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    FICO
    Earnings call· Dec 2024(Q1 FY25)

    FAIR ISAAC CORP FICO

    Feb 4, 2025 Source

    Executive summary

    Fair Isaac Corporation Q1 FY25 — Strong Scores Performance and Reaffirmed Guidance

    Fair Isaac delivered a robust first quarter, driven by strong performance in its Scores segment, particularly from mortgage originations. The company reaffirmed its fiscal year 2025 guidance, citing a conservative outlook on interest rates and a strong pipeline for its Software platform, despite some near-term headwinds from foreign exchange and prior bookings. Management continues to focus on strategic investments in its software business and capital returns through share buybacks.

    Highlights

    5

    • Total revenues increased 15% year-over-year to $440 million.

    • Scores segment revenue grew 23% year-over-year to $236 million, driven by a 110% increase in mortgage originations revenue.

    • Platform ARR grew 20% year-over-year to $228 million, representing 31% of total ARR.

    • Free cash flow for the quarter was $187 million, a 55% increase from the prior year.

    • Non-GAAP operating margin expanded by 209 basis points year-over-year to 50%.

    Concerns

    5

    • Software segment revenue growth was partially offset by a negative foreign exchange rate impact of 1.5% on software revenue.

    • Platform ARR growth of 20% was lower than the long-term target of 30% due to weaker bookings in prior quarters and FX impact.

    • Credit card, personal loan, and other originations revenues were down 3% year-over-year, reflecting a pullback in consumer lending.

    • Non-platform ARR grew only 1% year-over-year to $501 million.

    • FHFA has no specific timeline for the implementation of FICO Score 10T for conforming mortgages sold to GSEs.

    Guidance & targets

    5
    CategoryTargetConfidence
    Fiscal Year 2025 Guidance
    Reiterated
    high materiality
    High
    Platform ARR growth
    accelerate in the back half even in the coming quarters
    high materiality
    High
    Net effective tax rate
    around 22%
    medium materiality
    Medium
    Recurring tax rate
    around 26%
    medium materiality
    Medium
    Operating expenses
    increasing modestly throughout the year
    low materiality
    Medium

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    Scores
    Revenue growth primarily driven by mortgage originations from both pricing and volume increases. B2C growth driven by indirect channel partners.
    B2B revenue growth: 30% YoYB2C revenue growth: 3% YoYMortgage originations revenue growth: 110% YoYMortgage originations revenue as % of B2B revenue: 44%Mortgage originations revenue as % of total Scores revenue: 34%Auto origination revenues growth: 5% YoYCredit card, personal loan and other originations revenues growth: -3% YoY
    		$236 million23%——
    Software
    Revenue increase mainly driven by growth in SaaS software and license revenue, partially offset by foreign exchange rate impact.
    On-premises and SaaS software revenue growth: 10% YoYProfessional services revenue decline: 14% YoY
    		$204 million8%——
    Americas
    Combination of North America and Latin America regions.
    Revenue as % of total company revenue: 87%
    		————
    EMEA
    Revenue as % of total company revenue: 8%
    		————
    Asia Pacific
    Revenue as % of total company revenue: 5%
    		————

    Operational metrics

    17
    Non-GAAP net income
    $144 millionup 19% from prior year
    Q1 FY25
    Non-GAAP EPS
    $5.79up 20% from prior year
    Q1 FY25
    Non-GAAP operating margin
    50%vs 48% prior year, 209 bps expansion YoY
    Q1 FY25
    GAAP net income
    $153 millionup 26% from prior year
    Q1 FY25
    GAAP EPS
    $6.14up 28% from prior year
    Q1 FY25
    Effective tax rate
    -1.6%
    Q1 FY25

    Includes $40 million of reduced tax expense from excess tax benefits recognized upon settlement or exercise of employee stock awards.

    Operating tax rate
    24.3%
    Q1 FY25
    Cash and marketable investments balance
    $230 million
    Q1 FY25

    At quarter end.

    Total debt
    $2.42 billion
    Q1 FY25

    Floating rate debt is prepayable at any time.

    Share buyback
    79,000 shares
    Q1 FY25
    Share buyback
    47,000 shares
    January 2025

    Additional shares repurchased after Q1 end.

    FX impact on total revenue
    $3 millionapprox 1% of total revenue
    Q1 FY25

    Primarily impacted Software segment revenue.

    FX impact on Software revenue
    1.5%
    Q1 FY25

    Negative impact.

    FICO World expense
    $5 million-$6 million
    Q3 FY25

    Non-recurring expense expected in Q3.

    Mortgage originations revenue as % of B2B revenue
    44%
    Q1 FY25
    Mortgage originations revenue as % of total Scores revenue
    34%
    Q1 FY25
    Total operating expenses
    $260 millionvs $257 million prior quarter, up 1.5%
    Q1 FY25

    Industry KPIs

    5
    MetricValueDetails
    Revenue growth$440 millionUSD
    Arr net new arr$729 millionUSD
    Bookings billings$21.2 millionUSD
    Operating FCF margin rule of 4050%%
    Net revenue net dollar retention105%%

    Orderbook & backlog

    1
    Software ACV bookings$21.2 millionQ1 FY25

    vs $18.3 million prior year

    Represents new bookings for the quarter.

