Fair Isaac Corporation

Good day and thank you for standing by. Welcome to the fourth quarter 2025 FICO earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll 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 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 fourth 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. This includes an FY26 guidance reconciliation of GAAP to non-GAAP earnings, which are adjusted for items such as stock-based compensation and excess tax benefits. This reconciliation is part of the earnings release included in Exhibit 99.1 to our 8K, which we filed with the SEC under Item 2.02 called Results of Operations and Financials. The earnings release and Regulation G schedule are available on the investor relations page of the company's website at FICO.com or on the SEC's website at SEC.gov. A replay of this webcast will be available through November 5th, 2026. I will now turn the call over to our CEO, Will Lansing.

Thanks, Dave. And thank you, everyone, for joining us for our fourth quarter earnings call. In the investor relations section of our website, we've posted some financial highlight slides that we'll be referring to during this earnings announcement. Today, I'll talk about this quarter's results and our guidance for fiscal 26. We had another fantastic year. We exceeded fiscal 25 guidance on all metrics and delivered record annual free cash flow. As shown on page two of the fourth quarter financial highlights, we reported Q4 revenues of $516 million, up 14% over last year. For the full fiscal year, we delivered $1.991 billion, up 16% versus the prior year. In our software segment, we delivered $204 million in Q4 revenues. While performance at the segment level was flat year over year, results included 17% platform revenue growth driven by FICO platform and 7% decline in non-platform revenue due to the end-of-life legacy products and timing of recurring revenue within the quarter. For the fiscal year, we delivered $822 million in revenue, up 3% from last year. We have strong momentum in our software business driven by customer adoption of FICO platform. At FICO World, we announced upcoming general availability of next-generation FICO platform, enterprise fraud solution natively on FICO platform, and the groundbreaking FICO marketplace. Our R&D investments are directly tied to driving real value for our customers. These innovations bring connected end-to-end customer experience, including new use cases to the market. They enable smarter explainable outcomes, improve performance, and improve speed of deployment and yield better customer ROI. This quarter, we announced the general availability of FICO-focused foundation model for financial services, what we call FICO FFM. FICO FFM consists of FICO-focused language model, which is FICO FLM, and FICO-focused sequence model, which is FICO FSM. It's a domain, data, and problem-specific GenAI model for financial services that delivers accurate and auditable outcomes. FICO FFM enables enterprises to use small language models built for their specific business problems, significantly helping to mitigate hallucinations and provide transparency, auditability, and adaptability. FICO FFM achieves improved accuracy and cost efficiencies compared to conventional GenAI models. For example, FICO SFM results in more than 35% lift in world-class transaction analytic models in areas such as fraud detection, while requiring up to 1,000 times fewer resources compared to conventional Gen AI models. In fiscal 26, we plan to advance our direct and indirect distribution strategy and invest to capture market opportunities emerging from these innovations. Steve will discuss that further later on. As a reminder, analytic innovations and intellectual property at FICO are protected by our patent portfolio of over 230 issued patents and nearly 80 pending applications. Many of these issued and pending patents are AI specific and reinforce FICO's position at the forefront of responsible AI development. Turning scores. In our score segment, our fourth quarter revenues were 312 million, up 25% versus the prior year. While B2B scores were the key driver of growth, we also saw continued encouraging growth in B2C scores. For the full year, our revenues were $1.169 billion of 27% versus last year, and that was materially driven by B2B scores. The FICO score used by 90% of top U.S. lenders continues to be the standard measure of consumer credit risk in the U.S., Long-term model stability is a critical consideration for lenders determining which credit scoring model to use for originations. FICO scores are used by lenders across consumer credit sectors because they're time tested, trusted, reliable, and they are the independent standard around the world. In fact, FICO remains the only independent analytics provider and the only score with known predictable performance through a complete economic cycle, including the stressful period of the Great Recession. FICO scores continue to be widely used and critically relied on throughout the consumer credit ecosystem. That includes cards, personal loans, auto lending, and mortgages. The FICO score was established as an industry standard and was freely chosen by mortgage market participants long before the GSE selected Classic FICO as the credit score for guaranteeing conforming mortgages. With no government guarantee outside of conforming mortgages, Market participants seek out the most predictive score, which is often one of our recent innovations, like FICO 8, FICO Auto 10, and FICO 10T. In fact, bureaus have provided free vantage scores