Q4 2023 Fair Isaac Corp Earnings Call
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Greetings and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press. The one followed by the four on your telephone should you require operator assistance at any time.
Please press Star Zero as a reminder, this conference is being recorded Wednesday November eight 2023, I'd now like to turn the conference over to Dave Singleton, Vice President Investor Relations. Please go ahead.
Good afternoon, and thank you for joining <unk> fourth quarter earnings call I'm, Dave Singleton, Vice President of Investor Relations and I'm joined today by our CEO will Lansing and our CFO Steve Weber.
Today, we issued a press release that describes financial results compared to the prior year on this call management will open us gas results in comparison with the prior quarter to facilitate an understanding of the run rate of our business.
Certain statements made in this presentation are forward looking under the private Securities Litigation Reform Act of 1095.
Statements involve many risks and uncertainties that could cause actual results to differ materially.
Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the risk factors and forward looking statements portion of such filings.
These 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 the 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 schedule G are available on the Investor Relations page of the company's web site at FICO Dot com or on the Sec's website at SEC Gov.
A replay of this webcast will be available through November eight 2020 for now I'll turn the call over to our CEO will Lansing. Thanks, Dave. Thank you everyone for joining us for our fourth quarter earnings call.
In the Investor Relations section of our website, we've posted some slides that we will be referencing during our presentation today.
I am pleased to report, we had a strong quarter, which completed another outstanding year with record annual revenues and record earnings meeting the guidance that we raised last quarter.
Page two shows financial highlights from our fourth quarter, we reported fourth quarter revenues of $390 million up 12% over the prior year and 151 $4 billion of revenue for the fiscal year up 10% versus the prior year we.
We delivered $101 million of GAAP net income in the quarter and GAAP earnings of $4.01.
For the full fiscal year, we delivered $429 million in GAAP net income, which equates to $16 93 of earnings per share on a non-GAAP basis Q4, net income was 127 million with earnings of $5 <unk> per share.
Full year non-GAAP net income was $500 million up 10% over last year with $19 71.
non-GAAP earnings per share, which is up 14% versus the prior year.
We continued to deliver strong free cash flow with a record $163 million in our fourth quarter for the full year, we delivered $465 million of free cash flow.
We continue to return capital to our shareholders through buybacks in fiscal 2023, we repurchased 615000 shares at an average price of $659 per share.
And our score segment as you can see from page six.
Our fourth quarter revenues were $196 million up 12% versus the prior year for the full year, our revenues were $774 million up 10% versus last year.
On the <unk> side at the current quarter revenues were up 21% versus the prior year and up 18% for the full year is a strong result, considering the impact of rising interest rates.
<unk> origination volumes.
On the BDC side, the current quarter revenues were down 6% versus the prior year and down 8% for the full year due to difficult comps.
Fourth quarter mortgage origination revenues were up 147% versus the prior year and accounted for 24% of our scores revenues and 12% of our total company revenues.
Auto origination revenues were up 2%, while credit card and personal loan origination revenues were down 2% versus the prior year.
We continue to innovate and scores were happy to see traction with our latest score FICO score 10 T. This quarter, we announced that movement mortgage a top 10 retail mortgage lender has become an early adopter of FICO score 10 T.
They are using it to analyze their nonconforming loans in conjunction with the classic FICO scores as.
Is it firsthand market user a FICO score 10 T movement mortgage will work with FICO to share early use insights for nonconforming products to help the mortgage industry understand the benefits of the most predictive credit score in the space.
<unk> mortgages use of FICO scores <unk> will provide opportunities to evaluate risk more efficiently and credit decisioning.
The improvements in the predictive power of FICO score 10, T can help lenders avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers and this all occurred without sacrificing the trusted FICO score minimum scoring criteria and user experience.
A more predictive score will help project cash flows with more precision potentially increasing the value of securitized assets on the secondary market.
And our software segment, we delivered $194 million in Q4 revenue up 11% from last year.
We delivered $740 million in fiscal year revenue up 10% from last year.
We continue to drive strong growth in <unk> and NR through our land and expand strategy with expand driven by increased customer usage.
As shown on page seven total <unk> was up 22% with platform AAR growing 53% and non platform are growing 14%.
