Fair Isaac Corporation

message advising you 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.

Good afternoon and thank you for attending

FICO's third 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 and 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 portions of such filing. Probabilities 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 schedules 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 July 31, 2025. Now I'll turn the call over to our CEO Will Lansing.

Thanks Dave and thank you everyone for joining us for our third 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 I'll talk about this quarter's results and our increased guidance for the full fiscal year. We continue to deliver strong quarterly results including impressive growth in our ACV bookings and free cash flow. As shown on page 2 of the third quarter financial highlights, we reported Q3 revenues of $448 million, up 12% over the last year. We delivered $126 million of GAAP net income in the quarter, down 2% and GAAP earnings of $5.05 per share, down 1% from the prior year. On a non-GAAP basis Q3 net income was $156 million with earnings of $6.25 per share, up 9% and 10% respectively. We had a difficult comp in -over-year net income as Q3 of 2023 included an 8.5 million one-time reimbursement of third-party data implementation costs as well as a 9.5 million dollar reduction to income tax expense associated with the valuation of our R&D credits. We delivered record free cash flow of $206 million in our third quarter and $551 million over the last four quarters. We continue to return capital to our shareholders through buybacks. In Q3 we repurchased 196,000 shares at an average price of $1,293 per share. We announced a new board authorization for $1 billion of share repurchase. In our score segment on page 6 of the presentation our third quarter revenues were $241 million, up 20% versus the prior year. Breaking that down, in B2B current quarter revenues were up 27% versus the prior year. In B2C the current quarter revenues were down 2% versus the prior year. Third quarter mortgage origination revenues were up 80% versus the prior year. Mortgage origination revenue accounted for 49% of B2B revenue and 39% of total scores revenue. Auto origination revenues were down 3% while credit card personal loan and other origination revenues were down 7% versus the prior year. We continue to drive strong adoption for FICO score 10T for non-GSC mortgages. Based on 2023 firm reported data clients with over $126 billion in annualized mortgage originations and about $380 billion in eligible mortgage portfolio servicing have signed up for the FICO score 10T. Firms are using FICO 10T to make credit decisions, deliver to investors and for prioritization. FICO 10T for conforming mortgages will be rolled out based on the timeline of the FHFAs implementation of enterprise credit score requirements. In our software segment we deliver $206 million in Q3 revenue, up 5% from last year, driven mainly by growth in SAS software partially offset by decline in professional services. We continue to drive strong growth in ARR and NRR through our land and expand strategy with expand driven by increased customer usage. As shown on page 7, total ARR was up 10% with platform ARR growing 31% and non-platform ARR growing 3%. Total NRR for the quarter shown on page 8 was 108% with platform NRR at 124% and non-platform NRR at 101%. Our total ACV bookings for the quarter were an impressive 27.5 million. We continue to drive more FICO platform SAS bookings which aligns with our strategy. We expect this trend to continue as our recent FICO World Event has been a catalyst for driving pipeline growth, especially for the FICO platform. I'm very proud of the strength of our software business, both the industry-leading technology as well as our remarkable team. This quarter we secured another award for our FICO platform, the business intelligence platform of the year from Data Breakthrough. In July, Nikhil Bell was promoted to EDP for software leading all technology and -to-market functions. Nikhil has been instrumental in strengthening our brand value, reputation with customers and regulators, strategic competitive positioning for FICO scores and FICO platform, and market-leading business growth. We continue to excel in our scores business as well. Our team is focused on innovation to provide new ways to add value for our customers. FICO score is a tool that market participants rely on to make many crucial decisions, including pre-qual, underwriting, pricing, insuring, securitizing, rating, selling, assessing capital requirements, assessing prepayment risk, and determining collection strategies. The FICO score has long been freely chosen because it's trusted as the most predictive and reliable independent credit score, enabling lenders to fairly expand credit access to more consumers. The FICO score was widely adopted because it democratized and expanded access to credit while simultaneously under printing the safety and soundness of the market. It's worth pointing out that over half of mortgage market is non-conforming and also overwhelmingly uses FICO scores. The FICO score is provided and will continue to provide tremendous value to the credit ecosystem. As part of our ongoing commitment to industry-leading credit decision, we've made significant commitments to financial knowledge and financial inclusion. We've once again partnered with Chelsea Football Club, both men's and women's teams, and US Soccer Foundation for the Fields of Financial Empowerment summer tour. The goal is to build excitement for and access to financial education and resources to help more people, including the next generation of fans, make more informed credit decisions. As part of the campaign, FICO hosts free score of better future fundamentals, financial education workshops for students from traditionally underserved communities. Students improve financial literacy and have the opportunity to attend a Chelsea football game. I'll talk about our outlook and balance of the year, including our increased guidance after Steve provides further financial details.

Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another good quarter with total revenues of $448 million, an increase of 12% over the prior year. Score-set gun revenues for the quarter were $241 million, up 20% from Q3 of 2023. B2B revenues were up 27%, driven primarily by mortgage origination revenues. Our B2C revenues were down 2% versus the prior year due to volume declines in our MyFICO.com business. Software segment revenues in the third quarter were $206 million, up 5% versus Q3 2023. On-prem and SaaS software revenue grew 7% year over year, while professional services declined 9%. This quarter, 85% of total company revenues were derived from our Americas region, which is a combination of our North America and Latin American regions. Our EMEA region generated 10% of revenues, and the Asia Pacific region generated 5%. Our total software ARR was $710 million, a 10% increase over the prior year. Platform ARR was $215 million, representing 30% of our total Q3-24 ARR, up from 25% of total in Q3 of 2023. Platform ARR grew 31% versus the prior year, while non-platform ARR grew 3% to $495 million this quarter. Our platform land and expand strategy continues to be successful. Our dollar-based net retention rate in the quarter was 108%. Platform NRR was 124%, while our non-platform NRR was 101%. Platform NRR was driven by a combination of new use cases and increased usage. Our software ACV bookings for the quarter were $27.5 million. As a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Our expenses for the quarter, total operating expenses were $258 million this quarter versus $222 million in the prior year, an increase of 16% year over year and 8% versus the prior quarter. Our third quarter included our FICO World event and a true up for our annual incentive rewards, and we expect Q4 expenses to be down modestly from our Q3 run rate. As Will noted, the prior year includes an $8.5 million one-time reimbursement, a third-party data implementation cost, and a reduction to income tax expense of $9.5 million associated with the valuation of our R&D tax credits. Our non-GAAP operating margin, as shown on our Reg G schedule, was 52% for the quarter compared with 51% in the same quarter last year. GAAP net income this quarter was $126 million, down 2% from the prior year's quarter. Our non-GAAP net income was $156 million for the quarter, up 9% from the prior year's quarter. The effective tax rate for the quarter was 24.5%. 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%. The recurring tax rate isn't for any excess tax benefit and other discrete items. Free cash flow for the quarter was $206 million, a 69% increase from the previous year. The trailing 12-month free cash flow was $551 million compared to $467 million in the prior quarter. At the end of the quarter, we had $199 million in cash and marketable investments. Our total debt at quarter end was $2.13 billion, with a weighted average interest rate of 5.3%. Currently, 61% 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. During the quarter, we secured a $450 million term loan and used those proceeds to reduce our revolving line of credit and to provide additional debt capacity. Turning to return to capital, we bought back 196,000 shares in the quarter at an average price of $1,293 per share. That exhausted the existing board authorization, which was approved in January, and we have just announced a new board authorization for $1 billion. We continue to view share repurchases as an attractive use of cash. And with that, I'll turn it back to Will for his thoughts on the rest of the year and the increase in our full year guidance. Thanks, Steve.

We are executing on our strategy. Our customers are delighted with our innovative products. Our execution is generating strong financial results, including impressive ACV bookings, record free cash flow, and an increase in FICO platform and FICO 10T adoption. The business is strong. I'm pleased to report that today we're again raising our full year guidance as we enter the fourth quarter of our fiscal year. We're raising our full year revenue guidance to $1.70 billion. Gap net income is now expected to be $500 million, with gap earnings per share of $19.90. Non-gap net income is now expected to be $582 million, with non-gap earnings per share of $23.16. With that, I'll turn it back to Dave, and we'll open up the Q&A session.

Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.

Thank you. As a reminder, to ask a question at this time, please press star, then 1, 1 on your telephone. If you wish to remove your question, please press star, 1, 1 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Saiza Elway with Deutsche Bank. Your line is open. Please go ahead.

Yes, hi. Thank you so much. I wanted to start with the software business and just ask you if you could comment on the selling environment, if there's any change from a macro perspective, anything new or different you're hearing from your customers. And then, you know, I know at FICO World we had talked about, you know, improvement of the platform and talking about decomposition of the platform. So just give us a sense of if there's any update there and any additional color.

FICO World is always and was this year the biggest pipeline generating event that we have. And so we came out of FICO World with a very, very healthy pipeline. I would say that the selling environment, you know, has not changed that much over the last year or so. And I would also emphasize that increasingly customers are buying FICO software as a strategic move. And so it's a very considered purchase. And it's, you know, it's not just like going out and finding a point solution to a small problem, to a specific problem. It's a bigger thing than that. And that hasn't changed. That's kind of the new way of operating.

Got it. Thank you.

And then just a question on mortgage or revenue. You obviously had very strong growth in the quarter. I'm curious how, you know, volume trended in the quarter. I know you don't give a breakdown, but was it in line with your expectations? Are there any, you know, dynamics you're seeing around, you know, soft falls where I believe lenders have the option to go to, you know, one or two bureaus like that? Are you seeing an impact on volumes from that and just the general environment

around mortgage? You know, our mortgage volumes are a lagging indicator relative to other mortgage data that you have. You know, our mortgage volumes are down versus a year ago. They're pretty much flat versus a quarter, last quarter. And then,

you know, none of that is particularly surprising.

All right. Thank you so much. Thank you. And one moment as

we move on to our next question. And our next question is going to come from the line of surrender send with Jeffries. Your line is open. Please go ahead.

Thank you. First question on just the guidance raise. It implies revenues are going to be down roughly $10 million quarter to quarter. Just any color there. I know you normally are conservative in the guide, but just can you do the walk for us from 3Q to fiscal? Yeah.

So we are pretty conservative with the way we guide. So, you know, we want to make sure that, you know, a lot of us on the scores, we don't have much control over, right? So we don't really know what's going to happen there. I would say that generally the fourth quarter is a little lighter seasonally for mortgage. Mortgage volumes aren't as high typically then as they are in the spring. So there might be some, you know, a little bit of volume decline there, but a lot of it just depends on the environment, which we don't have a lot of

visibility to.

Thank you. And then in terms of just when I think about the non-platform business here, the NRR was 101%. That's the slowest pace of growth in about two years. So any color there that you can help with, is there some movement of revenues from non-platform to platform at this point? How should we think about that?