for years outside of mortgage, yet FICO has continued to successfully compete and win business in those areas. Our scores remain the standard for use in mortgage underwriting and pricing. in investor credit risk and prepayment models, in capital requirements, and by credit rating agencies for mortgage-backed securities ratings. Classic FICO is critical to driving investor pricing of mortgage-backed and other securities, and ultimately the cost consumers pay in the mortgage industry. We recently announced our FICO Mortgage Direct License Program, with a view to driving competition, transparency, and cost savings in mortgage, while aligning with calls from policymakers and industry leaders to modernize credit infrastructure and promote affordability, liquidity, and access in the $12 trillion U.S. mortgage market. In the short time since our announcement, we've seen overwhelming interest in the FICO Mortgage Direct License Program. As we announced today, we entered into a multi-year direct license and distribution agreement with Xactus, the largest credit verification and tri-merge provider of FICO scores. In addition, we're actively engaged with resellers representing about 90% of mortgage volume, including the largest tri-merge resellers, as well as technology platform providers who serve the smaller tri-merge resellers to enable our Mortgage Direct program as quickly and efficiently as possible. We've already provided our FICO scores our FICO score scoring software for the Mortgage Direct License Program software to the top four resellers, along with several key platform providers. With our FICO Mortgage Direct License Program, TriMerge resellers have the option to calculate and distribute FICO scores directly to their customers, eliminating reliance on the three nationwide credit bureaus. The calculation of the FICO score and the packaging to create a TriMerge bundle does not add incremental complexity or risk for TriMerge resellers. The tri-merge resellers have the infrastructure and processes to package data today, as this is their core business. The FICO score algorithm that will now be used by the resellers under our direct program is the same model as what is currently installed at the bureaus today. The underlying data used by resellers and bureaus in the FICO score models is the very same data. The data format for the FICO direct license program is the very same data format processed by tri-merge resellers today. that lenders use today and that's required in the conforming mortgage market by Freddie and Fannie today. In fact, it's the same format we use in our partnership with the tri-merge resellers for the FICO Score Mortgage Simulator, which is in the market today. Our FICO Mortgage Direct License Program provides optionality to the market. We offer two alternative pricing models, a historical per score pricing model and a new performance pricing model. The performance pricing model is built on successful mortgage funding and answers the call of industry participants to provide optionality in our pricing models. We anticipate resellers evaluating lenders' throughput rates to determine which FICO score pricing models provides lenders with the most savings. From a pricing perspective, the FICO score for mortgage originations was $4.95 per score in 2025. The Bureau has marked this price up on average to $10 per score. In 2026, Under the FICO direct license program, lenders have a choice of either the performance model at 495 per score plus a funding fee at closing, or the per score model at $10 per score. The performance model yields a 50% reduction in average per score fees to what resellers paid for FICO scores in 2025. And the per score model is on average the same price as the resellers paid for FICO scores in 2025. Lenders obviously have a lot to consider when evaluating which credit scores to adopt, and that decision considers factors well beyond the upfront cost of the credit scores. Classic FICO is still the only score used for conforming mortgages guaranteed by the GSE. It is the only score that has performance data through the Great Recession in 2008-2009. It's the only score that's leveraged throughout our secondary mortgage markets. Regardless of GSE guarantees, predictiveness of the score matters. Recent independent studies by Milliman, Urban Institute, AEI Housing Center, and others have found classic FICO, a score developed 20 years ago, to perform similarly or on a par with or at times to outperform the recently developed managed score 4. Our latest score, FICO 10T, is the most predictive and inclusive credit scoring model on the market. We continue to see growing momentum and adoption of FICO Score 10T. There's a large industry efficiency benefit in testing FICO 10T and Vantage Score simultaneously, and we expect FICO Score 10T to be made available for implementation at the GSEs. FICO 10T builds upon FICO's decades as a trusted pillar of the mortgage ecosystem, using advanced modeling techniques and comprehensive consumer financial data, including rental payments. a source of data that we at FICO have used in our credit score model since 2015. In addition to rental data, utility data, and telco data, by leveraging trended credit data, FICO Score 10-T analyzes borrower behavior over time, which allows lenders using the score to gain deeper insights into prospective borrowers, helping them to make more precise lending decisions. Our latest score is a meaningful step forward in credit risk assessment. FICO 10-T offers significant improvements in predictive accuracy, combined with a focus on fairness and