Q2 2023 Fair Isaac Corporation Earnings Call
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 Florida and your telephone.
Should you require operator assistance at any time. Please press star Zero as a reminder, this conference is being recorded Thursday April 27th 2023, I would now like to turn the conference over to Steve Weber. Please go ahead.
Good afternoon, and thank you for joining <unk> second quarter earnings call.
Weber, Andrew <unk>, CFO and I'm joined today by our CEO will Lansing today.
Today, we issued a press release that describes financial results compared to the prior to 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 1995 <unk>.
Those statements involve many uncertainties that could cause actual results to differ materially inferred.
Information concerning those uncertainties is contained in the company's filings with the SEC, particularly the risk factors 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.
A replay of this webcast will be available through April 27 for 2024, and now I will turn the call over to Willie.
Thanks, Steve and thank you everyone for joining us for our second quarter earnings call in the Investor Relations section of our website, we've posted some slides that offer financial highlights of our second quarter.
I am pleased to report that we continued to deliver strong results with record revenue and growth throughout our business today I'll talk about this quarter's results and our expectations for the rest of the year.
As you can see on page two of the presentation, we reported revenues of $380 million, an increase of 6% over the same period last year.
We delivered $102 million of GAAP net income and GAAP earnings of $4 per share on a non-GAAP basis net income was 121 million with earnings per share of $4 78.
On the score side of the business, we continue to perform well.
<unk> delivered a record quarter with $198 million of revenue up 8% in the quarter versus the prior year as you can see on page six.
On the <unk> side revenues were up 16% driven primarily by increased originations revenues mortgage originations revenues were up 90% versus last year auto originations revenues were up 13% credit card personal loan and other originations revenues were up 12%.
Our BDC revenues continued to face difficult comps and while up slightly versus last quarter were down 8% versus the same period last year.
And our software business, our FICO platform provides the power of analytics and AI to enable smarter business decisions at scale.
<unk> focused on helping clients maximize the customer experience by predicting analyzing and optimizing customer interactions in real time to make better customer decisions across the enterprise. These better decisions build trust and loyalty by delivering hyper personalized experiences through holistic customer management and the strong results we are delivering demonstrated an.
<unk> hungry for these solutions as you can see on page seven we delivered overall AOR growth of 17% and platform AOR growth of 60%.
This represents our 14th straight quarter of platform <unk> growth in excess of 40% I.
Again, our customers continue to increase volumes and find new use cases as you can see from our net retention rate as shown on page eight.
Overall net retention rate was 114% legacy off platform NR was 105% as volumes grew in many of our customers.
Platform net retention rate was 146% due to expanded use cases, driven by the success of our land and expand strategy and.
And we continue to see strong demand for our software as you can see on page nine our ACD bookings were up 16% over the same period last year, we continue to see a strong pipeline of opportunities as we help our customers to look at.
At strategic mission critical Decisioning as they pursue their digital transformation.
Finally, I'd like to talk a little bit about our FICO world customer event next month.
Cycle World attendees will be able to discover how to design build and deliver a hyper personalized customer experience across every touch point and within every interaction.
Attendees will have access to schedule meetings with FICO is leading thought leaders and experts to discuss best practices and innovative solutions designed to solve business challenges.
General session presenters at FICO World include leading financial services providers from North America, Latin America, Europe , and Asia Pacific.
Conference will reveal new products FICO score alternative data innovations software capabilities on the FICO platform as well as the Companys flagship solutions for AI powered decisions.
We also announced a new partnership and other new FICO solutions, we'll talk more next quarter about the advent and give more details about how leading financial services providers are using the FICO platform to design innovative solutions to solve business challenges.
The final comments, including our revision of our guidance in a few minutes, but first let me turn the call over to Steve for further financial details.
Thank you and as will said, we delivered another very good quarter in both our scores and software segments.
Total revenue for the second quarter were around $30 million $308 million, an increase of 6% over the prior year or 7%.
Richard.
In our scores segment revenues were $198 million up 8% from the same period last year.
<unk> revenues were up 16% over the prior year driven by increased originations revenues.
We drove revenue increases in mortgage auto and credit card personal loan originations.
This quarter mortgage originations revenues were up 90% from the same quarter last year, our originations revenues were up 13% and credit card and personal loan and other originations revenues were up 12% over last year.
<unk> revenues were down 8% in the same period last year is mostly due to difficult comps.
As a reminder, that was an area that experienced outsized growth during the refinery.
And our third quarter of fiscal 'twenty, two and was up about 1% this quarter versus the first quarter of fiscal 'twenty three.