You know, I wouldn't say that it's cannibalization if that's what your question is getting at. You know, we're pretty pleased with our classic offerings with 101% NRR. We've been trying to manage that business in this, you know, relatively flat way, and we're pleased that it's turning out that way. But, you know, as you can see, the growth is on the expand side on the platform. You know, we let the market tell us what it wants, but we're not this pleased with the way it's shrinking out.

Yeah, and I would say, I mean, we had higher numbers last year, and at the time we said there were some things driving that. Some of it was, you know, some of the CPI increases we had, and we had some advantages last year from some FX as well, and we knew that was not going to maintain this year. So it's kind of what we thought was going to happen. It would settle more around 100%.

Okay, thank you. I'll get back in the queue for additional questions.

Thank you, and one moment as we move on to our next question. And our next question is going to come from the line of Scott Wurzel with Wolf Research. Your line is open. Please go ahead.

Hey, good afternoon, guys, and thank you for taking my questions. I wanted to start on the versus modestly up last quarter. Just wondering, similar to how you did in mortgage, maybe comment on the volumes there and how they trended versus last quarter.

Yeah, volumes were relatively flat, but the real is a mix shift. So we had more of a mix shift to, you know, more market share in the tiers that are a little bit less price for us. Unicom is a little bit lower. So that's really the difference between the volume and the revenue. So the price per score went down slightly because of a mix shift.

Got it. That's helpful. Then on the software side, on the platform ARR, I mean, I think, you know, it's pretty good to see the sort of

rate of deceleration

moderate from 2Q to 3Q at sort of this low 30s level. I mean, do you kind of see this as a sort of sustainable growth rate for platform ARR over the near to medium term here?

Probably. Yeah, I mean, we don't, you know, we think we're pretty confident in that or at that rate, you know, can change as we go out farther. But, you know, we think that's a sustainable rate. And we've got, you know, it helps when you have a good quarter like this in terms of signing new deals too, because that'll, you know, that'll help boost ARR in the future. So we don't have really good visibility too, because a lot of it depends on how quickly our customers can get online and how much usage they have. But, you know, there's a lot of growth there. So we're pretty confident that we can maintain these levels.

Great. Thanks, guys.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Kyle Peterson with Needham. Your line is open. Please go ahead.

Great. Thanks, Stephanie and guys. I just wanted to start out on software. Because the bookings, you know, looked pretty nice on the ACB basis, committed a lot of the prior quarters. So how should we think about, you know, some of the implementation cycles and kind of when, you know, some of those bookings will start to translate to revenue here?

It's, you know, as you know, it's a long sales cycle, as long as 400 days. And it takes not that long to get live once it's all said and done. But, you know, I think that the flow through is the subsequent year. I mean, that's the easiest way to think about it.

And it does depend on the customer, how sophisticated they are, how ready they are. But yeah, I mean, you know, if you sign deals now in the next six to nine months, you start seeing a flow through on that.

Got it. That's very helpful. And then, you know, just to follow up, you

know, on, you know, particularly on, you know, if we do get rate cuts, whether it's, you know, later this year or next year, maybe if you could walk us through some of the different sensitivities. I know your business now looks quite a bit different, you know, maybe compared to past cycles. So, you know, especially on those first, you know, one to two rate cuts, you know, what are some of the, you know, the impacts that, you know, we should be mindful of, you know, if those do come to fruition?

You know, we're already seeing a little bit of an uptick in refi. And it's not exactly, you know, a gigantic leap of faith that as rates come down, we'll see volumes go up. We fully anticipate that. You know, your guess is as good as ours as to the timing of the rate cuts. We would hope to see some rate cuts, you know, towards the end

of this year and next year, and volumes go up with that. All right, that's helpful. Thanks, guys.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of George Tong with Goldman Sachs. Your line is open. Please go ahead. Hi,

thanks. Good afternoon. Within the scores business, card and personal loan revenue fell 7% in the quarter, which is a little bit better than the 9% decline in the prior quarter. Can you talk about some of the trends you're seeing among subprime or lower tier consumers that may be impacting card and personal loan performance and also talk about overall bank lending conditions?

Yeah, I mean, the subprime markets obviously seem the biggest pullback, which is not surprising, right? You're late in the credit cycle. You have a lot more, you know, uncertainty. And that's kind of where you see that first. Bank by bank, it kind of varies depending on what they're looking at and what kind of, you know, what kind of campaigns they might may or may not be running. But, you know, we see banks being relatively conservative with new originations. And I think they're kind of waiting to see what happens and see what the economic environment looks like. So it's really not surprising. You know, we saw, you know, probably a little over a year ago, strong growth there. When mortgage started to slow down and rates started to go up, we saw strong growth there. Now, I think there's just more uncertainty in the market and they're just kind of being more cautious in their originations.

Got it. That's helpful. And then switching to the software side, software operating margins contracted about 430 bips year over year in the quarter. Can you talk about some of the reasons behind what? That's almost completely,

it's almost completely around that, that, you know, that reimbursement we had last year. So that, you know, that was a big number we had. And that was all on the software side. So that's the driver of that.

And so as that lapse, when would you expect the flip to margin expansion in the software business? Well,

we'll get some margin expansion next quarter because, I mean, again, we have some costs by FICO World this quarter is not going to repeat next quarter. So we'll have some, our costs will decline next quarter and that'll end up with some, you know, margin expansion. We, you know, these costs are big enough where in any one given quarter, something like FICO World is going to have an impact on quarter's margin.

Got it. Very helpful. Thank you.

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Ashish Shabhadra with RBC. Your line is open. Please go ahead.

Thanks for taking my question. Just on the software revenue growth, particularly the on-prem and SAS and within that, when I look at software recognized over the contract term, the growth there moderated, how should we think about the growth profile there?

