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spk03: Good day, and thank you for standing by. Welcome to the Fair Isaac Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Singleton. Please go ahead.
spk15: Good afternoon, and thank you for attending FICO's second 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 also discuss results in comparison with the prior quarter to facilitate an understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those 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. 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 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. And a replay of this webcast will be available through April 25, 2025. I will now turn the call over to our CEO, Will Lansing.
spk05: Thanks, Dave. And thanks, everyone, for joining us for our second quarter earnings call. In the investor relations section of our website, we posted some financial highlight slides that we'll be referencing during our presentation today. Today, I'll talk about this quarter's results and our increased guidance for the full fiscal year. We again delivered strong results, demonstrating the resiliency of our business with solid growth both in scores and in software. As shown on page two of the second quarter financial highlights, we reported Q2 revenues of $434 million, up 14% over the last year. We delivered $130 million of gap net income in the quarter, up 28%. We delivered gap earnings of $5.16 per share, up 29% from the prior year. On a non-GAAP basis, Q2 net income was $154 million with earnings of $6.14 per share, up 27% and 29% respectively. We delivered free cash flow of $62 million in our second quarter and $182 million in the first half of fiscal 24. We continue to return capital to our shareholders through buybacks. In Q2, we repurchased 144,000 shares at an average price of $1,246 per share. We have $367 million remaining on our board repurchase authorization. Now, in our score segment on page six of the presentation, our second quarter revenues were $237 million, up 19% versus the prior year. In B2B, the current quarter revenues were up 28% versus the prior year. On the B2C side, the current quarter revenues were down 4% versus the prior year. Second quarter mortgage originations revenues were up 85% versus the prior year. Mortgage origination revenue accounted for 46% of B2B revenue and 36% of total scores revenue. Auto originations revenues were down 1%, while credit card, personal loan, and other originations revenues were down 9% versus the prior year. We continue to drive strong adoption for FICO Score 10-T for nonconforming mortgages. Since 2023, clients with over $100 billion in annualized mortgage originations and about $300 billion in eligible mortgage portfolio servicing have signed up for the FICO Score 10-T. FICO 10-T for conforming mortgages will be rolled out based on the timeline of the FHFA. In our software business, we delivered 197 million in Q2 revenue, up 8% from last year, driven by growth in on-premises and SaaS software, partially offset by decline in professional services. We continue to drive strong growth in ARR and NRR to our land and expand strategy, with expand driven by increased customer usage. As shown on page seven, total ARR was up 14%, with platform ARR growing 32%, and non-platform ARR growing 8%. Total NRR for the quarter shown on page eight was 112%. Platform NRR was 126% and non-platform NRR was 106%. Our total ACV bookings for the quarter were 17 million. Our pipeline remains strong, especially with platform offerings. Before I turn it over to Steve to talk about financial detail, I'd like to take a few moments to talk about the FICO World event we hosted last week. The four-day event included 1,200 attendees representing more than 400 companies from 60 countries. FICO World brought together customers and prospective customers from around the globe to discuss the benefits of making real-time decisions at scale through the power of the FICO platform. Current customers explain the benefits of improved profits, increased customer acquisition and retention, reduced costs, growth in new product offerings, and improved employee efficiency. Through FICO platform demonstrations and our innovation center, customers experience real examples of the variety of use cases that can be deployed using the FICO platform. At FICO World, we announced several innovations. We responded to market demand with an open API framework, a FICO marketplace open ecosystem, and business composability. Together, these innovations foster a more collaborative environment by reducing silos and creating transparency into future outcomes. Some of the content from FICO World will be available in the coming weeks on our YouTube channel. I'd encourage all of you to view the demonstrations and presentations to better understand our customers' excitement around this innovative technology. I'll talk about our outlook for the balance of the year, including our increased guidance, but first let me turn it to Steve for further details. Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another very good quarter with total revenue of $434 million and increase of 14% over the prior year. Score segment revenues for the quarter were $237 million, up 19% from Q2 of 2023. B2B revenues were up 28%, driven primarily by mortgage originations revenues. Our B2C revenues were down 4% versus the prior year due to volume declines in our MyFICO.com business. Software revenues in the second quarter were $197 million, up 8% versus Q2 2023. On-premises and SaaS software revenue grew year over year, while professional services revenues declined. This quarter, 84% of total company revenues were derived from our Americas region, which is a combination of our North America and Latin America regions. Our EMEA region generated 10% of revenues, and the Asia Pacific region delivered 6%. Our total software ARR was $697 million, a 14% increase over the prior year. Platform ARR topped $200 million this year for the first time at $201 million and represented 29% of our total Q2 ARR, up from 25% of the total in Q2 of 2023. Platform ARR grew 32% versus the prior year, while non-platform ARR grew 8% to $496 million this quarter. Our platform land and expand strategy continues to be very successful. Our dollar-based net retention rate in the quarter was 112%. Platform NRR was 126%, while our non-platform NRR was 106%. Platform NRR was driven by a combination of new use cases and increased usage. Non-platform was driven by customers' increased usage and by CPI price increases. Our software ACV bookings for the quarter were 16.8 million. As a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Turning to expenses, our total operating expenses were $239 million this quarter versus $221 million in the prior year. Our current expenses are a 4% increase over the prior quarter. As we indicated last quarter, we maintain focus on investment to accelerate development of the FICO platform. and that incremental investment is relatively modest and built into our guidance. Our non-GAAP operating margin as shown in our Reg G schedule was 53% for the quarter, and that represents a 400 basis point increase from the same quarter last year. GAAP net income this quarter was $130 million, up 28% from the prior year's quarter. Our non-GAAP net income was $154 million for the quarter, up 27% in the prior year's quarter. The effective tax rate for the quarter was 25%. We believe that our fiscal year 2024 net effective tax rate is expected to be around 22%, while our recurring tax rate is expected to be around 26%. And as a reminder, the recurring tax rate is before any excess tax benefit on other discrete items recognized. Free cash flow for the quarter was $61.6 million, a 30% decrease from the prior year. The trailing 12-month free cash flow was 467%. $467 million compared to $494 million in the prior quarter. We do expect free cash flow to accelerate from the Q2 level in the next two quarters. At the end of the quarter, we had $177 million in cash and marketable investments. Our total debt at quarter end was $2.04 billion, with a weighted average interest rate of 5.2%. Currently, 63% of our total debt is fixed rate. Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods. In terms of return of capital, we did buy back 144,000 shares in the second quarter at an average price of $1,246 per share. And at the end of the quarter, we still had $367 million remaining on the board authorization. And with that, I'll turn it back to Will for his thoughts on the rest of the year and to give the information on our increase in full year guides. Thank you, Steve. Our strategy remains consistent despite an uncertain macroeconomic environment. We're experiencing strong growth in our scores business, even as the current rate environment has driven volumes lower. Throughout our business, we continue to invest in innovation. This is particularly evident as we see growing customer adoption and expanded use cases of FICO platform. Our customers are delighted to be able to optimize interactions with their end customers through data-driven, composable solutions that are executed in real time. I'm pleased to report that today we're raising our full-year guidance as we enter the second half of our fiscal year. We're raising our full-year revenue guidance to $1.69 billion. GAAP net income is now expected to be $495 million, with GAAP earnings per share of $19.70. Non-GAAP net income is now expected to be $573 million, with non-GAAP earnings per share of $22.80. Non-GAAP earnings per share of $22.80. With that, I'll turn the call back to Dave to open the Q&A session.
spk15: Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.
spk03: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk11: Please stand by while we compile the Q&A roster. Our first question comes from Manav Patnaik with Barclays.
spk03: Your line is now open.
spk12: Thank you. Good evening. Maybe I'll just start with the software segment first. Well, you know, clearly we were at FICO World and your comments and, you know, both are pretty bullish, but can you just help us appreciate or understand the, you know, second quarter in a row of deceleration on the platform side? I think last quarter you said there was some, you know, movement in the bookings or timing, et cetera. So just help us, you know, if there's something more of that going on, is 30% the new level now? Just any help there would be appreciated.
spk05: Yeah, absolutely. So as you know, we had many, many quarters of over 50% growth in the platform, and then it slowed to the 40s, and now we're in the 30s. And I think that's a reasonable and sustainable level for the foreseeable future. I think we'd always anticipated some level of slowing just because as the number gets bigger, that was inevitable. And I think that's really all it is. We're not seeing anything that's caused for any kind of concern or alarm. Our customers are buying the platform. They're expanding the use cases once they've got the platform in. There's a little bit of timing issues around various deals, but I don't think anything really significant. I guess it's probably worth pointing out that the second half of the year is always bigger than the first half. And so there's more to come this year. And Manav, I would just say we had a really difficult comp this quarter too. Second quarter last year, the platform grew 60%. So we're growing more than 30% off of a pretty big number. It was a big step up last year in the second quarter.
spk12: Okay, got it. That's helpful. And then maybe just one on the scores on the mortgage origination side or the moving pieces there, Steve, maybe just how did volumes come in this quarter versus your expectations? And then you know, when you think about the guidance raise, like what were the moving pieces there as well, please?
spk05: Yeah, I mean, you know how we guide, we're pretty conservative. We don't, we're not banking on things getting better anytime soon. I mean, I think even when we gave guidance last year, people at that point were talking about six rate cuts in the year and we weren't anticipating that. So, you know, the way we look at the guidance, And a mortgage agency being such a big piece of that is that we don't expect things to get better in our fiscal year. And if they do, great. But it's hard for us to depend on that because, obviously, you know, the rates are going to be higher or longer than anybody thought. So that's kind of how we look at that. So, you know, when they do come down, we'll enjoy that benefit, but we don't try to put a timeline on that.
spk03: Okay.
spk11: Thank you. Thank you. One moment for our next question. Our next question comes from Faiza Alwi with Deutsche Bank.
spk03: Your line is now open.
spk16: Yes. Hi. Thank you. So I wanted to follow up on mortgage. You know, you've taken obviously a lot of pricing successfully the last couple of years. And I know you have a long-term strategic plan of value creation here. And there's been some noise from regulators, other bodies. I'm curious. how you think about that and what are some of the factors that you're considering as you think about your long-term strategic plan on pricing?
spk05: Well, as we've discussed in the past, we're catching up from 30 years of frozen pricing. And so, our putting through price increases in this space is really a matter of trying to close the gap on on the value that we provide relative to what we charge. The way we think about criticism, because you're right, every once in a while there is noise about price increases. The way we think about it is transparency is our friend. And so we have increasingly been willing and interested to share exactly what our pricing is because it's such a small part of the overall bundle. So if the concern, whether it's from Congress or regulators or third-party groups, is about the level of expense associated with a FICO mortgage score, it's important for everyone to understand that we're talking about single-digit dollars in a bundle that costs a consumer about $6,000. So we point out the gigantic difference gap between what we charge and the bundle in which we reside. And we think that that's the way to do it. We think transparency is our friend.
spk16: Great, thank you. And then just to follow up on, you know, other originations, maybe you can talk about, you know, what you're seeing on the, you know, card and auto side in terms of volumes versus versus pricing sort of what's the overall environment like and maybe if you've adjusted your expectations for volumes just given the macro environment here?