<unk> segment revenues in the second quarter were $182 million up 5% from the same period last year, where we have.
Reminder, last year, we had a significant upfront license revenue quarter.
Software revenue is recognized over time were $136 2 million or <unk>, 74% of total software revenues.
Since revenue is recognized upfront or at any point in time were $119 million this quarter and represented 11% of software revenues.
<unk> services revenues were $27 million, representing 15% of total software revenue.
In the second quarter, 84% of total company revenues were derived from our Americas region.
EMEA region generated 11% and the remaining 5% were from Asia Pacific.
Our software IRR in the second fiscal quarter of 2023 was 613 million a 17% increase over the prior year.
Our platform Anr was $152 million.
60% last year and represented 25% of our total second quarter.
Compared with 18% last year.
Our non platform here are also grew nicely and was $461 million in the first quarter up 7%.
As a reminder, all of all of our <unk> numbers have been adjusted for divestitures.
Our dollar based net retention rate in the quarter was 114% overall versus 109% last year.
Our platform customers continue to show very strong net expansion for follow on sales of new use cases and from increased usage.
The net retention rate for platform was 146% in the second quarter.
Our non platform customer software usage increased this quarter.
Increased volumes and CPI increases.
The now platform NR was 105.
We have had a good quarter software sales with annual contract value bookings of $23 3 million versus $2 2 million in the prior year, an increase of 16%.
As a reminder, ACD bookings include only the annual value of software sales excluding professional services.
Turning now to expenses for the quarter. Our total operating expenses were $221 million this quarter versus 205 million in the prior year and $205 million in Q1.
Much of the increase was due to salary increases which took effect in December .
And some modest headcount increases.
We also had approximately $10 million of nonrecurring expense.
A number of small items that were incurred this quarter.
We will have some onetime expense from our FICO world event in the third quarter, but we do expect to run rated in the back half of the year to increase slightly from the current levels.
Our non-GAAP operating margin as shown on our Reg G schedule was 49% for the quarter, our first quarter of FY2023.
GAAP net income this quarter was $102 million down 3% from the prior year quarter, where again, we had a large upfront license deal.
GAAP EPS of $4 was up 1% in the prior year.
non-GAAP net income was $120 million $121 million for the quarter down 2% versus the same quarter last year and.
And non-GAAP EPS was $4 78 up 2% from the prior year.
The effective tax rate for the quarter was 26%.
Our full year 2023 recurring tax rate to be approximately 25, 6%.
Is that expected recurring tax rate before any excess tax benefit or other discrete items.
<unk> net effective tax rate is estimated to be about 24% to 5%.
Free cash flow for the quarter was $88 million for the trailing 12 months free cash flow was $439 million.
At the end of the quarter, we had $167 million in cash and marketable investments.
Our total debt at quarter end was $192 billion.
With a weighted average interest rate of five 1%.
Currently about 67% of our total debt is fixed rate.
Our floating rate debt is pre payable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating debt balances in future periods.
Turning to return of capital we bought back 170000 shares in the second quarter at an average price of $684 per share at the end.
For the quarter, we had $335 million remaining under current board authorization and continue.
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 fiscal 'twenty, three and our revised full year guidance.
Thank you Steve as I said in my opening remarks, we continue to deliver strong results and I have confidence in our team as we move forward. Our scores business continues to deliver strong growth even in a volatile macro environment as I've said in the past our diversification through different credit verticals means we're less dependent on specific types of lending, which is very important in <unk>.
Rising rate environment.
On the software side, we continue to prove that market demand for FICO platform is strong and growing we are delivering valuable technology to customers looking to use the latest analytics and AI technology to optimize their consumer interactions and rebel of shines their businesses through digital transformation and importantly to do it at scale and with low latency.
As always we're focused on execution and remain committed to delivering value to our shareholders and visibility into our progress.
Finally today, we are raising our full year guidance as we enter the back half of our fiscal year. There is still a great deal of uncertainty in the markets. We serve but we have line of sight to much of our revenue and are confident that we can raise our guidance accordingly.
We are raising our full year revenue guidance to $1 four 8 billion.
We're also increasing our GAAP and non-GAAP net income guidance GAAP net income is now expected to be $406 million.
GAAP earnings per share is now expected to be $16 15.
non-GAAP net income is now expected to be $489 million non-GAAP EPS is <unk> $19 45.
And with that let's turn the call back to Steve for Q&A.
Thanks, Paul.
This concludes our prepared remarks, I wonder right now take any questions you may have operator.
<unk>. Please open the line.
Certainly and thank you if you would like to register a question. Please press. The one followed by the four on your telephone Youll hear <unk> probe to acknowledged 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 your first question comes from the line of Stacy <unk> with <unk>.
