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spk04: Greetings. 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. 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. This conference is being recorded Wednesday, April 27, 2022. And now I'd like to turn the conference over to Steve Weber. Please go ahead.
spk06: Thank you. Good afternoon, everyone, and thank you for joining FICO's second quarter earnings call. I'm Steve Weber, Vice President of Investor Relations, and I'm joined today by Will Lansing, our CEO, 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 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-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 April 27, 2023. And now I'll turn the call over to Will Lansing.
spk07: Thanks, Steve, and thanks to all of you who are joining us for our second quarter earnings call. On the investor relations section of our website, we posted some slides that offer financial highlights of our second quarter. I'm pleased to report that we continue to deliver strong results as we pursue our strategic initiatives in both scores and software. Today, I'll talk about this quarter's results and how we view our business at the midpoint of our fiscal year. As you can see on page two of the presentation, we reported revenues of $357 million. which is an increase of 8% over the same period last year. We delivered $104 million of GAAP net income and GAAP earnings of $3.95 per share, up 52% and 70% respectively. On a non-GAAP basis, net income was $124 million, up 37%, and earnings per share of $4.68 were up 53% from last year. On the score side, the business continues to perform well. Scores were up 9% in the quarter versus the prior year, as you can see on page six. On the B2B side, revenues were up 5%. As others have reported, we continue to see a slowdown in mortgage activity as interest rates rise. Mortgage origination revenues were down 23% versus last year. Mortgage revenues account for about 14% of our scores revenues, and 7% of our total company revenues. Auto origination revenues were up 9%. Personal loan origination revenues were up 27%. While the mortgage declines have been significant, we do remain confident in our revenues given other areas of strength and pricing increases. Our B2C revenues continue to be strong, up 18% versus the prior year quarter. We saw strong growth through both our own MyFICO business and also through our channel partners. In our software segment, we delivered $173 million of revenue, up 7% from last year. We continue to drive growth in this segment, particularly on our platform. As you can see on page 7, total ARR was up 11%, and the platform ARR grew 60%. We continue to deliver strong NRR as well, demonstrating our existing customers' eagerness to find new ways to expand their usage. Total NRR for the quarter, which you can see on page 8, was 110%. Platform NRR was 141%. And we continue to sign more deals and bigger deals. Our ACV bookings, as seen on page 9, were up 55% over last year. I'll have some final comments, including a revision of our guidance in a few minutes. But first, I'll turn the call over to Mike for further financial details.
spk05: Thanks, Will, and good afternoon, everyone. As Will said, we continue to drive strong growth throughout the business. Total revenue for the second quarter was $357 million, an increase of 8% over the prior year, or 13% after adjusting for the divestiture of our collections and recovery product line last June. In our score segment, revenues were a record $184 million, up 9% from the same period last year. B2B scores revenue was up 5% over the prior year. As expected, mortgage origination revenues continued to decline, down 23% from the same quarter last year, but that was more than offset by growth in other areas. Credit card and personal loan originations revenues were up 27%, and auto originations revenues were up 9%. B2B non-originations revenues, which include FICO scores used for pre-screening, account management, and insurance, were up 16%. B2C scores revenues were up 18% from the same period last year. Both MyFICO.com and partner B2C revenues grew significantly. Software segment revenues in the first quarter were $173 million, up 7% versus the same period last year. Adjusting for the divestiture of our collections and recovery business, software revenues were up about 19%. Software license revenue recognized up front or at a point in time, as it is referred to on our 10Q, was $27 million this quarter compared to $12 million in the same period last year. Our lower margin professional services revenues, which we are strategically deemphasizing, were $24 million down from $37 million in the same period last year. This quarter, 78% of our total company revenues were derived from our Americas region. Our Asia Pacific region generated 12%, and the remaining 10% was from EMEA. Our software ARR at the end of the second fiscal quarter of 2022 was $550 million, an 11% increase over the prior year quarter. Our platform ARR was $97 million, representing 18% of our total second quarter ARR. and a growth rate of 60% versus the prior year. Our non-platform ARR was $453 million in the second quarter, up 4% from the prior year. A quick reminder, our reported ARR and related metrics exclude all revenue from divestitures in prior period. Our dollar-based net retention rate in the quarter was 110% overall. We continue to drive very strong expansion from our platform customers as they expand their usage. The dollar-based net retention rate for platform software was 141% in the second quarter. Our non-platform software usage continues to be mature and relatively stable, which