platform ARR growth and the continued strong net retention rate of current customers. We're confident we have the best-in-class capabilities in an emerging marketplace that's poised for sustained growth. I'm confident we have the correct strategy and a strong team in place.

deliver on the remarkable opportunities ahead. As always, we remain focused on execution and we're committed to delivering outstanding value for our

As a reminder, when we announced our CFO transition, we also reiterated our guidance with an adjustment for the transition of the SIRON compliance solution to our partner. So we are guiding revenues of $1.463 billion.

Gap net income of 401 million dollars. Gap EPS of $16.

non-GAAP net income of $487 million, and non-GAAP EPS of $19.42. I'll turn the call back to Steve and we'll be taking questions.

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

Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. Once again, that's 1-4 to register for a question. One moment please for the first question.

And we have a question from the line of George Tong with Golden Sacks. Please go ahead your lines open. Hi, thanks. Good afternoon. When you presented your fiscal 2023 guidance last quarter you had assumed scores revenue growth of 7% composed entirely of pricing increases and flat origination volumes.

One quarter into fiscal 2023, does that assumption still hold on your end? Are you seeing anything that could challenge those trends?

I think the assumption still holds. You know, the future remains uncertain, but right now the assumption holds. We think we're right on track.

Great. Switching to the software side, ARR year-over-year growth accelerated in fiscal 4Q from fiscal 3Q. And you mentioned in your prepared remarks that customer demand remains strong. Can you overall elaborate on the overall spending environment for enterprise software? And if you are seeing any second derivative slow down in spend?

So as I mentioned, I think that because the platform software is so mission critical, it's a little bit less subject to our customers pulling in their budgets and pulling in their budget. So there's no question that there is.

budget pressure out there. I mean everyone's under budget pressure, but the kinds of solutions we provide with the platform are such a perfect fit for the strategic needs of some of these customers that it's something that just can't wait. And so when the customers adopt the platform, it's a transformation.

getting around, our customers are finding out that this stuff pays for itself within a year and as a result we have not seen any slowdown in the spend on our platform business.

Very helpful. Thank you.

Our next question is from Surrender Tint with Jefferies. Please go ahead. Your state and university services will not apply to our campuses or firms or funding 12.5 million seat?

Thank you. I'd like to start with a question on the scores business. Can you provide any other additional color and kind of the licensing deals with the magnitude of that when I kind of think about with volumes were the B2B revenues came in a bit higher than I was anticipating. So any color on how licensing.

They happen every year. We can't really predict what quarter they happen in and so we get a little bit of lumpiness there And that's what we've got here

I think you mentioned that maybe you're expecting some modestly lower revenues on a go-forward basis. Is the expectation just of sequential declines on a quarter of a quarter basis throughout the year at this point or? Is the expectation just of sequential declines on a quarter of a quarter basis throughout the year at this point or?

any color that you can help us provide on how to think about the amount of drag that perhaps there might be on a go-forward basis.

Yeah, yeah, through the speed it's relatively modest that we see right now. I mean we just a piece of that business You know, there's a partner side and then the my fire side the Michael My fighter side and challenged by the economic environment by the fact that you are not even a horse If you have mortgages and increasing the screen and breaking them down and that increases that this is a play take back up again. It looks

on my FICO side because the my FICO side is more, you know, the partners have a lot of different business models they can cycle up to, right? There's a premium, there's a lot of different getting data. The my FICO side is, we don't spend a lot of market age. You know, it's a lot more tied to the mortgage market.

Got it. And then one quick question on just capital allocation. The stock has obviously performed really well over the past year and especially over the previous quarter.

So does this still kind of make sense to be fully allocating all of your free cash code towards share repurchases or should we start to think about maybe paying down some of the floating rate debt at this point?

We're still in love with our stock and the plan is to continue to return capital to shareholders through stock repurchase. That said, we'll keep an eye on rates and you know, we're at a weighted 4.9% on the interest expense right now.

And, you know, I just, when I look at FICO stock, when you look at FICO stock, I think you believe that's a good balance.

So for now, I'm still on stock buyback.

Understood. Thank you. That's all my questions.

Our next question is from Kyle Peterson with Needham & Company. Please go ahead your line is open.