model stability, offering tremendous benefits for lenders, investors, and borrowers alike. Earlier this year, our team at FICO published a comprehensive white paper demonstrating how FICO Score 10-T offers significant improvement in predictive accuracy over other models, including both Vantage 4 and Classic FICO. The link to that white paper and other studies mentioned in today's earnings call can be found in our investor relations presentation. Specifically, FICO score 10T identified 18% more defaulters in the critical score decile commonly used for mortgage originations, while banded score identified only marginally more than classic FICO. FICO score 10T also enables a 5% increase in mortgage originations without taking on additional credit risk. Vantage 4 claims to score more consumers, but does so using models that are statistically unsound for predicting risk. For example, scoring using one month of payment history. We, by contrast, don't lower our standards. In 2024, the GSE average credit profile included an average FICO score of 758. Vantage 4 claims they can score more consumers, but with less than 10% of GSE guaranteed loans below FICO score 680, This does not result in a material increase in loan qualifications that are guaranteed by the GSEs. In fact, it can actually hinder those who have thin credit profiles from processes that are already in place that are designed to approve no-file or thin-file applicants. Make no mistake, we have access to the same data as our competition. What matters is how the data is used to innovate scoring models to yield the best risk prediction. FICO's decades of experience enable us to innovate better, as shown in the outstanding performance of FICO 10T versus Vantage 4, which can only keep pace and in some cases can't even do that with the score that we created two decades ago. FICO Score 10T's better performance will drive benefit for not only mortgage insurers and investors, but other market participants as well. It'll deliver improved mortgage pricing and lower monthly costs for borrowers. It's going to benefit millions of Americans. To further emphasize this point, The benefits of FICO Score 10-T are not hypothetical. In the non-conforming mortgage industry, FICO Score 10-T has already been adopted by nearly 40 lenders, accounting for more than $316 billion in annual originations and more than $1.5 trillion in eligible servicing volume, most making multi-year commitments to use the FICO Score for mortgage decisions in both the conforming and non-conforming markets. We're proud of our innovations and ability to adapt to needs of our customers. We're excited about the perception and adoption of our latest offers. I'm going to pass it now over to Steve for further financial details. Thanks, Will, and good afternoon, everyone. We had another good quarter with total quarterly revenues of $516 million, an increase of 14% over the prior year. As we discussed last quarter, sequential revenue is down. due primarily to lower point-in-time revenues from scores and software licenses, as well as seasonality and lower professional services revenues. Software segment revenues for the quarter were $204 million flat versus the prior year. From page five of our presentation within that segment, you could see on-premise and fast software revenues were flat year over year, while professional services declined 5%. We delivered $822 million in fiscal year revenue, which was up 3% from the year. from the prior year. This quarter, 87% 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 8% of revenues, and the Asia Pacific region delivered 5%. Score segment revenues for the quarter were $312 million, up 25% from the prior year. As shown on page six of the presentation, B2B revenues were up 29%, primarily attributable to a higher mortgage origination scores unit price. Sequentially, B2B revenue slightly improved when excluding our prior quarter multi-year U.S. license renewal on our insurance score product last quarter. Our B2C revenues were up 8% versus the prior year, driven both by our MyFICO.com business and our indirect channel partners. Total scores revenues were $1.169 billion, up 27% despite lower than historical mortgage originations volume, driven by persistently high interest rates. Fourth quarter mortgage originations revenues were up 52% versus the prior year. Mortgage origination revenues accounted for 55% of B2B revenue and 45% of total scores revenue. Auto originations revenues were up 24%, while credit card, personal loan, and other originations revenues were up 7% versus the prior year. According to guidance for 26, our FY26 revenue guidance assumes software SaaS growth driven mainly by FICO platform and offset by less point-in-time revenue due to fewer non-platform license renewal opportunities and a similar level of annual professional services revenue. For our scores business, our guidance doesn't anticipate any significant improvement in the macro environment. We also don't expect any loss of market share or any significant volume changes in auto card and personal loan originations. As a reminder, our last quarter contained one material non-recurring multi-year U.S. license renewal on our insurance score product that we won't see in FY26. Shown on page seven of our investor presentation, our total software ARR was $747 million, a 4% increase over the prior year. Platform ARR was $263 million, representing 35% of our total Q4 25 ARR. Platform ARR grew 16% versus the prior year, while non-platform declined 2% to $484 million this quarter. Our platform ARR experienced lower performance