Ashish, we can't hear you. We can't hear you.

Sorry. Let me know if that's better. Yeah. So I wanted to focus on the on-prem and SAS software revenue growth and within that even the software recognized over contract term that moderated a bit, still pretty strong at 80% but did moderate from mid-teens. How should we think about those puts and takes on the revenue growth going forward?

Yeah. I mean, a lot of that's the fact that we had the Omega growth, the non-platform growth that we saw last year. So that right there drives most of the, and obviously the platform is not going 50% either. But so we think these kind of growth rates going forward, as I said earlier, that's probably more likely what we're going to see to continue. And as the numbers get bigger, it's harder to drive 50% growth or even 40% growth. So we're pretty happy with the 30% growth on the platform side and on non-platforms, we think we can get better than 100%. We're happy with that

as well.

That's helpful. Thanks. Thank you.

Thank you. In one moment as we move on to our next question. And our next question comes from the line of Simon Clinch with Redburn Atlantic. Your line is open. Please go ahead.

Hi. Thanks for taking my question. I wanted to cycle back to the 30% plus growth in the platform software ARR. And just as one of you could just go in a little bit more detail as to why you think that that is a sustainable level of growth and just perhaps flesh that out a little bit more for us, please.

Well, I mean, we've got, I mean, again, we had a really good quarter, you know, with new bookings and we've got a lot of install base that's rapidly expanding. I mean, when we install, you know, most of our customers, you know, look for new ways to use it. And we see that in the net retention rate. And that number continues to do well. And we continue to add more business to it. So again, we can't guarantee it, but we've got a lot of reasons, both, you know, data driven anecdotally to think that we're going to continue to see that kind of growth.

Okay, thanks. And just to follow up on that, could you just frame the approach to pricing within the software business? You mentioned last year in the, I think, was the non-platform side, you had sort of higher inflatory pricing, but just wondering if you could talk a bit about the strategy around the pricing, pricing value and how to think about that going forward.

Our strategy around software pricing is, you know, we're very focused right now on making our software accessible and encouraging adoption. And so, you know, while there's probably room for value pricing in our software business, that's not where our direction is. Our direction is to put the software in the hands of our customers and then watch revenue grow as their usage increases. And their usage increases, you know, within the initial applications that they put the platform to use for. And then also as they discover new uses, you know, the expand part of our land expand strategy is very much wrapped around the customer taking control of what they can do with the platform and coming up with new use cases. And we tend to design in a way that we don't have to renegotiate contracts and go back and do a lot of contractual work for them to do more revenue with us. We tend to design it in a way that they can, you know, select how much usage they want and, you know,

our revenue goes up automatically as their usage goes up.

Thanks so much. Appreciate it.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Jeff Mueller with Baird. Your line is open. Please go ahead.

Yeah, thanks. Instead of me getting to ask a question about cash flow this quarter, I just get to say congrats on the night cash flow. Can you give us some perspective on the geographic kind of trends within software? And I guess I'm just, it looks like America's revenue was down a little year over year. So any particular call outs and then AMEA was up a lot. So just any mega wins in AMEA or any reason to think that you're at an inflection point there and it's really taking off?

You know, Jeff, I don't think that we have tremendous changes regionally. I, you know, I wouldn't try to read too much into, you know, into the data on a quarterly basis. You know, we have strength of platform across all the regions. I think Asia Pacific was a little behind the other regions in terms of platform adoption. And there were some structural reasons for that. For example, AWS was not available in India before and now it is. But we're, you know, we're seeing adoption across all the regions.

Yeah, I would think some of what you see might see with the volatility is when we have that point in time license revenue and that could skew things in one given quarter. But we've had a lot of adoption in the last year in North America and we're starting to see a lot more interest to AMEA as well.

And then when you're calling out the FICO 10T adoption and then the non-conforming mortgage market, is that almost exclusively about upgrades from prior versions of the FICO score given how your penetration is? Or are you finding, I guess, like incremental volume as part of that adoption?

It's

a bit of

both, but probably more of the upgrade. Yeah, I mean, for the most part, everybody was using the traditional FICO scores and now they're just moving to the 10T, you know, ahead of the adoption by the FHFA.

Right. Okay. Thank you.

Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment as we move on to our next question. And our next question is going to come from the line of Manav Patnik with Barclays. Your line is open. Please go ahead.

Thank you. Good evening. I just wanted to, you know, ask Will, I think you tried to reference some of these and you prepared the marks, but, you know, in the face of some public criticism around the price of your scores, like how's your approach or thought process around the value of your score, maybe the timing around which you get to that value, has that changed at all?

Well, you know, you've heard us say in the past, and I certainly continue to believe that what we charge for the FICO score is so much less than the value that we provide that I would say there's not a lot of change in our thought process. Our thought process is that over time, we're going to close some of that gap. And, you know, I think, you know, I think anyone who actually studies the numbers and gets into the details of it sees that FICO scores are, you know, a tiny, tiny piece of the overall process, whether you're talking mortgage or any other kind of credit evaluation process. And so I would say no, no real change anticipated.

Okay. And then somewhat similarly on the software side, you know, I think you talked about that value proposition being unique and niche, et cetera, but, you know, we've heard, obviously, a lot of other software companies during the learning season talk about, you know, the weak environment and the slowdown. It doesn't sound like you're seeing any of that, but anything you'd like to call out, was there maybe some, you know, could it be a lag that you see some of these headwinds or perhaps you're not seeing them at all?

We're really not seeing that. That's not, that's, I mean, we've certainly heard that and I guess the industry is experiencing that, but we haven't felt that.