Great. Thanks guys. So, just wanted to get your sense of appetite. You know, I guess like...

You guys just mentioned, you know, psychosocct is really attractive, but

How are you guys feeling about the buyback and capital allocation in this environment? If you could rank order Steve your use of capital, that would be really helpful.

Yeah, okay Kyle, it's a good question. So one of the things we're really working on hard, frankly, is we're bringing back as much cash as we can from around the world. Even if there's a slight expense to that, you know, when the rates are higher, it just makes more sense to do that as much as possible. So that we're bringing as much cash into the US as we can. And then we look at the trade-offs between the...

the rates and the what kind of stock we can buy back. So as Will said, we're concentrating on buybacks, but that can change as the markets change. So we look at that, we model it out, and we're still comfortable that buying as many shares back as we can conceivably. We're not gonna do like we did last year where we went all in and you know we.

But like yeah, we're we're all about that. But yeah, I guess like just you know as were

Thinking, yeah, into the next year is...

Is there anything different or should we expect more or less fast flow? I guess that the messaging from you guys historically has been, you know.

you know, cash flow is it's your money and shareholders, not ours, and we want to return that. We can't find a better use of that, but is there any different messaging or is it more of the same with you at home, at least for now?

I think Steve said it well. We try to return pre-cash flow every year and then periodically we do more than that. So for the last two years we've done considerably more than that and it's because the stock price was depressed, really in our minds quite depressed relative to its value and also it was a lower interest rate environment.

Now we have higher interest rate environment, the stock's a little bit pricier. I still think it's a bargain, but it's more expensive than it was. And so we're back to thinking about stock repurchase in terms of our free cash flow, our annual free cash flow. So I would say that things have changed. We were really piling up the debt to buy in the shares over the last two years.

where it is right now, but we continue to monitor it and if rates were to go up significantly, then we'd probably pare back the buybacks, but it's always just the calculus we have to do.

Yep, makes sense. Thanks, guys. Nice quarter.

Thank you. Our next question is from Manav Patnaik with Barclays. Please go ahead. And I'll just ask you to have one minute since the mike went down.

Thank you. On the auto and card side, you showed some healthy revenue increases, but I was hoping you could just help us understand what volumes are doing in those two categories. And the flat volume assumption for overall volumes and scores, I guess what are you assuming for auto and card?

to get to that flat number? Yeah, so right now, auto is relatively flat. You know, it's up some months and down some months, but it's relatively flat. Cart is still up. It's been probably decelerating, but it's still up. So most of the increase year-over-year on revenue is on the auto side came from pricing.

volumes because you know there's there's a lot of different tiers involved and there's different pricing tiers so you have to really dig under the covers to see all that but we're not seeing anything in the market it's really changing the way we looked at it when we issued guidance you know three months ago you know mortgage is probably a little bit weaker than it was then but we knew was gonna be weak so you know

three months ago.

Got it helpful. And then just on the software side, the platform business always had a five-handle next to it in terms of growth. I know it's probably just nit-picking. This time it's 46, but even in your prepared remarks you said 40% plus type growth. Is there, you know...

Is it just the law of large numbers? Is there something timing-wise or just...

Just talk to us a little bit around that, please. It's a little bit of both. So, you know, we knew we were never going to be able to keep the 70% number, right? So now we've been 50, now we're a little less than 50. Looking at the rest of the year, we think we'll probably be in that.

high 40s to low 50s percent. So there is some timing around some of these things, but we don't see it really decline. I mean it's declined for the last few quarters, but we think we're pretty comfortable operating in this range, give or take a few points.

Got it. Okay. Thank you, guys.

Our next question is from Ashish Sapadra with RBC Capital Markets. Please go ahead, your line is open.

Thanks for taking my question. Just a question on the special pricing. Our understanding is that tends to be in the $40 to $60 million range usually. Is that the expectation this time as well based on initial feedback as you have rolled out these special pricing increases? That's what our objective for calling our that this become a proper

You know, we never confirmed that number. And so I won't be doing it today. There is still some special pricing, but I can't confirm a number for you today. It's easier to do in hindsight. You know, there's a lot of volatility, right, in the marketplace. So, you know, if you can tell us what the interest rates are going to be in six months, we can probably give you a better number.

I would say yes and no.

