Fair Isaac Corporation

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'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 the conference you need to reach an operator, please press star 0. The conference is being recorded Thursday, January 28, 2021. And now I'd like to turn the conference over to Steve Weber. Please go ahead.

Thank you. Good afternoon and thank you for joining FICO's first quarter earnings call. I'm Steve Weber, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing, and our CFO, Mike McLaughlin. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties, including the impact of COVID-19 on macroeconomic conditions and the company's business, operations, and personnel that could cause actual results to differ materially. Information concerning these uncertainties is contained in the company's filings with the SEC, in particular in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website, or from our investor relations teams. 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 FICO.com or on the SEC's website at SEC.gov. A replay of this webcast will be available through January 28th, 2022. And now I'll turn the call over to Will Lansing.

Thanks Steve. And thank you everyone for joining our first quarter earnings call. As we continue to deal with the effects of the pandemic, we remain focused on the health and safety of our employees. We're still primarily working from home and most of our offices remain closed. I'm grateful to our dedicated employees who every day show their commitment to FICO and to our customers. On the investor relations section of our website, we've posted some slides that offer financial highlights of our first quarter. I'm pleased to say we started 2021 well as we continue to make progress on our strategic initiatives. We have reported revenues of $312 million, an increase of 5% over the same period last year. We're pleased with that result because we knew we would have headwinds on the software side as we transition toward more erratable recognition of our subscription software license revenues. And our first fiscal quarter is typically our slowest software new business quarter. We delivered 86 million of GAAP net income and GAAP earnings of $2.90 per share, up 57% and 59% respectively. On a non-GAAP basis, net income was 82 million, up 51%, and earnings per share of $2.74 was up 52% from last year. as we reap the benefits of the cost reductions we put in place last year. As we discussed last quarter, some of those savings will be reinvested as we identify opportunities and hire additional individuals in key strategic areas. We continue to deliver free cash flow growth as well. Q1 free cash flow was $75 million, up 39% from last year. I am encouraged by the progress we're making across the business. The decisioning market continues to grow, and we are well positioned to serve it. In fact, in December, Forrester issued a digital decision platform report and named FICO as a leader in space. The FICO decision management platform was recognized for providing all the tools necessary to manage and deploy digital decisions, which will stand up to the highest standard of regulatory rigor. We've been helping financial institutions make lending decisions for decades. We now bring that same level of automated analytic decisioning to the broader market. to help businesses respond quickly to customers' needs and anticipate their future demands. As we migrate more of our business toward a subscription-based model, including SaaS software subscriptions and term license subscriptions for on-prem software, we will see less upfront license revenue than we would have in the past, as the revenue is spread over the term of the deal. Last quarter, we talked about how we would recognize less revenue upfront for on-premise licenses and that change pushed about $9 million of revenue this quarter out to future quarters. This doesn't affect cash flows or total revenues recognized, but it does delay the timing of revenues, and over time will smooth the lumpiness we've historically seen. This change is in line with industry standards, and we believe it will provide a more representative, transparent view of the growth trajectory of our business. In our application segment, we delivered $135 million of revenue, down 11% from last year. This was due to a decline in upfront license revenues and, to a lesser extent, professional services revenues. The license revenue was negatively affected by a smaller amount of term licenses upfront for renewal in the quarter and the revenue recognition change I mentioned earlier. In our decision management segment, we delivered $32 million of revenue of 4%, despite many of the same issues we described in our application segment. While our license revenue declined versus the previous year, Transactional revenues in DMS were up 36%, providing a steady, predictable recurring revenue stream that we believe will continue to grow. We've had a lot of interest in our decisioning platform. And we've sold a number of large deals in the past few quarters. We're working hard to install and get those customers live so we can begin seeing the impacts from those recurring revenues. As I've often said, we're committed to becoming the preeminent platform player in decisioning analytics. This is the strategic focus of our software business. And like I said last quarter, that may mean exiting non-strategic products or services, or not signing or renewing low-margin services-led project work. Last fall, we sold our enterprise security score business, because although we believe in the effectiveness and value of the product, it is off-strategy, and we need to remain incredibly focused to maximize the opportunities in front of us. In December, we entered into a joint venture with a long-standing partner in China that distributes FICO scores. and the joint venture will now distribute all software solutions for the China market. Moving forward, this will allow us to serve that market with less infrastructure and therefore better margins. Both this and the ESS deal will have a small near-term negative impact on top line revenues, but will help our overall margins and again, allow us to focus on our overarching strategy. We expect more adjustments to be made to our software business as we make the necessary decisions to pursue our strategic initiatives. On the score side, the business continues to perform very well. Scores were up 26% in the quarter versus the prior year. On the B2B side, revenues were up 20%. There was continued strength in mortgage originations volumes, although normal seasonality meant it wasn't quite as strong as our fourth quarter. Auto originations were relatively flat versus the previous year. We're starting to see signs of cards and other unsecured loans beginning to bounce back. as both prescreen and origination activities picked up in that space. As we discussed last quarter, we did institute some price increases across various volume tiers. Those price increases start to feather in during our second quarter, and we can talk more about those impacts when we release the results of our March quarter. On the consumer side, we continue to drive growth. Our B2C revenues were up 40% versus the same quarter last year. The growth at myFICO.com is even more impressive, up 69% this quarter versus last year. The recent results of our myFICO business, as well as our partners' experience, demonstrate that savvy consumers want the FICO score, the scores that lenders use. Finally, as you know, we haven't provided guidance since the middle of our last fiscal year. We're still operating in a marketplace and economy with a great deal of uncertainty and volatility. While our business has been remarkably resilient over the past year, it's still difficult to quantify what macro trends will impact our volumes. So while we're confident in our prospects this year, we still believe that there's a wide range of possible outcomes, depending on the timing of vaccine rollout and the opening back up into global economy. As we move through the year, we'll provide more color when we believe it's prudent. I'll have some final comments in a few minutes, but first, let me turn the call over to Mike for further financial details.