spk05: I don't know that we've really adjusted our expectations. I think that what we're seeing is kind of in line with what we did expect, and it is a function of the macro environment. You know, as we pointed out, we're down a little bit in auto and a little bit more in credit card and other, but I don't think it's any kind of surprise given the macro environment.
spk11: Got it.
spk17: Thank you.
spk11: Thank you. One moment for our next question. Our next question comes from the line of Surrender Thin with Jefferies. Your line's now open.
spk04: Thank you. I'd like to revisit the software business and more specifically just kind of the bookings When you think about the client conversations that you've been having, obviously, you know, quite positive, but how much should we attribute to macro? Because there has been an overall slowdown. So is the earlier commentary that you, you know, the slowdown is not macro related to any expense?
spk05: I think that it's fair to put some of the explanation on macro environment because what we're not seeing is losses to competition. What we are seeing is projects deferred or taking a little bit longer. And so I think it's very fair to attribute some of that to the macro environment.
spk04: Got it. And then I guess turning to the non-platform piece, When you think about volumes versus pricing, I think you mentioned CPI, but just any other color that you can provide, is this mostly growth within like Falcon or how does pricing work here? Is it just CPI is the right number and that's how it should continue or how should we think about that?
spk05: So as you know, the non-platform business is very mature and we're deeply embedded in And yet our customers often prefer to renew and renew and renew. And so there's a cycle of multiple renewals typically associated with our licensed software and with our legacy and non-platform software. Our philosophy is to not push the limits on pricing there. The customers are the same customers who are buying platform from us and customers that we'll have a relationship with for the next 20 or 30 years. And so it's not about harvesting and gouging. We raise our prices to cover costs of adding features and functionality and cybersecurity and keeping the product current. But we're not really pushing the limits of what could be done on price there and don't really intend to.
spk11: Got it. Thank you. I'll get back to you. Thank you. One moment for our next question. Our next question comes from the line of Kyle Peterson with Needham.
spk03: Your line is now open.
spk01: Great. Good afternoon, guys. Thanks for taking the questions. I wanted to start on capital return. Obviously, it looks like you guys bought back a little bit more this past quarter than the first quarter. How should we think about the pace of buybacks in the back half of the year? Obviously, we've seen a bit of a pullback in the shares with the market and such, and then also just giving some of your comments on potential for free cash flow to accelerate as the year progresses. Just want to And get your opinion on how you guys are thinking about that over the next few quarters.
spk05: We remain as committed to buyback as we have ever been. And it is our intent to continue to spend at least our free cash flow and often in excess of our free cash flow on buyback every year. And I don't expect that would change. Our leverage has flipped a bit as our earnings have gone up. And, you know, I guess that's a happy bonus of being more profitable. And, you know, in the fullness of time, you'll see that reflected in increased buyback.
spk01: Got it. That makes sense and it's helpful. And just a follow-up, you know, I guess in the professional services piece of the business, you know, I guess that revenue's falling off a bit. I get that it's, you know, lower margin. But, you know, I just want to get your sense as to kind of is this, call it 19 to 22 million a quarter. Is that kind of a good range to use moving forward, given the mix of the business that you guys are selling? Or was there anything kind of one time in this past quarter that dragged it down a bit below? No, I...
spk05: I think it's a reasonable range to anticipate going forward. We love our professional services, and yet we're not a professional services company first and foremost. We're a software company. And so our goal with professional services is to provide enough PS to manage quality installs and keep our customers happy. We're also delighted to have partners do the installation from us, and we're bringing up partners to do some of that work. I don't imagine that our PS will shrink much more than it already has. As you know, it's come down quite a bit. And we're probably pretty close to a, I think we're at kind of a base level that it would be hard to imagine going below. Got it.
spk11: That's a good color. Thanks, guys. Thank you. One moment for our next question. Our next question comes from the line of
spk03: Ashish Sabadra with RBC. Your line's now open.
spk13: Thanks for taking my question. I just had a quick question on the expense trajectory. I was wondering if you – what should we expect there, both in terms of either sequential or year-on-year growth in expenses for the rest of the year? Thanks.
spk08: Yeah, so we had –
spk05: As we said, we had FICA World this quarter. So that's a pretty significant expense for us. So you'll see an increase in our Q3 spanning by a little bit that's associated with that. And then the fourth quarter would probably be relatively flat, so that are maybe even down a little bit. But we don't expect any significant uptick in expenses the rest of the year. Really, it's basically due to the FICA World being held this quarter.
spk13: That's helpful, Kodak. And maybe just from a modeling perspective, the on-prem software, again, the de-emphasis there, that's maybe one of the reasons why that piece of the software revenues has been muted. How should we think about that going forward? Any color.
spk06: About the on-prem software?
spk13: Yes.
spk06: So, I mean, we're focused, we're cloud first, right? So we really are focused in the cloud.
spk05: But if our customers want to run it on-prem, we'll sell it to them that way. But, you know, I would expect that the on-prem piece is probably not going to grow a lot, but it's probably not going to shrink a lot either because a lot of those are deeply embedded and it's going to take years to move it to the cloud.
spk11: That's helpful, Kelly. Thank you. Thank you. One moment for our next question. Our next question comes from Jeff Moeller with Baird.
spk03: Your line is now open.
spk10: Jeff Moeller Yeah, thank you. Good afternoon. So I want to go back to the card P loan and other origination revenue down nine. I think the majority of that's card. So is pricing a positive contributor to that line? And if so, just based upon the bureaus that have reported thus far, it doesn't seem like card volumes are down that much, but I love your- Well, so yeah.