Yes, you know, our platform growth rate is substantially higher than the Siron business that we divested. And so divesting it does contribute to a higher growth rate for FICO.

And are there other opportunities in our portfolio? Not really. I mean never say never. We're always looking to be as streamlined and efficient as we possibly can be. But we're pretty happy with the set of assets and the set of solutions that we have today. Even our older application solutions are still quite popular with our customers. We continue to invest in them.

probably hanging on to the vast majority of our portfolio. There are no obvious candidates for divestiture at this time.

That's very helpful, Kallar. And maybe if I can sneak in one last question on the B2C side, as you mentioned, some of it is tied to the mortgage weakness, but I was wondering if there's anything that you can do from a product perspective or marketing perspective in order to improve or moderate the headwinds that are causing from the weak mortgage mark.

and the kind of performance that you're seeing right now. That business is a completely data-driven, science-based kind of a business where we spend on customer acquisition up to where it ceases to be economically smart to do so. And so that is always optimized.

from an economic standpoint.

That's very helpful, Kala. Thank you. Thanks.

We have a question from Fazer Ali with Deutsche Bank. Please go ahead, line's open. Please go ahead, line's open.

Yes, hi, thank you. So first I just wanted to pick on a comment that you made saying that you thought revenues were ahead of plan. Maybe you could talk about what areas in particular were better than your expectations in the quarter. wellbeing

Yeah, I mean it was modest, but it was on the software side. We didn't mean the scores number was pretty much dead on plan and software came in a little bit ahead of plan. So it's encouraging to see that that happened. Okay, great. And then on the software side, I'm curious how we should think about the nuance of theANGLE experiment.

the right way to think about it going forward? Or do you expect sort of more, some declines from here in that business? You know, I think someday we will have declines, but I think for the time being, flat is the right way to think about it. Now obviously we can manage that number.

You know, we choose to end the life with some products and that contributes to shrinkage. And it's a balancing. It is really a balancing act that we are in. I think that we're in a good place right now as flat. You know, that's just about the right balance where we can...

close down, end of life, the products that would result in us having a lot of technical debt were we to continue them without really shrinking that business. The day will come no doubt when we will shrink that business somewhat, but that day is still a ways away.

Got it. And then just on expenses, I think you mentioned that expenses are going to go up a little bit as we go through the year, mostly driven by by personnel expenses. And I'm curious, is that something that

you know, that's something that's already put in motion, or maybe want to talk about the magnitude of that increase if you can. And secondly, like how much flexibility you have on that, like to the extent revenues don't come in line, is that something you can pull back on.

It's not it's not a lot of money, but I mean, we put we have salary increases that take place in December . So, you know, we'll have 3 full quarters of that. There'll probably be some, you know, some additions to head count. But we expect to have more revenues too. So, I mean, we can we can delay the head count hires if the revenues don't come in. So we do have we do have.

Yeah, thank you. It's even polygon for Jeff. I was hoping to get a little color on some of the non origination B2B scores and particularly the marketing and pre-screen side of things.

How is that trying to do it? Yeah, pre-screen is down slightly from last quarter. Some of that's seasonal. But you know we still see pretty strong pre-screen numbers, but they're not what they were in the fall. So we'll see what happens after the first of the year. Typically, that's a lower marketing quarter.

But we'll monitor that and we'll see. It's still strong, but it's not as strong as it was in the fall.

Okay, and then in terms of the account management scores, the account review scores, those are actually stronger. So there's a lot of different factors on that, but it's a little bit stronger than it was in the prior quarters.

Appreciate that. And then on the software side of things, is there a usage component that benefited in the quarter or is it just strong growth?

There's some usage in it. I mean, it's a combination. Most of the platform, especially, it's all based off the usage. So, it can either be increased usage of the same functionality or additional use cases that are brought on board.

But is there like a transactional or does there a revenue benefit to...

Like, the increased usage that's specifically. Yeah. Yes. Yes. Yes.

That's just a specific idea. Yes, it always is. Yes, yes, yes. Okay. Okay, appreciate it. Okay.

And that concludes our Q&A session for today. That also concludes the call. Thank you for your participation and ask that you please disconnect your line.

Thank you everyone.