Total <unk> for the quarter shown on page eight was 123% with platform and are at 145% of non platform NR at 111%.
We continue to see strong demand from new customers, our total ACB bookings for the year.
Were $94 million up 10% year over year.
There continues to be strong demand for our FICO platform.
Built a strong pipeline of prospects interested in using this advanced Decisioning technology.
To optimize interactions with their consumer customers.
And we continue to be recognized for our technology Chartis ranked FICO number one for innovation and risk management technology for the seventh consecutive year.
And we're in the top five as a risk and compliance technology provider for the second year in a row.
Forrester identified FICO as a leader in AI Decisioning platforms, and Juniper resources awarded FICO platform of the future Digital award for banking innovation of the year.
I'll highlight the fiscal year 2024 guidance in just a few minutes, but first let me turn the call back to Steve over to Steve for further financial details.
Thanks will and good afternoon, everyone. We had another outstanding fiscal year and we are excited about our momentum as we head into fiscal 2024.
As will mentioned total revenue for the quarter was $390 million, an increase of 12% over the prior year full year revenue of 151 4 billion was up 10% over last year.
Scores revenues for the quarter were $196 million up 12% from Q4 of 2022, <unk> revenues were up 21% driven by mortgage originations.
Other areas within <unk> were relatively flat to the prior year.
Our <unk> revenues were down 6% versus the prior year due primarily to our Myfico dot com business, where are we to see partner business was relatively flat compared to the prior year.
For the full year scores revenues were $774 million up 10% from the prior year, despite sizable headwinds in the mortgage origination market.
Software segment revenues in the fourth quarter were $194 million up 11% versus Q4 of 2022 with.
With full year software revenues of $740 million up 10% from the previous year.
This quarter, 85% of total revenues were derived from our Americas region, which is a combination of our North America and Latin American regions.
Our EMEA region generated 9% and the Asia Pacific region delivered nine 6%.
Our total software <unk> was $669 million or 22% increase over the prior year.
Platform <unk> was $173 million, representing 26% of our Q4 <unk> up from 21% in Q4 of 2022.
Platform <unk> grew 53% versus the prior year, while non platform <unk> grew 14% and ended the year at $496 million.
Our customers continue to show very strong net expansion from land and expand follow on sales and increased usage.
Our dollar based net retention rate in the quarter was 120% for the total software business platform NR was 145% versus 129% in the prior year, while our non platform and our was 111% versus 101% in the prior year non.
<unk> platform was driven by customers increased usage and some CPI increases.
Our software ACB bookings for the quarter were $28 million versus 20 $29 million in the prior year and as a reminder, Q4 of 2022 contained one very large deal.
<unk> bookings increased 10% for the full year to $94 million.
Versus the $85 million in the prior year.
And as a reminder, ACD bookings include only the annual value of software sales and exclude professional services.
Turning now to our expenses for the quarter total operating expenses were $224 million this quarter versus 215 in the prior year, an increase of 4% for.
For the full year, our expenses were $871 million versus $835 million in the prior year also an increase of 4%.
In fiscal 2024, we maintain our focus on efficiencies and are committed to prioritizing resources to our most strategic initiatives in.
In the next year will be focused on investment to accelerate development and distribution and FICO platform.
We also plan to invest in cyber securities to continue to remain a top standard for both the protection of our clients and a FICO assets.
The incremental investment is relatively modest and built into our guidance.
Our non-GAAP operating margin as shown in our Reg G schedule was 51% both for the quarter and the full year, we delivered non-GAAP margin expansion of 300 basis points for the full fiscal year.
GAAP net GAAP net income this quarter was $101 million up 12% from the prior year quarter.
Our non-GAAP net income was $127 million for the full for the quarter up 13% from the prior year quarter.
For the full year GAAP net income was $429 million.
Up 15% from last year and non-GAAP net income for the current year was $500 million up 10% from last year.
The effective tax rate for the full year was 22%, including $13 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards and $9 million reduction associated with the valuation of our R&D tax credits.
We expect our fiscal 2024 effective tax rate to remain around 20%, while our recurring tax rate is expected to be around 26%.
The recurring tax rate is before any excess tax benefits and other discrete items.
Free cash flow for the quarter was a record breaking $163 million for the full year, the free cash flow was $465 million.