spk05: It's a little apples and oranges. So this is just the originations piece. I mean, our card in total is not down that much because we have a lot of the pre-screen and in the account management. So the scores are not down that much. This is just the origination subset of that. There's very low pricing in it. So it's probably, when you take all that into consideration, I think it's hard to compare our numbers actually across the board to what the bureaus put out, but things like CART, every bureau has a different subset of banks, you know, a subset of what we have. So there could be a lot of different, you know, different things happening at different banks. So this is just on the originations piece.
spk10: Okay. And then at FICO World, you talked a bit about, I forget the exact word, I think it's enterprise platform clients, but Maybe talk through, like, how many of your platform clients have a single use case? And then of those, how many of them just signed on within the last year and kind of, like, what the typical path forward is for them broadening out their use case expansion and how long it typically takes? Thank you.
spk05: So, you know, depending on how you count it, we're in about 130 of the top 300 financial institutions globally. And of that, I'd say 40% or so are on their first use case, maybe a little bit more than that.
spk10: And how many of those, like, just landed with you in the last year? And if you can just kind of, like, talk about the expansion pathway.
spk05: I would say most of them have landed in the last year. I mean, there's, you know, the very typical path is, even for the single use cases, is to eventually move to multiple use cases. And so the ones that are still on one are typically the most recent.
spk19: Okay. Thank you.
spk03: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
spk11: Our next question comes from George Tong with Goldman Sachs. Your line is now open.
spk18: Hi, thanks. Good afternoon. In scores, you're catching up from 30 years of frozen pricing to close the gap with what you charge. You're closing the gap more quickly with mortgage than with cards and autos currently. To what extent can pricing and autos and cards close the gap at the same pace? as in mortgages over time? What are some of the considerations?
spk05: Well, you know, as we've talked about in the past, we take the entire portfolio scores every year and we evaluate it from top to bottom, thinking through what is the elasticity of demand for that particular kind of a score and, you know, where should the scores prices move by CPI and not more than that and where should they move more than that. And so, you know, you're going to see variation in the portfolio always. I would never expect for us to raise prices the same amount across all scores.
spk06: So, yeah, you could continue to expect them to be different.
spk18: Okay. Got it. That's helpful. And then with respect to the software business, you saw 32% platform ARR growth in the quarter from both Land and Expand. Can you break that down? How much of that growth is coming from new business wins versus wallet penetration from existing customers?
spk07: Yeah, it's hard to do that, George.
spk05: I mean, you can kind of back into it a little bit by looking at the AR versus the NRR, but we don't have the detail to talk about use cases versus usage.
spk18: I guess maybe then qualitatively, would you say you're more in land mode or expand mode?
spk05: Well, I mean, we're trying to get as much business as we can landed, but it's a lot easier to expand. Once it's in, they find their own use cases a lot of times. So a lot of our growth is coming from expansion because a lot of the initial use cases are really small. They're coming in at a very small amount and they're expanding off of that. And you're on the right question. I think whether it's today or next quarter or the quarter after that, Expand will exceed land sooner or later. That's inevitable. That's anticipated. That's coming. I don't think we're quite at the tipping point yet. I think land probably still exceeds expand, but I'm not sure.
spk18: Got it. That's helpful. Thank you.
spk03: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Dave Singleton for closing remarks.
spk15: Did you want to check just one more time? Simon might be in the queue for a question that he just popped in in the last five seconds.
spk03: We do have a question from Simon Clinch with Redburn Atlantic.
spk02: Your line is now open, Simon.
spk19: Hi. Thanks for taking my question. I'm just squeezing me in just for the last second there. I wanted to ask a couple of questions. So first of all, on the software side, How should I think about the longer-term sustainable retention rates for both platform and non-platform?
spk07: Yeah, so the net retention rate on a non-platform is probably going to dip below 100% at some point.
spk05: These are legacy products that at some point are going to shift over to the platform. So that's been running probably just slightly above 100% and will probably be there for a while, but it could dip below 100% at some point. And that retention rate on the platform, it's been very strong as long as we reported it. So it can vary, obviously, quarter to quarter, and there's no real trend to it. You've seen, you know, some quarters it's been as low as in the 110s, and some quarters it's been as high as 140 plus. But we do see continually that all the customers on the platform are almost without sale, use more the following year than they used the previous year. So there's still a lot of room to expand on that. We think that's going to last for quite a while.
spk19: Okay, great. And just as a follow-up then, I mean, you've managed to grow this business pretty rapidly with minimal sort of expense growth recently. I'm just thinking when we're thinking over the next decade, you know, what are the kind of key investment areas you're looking at and how do we extrapolate that to thinking about the the durable expense growth in this business?
spk05: The kind of a key expense, I would say growth. Growth is probably the wrong word. I think we're happy with kind of the expense rates that we have. And if anything, they'll go down over time. But the places where we're spending that money from an R&D standpoint are on the product, on the ecosystem, and the marketplace, and that side of the house. And then I think we also have to think a lot about broadening our distribution because, as you know, we have very limited direct distribution and we have a reasonably nascent indirect partner distribution channel. So there will be more investment on both direct and indirect sales in coming years.
spk11: That's great. Thanks very much. Thank you, and I'm showing no further questions at this time. I'll now turn it back to Dave Singleton for closing.
spk14: Thank you. Thanks, everyone, for the great questions, and we had another great quarter. That's about all I need to say. Thank you.
spk03: This concludes today's Congress call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Fair Isaac Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Singleton. Please go ahead.