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Greetings and thank you for standing by. Welcome to the FAIR-ISAC Corporation Quarterly Earnings Call. During the presentation all participants will be in a listen-only mode and afterwards we'll conduct a question-and-answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone. If at any time during conference you need to reach an operator please press star 0.

This conference is being recorded Thursday, January 26, 2023. And now I'd like to turn the conference over to Steve Weber. Please go ahead.

Good afternoon and thank you for joining FICO's first 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 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 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-gapped financial measures.

Please refer to the company's earnings release and regulation sheet schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure.

The earnings release and regulations you 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.

Replay of this webcast will be available through January 26, 2024. Now I'll turn the call over to Will Lansing.

Thanks Steve and thank you everyone for joining us for our first quarter earnings call. In the investor relations section of our website, we've posted some slides that we'll be referencing through our presentation today.

I'm pleased with the results we delivered in our first fiscal quarter. Even in these uncertain economic times, the resilience of our assets and the execution of our team allow us to deliver steady growth in both revenues and earnings and value to our shareholders. Page 2 shows financial highlights from our first quarter.

We reported revenues of 345 million in Q1 up 7% from the prior year. Our gap net income of 98 million dollars was up 15% over the prior year and gap EPS of $3.84 up 24%. On a non-gap basis Q1 net income was 108 million dollars up 6% from the prior year and earnings per share of $4.26.

price increases, increased volumes in card and personal loan originations, and also by a licensed renewal of Latin America.

In the U.S. auto originations revenues were up 24% and card and personal loan originations revenues were up 19%. We continue to see reduced mortgage origination volumes for the U.S. market where revenues were down about 40% year over year. The fiscal 2023 price increases we talked about last quarter take effect primarily in January .

of the higher interest rates and lower number of consumers preparing for mortgages. In our software business, we continue our focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. Our software numbers look strong and platform numbers continue to be exceptional.

As you can see on page 7, we delivered overall ARR growth of 11% and platform ARR growth of 46%. Our ARR, our DB NRR, and our ACB numbers are adjusted for the SIRON divestiture. And again, our customers continue to find new use cases, as you can see from our network.

our ACV bookings were up 31% over the same period last year, and we continue to see a strong pipeline of opportunities as customers look to FICO to deliver strategic mission critical decisioning.

Earlier this week, I had the opportunity to attend our annual sales meeting where I met with colleagues from around the world to discuss best practices, current trends, and especially how our customers view our offerings. I heard firsthand how customers were looking to FICO to help solve their most difficult decisions and how those customers were increasingly finding new ways to use the FICO platform throughout their businesses.

I don't think there's ever been a time at FICO where the team has been so excited about the opportunities ahead of us. And I share that excitement. I came away with a renewed appreciation for our unique technological capabilities and the incredible team that we have taking it to the market. Finally, as I've often said, we're committed to becoming the preeminent platform player in decisioning analytics.

The strategic focus has allowed us to exit some non-strategic products and services over the last few years. In November , we announced we had reached an agreement to transition our Siron compliance business to our partner IMTF. We closed that transaction in December . Well, we're proud of the work and the innovation that the FICO team put into Siron to make it an industry leading solution.

We delivered another solid quarter in both our scores and software segments.

Total revenues for the first quarter were $345 million, an increase of 7% over the prior quarter, and slightly ahead of our internal plan.

In our score segment revenues were $178 million, up 5% from the same period last year.

B2B scores revenues were up 11% over the prior year. As has been the case for several quarters, mortgage origination revenues were down from the previous year. This quarter, those revenues were down 40% from the same quarter last year and 29% from Q4.

But again, that was offset by growth in other areas.

Credit card and personal loan originations revenues were up 19% over last year and auto originations revenues were up 24%. We also renewed a multi-year license, which had a positive impact on the quarter. B2C scores revenues were down 6% from the same period last year. And we expect B2C revenues to be down modestly from current levels throughout the rest of the fiscal year.

Software segment revenues in the first quarter were $167 million, up 9% versus the same period last year. Software revenues recognized over time were $133 million, or 80% of total software revenues.