is reflected in the non-platform net retention rate of 103% this quarter. Software sales were strong again this quarter, with annual contract value bookings of 20.6 million versus 13.3 million in the prior year, an increase of 55%. As a reminder, ACV bookings include only the annually recurring value of software sales, excluding professional services. Turning now to our expenses for the quarter, total operating expenses were $205 million this quarter, a decrease from $230 million in the same quarter last year. This year-over-year decrease is primarily due to the divestiture of our collections and recovery business, as well as various cost reduction initiatives. Our non-GAAP operating margin, as shown on our Reg G schedule, was 51% for the quarter. We delivered non-GAAP margin expansion of 1200 basis points over the same period last year. GAAP net income this quarter was $104 million, up 52% from the prior year quarter. Our GAAP EPS was $3.95, up 75% or 70% from the prior year. Our non-GAAP net income was $124 million for the quarter, up 37% from the same quarter last year. The effective tax rate for the quarter was 21%. We expect our FY 2022 recurring tax rate to be approximately 25% to 26% before any excess tax benefit or other discrete items. The resulting net effective tax rate is estimated to be about 24%. Free cash flow for the quarter was 120 million versus 152 million in the same period last year. At the end of the quarter, we had 207 million in cash and marketable investments. Our total debt at quarter end was 1.81 billion with a weighted average interest rate of 3.70%. Turning to return of capital, we bought back 580,000 shares in the second quarter and an average price of $455 per share. During the quarter, the prior Board repurchase authorization was exhausted, and as previously communicated, a new $500 million authorization was approved. At the end of March, we had about $400 million remaining on that authorization and continue to view share repurchases as an attractive use of cash. With that, I'll turn it back over to Will for his thoughts on the rest of FY22.
spk07: Thank you, Mike. 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 that we're less dependent on specific types of lending, which is important in a rising rate environment. On the software side, we continue to see more evidence that we're on the right strategic path. We've now delivered 10 straight quarters of platform ARR growth in excess of 40%. And we're excited to demonstrate to new and existing customers the best-in-class capabilities that can revolutionize the way they interact with consumers. As always, we remain focused on execution and are committed to delivering value to our shareholders and visibility to the progress we're making. Finally, today we're raising our full-year guidance as we enter the back half of our fiscal year. We're raising our full-year revenue guidance to $1.355 billion. As we've noted, we're facing difficult comps and mortgage, but we're seeing strong growth in the unsecured lending markets and in most of our software markets. Some of these trends were anticipated, but there's clearly uncertainty as we move through the next half year. We're also increasing our GAAP and non-GAAP net income as well as EPS. Our GAAP net income is now expected to be $350 million. GAAP earnings per share are now expected to be $13.11. Non-GAAP net income is now expected to be $429 million, and non-GAAP EPS are now $16.08. I'll now turn the call back to Steve, and we'll take questions. Steve?
spk06: Thanks, Will. This does conclude our prepared remarks, and we will now take your questions. Operator, please open up the line.
spk04: Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You'll 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. And 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 brief moment for the first question. And our first question is from Kyle Peterson with Needham. Please go ahead. Your line is open.
spk00: Hey, good afternoon, guys. Thanks for taking the questions. I wanted to touch on margins. um really impressive this quarter um the expenses kind of coming in leaner than expected know a lot of companies have been talking about um you know inflation dynamics and you know cost pressures um how are you guys kind of managing the costs and was there anything kind of one time in terms of like timing of spending that we need to uh keep in mind as we progress through the rest of the year
spk07: Well, our expenses will be a bit higher in the second half than they were in the first half, but we're doing a pretty good job on managing expenses. Some things like travel and real estate are the kinds of things you expect coming out of COVID. They're still under control and less than they were in the old days. So there's that kind of cost control. But I would say that we're also doing a pretty good job on the software side of bringing down our COGS And we're starting to see some benefits from our increasing focus on engineering our products and solutions for cost, for cost and efficiency and scaling. And so all that's coming together and improving our margins.
spk00: That's helpful. And then I guess just a follow-up on the guidance raised on the top line. I know there's quite a few moving pieces Um, but just want to see if you guys can give any color on the dynamics between, you know, the pricing benefit. And then I'm also assuming it's some lower volume assumptions, uh, at least on the mortgage side of things. So, um, just wondered if you could give, you know, some of the puts and takes of, um, uh, of kind of the pricing versus volume and the net impacts of those, um, in your updated assumptions.