Okay, fair enough. Thank you guys.

Thank you. This will conclude today's question and answer session. Ladies and gentlemen, this will also conclude today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day. Goodbye. Okay. Good day, ladies and gentlemen, and thank you for standing by. Welcome to the third quarter, 2024 FICO 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 this session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising you 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.

Good afternoon and thank you for attending FICO's

third 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 and 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 portions of such filings. Probabilities 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 schedules are available on the Investor Relations page of the company's website at FICO.com or on SEC's website at SEC.gov. And a replay of this webcast will be available through July 31, 2025. Now I'll turn the call over to our CEO, Will Lansing.

Thanks, Dave, and thank you everyone for joining us for our third quarter earnings call. In the Investor Relations section of our website, we've posted some financial highlight slides that we'll be referencing during our presentation. Today I'll talk about this quarter's results and our increased guidance for the full fiscal year. We continue to deliver strong quarterly results, including impressive growth in our ACV bookings and free cash flow. As shown on page 2 of the third quarter financial highlights, we reported Q3 revenues of $448 million, up 12% over the last year. We delivered $126 million of GAAP net income in the quarter, down 2%, and GAAP earnings of $5.05 per share, down 1% from the prior year. On a non-GAAP basis, Q3 net income was $156 million, with earnings of $6.25 per share, up 9% and 10% respectively. We had a difficult comp in -over-year net income as Q3 of 2023 included an $8.5 million one-time reimbursement of third-party data implementation costs, as well as a $9.5 million reduction to income tax expense associated with the valuation of our R&D credits. We delivered record-free cash flow of $206 million in our third quarter and $551 million over the last four quarters. We continued to return capital to our shareholders through buybacks. In Q3, we repurchased 196,000 shares at an average price of $1,293 per share, and we announced a new board authorization for $1 billion of share repurchase. In our score segment, on page 6 of the presentation, our third quarter revenues were $241 million, up 20% versus the prior year. Breaking that down, in B2B, current quarter revenues were up 27% versus the prior year. In B2C, the current quarter revenues were down 2% versus the prior year. Third quarter mortgage origination revenues were up 80% versus the B2B revenue and 39% of total scores revenue. Auto originations revenues were down 3%, while credit card personal loan and other originations revenues were down 7% versus the prior year. We continue to drive strong adoption for FICO score 10T for non-GSC mortgages. Based on 2023 firm-reported data, clients with over $126 billion in annualized mortgage originations and about $380 billion in eligible mortgage portfolio servicing have signed up for the FICO score 10T. Firms are using FICO 10T to make credit decisions, deliver to investors, and for securitization. FICO 10T for conforming mortgages will be rolled out based on the timeline of the FHFA's implementation of enterprise credit score requirements. In our software segment, we delivered $206 million in Q3 revenue up 5% from last year, driven mainly by growth in SaaS software, partially offset by decline in professional services. We continue to drive strong growth in ARR and NRR through our land and expand strategy, with expand driven by increased customer usage. As shown on page 7, total ARR was up 10%, with platform ARR growing 31% and non-platform ARR growing 3%. Total NRR for the quarter, shown on page 8, was 108%, with platform NRR at 124%, and non-platform NRR at 101%. Our total ACV bookings for the quarter were an impressive 27.5 million. We continue to drive more FICO platform SaaS bookings, which aligns with our strategy. We expect this trend to continue as our recent FICO World Event has been a catalyst for driving pipeline growth, especially for the FICO platform. I'm very proud of the strength of our software business, both the industry-leading technology, as well as our remarkable team. This quarter, we secured another award for our FICO platform, the Business Intelligence Platform of the Year from Data Breakthrough. In July, Nikhil Bell was promoted to EDP for software, leading all technology and -to-market functions. Nikhil has been instrumental in strengthening our brand value, reputation with customers and regulators, strategic competitive positioning for FICO scores and FICO platform, and market-leading business growth. We continue to excel in our scores business as well. Our team is focused on innovation to provide new ways to add value for our customers. FICO score is a tool that market participants rely on to make many crucial decisions, including pre-qual, underwriting, pricing, insuring, securitizing, rating, selling, assessing capital requirements, assessing prepayment risk, and determining collection strategies. The FICO score has long been freely chosen because it's trusted as the most predictive and reliable independent credit score, enabling lenders to fairly expand credit access to more consumers. The FICO score was widely adopted because it democratized and expanded access to credit, while simultaneously underprinting the safety and soundness of the market. It's worth pointing out that over half of mortgage market is non-conforming and also overwhelmingly uses FICO scores. The FICO score is provided and will continue to provide tremendous value to the credit ecosystem. As part of our ongoing commitment to industry-leading credit decision, we've made significant commitments to financial knowledge and financial inclusion. We've once again partnered with Chelsea Football Club, both men's and women's teams, and U.S. Soccer Foundation for the Fields of Financial Empowerment summer tour. The goal is to build excitement for and access to financial education and resources to help more people, including the next generation of fans, make more informed credit decisions. As part of the campaign, FICO hosts free score of better future fundamentals, financial education workshops for students from traditionally underserved communities. Students improve financial literacy and have the opportunity to attend a Chelsea football game. I'll talk about our outlook for the balance of the year, including our increased guidance after Steve provides further financial details.

Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another good quarter with total revenues of $448 million, an increase of 12% over the prior year. Score-second revenues for the quarter were $241 million, up 20% from Q3 of 2023. B2B revenues were up 27%, driven primarily by mortgage origination revenues. Our B2C revenues were down 2% versus the prior year due to volume declines in our myfico.com business. Software segment revenues in the third quarter were $206 million, up 5% versus Q3 2023. On-prem and SaaS software revenue grew 7% year over year, while professional services declined 9%. This quarter, 85% of total company revenues were derived from our Americas region, which is a combination of our North America and Latin American regions. Our EMEA region generated 10% of revenues, and the Asia Pacific region generated 5%. Our total software ARR was $710 million, a 10% increase over the prior year. Platform ARR was $215 million, representing 30% total Q3-24 ARR, up from 25% of total in Q3 of 2023. Platform ARR grew 31% versus the prior year, while non-platform ARR grew 3% to $495 million this quarter. Our platform land and expand strategy continues to be successful. Our dollar-based net retention rate in the quarter was 108%. Platform NRR was 124%, while our non-platform NRR was 101%. Platform NRR was driven by a combination of new use cases and increased usage. Our software ACV bookings for the quarter were $27.5 million. As a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Our expenses for the quarter and total operating expenses were $258 million this quarter versus $222 million in the prior year, an increase of 16% year over year and 8% versus the prior quarter. Our third quarter included our FICO World event and a true-up for our annual incentive rewards, and we expect Q4 expenses to be down modestly from our Q3 run rate. As we'll note, the prior year includes an $8.5 million one-time reimbursement, a third-party data implementation cost, and a reduction to income tax expense of $9.5 million associated with the valuation of our R&D tax credits. Our non-GAAP operating margin, as shown on our Reg G schedule, was 52% for the quarter compared with 51% in the same quarter last year. GAAP net income this quarter was $126 million, down 2% from the prior year's quarter. Our non-GAAP net income was $156 million for the quarter, up 9% from the prior year's quarter. The effective tax rate for the quarter was 24.5%. 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%. The recurring tax rate is before any excess tax benefit and other discrete items. Free cash flow for the quarter was $206 million, a 69% increase from the previous year. The trailing 12-month free cash flow was $551 million compared to $467 million in the prior quarter. At the end of the quarter, we had $199 million in cash and marketable investments. Our total debt at quarter end was $2.13 billion, with a $23.3%. Currently, 61% 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. During the quarter, we secured a $450 million term loan and used those proceeds to reduce our revolving line of credit and to provide additional debt capacity. Turning to return to capital, we bought back 196,000 shares in the third quarter at an average price of $1,293 per share. That exhausted the existing board authorization, which was approved in January, and we have just announced a new board authorization for $1 billion. We continue to view share repurchases as an attractive use of cash. And with that, I'll turn it back to Will for his thoughts on the rest of the year and the increase in our full year guidance. Thanks, Steve.

We

are

executing on our strategy. Our customers are delighted with our innovative products. Our execution is generating strong financial results, including impressive ACV bookings, record free cash flow, and an increase in FICO platform and FICO 10T adoption. The business is strong. I'm pleased to report that today we're again raising our full year guidance as we enter the fourth quarter of our fiscal year. We're raising our full year revenue guidance to $1.70 billion. Gap net income is now expected to be $500 million, with gap earnings per share of $19.90. Non-gap net income is now expected to be $582 million, with non-gap earnings per share of $23.16. With that, I'll turn it back to Dave, and we'll open up the Q&A session.

Thanks, Will. This concludes our preparatory remarks, and we're now ready to take questions. Operator, please open the lines.

Thank you. As a reminder, to ask a question at this time, please press star, then 1-1 on your telephone. If you wish to remove your question, please press star, 1-1 again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Saiza Elway with Deutsche Bank. Your line is open. Please go ahead.

Yes, hi. Thank you so much. I wanted to start with the Q&A session. I'm going to go off to our business and just ask you if you could comment on the selling environment, if there's any change from a macro perspective, anything new or different you're hearing from your customers. Then I know at FICOworld, we had talked about improvement of the platform and talking about decomposition of the platform. Just give us a sense of if there's any update there and any additional color.

FICOworld is always and was this year the biggest pipeline generating event that we have. We came out of FICOworld with a very, very healthy pipeline. I would say that the selling environment has not changed that much over the last year or so. I would also emphasize that increasingly customers are buying FICO software as a strategic move. It's a very considered purchase. It's not just like going out and finding a point solution to a small problem, to a specific problem. It's a bigger thing than that. That hasn't changed. That's kind of the new way of operating.

Got

it. Thank you.

Then just a question on mortgage or revenue. You obviously had very strong growth in the quarter. I'm curious how volume trended in the quarter. I know you don't give a breakdown, but was it in line with your expectations? Are there any dynamics you're seeing around soft falls where I believe lenders have the option to go to one or two bureaus? Are you seeing an impact on volumes from that and just the general environment

around mortgage? Our mortgage volumes are a lagging indicator relative to other mortgage data that you have. Our mortgage volumes are down versus a year ago. They're pretty much flat versus the quarter, last quarter.

None of that is particularly surprising.

Thank you so much.

Thank

you.

In one moment, as we move on to our next question. Our next question is going to come from the line of Surrender Send with Jeffries. Your line is open. Please go ahead.

Thank you. First question on just the guidance raise. It implies revenues are going to be down roughly $10 million quarter to quarter. Just any color there. I know you normally are conservative in the guide, but can you do the walk for us from three Q to fiscal? Yeah.

We are pretty conservative with the way we guide. We want to make sure that a lot of us on the scores, we don't have much control over. We don't really know what's going to happen there. I would say that generally the fourth quarter is a little lighter seasonally for mortgage. Mortgage volumes aren't as high typically then as they are in the spring. There might be a little bit of volume decline there, but a lot of it just depends on the environment, which we don't have a lot

of visibility to.

