Fair Isaac Corporation — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and thank you for standing by. Welcome to the Fair Isaac second quarter earnings conference call. [Operator Instructions] Please be advised that today's conference is being recorded.
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.
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 highlights slides that we'll be referencing during our presentation today.
Thanks, Will, and good afternoon, everyone. As Will mentioned, we had another very good quarter with total revenue of $434 million, an increase of 14% over the prior year. Scores 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.
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.
Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.
[Operator Instructions] Our first question comes from Manav Patnaik with Barclays.
Maybe I'll just start with the Software segment first, Will. Clearly, we were at FICO World and your comments -- both are pretty bullish. But can you just help us appreciate or understand the second quarter in a row of deceleration on the platform side? I think last quarter, you said there were some movement in the bookings or timing, et cetera. So just help us if there's something more of that going on? Is 30% the new level now? Just any help there would be appreciated.
Yes, absolutely. So as you know, we had many, many quarters of over 50% growth in the platform, and then we had 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 had always anticipated some level of slowing just because as that number gets bigger, that was inevitable. And I think that's really all it is.
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.
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 when you think about the guidance raise, like what were the moving pieces there as well, please?
Yes. 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 6 rate cuts in the year, and we weren't anticipating that.
Our next question comes from Faiza Alwy with Deutsche Bank.
So I wanted to follow up on mortgage. 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?
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 the value that we provide relative to what we charge.
Great. And then just to follow up on other originations. Maybe you can talk about what you're seeing on the card and auto side in terms of volumes 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?
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. 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.
Our next question comes from the line of Surinder Thind with Jefferies.
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, quite positive, but how much should we attribute to macro because there has been an overall slowdown? So is the earlier commentary that you -- the slowdown is not macro related to any extent?
So 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.
Got it. And then I guess, turning to the nonplatform 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?
So as you know, the nonplatform business is very mature and we're deeply embedded, 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 nonplatform software.
Our next question comes from the line of Kyle Peterson with Needham.
I wanted to start on capital return. Obviously, it looks like you guys bought back a little bit more past quarter than the first quarter. How should we think about the pace of buybacks in the back half of the year? Obviously, you've seen a bit of a pullback in the shares, obviously, with market and such. And then also just given some of your comments on potential for free cash flow to accelerate as the year progresses. I just want to get your opinion on how you guys are thinking about that over the next few quarters.
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 slipped a bit as our earnings have gone up. And I guess that's a happy bonus of being more profitable. And in the fullness of time, you'll see that reflected in increased buyback.
Got it. That makes sense, and that's helpful. And just a follow-up, I guess, on the professional services piece of the business, I guess that revenue is falling off a bit. I guess that it's lower margin. But I just want to get your sense as to kind of is this, call it, $19 million 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 onetime in this past quarter that dragged it down a bit below kind of historical levels?
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.
Our next question comes from the line of Ashish Sabadra with RBC.
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?
Yes. So we had -- we said we had FICO World this quarter. So there's -- that's a pretty significant expense for us. So you'll see an increase in our Q3 spending by a little bit that's associated with that. And then the fourth quarter would probably be relatively flat to that or maybe even down a little bit. But we don't expect any significant uptick in expenses for the rest of the year. Really, it's basically due to the FICO World being held this quarter.
That's helpful color. 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 revenue has been muted. How should we think about that going forward? Any color?
About the on-prem software?
Yes.
So I mean we're focused -- we're cloud-first, right? So we really are focused in the cloud. But if our customers want to run it on-prem, we'll sell it to them that way there. But 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.
Our next question comes from Jeff Meuler with Baird.
So I want to go back to the card, p loan and other origination revenue down 9%. I think the majority of that is cards. 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'd love [ to get your thoughts on ]...
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 [ prescreen and ] account management. So the scores are not down that -- 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 of what the bureau has put out.
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?
So 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.
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 path.
I would say most of them have landed in the last year. I mean there's -- the very typical path for the single use case is to eventually move to multiple use cases. And so the ones that are still on one are typically the most recent.
[Operator Instructions] Our next question comes from George Tong with Goldman Sachs.
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 in autos and cards close the gap at the same pace as the mortgages over time? What are some of the considerations?
Well, as we've talked about in the past, we take the entire portfolio of 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 where should the Scores prices move by CPI and not more than that and where should they move more than that. And so 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. So yes, you could continue to expect them to be different.
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?
Yes, it's hard to do that, George. I mean you can kind of back into it a little bit by looking at the ARR versus the NRR, but we don't have the detail to talk about use cases versus usage.
I guess maybe then qualitatively, would you say you're more in land mode or expand mode?
Well, I mean, it's -- I mean we're trying to get as much business as we can land in. But a lot of -- 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.
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.
Did you want to check just one more time? Simon might be in the queue for a question, and he just popped in, in the last 5 seconds.
We do have a question from Simon Clinch with Redburn Atlantic.
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 nonplatform?
Yes. So the net retention rate on the nonplatform is probably going to dip below 100% at some point. 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.
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 out over the next decade, what are the kind of key investment areas you're looking at? And how do we extrapolate that to thinking about the durable expense growth in this business?
The kind of the key expense, I would say growth. I would -- 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.
Thank you. And I'm showing no further questions at this time. I'll now turn it back to Dave Singleton for closing.
Thank you. Thanks, everyone, for the great questions, and we had another great quarter. That's about all I need to say. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.