spk15: Good afternoon, and thank you for attending FICO's second 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 also discuss results in comparison with the prior quarter to facilitate an understanding of the run rate of the business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those 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. 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 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. And a replay of this webcast will be available through April 25th, 2025. I will now turn the call over to our CEO, Will Lansing.
spk05: Thanks, Dave. And thanks, everyone, for joining us for our second quarter earnings call. In the investor relations section of our website, we posted some financial highlight slides that we'll be referencing during our presentation today. Today, I'll talk about this quarter's results and our increased guidance for the full fiscal year. We again delivered strong results, demonstrating the resiliency of our business with solid growth both in scores and in software. As shown on page two of the second quarter financial highlights, we reported Q2 revenues of $434 million, up 14% over the last year. We delivered $130 million of gap net income in the quarter, up 28%. We delivered gap earnings of $5.16 per share, up 29% from the prior year. On a non-GAAP basis, Q2 net income was $154 million with earnings of $6.14 per share, up 27% and 29% respectively. We delivered free cash flow of $62 million in our second quarter and $182 million in the first half of fiscal 24. We continue to return capital to our shareholders through buybacks. In Q2, we repurchased 144,000 shares, at an average price of $1,246 per share. We have $367 million remaining on our board repurchase authorization. Now, in our score segment on page six of the presentation, our second quarter revenues were $237 million, up 19% versus the prior year. In B2B, the current quarter revenues were up 28% versus the prior year. On the B2C side, the current quarter revenues were down 4% versus the prior year. Second quarter mortgage originations revenues were up 85% versus the prior year. Mortgage origination revenue accounted for 46% of B2B revenue and 36% of total scores revenue. Auto originations revenues were down 1%, while credit card, personal loan, and other originations revenues were down 9% versus the prior year. We continue to drive strong adoption for FICO Score 10-T for nonconforming mortgages. Since 2023, clients with over $100 billion in annualized mortgage originations and about $300 billion in eligible mortgage portfolio servicing have signed up for the FICO Score 10-T. FICO 10-T for conforming mortgages will be rolled out based on the timeline of the FHFA. In our software business, we delivered 197 million in Q2 revenue, up 8% from last year, driven by growth in on-premises and SaaS software, partially offset by decline in professional services. We continue to drive strong growth in ARR and NRR to our land and expand strategy, with expand driven by increased customer usage. As shown on page seven, total ARR was up 14%, with platform ARR growing 32%, and non-platform ARR growing 8%. Total NRR for the quarter shown on page eight was 112%. Platform NRR was 126% and non-platform NRR was 106%. Our total ACV bookings for the quarter were 17 million. Our pipeline remains strong, especially with platform offerings. Before I turn it over to Steve to talk about financial detail, I'd like to take a few moments to talk about the FICO World event we hosted last week. The four-day event included 1,200 attendees representing more than 400 companies from 60 countries. FICO World brought together customers and prospective customers from around the globe to discuss the benefits of making real-time decisions at scale through the power of the FICO platform. Current customers explain the benefits of improved profits, increased customer acquisition and retention, reduced costs, growth in new product offerings, and improved employee efficiency. Through FICO platform demonstrations and our innovation center, customers experience real examples of the variety of use cases that can be deployed using the FICO platform. At FICO World, we announced several innovations. We responded to market demand with an open API framework, a FICO marketplace open ecosystem, and business composability. Together, these innovations foster a more collaborative environment by reducing silos and creating transparency into future outcomes. Some of the content from FICO World will be available in the coming weeks on our YouTube channel. I'd encourage all of you to view the demonstrations and presentations to better understand our customers' excitement around this innovative technology. I'll talk about our outlook for the balance of the year, including our increased guidance, but first let me turn it to Steve for further details. Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another very good quarter with total revenue of $434 million and increase of 14% over the prior year. Score segment revenues for the quarter were $237 million, up 19% from Q2 of 2023. B2B revenues were up 28%, driven primarily by mortgage originations revenues. Our B2C revenues were down 4% versus the prior year due to volume declines in our MyFICO.com business. Software revenues in the second quarter were $197 million, up 8% versus Q2 2023. On-premises and SaaS software revenue grew year over year, while professional services revenues declined. This quarter, 84% of total company revenues were derived from our Americas region, which is a combination of our North America and Latin America regions. Our EMEA region generated 10% of revenues and the Asia Pacific region delivered 6%. Our total software ARR was $697 million, a 14% increase over the prior year. Platform ARR topped $200 million this year for the first time at $201 million and represented 29% of our total Q2 ARR, up from 25% of the total in Q2 of 2023. Platform ARR grew 32% versus the prior year, while non-platform ARR grew 8% to $496 million this quarter. Our platform land and expand strategy continues to be very successful. Our dollar-based net retention rate in the quarter was 112%. Platform NRR was 126%, while our non-platform NRR was 106%. Platform NRR was driven by a combination of new use cases and increased usage. Non-platform was driven by customers' increased usage and by CPI price increases. Our software ACV bookings for the quarter were 16.8 million. As a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Turning to expenses, our total operating expenses were $239 million this quarter versus $221 million in the prior year. Our current expenses are a 4% increase over the prior quarter. As we indicated last quarter, we maintain focus on investment to accelerate development of the FICO platform. and that incremental investment is relatively modest and built into our guidance. Our non-GAAP operating margin as shown in our Reg G schedule was 53% for the quarter, and that represents a 400 basis point increase from the same quarter last year. GAAP net income this quarter was $130 million, up 28% from the prior year's quarter. Our non-GAAP net income was $154 million for the quarter, up 27% in the prior year's quarter. The effective tax rate for the quarter was 25%. We believe that our fiscal year 2024 net effective tax rate is expected to be around 22%, while our recurring tax rate is expected to be around 26%. And as a reminder, the recurring tax rate is before any excess tax benefit on other discrete items recognized. Free cash flow for the quarter was $61.6 million, a 30% decrease from the prior year. The trailing 12-month free cash flow was 467%. $467 million compared to $494 million in the prior quarter. We do expect free cash flow to accelerate from the Q2 level in the next two quarters. At the end of the quarter, we had $177 million in cash and marketable investments. Our total debt at quarter end was $2.04 billion, with a weighted average interest rate of 5.2%. Currently, 63% of our total debt is fixed rate. Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods. In terms of return of capital, we did buy back 144,000 shares in the second quarter at an average price of $1,246 per share. And at the end of the quarter, we still had $367 million remaining on the board authorization. And with that, I'll turn it back to Will for his thoughts on the rest of the year and to give the information on our increase in full year guides. Thank you, Steve. Our strategy remains consistent despite an uncertain macroeconomic environment. We're experiencing strong growth in our scores business, even as the current rate environment has driven volumes lower. Throughout our business, we continue to invest in innovation. This is particularly evident as we see growing customer adoption and expanded use cases of FICO platform. Our customers are delighted to be able to optimize interactions with their end customers through data-driven, composable solutions that are executed in real time. I'm pleased to report that today we're raising our full-year guidance as we enter the second half of our fiscal year. We're raising our full-year revenue guidance to $1.69 billion. GAAP net income is now expected to be $495 million, with GAAP earnings per share of $19.70. Non-GAAP net income is now expected to be $573 million, with non-GAAP earnings per share of $22.80. Non-GAAP earnings per share of $22.80. With that, I'll turn the call back to Dave to open the Q&A session.
spk15: Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.
spk03: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk11: Please stand by while we compile the Q&A roster. Our first question comes from Manav Patnaik with Barclays.
spk03: Your line is now open.
spk12: Thank you. Good evening. Maybe I'll just start with the software segment first. Well, you know, clearly we were at FICO World and your comments and, you know, both are pretty bullish, but can you just help us appreciate or understand the, you know, second quarter in a row of deceleration on the platform side? I think last quarter you said there was some, you know, movement in the bookings or timing, et cetera. So just help us, you know, if there's something more of that going on, is 30% the new level now? Just any help there would be appreciated.
spk05: Yeah, absolutely. So as you know, we had many, many quarters of over 50% growth in the platform, and then it slowed to the 40s, and now we're in the 30s. And I think that's a reasonable and sustainable level for the foreseeable future. I think we'd always anticipated some level of slowing just because as the number gets bigger, that was inevitable. And I think that's really all it is. We're not seeing anything that's caused for any kind of concern or alarm. Our customers are buying the platform. They're expanding the use cases once they've got the platform in. There's a little bit of timing issues around various deals, but I don't think anything really significant. I guess it's probably worth pointing out that the second half of the year is always bigger than the first half. And so there's more to come this year. And Manav, I would just say we had a really difficult comp this quarter too. Second quarter last year, the platform grew 60%. So we're growing more than 30% off of a pretty big number. It was a big step up last year in the second quarter.
spk12: Okay, got it. That's helpful. And then maybe just one on the scores on the mortgage origination side or the moving pieces there, Steve, maybe just how did volumes come in this quarter versus your expectations? And then you know, when you think about the guidance raise, like what were the moving pieces there as well, please?
spk05: Yeah. I mean, you know how we guide, we're pretty conservative. We don't, we're not banking on things getting better anytime soon. I mean, I think even when we gave guidance last year, people at that point, we're talking about six rate cuts in the year and we weren't anticipating that. So, you know, we, the way we look at the guidance And, you know, mortgage obviously being such a big piece of that is that we don't expect things to get better in our fiscal year. And if they do, great. But it's hard for us to, you know, depend on that because obviously, you know, the rates are going to be higher or longer than anybody thought. So that's kind of how we look at that. So, you know, when they do come down, we'll enjoy that benefit, but we don't try to put a timeline on that.
spk11: Okay. Thank you. Thank you. One moment for our next question. Our next question comes from Faiza Alwi with Deutsche Bank.
spk03: Your line is now open.
spk16: Yes. Hi. Thank you. So I wanted to follow up on mortgage. You know, you've taken obviously a lot of pricing successfully the last couple of years. And I know you have a long-term strategic plan of value creation here. And there's been some noise from regulators, other bodies. I'm curious. how you think about that and what are some of the factors that you're considering as you think about your long-term strategic plan on pricing?
spk05: Well, as we've discussed in the past, we're catching up from 30 years of frozen pricing. And so, our putting through price increases in this space is really a matter of trying to close the gap on on the value that we provide relative to what we charge. The way we think about criticism, because you're right, every once in a while there is noise about price increases. The way we think about it is transparency is our friend. And so we have increasingly been willing and interested to share exactly what our pricing is because it's such a small part of the overall bundle. So if the concern, whether it's from Congress or regulators or third-party groups, is about the level of expense associated with a FICO mortgage score, it's important for everyone to understand that we're talking about single-digit dollars in a bundle that costs a consumer about $6,000. So we point out the gigantic difference gap between what we charge and the bundle in which we reside. And we think that that's the way to do it. We think transparency is our friend.
spk17: Great, thank you.
spk16: And then just to follow up on, you know, other originations, maybe you can talk about, you know, what you're seeing on the, you know, card and auto side in terms of volumes versus versus pricing sort of what's the overall environment like and maybe if you've adjusted your expectations for volumes just given the macro environment here?