License revenues recognized up front or at a point in time were $12 million this quarter and represented 7% of software revenues. Our professional services revenues were $22 million representing 13% of total software revenues. This quarter 85% of total company revenues were derived from our Americas region. Our EMEA region generated 9% and 4% from the US.

and the remaining 6% were from Age Pacific. Our software ARR in the first fiscal quarter of 2023 was $583 million, an 11% increase over the prior year quarter.

Our platform ARR was $133 million dollars, up 46% last year, and represented 23% of our total first quarter ARR compared with 17% last year. Our non-platform ARR was $450 million dollars in the first quarter, up 4% when adjusted for divestitures. Our dollar-based net retention rate in the quarter was $100.

is mature and relatively stable with retention this quarter at 103%. Software sales were again strong this quarter with annual contract value bookings at $21.5 million versus 16.4 million in the prior year, an increase of 31%. And as a reminder ACB bookings include only the annual value of software sales excluding professional sales.

expenses to trend up in FY23 from salary increases and modest headcount increases.

Our non-GAAP operating margin, as shown on our Reg G schedule, was 49% for the quarter, representing a 400 basis point non-GAAP margin expansion versus the same period last year.

Gap net income this quarter was $98 million, up 15% from the prior year quarter.

Our non-GAAP net income was $108 million dollars for the quarter up 6% from the same quarter last year.

The effective tax rate for the quarter was 17% and included $10 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards.

We expect our full year fiscal 2023 recurring tax rate to be approximately 25 to 26 percent.

That expected recurring tax rate is before any excess tax benefits or other discrete items.

the resulting net effective tax rate is estimated to be about 24%.

Free cash flow for the quarter was $92 million for the trailing 12 months. Free cash flow was $471 million.

At the end of the quarter we had $166 million in cash and marketable investments. Our total debt at quarter end was $1.92 billion with a weighted average interest rate of 4.9%. Currently about 67% of our total debt is fixed rate.

Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods.

Turning to return of capital, we bought back 180,000 shares in the first quarter at an average price of $418 per share.

We have $451 million remaining on the current board authorization, and we continue to view share repurchases as an attractive use of cash.

of 40 plus percent of platform ARR growth, and the continued strong net retention rate of current customers. We're confident we have the best-in-class capabilities in an emerging marketplace that's poised for sustained growth. I'm confident we have the correct strategy and a strong team in place to deliver on the remarkable opportunities ahead.

As always, we remain focused on execution and we're committed to delivering outstanding value for our shareholders.

Gap net income of 401 million dollars. Gap EPS of 16 dollars.

non-GAAP net income of $487 million, and non-GAAP EPS of $19.42. I'll turn the call back to Steve and we'll be taking questions.

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

One quarter into fiscal 2023, does that assumption still hold on your end? Are you seeing anything that could challenge those trends?

I think the assumption still holds. The future remains uncertain, but right now the assumption holds. We think we're right on track. Great. Switching to the software side, ARR year-over-year growth accelerated in fiscal 4Q from fiscal 3Q, and you mentioned...

in your prepared remarks that customer demand remains strong. Can you overall elaborate on the overall spending environment for enterprise software and if you're seeing any second derivative slowdown in spend?

So as I mentioned, I think that because the platform software is so mission critical, it's a little bit less subject to our customers pulling in their budgets and pulling in their SEND. So there's no question that there is budget pressure out there. I mean, everyone's under budget pressure. But the kinds of...

the kinds of solutions we provide with the platform are such a perfect fit for the strategic needs of some of these customers that it's something that just can't wait. And so when the customers adopt the platform, it's a transformation of their business really, and it's not the kind of thing that's easy to put off.

The other thing I would say is we're demonstrating incredibly rapid return on investment, and we have testimonials from customers with amazing returns, within-year returns. And that works getting around. Our customers are finding out that this stuff pays for itself within a year. And as a result, we have not seen any slowdown in the spend on our platform business.

additional color on kind of the licensing deals, the magnitude of that. When I kind of think about what volumes were, the B2B revenues came in a bit higher than I was anticipating. So any color on how licensing deals compare this year to last year in terms of the revenue impact.

I would say that the license deal that we referenced is kind of par for the course. We get these deals from time to time, renewal deals, sometimes they're bigger renewal deals. They happen every year. We can't really predict what quarter they happen in and so we get a little bit of lumpiness there and that's what we've got here.