At the end of the quarter, we had $170 million in cash and marketable investments.
Our total debt at quarter end was $1 86 billion with a weighted average interest rate of five 1%.
Currently about 70% of our total debt is fixed rate.
Our floating rate debt is pre payable at anytime, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods.
As will said, we bought back 136000 shares in the fourth quarter at an average price of $859 per share.
In fiscal 2023, we repurchased 615000 shares at an average price of $659 per share for a total of $406 million.
At the end of the quarter, we had $121 million remaining under 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 fiscal 2024. Thanks, Steve.
As we enter fiscal 2024 I remain excited about our future both our software and scores businesses are best in class and our continued investment will accelerate our competitive advantage. We continually look for ways to build our brands and expand our outreach last quarter I talked about our financial literacy efforts today I'd like to discuss the launch of the <unk>.
Psycho educational analytics challenge this program, which we've created for students at historically black colleges and universities features remote mentoring from FICO data scientists and in person lectures by FICO, Chief Analytics Officer, Dr. Scott <unk>.
The FICO educational analytics challenges a program created to help promote diversity and data science engineering and technology.
Today, we announced the departure of Stephanie covert who has led our software business. Stephanie was instrumental in driving FICO software growth in platform transformation and we wish her well in her future endeavors.
Before we open for questions I will review our fiscal 'twenty four guidance, while we don't break out our segments. We do expect growth in both our scores and software segments as with prior years, we expect the pricing initiatives in fiscal 'twenty four to have an additional impact beyond our guided numbers.
Because of uncertainty in volumes is difficult to estimate the timing and magnitude of that impact.
Our fiscal 2023 bookings strong pipeline recurring revenues and diversified product portfolio gives us considerable visibility into fiscal 2024.
So today, we're guiding double digit growth for both revenue and earnings as shown on page 13 of the presentation.
We are guiding revenues of about $1 $6 75 billion, an 11% increase versus last year.
We are guiding GAAP net income of approximately $490 million an increase of 14%.
GAAP EPS of approximately $19 45.
An increase of 15% <unk>.
non-GAAP net income of about $566 million, an increase of 13% and.
And non-GAAP earnings per share of about $22 45, an increase of 14%.
With that I'll turn the call back to Dave and we'll take some questions.
Thanks, Rob This concludes our prepared remarks.
And we are now ready to take questions. Operator, please open the lines.
Certainly and thank you if you would like to register a question. Please press. The one followed by the four on your telephone you will hear us retail probe to acknowledge that request.
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 <unk> with Deutsche Bank. Your line is open.
Yes, hi, thank you.
So I wondered a little bit more color on 2024.
<unk> <unk> in EPS.
One you mentioned that.
<unk> volumes have been slower it looks like theres been some tightening.
But it seems youre confident in gorilla around the scores business.
It seems that you are taking some pricing on the sort of incremental pricing on the mortgage side. So give us some more color around how youre thinking about about all of those variables around volume and pricing.
Across the various verticals.
Our forecast reflects is.
Lower volumes than last year, so a decline versus last year and roughly flat volumes from the level. We're at today. That's how we think about the volume side and as you know we we.
We take price action for CPI and sometimes in excess of CPI every year and so this year is no different we will be doing that again.
Okay.
Good.
And then I'm curious on the expense side, Steve I think you made some mention around.
Moderate increase.
Expenses give us an idea of how we should think about expense growth in 2024.
Yes, I mean, it is pretty modest I mean, you can when you build out your model Youll see theres. Some additional expense in there, but not a lot, but a lot of its re prioritization right. We're looking to invest.
On the software side.
We're putting a lot of money into the platform as we have done and we're putting money into security to make sure that were secured as possible. So it's relatively modest.
But.
Definitely are adding some additional investment there from what we've seen in the past few years.
Okay. Thank you.
And your next question comes from the line of George Tong with Goldman Sachs. Your line.
Hi, Thanks. Good afternoon, you typically set your rate card in your scores business in the beginning of September after your scores prices or set did you notice a negative inflection in credit volumes in September and October, particularly among subprime consumers and if you did do you believe your scores price.
<unk> increases next year are as high as they need to be to sustain your growth momentum.
Yes, that's a good question George.