spk05: I don't know that we've really adjusted our expectations. I think that what we're seeing is kind of in line with what we did expect, and it is a function of the macro environment. You know, as we pointed out, we're down a little bit in auto and a little bit more in credit card and other, but I don't think it's any kind of surprise given the macro environment.
spk17: Got it. Thank you.
spk11: Thank you. One moment for our next question. Our next question comes from the line of Surrender Thin with Jefferies. Your line's now open.
spk04: Thank you. I'd like to revisit the software business and more specifically just kind of the bookings When you think about the client conversations that you've been having, obviously, you know, quite positive, but how much should we attribute to macro? Because there has been an overall slowdown. So is the earlier commentary that you, you know, the slowdown is not macro related to any expense?
spk05: I think that it's fair to put some of the explanation on macro environment because what we're not seeing is losses to competition. What we are seeing is projects deferred or taking a little bit longer.
spk06: And so I think it's very fair to attribute some of that to the macro environment.
spk04: Got it. And then I guess turning to the non-platform piece, When you think about volumes versus pricing, I think you mentioned CPI, but just any other color that you can provide, is this mostly growth within like Falcon or how does pricing work here? Is it just CPI is the right number and that's how it should continue or how should we think about that?
spk05: So as you know, the non-platform business is very mature and we're deeply embedded in And yet our customers often prefer to renew and renew and renew. And so there's a cycle of multiple renewals typically associated with our licensed software and with our legacy and non-platform software. Our philosophy is to not push the limits on pricing there. The customers are the same customers who are buying platform from us and customers that we'll have a relationship with for the next 20 or 30 years. And so it's not about harvesting and gouging. We raise our prices to cover costs of adding features and functionality and cybersecurity and keeping the product current. But we're not really pushing the limits of what could be done on price there and don't really intend to.
spk11: Got it. Thank you. I'll get back to you. Thank you. One moment for our next question. Our next question comes from the line of Kyle Peterson with Needham.
spk03: Your line is now open.
spk01: Great. Good afternoon, guys. Thanks for taking the questions. I wanted to start on capital return. Obviously, it looks like you guys bought back a little bit more this past quarter than the first quarter. How should we think about the pace of buybacks in the back half of the year? Obviously, we've seen a bit of a pullback in the shares with the market and such, and then also just giving some of your comments on potential for free cash flow to accelerate as the year progresses. Just want to You know, get your opinion on how you guys are thinking about that over the next few quarters.
spk05: We remain as committed to buyback as we have ever been. And it is our intent to continue to spend at least our free cash flow and often in excess of our free cash flow on buyback every year. And I don't expect that would change. Our leverage has flipped a bit as our earnings have gone up. And, you know, I guess that's a happy bonus of being more profitable. And, you know, in the fullness of time, you'll see that reflected in increased buyback.
spk01: Got it. That makes sense and it's helpful. And just a follow-up, you know, I guess in the professional services piece of the business, you know, I guess that revenue's falling off a bit. I get that it's, you know, lower margin. But, you know, I just want to get your sense as to kind of is this, call it 19 to 22 million a quarter. Is that kind of a good range to use moving forward, given the mix of the business that you guys are selling? Or was there anything kind of one time in this past quarter that dragged it down a bit below? No, I...
spk05: I think it's a reasonable range to anticipate going forward. We love our professional services, and yet we're not a professional services company first and foremost. We're a software company. And so our goal with professional services is to provide enough PS to manage quality installs and keep our customers happy. We're also delighted to have partners do the installation from us, and we're bringing up partners to do some of that work. I don't imagine that our PS will shrink much more than it already has. As you know, it's come down quite a bit. And we're probably pretty close to a, I think we're at kind of a base level that it would be hard to imagine going below. Got it.
spk11: That's a good color. Thanks, guys. Thank you. One moment for our next question. Our next question comes from the line of
spk03: Ashish Sabhadra with RBC, your line's now open.
spk13: Thanks for taking my question. I just had a quick question on the expense trajectory. I was wondering if you, what should we expect there, both in terms of either sequential or year-on-year growth in expenses for the rest of the year? Thanks.
spk08: Yeah, so we had a
spk05: As we said, we had FICA World this quarter. So that's a pretty significant expense for us. So you'll see an increase in our Q3 spanning by a little bit that's associated with that. And then the fourth quarter would probably be relatively flat, so that are maybe even down a little bit. But we don't expect any significant uptick in expenses the rest of the year. Really, it's basically due to the FICA World being held this quarter.
spk13: That's helpful, Kodak. And maybe just from a modeling perspective, the on-prem software, again, the de-emphasis there, that's maybe one of the reasons why that piece of the software revenues has been muted. How should we think about that going forward? Any color.
spk06: About the on-prem software?
spk13: Yes.
spk06: So, I mean, we're focused. We're cloud first, right? So we really are focused in the cloud.
spk05: But if our customers want to run it on-prem, we'll sell it to them that way. But, you know, I would expect that the on-prem piece is probably not going to grow a lot, but it's probably not going to shrink a lot either because a lot of those are deeply embedded and it's going to take years to move it to the cloud.
spk11: That's helpful. Thank you. Thank you. One moment for our next question. Our next question comes from Jeff Moeller with Baird.
spk03: Your line is now open.
spk10: Jeff Moeller Yeah, thank you. Good afternoon. So I want to go back to the card P loan and other origination revenue down nine. I think the majority of that's card. So is pricing a positive contributor to that line? And if so, just based upon the bureaus that have reported thus far, it doesn't seem like card volumes are down that much, but I love your- Well, so yeah.