Which bank your line is open.
Yes, hi, thank you so much.
And as you talk about the updated revenue guidance.
One 8 billion can you walk us through sort of what's changed are there areas of the business, where you're feeling more positive about voices are there areas where.
You have maybe changed changed their view.
Well I think that it's not so much that things have changed as well.
With the benefit of half the year behind us we have more confidence than what we expected and so we're able as you know we're typically conservative in our guidance and so we're really just.
Just.
Stating officially that we're comfortable with the direction that things are headed there is not really any surprises there and there's not any dramatic changes.
Okay. So maybe just to follow up on the expenses.
Steve I know you mentioned something about $10 million of expenses that were more.
One time in nature, this quarter or just walk us through sort of what your expectations are for the back half of the year again on expenses.
Yes, so we had a number of things.
What's happened to take place throughout the year a lot of them just kind of happened this quarter.
The crude a little bit more for incentives with because we probably don't do total third quarter. So we did that now we had the success our sales events.
We had a few other kind of true up things that typically happen throughout the year, but we get more of them. This quarter. So the rest of the year.
Final world coming in our third quarter so thats.
There is an expense associated with that but we expect that if anything.
Expenses in the back half of the old part of it is similar to our second quarter or potentially even drift downward book in the fourth quarter, because there aren't any onetime events there.
And on the revenue we get too so.
It looks like there's a step function here, but it's not as much as that.
And probably as it looks like on the surface because of <unk>.
Because it's the aggregation of a lot of one time events quarter.
Understood. Thank you.
Your next question comes from the line of Manav Patnaik with Barclays. Your line is open.
Thank you, we'll just broad macro comment, especially since you're raising your guidance just in a lot of people don't seem to be too worried about the incremental pressure from the bank failures and so forth, but I just wanted to see if you had any.
Unique insight from what Youre seeing and how you assess the risks.
I wish that I had unique insight to share with you as you know our revenues tend to lag the bureaus they tend to lag.
And so we're not a leading indicator.
But we do see a sequentially from last quarter to this quarter.
Stabilized, we seem to be moving upward a little bit.
That's a positive sign.
I wouldn't say that I have that we feel will have any kind of unique insight into the future.
We certainly haven't felt any fallout right now were not sensing any fallout.
Got it Okay. That's helpful and then just on the.
Originations revenues.
All have a good sense from the views on the mortgage volumes, but I was just hoping you could give us some color on what <unk> card and personal loan debt from a volume perspective this quarter.
Yes, they were both up.
Auto was up a little not a lot, but it was up year over year and card was also.
All the details of the <unk>.
They were both up in these modestly.
Got it alright, thank you.
Your next question comes from the line of Kyle Peterson with Needham Your line is open.
Great.
Good afternoon guys.
Just wanted to.
Touch on the software side of the business.
Particularly on the platform side.
Really strong this quarter from the acceleration at least in terms of the year on year growth rate compared to last quarter I just wanted to see.
If you guys could dive into.
What drove the acceleration, especially kind of in an environment, where I think theres a lot of speculation in the bank budget could tighten just given all the ongoing volatility in the market.
Yes, it's a good question, Kyle and certainly the backdrop for it spending and software is a little softer.
But not for us.
So the good news is that our.
Our offerings, particularly our platform offering, but our software offerings are so critical.
So march part of kind of the strategic future for our big customers that they're not getting the same kind of cancellation and squeeze.
Some other software products are.
In fact, we've seen our sales cycles shortening a little bit.
We see continued expansion of existing sales of platform.
And we're actually running into less competition out there than one might expect most of the competition comes from homegrown theres not really competitors out there who have offerings that are.
On a par with ours.
Our platform offering is so much more powerful and fully featured and what the customer needs that it tends to be a less competitive situation in a much more of a strategic buy and.
So that's really what we're seeing and so no we have not slowed down in spite of the software spending environment.
Got it.
That's helpful and then maybe just a follow up.
On the software side of the business, particularly the talent side of things.
Historically, you guys have kind of been a bit.
Why constrained per se and I'm, having a hard time selling seats.
In some key roles has that gotten any easier given sort of the labor market.
Change is call it in the last six to eight months, particularly in white color per se.
Just wanted to see if it's Eric.
Eric maybe a part of that contributing to higher expenses.
I'd say that we have never had any trouble attracting talent to FICO not years ago, not last year not this year not even one times are tight.
Unemployment is very tight.
Yes, there are some some salary cost pressure and I would say is more of a year ago than today.