The volatility on the card side can can be pretty dramatic and it can be pretty short lived.
Nothing has surprised us.
Beyond what we saw that coming right. The subprime has been trending down for quite a while so there's nothing that happened in September that kind of caught us by surprise. So we.
We are satisfied that we have the right rate rate card in place.
Great.
That's good to hear and then secondly software <unk> growth accelerated to 22% in the quarter from 20% in the prior quarter can you elaborate on your overall software platform strategy and the traction that youre seeing with clients.
Yes.
The software strategy is going exactly as expected we continue to penetrate enterprise platform customers.
We've moved to we now have 55 of the top 300 financial services customers worldwide on the platform and that's that's 55.
We call them <unk> 55 of these enterprise customers, who are using multiple use cases of the platform.
Just a question of how many have taken the platform that number is over 100, and so we have pretty good penetration.
As I've shared in the past, we actually expect that the expand side of land and expand is significantly bigger than land. So we land we land the business and then our customers find all kinds of new ways to use the platform and the expansion revenue typically exceeds the land revenue by quite a bit and that has continued.
And that's part of why we're seeing the success that we're seeing.
Got it very helpful. Thank you.
Thank you. Your next question comes from the line of Ashish Sabedra with RBC capital markets. Your line is.
Thanks for taking my question.
Just wanted to follow up on that one.
On the non platform business, we've seen companies list acceleration there compared to historical levels. There was a call out an increase you've taken some are CPI based pricing on the usage front I was wondering if you could provide any incremental color is this more of a module that arent all paid more feature functionality.
And how do we think about the sustainability of this.
<unk> growth in the non platform site.
I would say that most of that is from transaction volume growth.
We do invest in features and functionality in our in our historical products and our legacy products and so it is all about keeping them up to date and useful to our customers.
Again, as we've discussed in the past.
Many of these solutions go into a customer of lending institution.
And they might go in for a three year term initially, but theyre typically renewed again at the three year, Mark and again at the next three year Mark.
We can have these solutions operating for 12 years or more and so it's incumbent on us to maintain the features and functionality and make sure. The security is good and the functionality is with our customers. What we do all of that so we're pretty proud of our classic products, but.
But I would say that the increase that youre seeing is largely just volume related.
That's very helpful color and maybe just switching to the special pricing for scores for next year. Our understanding was that mortgage fees were different <unk>, two and PSP institution and there is a potential for the tier one tier two stock being the same cycle fees at CFT for fiscal 'twenty four.
Is that.
Assumptions appropriate I was wondering if you can comment going back.
Yes, we really don't go into the detail around the.
Pricing within the segment.
We have studied it and I think that the price increases that we've put into this segment of our order a fair and appropriate for the market and we're pretty comfortable we've done the right thing, but we don't go into a lot of detail on that.
That's helpful color. Thanks.
Your next question comes from the line of Seth Weber with Wells Fargo Securities. Your line is open.
Hi, good afternoon, and thanks for taking my question.
For the last several quarters, you've talked about some shortening of the sales cycle.
Wondering if that if youre continuing to see that.
Dynamic and if you could maybe just give us some color on U S versus international Thank you.
We are seeing shortening the sales cycle a year ago was over a year long and today it's.
Two thirds of that we're very happy with that progress.
A lot of reasons for it but it's kind of a cumulative effect of that.
Smoothing out the process.
<unk> scaling up and things are just things are going faster I would also say that the demand is really hot for our offering.
Customers are really interested in there in a hurry to get it going and it's pretty easy for us to get it up and live.
So all of those things have contributed to a shorter sales process and I would say thats true overseas as well as in the U S.
Okay. Thank you and then maybe just going back to the expenses again for a second.
Fourth quarter software expenses were a little higher than what we were expecting.
Did that does that already include some of these new investments that youre talking to or will these investments would be incremental to sort of this fourth quarter run rate. Thank you.
Yes, I mean, it's maybe a little bit incremental.
We do have some onetime expenses in a lot of our.
Around incentives in the fourth quarter that ramps up in a lot of our people are in software so you're going to see a little bit higher expense there, but on a run rate, it's not going to increase significantly off of where we are exit rate from the fourth quarter.
Okay. Thank you. Thank you guys I appreciate it.