spk07: You know, it varies by the segment of scores you're talking about, but there's definitely a price benefit in there. Some volumes are down, some volumes are up, but price is offsetting the declines.
spk00: All right. Thanks, guys. Next quarter.
spk04: Thank you. Our next question comes from Manav Patnaik with Barclays. Please go ahead. Your line's open.
spk02: Thank you. Good evening. Will, I just want to do – I was hoping you could expand on the comments you made on you have diversified lending categories. I know you said mortgage was 14% of scores this quarter, I guess. Could you just help us with what auto, personal loans, et cetera, is and perhaps what you're assuming in your guidance for those?
spk05: Hey, Manav, it's Mike. Consistent with what we've shared in the past, the three – segments of the originations part of our B2B business are roughly the same size. That varies from quarter to quarter as one grows or shrinks. But in approximate terms, that's the way to think about it, and we don't get into specifics beyond that.
spk02: Okay. And when you say same size, you mean 14% which was mortgage would be the same for card and auto? No.
spk05: In terms of dollars for B2B originations, that's correct.
spk02: Okay. Got it. And then, you know, perhaps, you know, obviously there's a lot of uncertainties in the market, et cetera. I was just hoping you could help us understand how your pricing strategy changes should we do, you know, enter a period of slowdown.
spk07: Well, you know, we take it. every year, year by year, and we're committed to consistently increasing our revenue and net income and EPS. We do what we have to do on price to make sure that that remains true. I think you can expect that from us. It would take a fairly kilometers change in the cycle for that to not be true. But that's really what goes into figuring out how aggressively we move on price. And you've also heard us talk about the pacing and the moderation and the way we go at pricing. We don't want to shock the system. And so it's that balancing act. I think that we put a very high value on consistency of growth. And so I think you should expect that even as the cycle spins down a little bit. And, you know, we do what we have to do on pricing to make that happen.
spk02: Fair enough. Thank you.
spk04: Our next question is from George Tong with Goldman Sachs. Please go ahead. Your line's open.
spk03: Hi. Thanks. Good afternoon. So just wanted to dive further into the special pricing increases. Can you share – what the customer receptivity has been so far this year to pricing increases? And then as you look across the verticals, which vertical has seen more pricing increases than others? And last year, when mortgage volumes were very strong, pricing increases were not as high in the mortgage vertical. So are we seeing a reversal of that? Does any additional commentary would be great there?
spk07: George, you and I have talked about this in the past, and, you know, nobody loves price increases. Okay, so when you say what's the receptivity, I think customers would prefer not to have price increases than to have them. But I think that they expect reasonable and appropriate price increases from us, and that's what we deliver. And they've been well received. We haven't had any, you know, significant defection. We have no major customers leaving us. We have no threats of major customers leaving us. And so I would say that we've been able to strike a pretty good balance between the price increases that let us, you know, consistently drive revenue and earnings without, again, without shocking the system. So that's, you know, in short, you know, I think it's a conservative strategy and it's working well in the ecosystem.
spk03: And then the part on where you're seeing more or less price increases by vertical mortgage versus card, versus autos?
spk07: Well, so as I've said in the past, we are increasingly trying to spread the price increases in ways that they're less visible to the customers and less visible to you. Our goal in a perfect world would be we could even point our fingers at where the price increase happened. So there's a fairly elaborate exercise that we do internally to figure out where the pockets of inelasticity where we can we can do price increases without losing volume and so we do that and and we're getting better and better and better at that and that lets us do it in a way that's uh not nearly as visible and not as easy to describe um so so i can't really give you a lot more detail there got it that that's helpful and then okay keep going yeah Now, what's your next question, George?
spk03: I just wanted to get sort of your experience in working with the FHFA so far, whether you're in regular conversations with them and where in the process you believe they are in terms of ultimately reaching a decision on mortgage scores.
spk07: You know, I can't tell you when they will reach a decision. We're waiting for a decision like you all are. Pretty much what I can tell you is that, you know, we continue to believe that we have the most predictive score. And so, you know, we're proud of what we've submitted for evaluation. It's, you know, that's about where we are. We're waiting to hear the results.
spk03: Okay. Got it.
spk04: Thank you. We have a question from Ashish Sabhadra with RBC Capital Markets. Please go ahead. Your line's open.
spk01: Thanks for taking my question. I was wondering if you could provide some more details around the large software license deal, whether that was a platform or enterprise deal. Any color will be helpful. Thanks.
spk05: Hi, Ashish. It's Mike. It was mostly platform, not 100%. It's a multi-year deal. And... with what we think is a great customer.