    Product announcements

    1
    ProductTypeDetails
    FICO Score mortgage simulatorroadmap

    Deals & partnerships

    1
    AffirmStudy on Buy Now Pay Later (BNPL) loan data integration

    Concluded that inclusion of BNPL loan data could drive FICO Score increases for some consumers and improve model risk performance for lenders. Working with stakeholders to introduce proprietary treatment of this data to the credit scoring marketplace.

    Risks & headwinds

    5
    Foreign exchange rate impactQ1 FY25

    Negative 2% on total ARR, negative 3% on platform ARR, $3 million on total revenue (1% of total revenue), 1.5% on Software revenue

    Weaker bookings in prior quartersPast quarters, impacting current ARR

    Contributed to lower platform ARR growth of 20% in Q1 FY25

    Mitigation: Stronger bookings in recent quarters are expected to drive future ARR acceleration.

    Pullback in consumer lendingQ1 FY25

    Credit card, personal loan and other originations revenues down 3% YoY

    Mitigation: Management notes this is in line with industry trends and reflects conservativeness among banks.

    FHFA delay in FICO Score 10T implementation for GSEsIndeterminate

    No specific timeline announced

    Mitigation: Management believes the industry was not ready for the move; FICO Score Classic is highly effective, and 10T is already seeing adoption in non-GSE markets.

    Seasonality in Software usageQ1 FY25

    Lower usage in Q1 FY25 for some products

    Mitigation: Usage can vary quarter-to-quarter, sometimes reduced over holidays or for cost savings; expected to return to normal.

    What to watch in Q2 FY25

    5

    Platform ARR growth acceleration

    H2 FY25 and beyond
    Current20% YoY
    TargetAccelerating towards 30% range

    Why it matters

    This indicates the success of the land and expand strategy and the flow-through of recent strong bookings.

    Yes. And Manav, we actually do expect ARR to accelerate in the back half even in the coming quarters⏳.

    Q&A highlights

    6

    How do changes at FHFA and potential GSE privatization impact the status of the FICO Score, especially with the delay in FICO Score 10T implementation?

    The FHFA's decision to delay FICO Score 10T implementation was not surprising as the industry wasn't ready. Regardless of GSE privatization, the FICO Score is fundamental for investors to understand mortgage risk, and FICO has strong market share in non-government-involved markets due to the score's efficacy. No significant change is anticipated.

    “I mean if you go back to the fundamentals, the FICO Score is really the best way for investors to understand the risk in the paper that they're buying. And we don't see that changing, whether the government is more or less involved with the GSEs.”

    asked by Manav Patnaik · answered by William Lansing

    2 min read5 chapters

    Detailed Narrative

    01

    FICO Score 10T Adoption and FHFA Timeline

    FICO continues to drive adoption of FICO Score 10T for non-GSE mortgages, with loans utilizing it now trading on MCT Marketplace and Cardinal Financial forming the first government-issued mortgage-backed security featuring loans powered by FICO Score 10T. Clients with over $261 billion in annualized mortgage originations and $1.43 trillion in eligible mortgage portfolio servicing have signed up. However, the FHFA announced it no longer has a specific timeline for the implementation of FICO Score 10T for conforming mortgages sold to the GSEs, a decision management found unsurprising given industry readiness.

    02

    Buy Now Pay Later (BNPL) Data Integration

    FICO conducted a study with Affirm, concluding that including BNPL loan data could increase FICO Scores for some consumers and improve model risk performance for lenders. The company is working with stakeholders to introduce its proprietary treatment of this data to the credit scoring marketplace, aiming to leverage alternative data for better credit decisions, though consistency in bureau treatment is still evolving.

    03

    Software Platform Strategy and Growth Drivers

    The Software segment continues to execute its land and expand strategy, driving growth in ARR and NRR through increased customer usage and new capabilities. Investments are focused on FICO platform development, partner channel adoption, FICO Marketplace realization, and scalability improvements. Management expressed confidence in platform ARR accelerating back to the 30% growth range in the back half of the year, driven by strong recent bookings, despite current quarter's lower growth due to prior weaker bookings and FX impact🌐.

    04

    Capital Allocation and Share Buybacks

    FICO continues to return capital to shareholders through buybacks, repurchasing 79,000 shares in Q1 at an average price of $2,015 per share and an additional 47,000 shares in January at an average price of $1,905 per share. Management views FICO stock as a good value and maintains appetite for further purchases, especially when the stock dips, while aiming to use cash flow and maintain comfortable leverage.

    05

    Macroeconomic Environment and Conservative Guidance

    The macroeconomic environment remains fluid, particularly regarding interest rates and mortgage volumes. Management's fiscal year 2025 guidance was built on a conservative view that rates would not decline significantly, which has largely played out as expected. This conservative approach provides potential upside if rates do come down in the latter half of the year, while preparing the company for continued stability if they do not.

    AI-generated summary of the company’s earnings call. Not investment advice.