due to usage reductions from select CCS customers. Non-platform ARR was consistent with the last few quarters. We expect total software ARR to increase in fiscal 2026, reflecting the benefit of recent FICO platform bookings going live. Our platform land and expand strategy continues to be successful. On page 8, our dollar-based net retention rate in the quarter was 102%. Platform NRR was 112%, while our non-platform NRR was 97%. Platform NRR was driven by a combination of new use cases and increased usage of existing use cases. Our software ACV bookings for the quarter were $32.7 million compared to $22.1 million in the prior year, representing our best quarterly ACV performance in the six years since we began disclosing this metric. On a full year basis, ACV bookings reached $102 million, our strongest annual performance over that timeframe. Expenses for the quarter is shown on page five of the financial highlight presentation. Total operating expenses were $279 million this quarter versus $274 million in the prior quarter, a 2% increase. In our prior quarter's prepared remarks, we outlined key factors we expect to contribute to a sequential increase in total expenses. Those factors largely materialized, as expected, and included $10.9 million for restructuring, increased interest expense, and increased marketing expenses. Partially offsetting these factors, stock-based compensation declined in Q4 due to forfeitures. The restructuring I noted was the result of reallocating resources to align with our strategy. For the full year, our expenses were $1.066 billion versus $984 million in the prior year, an increase of 8%. Our FY26 guidance assumes a similar year-over-year operating expense growth compared to the prior year. We maintain our focus on efficiencies and are committed to prioritizing resources to our most strategic initiatives. Investments focus on headcount for distribution and continued development of our FICO platform, as well as increased headcount for our scores business and marketing across both sides of the business. Our non-GAAP operating margin as shown in our Reg G schedule was 54% for the quarter compared with 52% in the same quarter last year. We delivered year-over-year non-GAAP operating margin expansion of 210 basis points. Our full-year non-GAAP operating margin was 55% in improvement of 340 basis points year-over-year. We reported $155 million in GAAP net income in the quarter, up 14%, and GAAP earnings of $6.42 per share, up 18% from the prior year. Excluding restructuring, GAAP net income would have been $166 million with earnings of $6.76. As reported for the full fiscal year, we delivered $652 million in GAAP net income, equating to $26.54 of earnings per share, up 27% and 30% respectively. For the quarter, we reported $187 million in non-GAAP net income, up 15%, and non-GAAP Earnings per share of $7.74 per share, up 18% in the prior year. And note, restructuring is added back to the non-GAAP net income as shown on the Reg G schedule. For the full fiscal year, we delivered $734 million in non-GAAP net income, equating to $29.88 of earnings per share, up 23% and 26%, respectively. The effective tax rate for the quarter was 23.4%, and the operating tax rate was 25%. Our full year net effective tax rate was 18.8%, while the operating rate was 25%. As a reminder, the key difference between operating tax rate and net effective tax rate was the $44 million excess tax benefit. Our FY26 guidance assumes a net effective tax rate of 24% with an operating tax rate of 25%. As shown on page 10, we delivered free cash flow of $211 million in our fourth quarter, Over the last four quarters, we delivered $739 million in free cash flow, which represents an increase of 22% year-over-year. At the end of the quarter, we had $189 million in cash and marketable investments. Our total debt at quarter end was $3.06 billion, with a weighted average interest rate of 5.27%. As of September 30th, 2025, 91% of our debt was held in senior notes with no term loans. We had $275 million balance on our revolving ladder credit, which is repayable at any time. We continue to return capital to our shareholders through buybacks. This quarter, we repurchased 358,000 shares and an average price of $1,499 per share. For the fiscal year, we repurchased 833,000 shares at an average price of $1,693 per share. Share repurchases totaled $536 million in the fourth quarter and $1.41 billion for fiscal 2025, the highest quarterly and annual repurchase levels in the company's history. Going forward, our philosophy has not changed, and we continue to view share repurchases as an attractive use of cash. With that, I'll turn it back to Will for his closing comments. Thanks, Steve. We continue to execute well in our strategy and we're well positioned for a strong fiscal 26. As we announce our guidance, I'll remind everyone that consistent with prior years, we expect some of the pricing initiatives in 26 to have an additional impact beyond our guided numbers. And because of uncertainty in volumes, it's difficult to estimate the timing and magnitude of that impact. I'm pleased to report that today we're guiding even stronger growth than we achieved in fiscal 25. As you can see on page 13, we are guiding the following. Revenue of 2.35 billion, an increase of 18% over fiscal 25. Gap net income of 795 million, an increase of 22%. Gap EPS of $33.47, an increase of 26%. Non-gap net income of 907 million, an increase of 24%. and non-GAAP earnings per share of $38.17, an increase of 28%. With that, I'll turn the call back to Dave, and we'll open up the Q&A session.