Okay.
Your next question comes from the line of Jeff Mueller with Baird. Your line is open.
Yes, good afternoon.
Taking my question can you give us any sense of.
<unk> included in the guidance versus what you held background pricing for instance, last year I think you talked about the original guide had the CPE I like pricing increases, but it didn't have the special pricing increases just any way to help us kind of like understand.
What's assumed versus what could still be on this call.
Yes, Jeff I know you'd love for us to put a number on it.
Ross, we never do and so it's not going to happen today either.
The way, we think about it as we look at the volumes, we make our forecast built around the volumes would put on a CPI increase and then we put on.
Some people call special pricing, but we have some additional increases beyond CPI.
And then because of the timing of those is uncertain, we leave some of that out of the guidance and so call our guidance Conservative it's really designed to reflect the fact that we just don't know how quickly the.
The full price effect will be ramped into our into our numbers.
So.
Does it take to put any kind of a number on it for you.
Is it safe to think about it the way we have in years past, yes, So think about it the way we do it every year and we haven't changed our methodology I would say the only change is that theres, probably more volatility in terms of volumes that we've had in the past so I mean.
If you could tell me what the ownership rate is going to be in six or nine months I could probably give you a better idea, but I don't think anybody knows that.
That's right, Okay, and then I guess I was surprised to see the departure of Stephanie just given how well software has been doing for a while now can you just comment on just any I.
I guess reasoning of why there is a change now when do you expect to have a new leader announced they are likely to come as an internal promotion external just any perspective on that would be helpful. Thank you.
Yes, pretty simple Stephanie has done a great job with us she's she's done a lot of good things for FICO and for the software business in particular.
Decided to pursue other professional opportunities and so we wish you well with all of that.
FICO graduates a lot of talent and then it's not a first Stephanie is now the first talent has left us and we have a really strong team and I am confident that our software business will continue very smoothly.
In terms of leadership I am taking over the leadership of the software business directly so which is what I did before Stephanie you took it over and and so I'm pretty comfortable with that.
Might we have another leader Besides me in the future we might but that's not the plan right now so I'm going to run it for the time being and we'll see.
Okay. Thank you.
And as a brief reminder, tool to register for a question. It is one four on your telephone keypad. The next question comes from the line of Modesto Patnaik with Barclays. Your line is open.
Thank you well just on the software side I mean, a lot of good numbers. This quarter you talked a lot about the visibility going into next year. So maybe just help us in terms of the 'twenty guidance.
How should we think about the components of the software growth in there.
The software business is growing double.
<unk> just like the scores business I mean, it's very strong and.
It continues to be strong, where we haven't decelerated in any way in terms of our platform growth rates, which as you know are very high.
And.
Trees don't grow to the sky, but we expect that to continue for quite some time I mean, there's a lot of demand the pipeline. This year is stronger even than a year ago.
So we're very optimistic and Manav the business has changed a lot from the days when we had we rely on term licenses. So I'll know a lot of the deals a lot of the revenue we have visibility to because of the deals already signed right. We're just implementing them. So we'll be standing up more and more of these recurring revenue in the coming quarters. So we have a pretty good lineup.
Thanks for that and then there's still a lot of people that we're working with from the customer success side to expand their usage. So.
We are far less dependent on making sure we signed deals at the end of the quarter to pull revenue in.
Got it and then Steve in looking at the EPS guidance can you just talk about the assumptions there just help us out with share count I don't think you would include additional buybacks interest expense and maybe any other items, but could change year over year.
Yes, I mean, the share count, it's anybody's guess, but we kind of try to leave that relatively flat because thats just kind of upside for us.
The interest expense, we've had we've actually done a pretty good job of paying down a little bit of that on the on the revolver. So we're saving a little bit that we don't have any big plans to really pay that down we'll probably be.
Maintaining that debt or depending on how the market works, where Bruce sometimes opportunistic if theres a market downturn. So we were basically planning on that to be relatively flat, but we will react as we always do depending on what the market conditions look like.
Thank you guys.
And there are no further questions I will turn the call back to Dave Singleton for closing remarks, Thank you very much.
Thanks to everyone for attending the call.
And the great year.
And that does conclude the conference call for today, we thank you very much for your participation you may now disconnect.
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