spk01: That's great. And I just wanted to follow up on an earlier question. Obviously, the mortgage has worsened compared to the prior guidance. The expectations there have come down. But I was just wondering how have expectations for cards and autos changed since the last guidance? Those seem to be holding up really well, and the market there is pretty strong. I was just wondering how do those flow into the updated revenue guidance? Any color will be helpful. Thanks.
spk05: Well, you can see from the external data that auto sales for the first of our two fiscal quarters have been lower than what forecasts were when we set guidance originally, supply chain being one of the primary reasons for it. And so relative to the assumption we had for auto credit originations that was embedded in our guidance last November, we have brought that down a bit to be in line with what best we can triangulate from external forecasts. We continue to be optimistic about credit card and personal loan originations. Not much change, frankly, from what we thought was going to unfold when we set the guidance at the beginning of the year. And, you know, mortgage continues to be, you know, continues to be negative.
spk01: That's very helpful, Caleb. Thanks.
spk04: And we have a question from the line of Jeff Mueller with Bayard. Please go ahead. Your line's open.
spk08: Yeah, thanks. So we've had a couple of the Bureau partners guide to the calendar year mortgage inquiries being down 30 to low 30 percent. Does your guidance assume something similar?
spk07: It assumes something similar, yes. I mean, you know, there's a little bit of a lag with us because we lag the bureaus, but we're affected by some of the same headwinds.
spk08: Okay. I know you answered the question on expense management, but can you give us a similar take on the question, but in the context of guidance, just you know, stands out how much the adjusted net income guidance has increased relative to the magnitude of the revenue guidance increase. So if you could help us bridge that, that'd be helpful.
spk05: So without getting into too much granular detail, I can give you the buckets that you can think about. The first one is COVID-related T&E, you know, travel and entertainment, as well as, you know, big customer events. We've returned to normal there slower than we expected we would when we set guidance at the beginning of the year. We still think that's going to increase in the second half of the year. We know it's going to increase because we have our FICO World event coming up next month, and we also had our internal event we call Success last month. Actually, it was in April, so it'll hit Q3. So we'll see increases there, but relative to what we forecast at the beginning of the year, we saw less in Q1 and Q2, and we think we'll continue to see less than we had thought we would in Q3, Q4. The second bucket, Will mentioned it, is just reduction in the cost of delivering our SAS products, COGS for SAS, as well as other operational improvements that we've been able to achieve mostly in the software business. We had line aside on some of them, but we've frankly done a little better than we hoped. And so we feel it's appropriate to reflect that in the guidance. And then the third bit is probably not a surprise if you cover other companies in the American economy that hiring is harder these days just in terms of pace of being able to find people and get them on board. And so we are hiring rapidly. We think we're getting good people, but it's just happening at a slower pace than we had assumed in the guidance. So personnel costs are a little bit lower. Those are the three buckets.
spk08: Got it. And then just maybe another comment on platform ARR and pipeline you know I get that you had the monster sequential growth last quarter so there's probably some pull forward into q1 but just maybe if you could comment on the sequential growth or the pipeline because I think the you said the mega win benefited platform and I would think that benefits platform ARR and it was fairly small sequential growth this quarter if you could just talk through that thanks
spk05: Yeah, it's a fair question. The ARR for that large deal will not hit our reported ARR until next quarter. We have certain definitional rules about when a deal qualifies for ARR. In other words, we don't want deals that sign at 1159 on the last day of quarter to boost ARR by millions and millions of dollars. That doesn't seem like it's a fair reflection. So we have a cutoff period for ARR that's different than cutoff period for ACV bookings or revenue. So you'll see that hit next quarter. And also keep in mind that our business, whether you think about it in ACB bookings terms or ARR terms, is lumpy from quarter to quarter. We do big deals, and sometimes they hit in a quarter. Sometimes they hit three or four days after the quarter. It was a good quarter, but in terms of platform deals, we just happened to have a nice chunky one sign a few days ago for Q3. So don't fret too much about the quarter to quarter because of that and then specifically that big deal that shows up in our revenue recognizer point in time and ACB bookings disclosure did not hit ARR this quarter.
spk08: Okay, thank you.
spk04: And there are no further questions at this time.
spk06: Thank you. Thank you, everyone, for joining today. That concludes our call, and we will look forward to talking with you again soon. Thank you for joining.
spk04: That concludes the call. We thank you for your participation. I ask that you please disconnect your line.
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