All right. Good afternoon, everyone, and thanks for joining us. My name is John Mazzone. I'm an equity analyst here at Wells Fargo, and for those of you in the room, we're at the Wells Fargo TMT Summit here in sunny California. We have the pleasure to host Steve Weber, the Executive Vice President and Chief Financial Officer of FICO, or Fair Isaac Corporation. Steve leads FICO's global finance organization, and he has been with the company since 2003. Previously, he has led both treasury, tax, and investor relations departments, and during his 20-year career at FICO, he served as the head of FP&A, and also has been intimately involved with the strategy. With less ado, do you wanna maybe kick it off with a brief background and just what FICO really means to a TMT investor base?
Yeah, great. Thank you. Thank you for inviting us today. Great to be here. Yeah, FICO has been around for more than 60 years. People think of us as a scores company, and obviously that's a big piece of what we do. That's half of our business, roughly, and it's a very profitable half of our business, but we also have a pretty significant software business. We started building software primarily for banks in the 1980s, and we've done some acquisitions along the way, and today we have a really interesting platform business that's taken a lot of the IP that's has been embedded in our software, and we have it available on a platform, and it's growing really dramatically. We're seeing this last quarter, we had better than 50% ARR growth in that area.
So it's really the right product for the right time, and banks are all talking about improving their, you know, their, their digitization of their business, and we're really helping with that whole transformation. So it's an exciting time to be at FICO.
That's great color. Thank you. Maybe just to talk a little bit more about the score side before we jump right-
Mm-hmm
... into software. Could you just remind us on how the FICO Score originated, and really, what was the basis of the decisioning process? Maybe more of a historical lens, if you will.
Sure. Yeah, so I mean, the Fair Isaac was founded by two Stanford graduates, whose premise was that if you take data, you can make better decisions. And so it really was one of the first analytics companies, and that really made its way into the credit decisioning process in the eighties, when they built scorecards to first figure out how do we, you know, take a process that has been pretty subjective-
Mm-hmm
... you know, if you go back far enough, you had to kinda know somebody to get a loan, and to really take a look at data and make objective decisions, and that's what they tried to do. And the first score was built on top of Equifax data back in the eighties, and then we built the score across all three bureaus. So we were able to take, you know, these credit bureau reports that had, you know, had a lot of information in them, and then boil that down to a three-digit number that could kind of identify what, you know, how risky is this person if we were to lend to them? What's the risk associated with them? So it really was one of the things that spurred a lot of nationwide lending.
You didn't have to go in to a bank and try to explain to them why you were creditworthy.
Mm-hmm.
Suddenly, they could take all the data they had about you and make decisions on you remotely.
Absolutely. And maybe just double-clicking into that lens, it seems like this, the penetration, again, based on industry estimates, is above 90%, and you have over 10 billion scores a year. How should we think about the evolution of the FICO Score and growth, as well as potential for pricing to the value, also known as special pricing?
Right. So, you know, the first probably 10-20 years was all about gaining penetration and really seeing the score get used more and more till it became so ubiquitous that virtually every lending decision uses the FICO Score.
Mm-hmm.
It's used to help generate the loan in the first place, then it's used to, well, we sell account management scores, which are used to help identify the ongoing risk in a portfolio and understand what the underlying risk that you have. And they can also be used for securitization. If you want to securitize a portfolio, this is the measure that they can use to determine how risky that portfolio is, and then determine how to price it. So it really is used for a wide number of things, even marketing upfront-
Mm-hmm
... figuring out who to send offers to. So there's a lot of use cases for it throughout the credit ecosystem, you know, in mortgage, in auto, and in credit card lending. So it's really widely used, and for a long time, we never changed the price. So for the first almost 30 years, it was the same price-
Mm-hmm
... that was put in place in the eighties. So, in the last, you know, five, six years, we've started to actually, you know, push through some price increases. Because we realized the value that was derived from this score, we weren't pricing anywhere near what that value was. So, you know, we, we've been putting through price increases every year to kind of bring us in line with what we think the value is.