And then in terms of the B2C business, I think you mentioned that maybe you're expecting some modestly lower revenues on a go forward basis. Is the expectation just of sequential declines on a quarter over quarter basis throughout the year at this point, or is it just a

any color that you can help us provide on how to think about the amount of drag that perhaps there might be on a go-forward basis.

Yeah, it's relatively modest that we see right now. I mean, we used to that business as you know, the partner side and then the micro side, the micro side is challenged by the economic environment. Right? In fact, if you weren't, I didn't think mortgage mortgages.

and increasing the strain and breaks them down and that increases that in our business before we pick back up again. But as it looks right now, we're projecting it to be a little bit less than it is today. But not expecting it to be turn-around tension.

Got it. And just a clarification on that Steve. So is the partner side holding study at this point or and it's the drag is mostly from the myFICO side? Yeah it's mostly on the myFICO side because the myFICO side is more you know there's a partner's have a lot of different business models they can.

they can cycle up to right there's a premium letter that you gave them. In my five-year size, we don't spend a lot of marketing. It's a lot more tied to the mortgage market.

got it and then one quick question on just capital allocation the stock is obviously performed really well over the past year and especially over the previous quarter so does this still kind of make sense to be fully allocating all of your free cash code towards share repurchases or should we start to think about

Maybe paying down some of the floating rate debt at this point We're still in love with our stock and the plan is to continue to To return capital to shareholders through stock repurchase that said we'll keep an eye on rates And you know we're at a weighted 4.9% on the on the

interest expense right now and you know, I just when I look at FICO stock when you look at FICO stock I think you believe that's a better, you know, that's a good balance.

So for now, I'm still on stock buyback.

now still on stock buyback. Understood. Thank you, that's all my questions.

Our next question is from Kyle Peterson with Needham & Company. Please go ahead. What can you tell us about your product and why?

Great. Thanks guys. So, just wanted to get your sense of appetite. You know, I guess like...

You guys just mentioned, you know, FICO stock is really attractive, but

How are you guys feeling about the buyback and capital allocation in this environment? If you could rank order Steve your use of capital, that would be really helpful.

Yeah, okay Kyle, it's a good question. So one of the things we're really working on hard, frankly, is we're bringing back as much cash as we can from around the world. Even if there's a slight expense to that, you know, when the rates are higher, it just makes more sense to do that as much as possible. So that we're bringing as much cash into the US as we can, and then we look at the trade-offs between the rates and the...

you know, we'll kind of stop, we can buy back. So as Will said, we're concentrating on buybacks, but that can change as the markets change. So, you know, we look at that, we model it out, and we're still comfortable that, you know, buying as many shares back as we can, you know, conceivably. We're not going to do like we did last year, where we went all in and, you know, we ratcheted up our debt.

We're all about that. But yeah, I guess like just as we're...

Thinking, yeah, into the next year is...

Is there anything different or should we expect more or less fast flow? I guess that the messaging from you guys historically has been, you know.

you know, cash flow is it's your money and shareholders, not ours, and we want to return that if we can't find a better use of that, but is there any different messaging? Or is it more of the same with you at home, at least for now?

I think Steve said it well. We try to return pre-cash flow every year and then periodically we do more than that. So for the last two years we've done considerably more than that and it's because the stock price was depressed, like really in our minds quite depressed relative to its value and also the lower interest rate environment.

and we will not be quite as aggressive in the future, at least right now under these circumstances. And again, you know, two-thirds of our debt is fixed. So we have no rate risk there at all. So even with the rates increasing, so you know, we're just talking about the variable rate and we're happy with where it is right now, but we continue to monitor it and if rates were to go up significantly, then we'd probably pare back the buybacks, but it's always just the calculus we have to do.

what volumes are doing in those two categories and you know that the flat volume assumption for overall volumes and scores you know I guess what are you assuming for auto and card to get to that flat number.

Yeah, so right now, auto is relatively flat. It's up some months and down some months, but it's relatively flat. Cart is still up. It's been probably decelerating, but it's still up. So most of the increase year over year on revenue on the auto side came from pricing.

most of the increase on the card side came from volumes.