But we have had no issues whatsoever, with attracting talent or retaining talent for that matter I think that we offer our engineers and our people super challenging.
Rolls.
Non.
Industries, and gaining critical staff and and they like it.
And we've been able to attract great talent that way I wouldn't.
With the exception of what Steve mentioned from salary and stock comp expense standpoint, and a bonus standpoint, I Wouldnt say that there is disproportionate pressure on compensation or anything like that.
Alright Thats helpful. Thanks, guys.
Your next question comes from the line of Surinder <unk> with Jefferies. Your line is open.
Thank you.
I'd like to start with a question on the scores B to C side of the business. It looks like revenues were sequentially flat quarter over quarter.
Versus the declines that you've seen in the last couple of quarters any color there in terms of that dynamic.
Does it look like things have stabilized at this point.
And then maybe in terms of the new additions versus the <unk>.
People that are rolling off any color there.
I think things have stabilized it feels like they've stabilized.
For my FICO, you've had some success with a free program.
And.
And I think for our partners volumes are stabilizing so.
I think that that's kind of the general picture there.
Fair enough.
And then in terms of just the.
The dollar base NR.
Obviously, there was a material acceleration.
In the figure from 130% last quarter, 246% this quarter that reverses this slowing trend that we had been seeing.
Can you provide some additional color there how much how much of that is sensitivity to FX.
And then how much of that is just.
The international business there.
Yeah very little of it.
Backs frankly.
You got to remember this is a fairly small number of customers. So.
Customer coming out and really.
Spanish or use cases and have a pretty dramatic impact when they do that so I mean youre going to have you're going to have volatility in those in that number on a number but I mean, we're seeing pretty much across the board with our customers.
As they start to use it to find additional use cases and they drive more volume.
<unk>.
We are encouraged by that.
Thank you and then.
One one follow on in terms of when I think about that.
The new clients that you've been adding to the platform to new use cases.
That's consistently been growing at about a mid teens pace.
That was true last year that was true this year it was through truth for most of 2022.
So it doesn't seem like there's really any impact from macro.
Kind of quantified it is.
<unk>.
Maybe not a lot of sensitivity there given the importance of the platform, but can you discuss the conversations you are having with the new clients in terms of.
How are you recording them.
And what does that pipeline look at look like at this point like the conversions that you are seeing what we're seeing now is that conversations from last year or.
When I say lots from a year ago or how should we think about that in the current pipeline.
Well for starters I would say the pipeline is as strong as it has ever been so its not like were working off old pipeline from last year I think that the future is every bit as bright as the present.
So I would just lay that out there the conversations are strategic so we're operating at a higher level and our customers we're talking to chief.
Digital officer or the additional transformation officer the C suite.
The CIO.
The chief risk officer.
The conversation has been elevated and and.
And that continues to be the case and why.
I think a.
A couple of things to distinguish our sales approach here are one we have something and nobody else has which seven industry very much wants they want to be able to have this very interesting strategic review of the customer and optimize every interaction and leverage all the data that they know about every consumer to make the smartest kind of an interaction they possibly can and thats.
That's an imperative for the industry and certainly the biggest.
And most forward thinking banks and lenders are already well down this path and they see that we have the right offering for that.
The other thing is the payback is very rapid so unlike.
Some of the software that we sold in the past where.
It would be a long sales cycle and then it would be a long install and then the payback might take couple or three years and then it would get the license would be renewed for another three years and another three years I would say that was kind of a typical software.
Kind of approach.
Five years ago today, the payback is extremely rapid it can be within a year it can be less than a year and so what and it's very easy to get started you don't have to commit to a monster project to get started and you can start with one portfolio with one or two or three use cases see how it goes and then expand from there and as a result.
It's very easy for our customers to give it a try and when they do is they try it and they fall in love with it and then they expand and so I think between the very rapid ROI is very strong references we get from our customers, who talk to or would be customers and and the strategic nature. I think those are all the things that are powering.
Yes.
Thank you.
Your next question comes from the line of George Tong with Goldman Sachs. Your line is open.
Hi, Thanks, good afternoon.
Fiscal <unk> now complete you have visibility into the flow through of your scores special pricing increases can you discuss the traction of your special pricing increases and how much of it is reflected in your updated guidance.
I mean, if you are asking is there any special pricing on top of the guidance that we've provided.
That's what you're asking I would say, yes, there is but we don't quantify it I mean, we really there's enough uncertainty out there that we will know what the special pricing is at the end of the year when the numbers are counted.
So.
The short version is there is some special pricing above the guidance that we've provided today, but I wouldn't want to quantify it today, yes, George you followed us long enough you realize we're conservative with where we guide we don't want to if we can find out on anything.