Absolutely. And then maybe just quickly touching on the consumer, because it seems like there's been a lot of jitters in the economic backdrop.
Mm-hmm.
Have you had any updates in terms of what you're seeing in terms of not only the prime and subprime consumer groups, but perhaps by mortgage, card, and auto, as we should think about going into 2024 and 2025? And how is really the FICO Score perhaps more resilient than it was in the past? I'll leave it there.
Yeah. Well, I mean, I think, first of all, the score was always predictive.
Mm-hmm.
I think one of the things you saw in the financial crisis is that lenders were purposely lending to subprime markets, and by definition, subprime means they're low scores. So really, what they weren't doing was they, you know, they weren't doing a lot of the typical underwriting practices. They weren't checking for income verification. They weren't-
Mm-hmm.
You know, they had improper loan-to-value ratios. You know, they were sometimes lending on houses more than the value was.
Yep.
So I mean, it was just a problem waiting to happen, and they had a lot of things with, you know, you know, adjustable rate mortgages as well.
Mm-hmm.
So I mean, what the FICO Score does is identifies, you know, rank orders people and identifies who the subprime is, who the prime is, who the, who super prime is.
Mm-hmm.
So if the farther down you go, the riskier it's gonna be. So it's up to the bank to price it correctly. But what in terms of what we're seeing today, there's still a lot of strength among consumers. I mean, the subprime is getting squeezed, certainly, in terms of credit, it's a lot harder for the subprime consumer to get access to credit today than there has been. But there's a lot of lending activities happening, even on the credit card side, which tends to fluctuate a little bit. But there's a, you know, if you're a mid-market or an upmarket consumer, you have no trouble getting a credit card. A lot of what's happening on mortgages is really the market froze because of the rate increase.
You know, the dramatic climb in rates in such a short period of time, you have buyers that don't wanna buy anymore, and you have sellers that they don't wanna sell because they gotta buy something else, in some cases, and they don't wanna lower their prices. So it's kind of froze the market until we get to some sort of, you know, equilibrium, or if we start to see rates come down.
Absolutely. I think that segues nicely into the software side. Could you just, again, building on your expertise in as an analytics company and as a decisioning company, how does the software really fit into the bank workflows, as well as the overall-
Yeah
... credit landscape?
Yeah. So I mean, banks more and more are trying to... Again, they're, you know, digital transformation is what they're all chasing today. And really, it's because, you know, then the pandemic really kind of spurred this along. People don't go into branch offices much anymore.
Mm-hmm.
In some cases, there are branch offices that are closing down. So there's the one-to-one interaction doesn't happen anymore in the same way. It used to be you go into the bank, you'd sit down with somebody there that would kind of walk you through what's, you know, if you're interested in this or this, you talk to that person or whatever. That doesn't happen anymore.
Mm-hmm.
So the banks need to be more responsive and proactive, frankly, in how they deal with their consumers. They have a lot of data on their consumers, so they know a lot about the consumers. In some cases, they have, you know, if the consumer has a DDA account there, you know what their direct deposit is every two weeks, you know when they got a raise, you know because you have access to their credit bureau data, you know when they paid off their last car loan. You know a lot about them. Knowing all that and being able to analyze that on a, you know, individual person basis, gives you the ability, if you apply analytics on top of that, to make the right decision in moving forward with them. Every interaction has to be optimized.
Mm-hmm.
So, if you know the person, maybe they got married, there's suddenly two, two people getting direct deposits now. So maybe now is the time to offer them a car loan or a mortgage or whatever. So it's all those things that you realize what a person is likely to want next, based on all the aspects you see of them. You can make better, better, you know, better suggestions to the consumer, and in a proactive way, rather than wait for the consumer to come to you. Because the consumer might not come to you, they might go to somebody else. But if you can be, you know, through your app or through emails or voicemails or whatever, if you could be better at interacting with that consumer, the effectiveness is really high, and a lot of banks are starting to realize that today.