Thank you. In terms of just when I think about the non-platform business here, the NRR was 101%. That's the slowest pace of growth in about two years. Any color there that you can help with? Is there some movement of revenues from non-platform to platform at this point? How should we think about that?

I wouldn't say that it's cannibalization if that's what your question is getting at. We're pretty pleased with our classic offerings with 101% NRR. We've been trying to manage that business in this relatively flat way. We're pleased that it's turning out that way. As you can see, the growth is on the expand side on the platform. We let the market tell us what it wants, but we're not as pleased with the way it's shaking out.

I would say we had higher numbers last year, and at the time we said there were some things driving that. Some of it was some of the CPI increases we had. We had some advantages last year from some FX as well, and we knew that was not going to maintain this year. It's kind of what we thought was going to happen. It would settle more to around 100%.

Okay, thank you. I'll get back in the queue for additional questions.

Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Scott Wurzel with Wolf Research. Your line is open. Please go ahead.

Hey, good afternoon, guys, and thank you for taking my questions. I

wanted to

start on the volume. I'm just wondering, similar to how you did a mortgage, maybe comment on the volumes there and how they trended versus last quarter.

Yeah, volumes were relatively flat, but the real is a mix shift. We had more of a mix shift to more market share in the tiers that are a little bit less priced for us. Unicom is a little bit lower, so that's really the difference between the volume and the revenue. The price per score went down slightly because of a mix shift.

Got it. That's helpful. Then on the software side, on the platform ARR, I think it's pretty good to see the rate

of deceleration moderate

from 2Q to 3Q at this low 30s level. Do you see this as a sustainable growth rate for platform ARR over the near to medium term here?

Probably, yeah. We think we're pretty confident in that or at around that rate. It can change as we go. It helps when you have a good quarter like this in terms of signing new deals too, because that'll help boost ARR in the future. We don't have really good visibility too, because a lot of it depends on how quickly our customers can get online and how much usage they have, but there's a lot of growth there. We're pretty confident that we can maintain these levels.

Great. Thanks, guys.

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Kyle Peterson with Needham. Your line is open. Please go ahead.

Great. Thanks. Good afternoon, guys. I just wanted to start out on software. The bookings looked pretty nice on an ACB basis. I've committed a lot of the prior quarters. How should we think about some of the implementation cycles and when some of those bookings will start to translate to revenue here?

As you know, it's a long sales cycle. It's as long as 400 days, and it takes not that long to get live once it's all said and done. I think that the flowthrough is the subsequent year. That's the easiest way to think about it.

It does depend on the customer, how sophisticated they are, how ready they are. If you sign deals now in the next six to nine months, you'll see the flowthrough on that.

Got it. That's very helpful. Then just a follow-up,

particularly if we do get rate cuts, whether it's later this year or next year, maybe you could walk us through some of the different sensitivities. I know your business now looks quite different maybe compared to past cycles, especially on those first one to two rate cuts. What are some of the impacts that we should be mindful of if those do come to fruition?

We're already seeing a little bit of an uptick in refi. It's not exactly a gigantic leap of faith that as rates come down, we'll see volumes go up. We fully anticipate that. Your guess is as good as ours as to the timing of the rate cuts. We would hope to see some rate cuts towards the end of this

year and next year, and volumes go up with that. All right. That's helpful. Thanks, guys.

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of George Tong with Goldman Sachs. Your line is open. Please go ahead. Hi,

thanks. Good afternoon. Within the scores business, card and personal loan revenue fell 7% in the quarter, which is a little bit better than the 9% decline in the prior quarter. Can you talk about some of the trends you're seeing among subprime or lower tier consumers that may be impacting card and personal loan performance and also talk about overall bank lending conditions?

Yeah, I mean, the subprime markets obviously seem the biggest pullback. It's not surprising. You're late in the credit cycle. You have a lot more uncertainty, and that's kind of where you see that happen first. Bank by bank, it kind of varies depending on what they're looking at and what kind of campaigns they may or may not be running. But we see banks being relatively conservative with new originations, and I think they're kind of waiting to see what happens and see what the economic environment looks like. So it's really not surprising. We saw probably a little over a year ago strong growth there. When mortgage started to slow down and rates started to go up, we saw strong growth there, but now I think there's just more uncertainty in the market, and they're just kind of being more cautious in their originations.

Got it. That's helpful. And then switching to the software side, software operating margins contracted about 430 bips year over year in the quarter. Can you talk about some of the reasons behind what's... That's almost completely it's

almost completely around that reimbursement we had last year. So that was a big number we had, and that was all on the software side. So that's the driver of that.

And so as that laps, when would you expect the flip to margin expansion in the software business? Well,

we'll get some margin expansion next quarter because, I mean, again, we have some costs by FICO world this quarter. It's not going to repeat next quarter. So we'll have some... Our costs will decline next quarter, and that'll end up with some margin expense. These costs are big enough where in any one given quarter, something like FICO world is going to have an impact on that quarter's margin.

Got it. Very helpful. Thank you.

Thank you. And one moment as we move on to our next question. And our next question comes from the line of Ashish Shabhadra with RBC. Your line is open. Please go ahead.

Thank you for taking my question. Just on the software revenue growth, particularly the on-prem and SAS, and within that, when I look at software recognized over the contract term, the growth there moderated, how should we think about the growth profile there?

Ashish, we can't hear you. We can't hear you.