So as we go forward now, you know, Next So as we go forward now, you know, Next

But we're not seeing anything in the market that's really changing the way we looked at it when we issued guidance three months ago. You know, mortgage is probably a little bit weaker than it was then, but we knew it was going to be weak. So none of that really surprises us. We'll see how things progress in the next couple quarters if housing pricing comes down and the rates come down a little bit and that market picks up.

then we'll get some more acceleration there. But right now, we're pretty much tracking to what we thought we would see three months ago.

Got it helpful. And then just on the software side, the platform business always had a five-handle next to it in terms of growth. I know it's probably just myth-picking this time is 46, but even in your prepared remarks you said 40% plus type growth. Is it just a low of large numbers? Is there something timing-wise?

Subhadra with RBC Capital Markets. Please go ahead your lines open.

better number.

Maybe just a follow-up question on portfolio rationalization. Is it fair to assume that the Siron divestiture could also potentially help on the group profile and are there other opportunities for portfolio rationalization within the software portfolio?

I would say yes and no.

Yes, you know, our platform growth rate is substantially higher than the Siron business that we divested. And so divesting it does contribute to a higher growth rate for FICO.

hanging on to the vast majority of our portfolio, there are no obvious candidates for divestiture at this time.

That's very helpful, Kallar. And maybe if I could sneak in one last question on the B2C side. As you mentioned, some of it is tied to the mortgage weakness, but I was wondering if there's anything that you can do from a product perspective or marketing perspective in order to improve or moderate the headwinds that are causing from the weak mortgage market on the B2C side.

Well, I can share to you that our talented management team is doing everything they can on the marketing side and the customer acquisition side to keep the business growing as much as possible. But you do have a macro environment that just results in the kind of performance that you're seeing right now. That business is a completely data-driven science-based kind of a...

have in the marketplace. And so the short answer to your question is we're doing just the right amount. I really think it's optimized. I don't know that more would make things better. You might be able to get the growth rate up, but it wouldn't be better from an economic standpoint.

That's very helpful, Kala. Thank you. Thanks. We have a question from Fazer Alvi with Deutsche Bank. Please go ahead, line's open.

I just wanted to pick on a comment that you made saying that you thought revenues were ahead of plan. Maybe you could talk about what areas in particular were better than your expectations in the quarter? Yeah, I mean it was modest, but it was on the software side. I mean the scores numbers.

you had talked about those revenues being roughly flat, and they were down just a little bit on a year-over-year basis. I'm talking about the recurring revenue. Is that, so that 450 million, is that sort of the right way to think about it going forward, or do you expect sort of more?

you know, some declines from here and that business. You know, I think someday we will have declines, but I think for the time being CLAD is the right way to think about it. Now, obviously we can manage that number. You know, we choose to end of life with some products.

and that contributes to shrinkage. And it's a balancing, it is really a balancing act that we are in. I think that we're in a good place right now as flat. You know, that's just about the right balance where we can close down end of life of products that would result in us having a lot of technical debt where we continue them.

go up a little bit as we go through the year, mostly driven by by personnel expenses. And I'm curious, is that something that's you know, that's something that's already put in motion or or maybe want to talk about the magnitude of that increase if you can and secondly

like how much flexibility you have on that. And to the extent revenue don't come in line, is that something you can pull back on?

It's not it's not a lot of money, but I mean we put we have salary increases that take place in December . So, you know, we'll have 3 full quarters of that. They'll probably be some, you know, some additions to head count. But we expect to have more revenues too. So, I mean, we can we can delay the head count hires if the revenues don't come in. So we do have control over it to some degree, but it's not it's

some of the non origination B2B scores and particularly the marketing and pre-screen side of things. How is that trend? Yeah, pre-screen is down slightly from last quarter. Some of that's seasonal but you know we still see pretty strong pre-screen numbers but they're not what they were in the fall. So we'll see what happens after the first of the year. Typically that's a lower marketing.

Appreciate that and then on the software side of things, is there a usage component that. Benefit in the quarter, or is it just strong growth? There's some usage in it. I mean, it's always a combination. Most of the platform, especially, it's all based off the usage. So you can either be increased usage of the same functionality or additional.

And that concludes our Q&A session for today. That also concludes the call. Thank you for your participation and ask that you please disconnect your line.

Q1 2023 Fair Isaac Corp Earnings Call

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