Absolutely. And what are the main use cases that FICO... Again, some people in the room are a bit newer to the story, the main use cases that FICO really solves for the banks and also serves within the entire life cycle, be it fraud-
Right
... consumer communications, and others?
Right. So historically, we had point solutions that would deal with originating a new account, and then it would hand it over to somebody in account management that would help manage the portfolio. Who should get line increases? Where should we change interest rates? We had a collections product that would help deal with collections, you know, for late, if there was late payments. We had the Falcon Fraud Manager that looks for credit and debit card fraud.
Mm-hmm.
and we still have that, obviously, and it's a, you know, has like two-thirds market share in the world, so it's a very highly used product. But they were all point solutions as in specific silos within the bank.
Mm-hmm.
More and more banks are trying to look at, you know, across the, across the entire bank and look holistically at the customer and figure out, you know, what do they need. And by sharing all the data from all these different areas, and applying analytics on top of that, you can make better decisions on those interactions with consumers. And that's what the platform is all about. That's the difference between, you know, the, the old legacy products that were siloed and that were point solutions, and the platform, which kind of breaks down those, those silos and allows the flow of data back and forth.
Great. That actually is what my next question was. So, the platform has had over 40% ARR growth for about the last 14, 15 quarters, and right now we're seeing 55 banks within the enterprise kind of platform customer program—which means they're using more than one solution. Could you just talk about the land and expand strategy-
Yeah
... and really continued adoption, how much runway there is left?
Yeah, that's it. So yeah, so we have a little over 100 customers that use at least one use case. And then we have 55 that are EPCs, enterprise platform customers-
Mm-hmm
... that use two or more use cases. Because we figure if they're using one use case, they really aren't a platform customer yet. They really are just, you know, point solution customer. But the strategy is to, to get the platform installed-
Mm-hmm
... and get all the plumbing done, all the data hookups ready, so that the customer can see what's possible and how easily it can be used, and the, you know, the flexibility that it has. And when you get it started, when you get it installed and implemented, invariably, the customers grow dramatically.
Mm-hmm.
We've tried to drive down the initial expense, you know, tried to make the PS, professional services, lift as light as possible.
Mm-hmm.
So there's not as much expense to get it installed. And then, again, you know, train them up as much as possible on what's possible. And you know, we have a customer success team that comes in behind the original sale, that tells them what other banks are doing, and say, "Well, you could try it this way or in this area." And like I said, invariably they'll increase. So it really is a land and expand. I mean, our ARR growth is 50% or better, but our net retention rate is, like, 140%. So, I mean, a lot of it's coming from, you install it at first, and then you ramp them up afterwards. So there's a lot of runway left.
I mean, we've got, you know, $170 million-$180 million of ARR today on the platform.
Mm-hmm.
You know, a lot of industry analysts look at this kind of the environment here, depending on how you measure it, but it's probably, you know, $ billions a year, tens of $ billions a year, in potential revenue that's out there year in, year out in total. You know, we're well on the way to at least getting a foothold in this space. And we're way ahead of anybody else in terms of serving this market, because it is a fairly new market.
... Absolutely. And I think no matter how you cut it, there's billions of dollars in TAM, and-
Yeah
That's mostly just due to the fact that these are not only U.S. banks, but global banks.
Right, it's definitely a global marketplace.
Mm-hmm.
There's a lot of our early wins came from outside the U.S.
Mm-hmm.
Canada and Brazil in particular. In the last year, we've started to see a lot more wins in the U.S., and they're just kind of early stage at this point.
Definitely exciting. And maybe just segueing into the investment, you guys do about mid to high single-digit expense growth within the software side. Where do you see the major buckets of investment, and how are you balancing that with margins on a longer-term basis?