Sorry. Let me know if that's better. Yes. So I wanted to focus on the on-prem and SAS software revenue growth, and within that, even the software recognized over contract term, that moderated a bit. Still pretty strong at 80%, but did moderate from mid-teens. How should we think about those puts and takes on the revenue growth going forward?

Yeah. I mean, a lot of that's the fact that we had the Omega growth, the non-platform growth that we saw last year. So that right there drives most of the, and obviously the platform's not going 50% either. So we think these kind of growth rates going forward, as I said earlier, that's probably more likely what we're going to see to continue. And as the numbers get bigger, it's harder to drive 50% growth or even 40% growth. So we're pretty happy with the 30% growth on the platform side, and on non-platforms, we think we can get better than 100%. We're happy with that as

well.

That's very helpful. Thank you.

Thank you. In one moment, as we move on to our next question. And our next question comes from the line of Simon Clinch with Redburn Atlantic. Your line is open. Please go ahead.

Hi. Thanks for taking my question. I wanted to cycle back to the 30% plus growth in the platform software AR on. And just as one of you could just go in a little bit more detail as to why you think that that is a sustainable level of growth and just perhaps flesh that out a little bit more for us, please.

Well, I mean, we've got, I mean, again, we had a really good quarter with new bookings and we've got a lot of install base that's rather rapidly expanding. I mean, when we install, most of our customers look for new ways to use it and we see that in the net retention rate. And that number continues to do well and we continue to add more business to it. So again, we can't guarantee it, but we've got a lot of reasons, both data driven and anecdotally to think that we're going to continue to see that kind of growth.

Okay, thanks. And just to follow up on that, could you, I mean, just frame the approach to pricing within the software business. You mentioned last year in the, I think was the non-platform side, you had sort of higher inflatory pricing, but just wanting if you could to talk a bit about the strategy around the pricing, pricing value and how to think about that.

Our strategy around software pricing is, you know, we're very focused right now on making our software accessible and encouraging adoption. And so, you know, while there's probably room for value pricing in our software business, that's not where our direction is. Our direction is to put the software in the hands of our customers and then watch revenue grow as their usage increases and their usage increases, you know, within the initial applications that they put the platform to use for. And then also as they discover new uses, you know, the expand part of our land expand strategy is very much wrapped around the customer taking control of what they can do with the platform and coming up with new use cases. And we tend to design in a way that we don't have to negotiate contracts and go back and do a lot of contractual work for them to do more revenue with us. We tend to design it in a way that they can, you know, select how much usage they want

and,

you

know, our revenue goes up automatically as their usage goes up.

Thanks so much. Appreciate it.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Jeff Mueller with Baird. Your line is open. Please go ahead.

Yeah, thanks. Instead of me getting to ask a question about cash flow this quarter, I just get to say congrats on the night cash flow. Can you give us some perspective on the geographic kind of trends within software? And I guess I'm just, it looks like America's revenue was down a little year over year. So any particular call outs and then EMEA was up a lot. So just any mega wins in EMEA or any reason to think that you're at an inflection point there and it's really taking off?

You know, Jeff, I don't think that we have tremendous changes regionally. You know, I wouldn't try to read too much into, you know, into the data on a quarterly basis. You know, we have strength of platform across all the regions. I think Asia Pacific was a little behind the other regions in terms of platform adoption. And there were some structural reasons for that. For example, AWS was not available in India before and now it is. But we're, you know, we're seeing adoption across all the regions.

Yeah, I would think some of what you see might see with the volatility is when we have that point in time license revenue and that could skew things in one given quarter. But we've had a lot of adoption in the last year in North America. And we're starting to see a lot more interest to EMEA as well.

And then when you're calling out the FICO 10T adoption and then the nonconforming mortgage market, is that almost exclusively about upgrades from prior versions of the FICO score given how your penetration is? Or are you finding, I guess, like incremental volume as part of that adoption?

It's

a bit

of

both, but probably more of the upgrade. Yeah, I mean, for the most part, everybody was using the traditional FICO scores and now they're just moving to the 10T, you know, ahead of the adoption by the FHFA.

Right. Okay. Thank you.

Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment as we move on to our next question. And our next question is going to come from the line of Manav Patnik with Barclays. Your line is open. Please go ahead.

Thank you. Good evening. I just wanted to, you know, ask Will, you know, I think you tried to reference some of these and prepared remarks, but, you know, in the face of, you know, some public criticism around the price of your scores, like, you know, how's your approach or thought process around, you know, the value of your score, maybe the timing around which you get to that value? Has that changed at all?

Well, you know, I, you've heard us say in the past, and I certainly continue to believe that what we charge for the FICO score is so much less than the value that we provide that I would say there's not a lot of change in our thought process. Our thought process is that over time, we're going to close some of that gap. And, you know, I think, you know, I think anyone who actually studies the numbers and gets into the details of it sees that FICO scores are, you know, a tiny, tiny piece of the overall process, whether you're talking mortgage or any other kind of credit evaluation process. And so, so I would say, no, no real change anticipated.

Okay. And then, and then somewhat similarly on the software side, you know, I think you talked about that value proposition being unique and niche, et cetera. But, you know, we've heard, obviously, a lot of other software companies during learning season talk about, you know, the weak environment and the slowdown. It doesn't sound like you're seeing any of that, but anything you'd like to call out, was there maybe some, you know, could it be a lag that you see some of these headwinds or perhaps you're not seeing them at all?

We're really not seeing that. That's not, that's, I mean, we've certainly heard that. And I guess the industry is experiencing that, but we haven't felt that.

Okay, fair enough. Thank you guys.

Thank you. This will conclude today's question and answer session. Ladies and gentlemen, this will also conclude today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.