spk07: It's a little apples and oranges.
spk05: So this is just the originations piece. I mean, our card in total is not down that much because we have a lot of the pre-screen and in the account management. So the scores are not down that much. This is just the origination subset of that. There's very low pricing in it. So it's probably, when you take all that into consideration, I think it's hard to compare our numbers actually across the board to what the bureaus put out, but things like CART, every bureau has a different subset of banks, you know, a subset of what we have. So there could be a lot of different, you know, different things happening at different banks. So this is just on the originations piece.
spk10: Okay. And then at FICO World, you talked a bit about, I forget the exact word, I think it's enterprise platform clients, but Maybe talk through, like, how many of your platform clients have a single use case? And then of those, how many of them just signed on within the last year and kind of, like, what the typical path forward is for them broadening out their use case expansion and how long it typically takes? Thanks.
spk05: So, you know, depending on how you count it, we're in about 130 of the top 300 financial institutions globally. And of that, I'd say 40% or so are on their first use case, maybe a little bit more than that.
spk10: And how many of those, like, just landed with you in the last year? And if you can just kind of, like, talk about the expansion pathway.
spk05: Why I would take most of them have landed in the last year that I mean there's you know the very typical path is is even for the single use cases is to eventually move to multiple use cases, and so the ones who are still on one are typically the most recent.
spk03: Okay, thank you. Thank you as a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced.
spk11: Our next question comes from George Tong with Goldman Sachs. Your line is now open.
spk18: Hi, thanks. Good afternoon. In scores, you're catching up from 30 years of frozen pricing to close the gap with what you charge. You're closing the gap more quickly with mortgage than with cards and autos currently. To what extent can pricing and autos and cards close the gap at the same pace? as in mortgages over time? What are some of the considerations?
spk05: Well, you know, as we've talked about in the past, we take the entire portfolio scores every year and we evaluate it from top to bottom, thinking through what is the elasticity of demand for that particular kind of a score and, you know, where should the scores prices move by CPI and not more than that, and where should they move more than that? And so, you know, you're going to see variation in the portfolio always. I would never expect for us to raise prices the same amount across all scores.
spk06: So, yeah, you could continue to expect them to be different.
spk18: Okay. Got it. That's helpful. And then with respect to the software business, you saw 32% platform ARR growth in the quarter from both land and expand. Can you break that down? How much of that growth is coming from new business wins versus wallet penetration from existing customers?
spk05: Yeah, it's hard to do that, George. I mean, you can kind of back into it a little bit by looking at the AR versus the NRR, but we don't have the detail to talk about use cases versus usage.
spk18: I guess maybe then qualitatively, would you say you're more in land mode or expand mode?
spk05: Well, I mean, we're trying to get as much business as we can landed, but it's a lot easier to expand. Once it's in, they find their own use cases a lot of times. So a lot of our growth is coming from expansion because a lot of the initial use cases are really small. They're coming in at a very small amount, and they're expanding off of that. And you're on the right question. I think whether it's today or next quarter or the quarter after that, expand will exceed. land sooner or later. That's inevitable. That's anticipated. That's coming. I don't think we're quite at the tipping point yet. I think land probably still exceeds expansion. I'm not sure.
spk18: Got it. That's helpful. Thank you.
spk03: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Dave Singleton for closing remarks.
spk14: Did you want to check just one more time?
spk15: Simon might be in the queue for a question that he just popped in in the last five seconds.
spk03: We do have a question from Simon Clinch with Redburn Atlantic.
spk02: Your line is now open, Simon.
spk19: Hi. Thanks for taking my question. I'm just squeezing me in just for the last second there. I wanted to ask a couple of questions. So first of all, on the software side, How should I think about the longer-term sustainable retention rates for both platform and non-platform?
spk07: Yeah, so the net retention rate on a non-platform is probably going to dip below 100% at some point.
spk05: These are legacy products that at some point are going to shift over to the platform. So that's been running probably just slightly above 100% and will probably be there for a while, but it could dip below 100% at some point. And that retention rate on the platform, it's been very strong as long as we reported it. So it can vary, obviously, quarter to quarter, and there's no real trend to it. You've seen, you know, some quarters it's been as low as in the 110s, and some quarters it's been as high as 140 plus. But we do see continually that all the customers on the platform are almost without sale, use more the following year than they used the previous year. So there's still a lot of room to expand on that. We think that's going to last for quite a while.
spk19: Okay, great. And just as a follow-up then, I mean, you've managed to grow this business pretty rapidly with minimal sort of expense growth recently. I'm just thinking when we're thinking over the next decade, you know, what are the kind of key investment areas you're looking at and how do we extrapolate that to thinking about the the durable expense growth in this business?
spk05: The, the, um, kind of a key expense, uh, I would say growth. I wouldn't growth is probably the wrong word. I think we were happy with kind of the expense rates that we have. And if anything, they'll go down over time. But, um, the, the places where we're spending that money from an R and D standpoint are, um, on the product, on the ecosystem and the marketplace and, and that side of the house. And then I think we also have to think a lot about broadening our distribution because, as you know, we have very limited direct distribution and we have a reasonably nascent indirect partner distribution channel. So there will be more investment on both direct and indirect sales in coming years.
spk11: That's great. Thanks very much. Thank you, and I'm showing no further questions at this time. I'll now turn it back to Dave Singleton for closing.
spk14: Hey, thank you. Hey, thanks everyone for the great questions, and we had another great quarter. That's about all I need to say. Thank you.
spk03: This concludes today's Congress call. Thank you for participating. You may now disconnect.
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