So we are always lumpy when we can and will provide more context, where we can but this is pretty much consistent with what we've done in past years.
And then.
<unk> from guidance just in terms of what's the receptivity and what's the traction of your special pricing increases.
Well.
Maybe go through.
We wind up publishing the new prices and then they go through and they flow through.
And.
If there were if we were to face attrition because of the pricing.
I suppose we would start to learn about it now, but we certainly haven't seen anything like that.
Perfect very helpful. And then secondly, you mentioned auto and card volumes are up modestly can you describe what you're seeing with the origination volumes volumes from a trend perspective, how are they trending.
Things getting better or they enable card origination public trading down I mean, it was very hard at the end of last year next calendar.
Calendar year.
Okay, so it'd probably be trending down a little bit Bartlett bounces around a lot of it's been pretty stable throughout the last couple of years.
But.
I think frankly, you probably get us through the data from industry sources, and youre going to get crushed.
But where we see it all numbers anymore.
Got it thanks very much.
Your next question comes from line of Ashish Sabedra with RBC capital markets Your line.
Thanks for taking my question, Steve maybe a quick clarification when you talked about the expense growth.
In the back half of the year is that increasing in the back half of the year is that excluding the $10 million one times in the second quarter or does it include that.
No.
On a run rate basis will probably be flat to that $10 million of RGB, that's probably the high end.
Or it will be.
But a lot depends on how much revenue, we get to get revenue above and beyond our guidance. This was part of associated with that but if you can kind of back into your model. If you take our guidance implied.
The implied expenses in the back half of the year, but we.
Personnel was up 6% I think.
Personnel costs were not all of that obviously is payroll increase and.
And head count, we had bigger electronics fashion so.
We had some true ups of some tenants both in the U S and other parts of the world. So there's a little bit of that.
Under a different kind of a one time thing.
$10 million number so there's a lot of noise in the number I don't want people to think that our neuro extent there are ramping up that dramatically.
That's very helpful color and maybe just a quick question on the FHFA came.
Came out on March 23rd it mentioned that it's got to make the buy much implementation could occur by first quarter of 2024 I was just wondering if you had any thoughts on the on the implementation.
Your guess is as good as ours.
It has always seemed like somewhat aggressive timetable for us but.
Time will tell whether whether it happens at that time or later.
But.
One could imagine that it could happen on the timeframe that's been announced.
Okay. That's helpful. Thank you.
Your next question comes from the line of Jeff Mueller with Baird. Your line is open.
Yes. Thank you so software looks great look forward to seeing you at cycle World I guess next month.
I do have another question on the guidance methodology, just want to make sure im understanding that correctly.
Thank you said well that like you took a similar approach to <unk>.
Prior years.
There was another question and it didn't sound like the environment is all of that.
Different than what you were expecting but the magnitude of the increase this year was obviously quite a bit less so at least at the EPS line in some prior years. What you did during Q2, so I'm just I'm not understanding of like Youre holding back more of.
The pricing benefit this year, given uncertainty or if there's offsets in volumes you mentioned card getting worse or just anything like that or is this a pretty full.
<unk>.
Calendar 'twenty three special pricing impact.
Similar to what you've incorporated in prior years with a little bit of conservatism.
Okay.
Yes, I think theres, probably more conservative.
More conservatism than we've had in the past because of so much uncertainty right. I mean, you go back a couple of years really full guidance completely.
So I mean, there was a lot of uncertainty there, where we have a fair amount now as well.
We're obviously dealing in a pretty volatile environment, where a lot of.
A lot of our peers are putting their guidance. So we're trying to be as prudent as possible.
Got it.
And then just can you comment on free cash flow I get that it can be lumpy quarter to quarter. I think we've got a couple of years in a row now where it's about lower so just what's going on there or any sense of like what you would expect that to normalize.
I think it will probably normalize in the back half of the year I think what happens is you see it multiyear.
And our accounts receivable, so I think as our stores revenue jumped up.
It hit the receivables and that takes longer to flow through to cash. So a lot of that is fairly late in the quarter. So I think you'll probably see a lot more flow through next quarter.
Theres nothing thats in there.
Nothing changing in any of that so I mean, if you look at it over a longer period of time, you will see the bulk.
Okay. Thank you.
And there are no further questions I'll turn the call back to your presenters for closing remarks. Thank you.
Alright. Thank you all for joining today and we look forward to speaking with you again soon thank you. This ends our call.
Yeah.
And that does conclude the conference call for today, we thank you very much for your participation you may now disconnect your lines.
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