Yeah. It's R&D, for the most part. I mean, a lot of it is... Again, we have this platform that works really well, but we need to build some efficiencies into it today so that we can enjoy those as we scale the business. So, we need to do as much as we can to be able to run multi-tenant as much as possible. We need to be able to simplify some of the install so that there's less hours that are required-
Mm-hmm
... to install. We have less of our own professional services resources, or as we look to move to work with system integrators, we wanna make it easier for them to do as well. So we're building out APIs for them to use. We're, you know, building more documentation out so that they can actually install it themselves.
Mm-hmm.
As it stands today, almost every implementation requires our own in-house professional services people, and we wanna get away from that.
Got it. Maybe just to try to get a sneak peek of FICO World 2024-
Yeah
... are there any exciting product announcements or any potential things that we?
There'll be a lot of exciting things that-
Mm-hmm
... we can't, I mean, it's, it's five months away.
Of course.
Something like that. It's in April, right down the road in San Diego. But there's a -- we've got a big event planned, and it's gonna be really exciting. There's a lot of things that we'll be rolling out. There's a lot more function... I mean, you were at the last one, you saw a lot of what we did there. And every year it gets a little bit easier in some ways, 'cause there's a lot more use cases, and there's a lot more customers that are doing really exciting things that they wanna talk about. So we're looking forward to a big event this year.
Absolutely. And maybe just also hitting on FICO World, do the banks have very similar problems? It does seem like there's a lot of cross-pollination, and there's-
Yeah
... best practices being shared at FICO World. How does that segue into maybe a, contract signing or a potential conversation or a door opening?
Yeah, we have a lot of really good conversations there because, you know, a lot of the banks are coming there. There's a lot of cross-pollination, but then there's also a lot of, you know, there's also... They kind of keep the cards close to their vest on some things, right? I mean, there's everybody kind of has their own proprietary, secret sauce that they wanna do. And what the great thing about the FICO Platform is that you can build... We're giving them the tools, really. We're giving them the tools to use. If they've got, you know, a lot of data scientists that can, you know, glean their own insights, we're giving them the tools to do that.
We're giving them, you know, some analytics, some modeling capabilities, and you know, the ability to put this into a reproducible workflow-
Mm-hmm
... that you know, this is the decisioning behind the workflow. So, you know, there is a lot of cross-pollination, but there's also still a lot of their own that they kinda wanna keep to themselves. So they're willing to give up some to their peers, but in other cases, too, there's a lot of things that are codenames.
That makes sense, the delicate balance. And maybe just going a little bit further into the platform itself, it's not limited to financial services-
No
... but you've seen optimizer use cases within companies like DoorDash.
Mm-hmm.
You've seen explainable AI. Can we just talk about the longer term runway of the platform, and really how to think about it as a standalone asset?
Right
... within kind of the marketplace?
I mean, yeah, taken at the highest level, it really is a set of capabilities and technologies that can ingest a lot of data-
Mm-hmm
... make decisions on that data, and then put that decision into a workflow. So it really works best with consumer information. That's kind of what we, that's what our, our background is in consumer.
Mm-hmm.
So we're really good at taking massive amounts of data on consumers, and then taking all the learnings from that and, and making decisions at the individual level. So you really do have one-to-one decisioning. It's not... You know, in the old days it was always, you know, crude segmentation. You put everybody into one of five buckets. They were a-
Mm-hmm
... soccer mom or a, you know, young professional. Just the basic things like that. And, and that's fine, but you can do so much better now, because you know so much about the individual, that you can make decisions on that individual. And rather than just send out an email to everybody saying, "Hey, we have auto rates as low as 5.5%," you send something to that person with a specific about, "We can lend you this for this many months at this rate," you know, pre-qualified.
Mm-hmm.
And you're saying it to them because you think they might want that, right? Not just because out of the blue. You've done enough research that you think this is what they're gonna respond to. Because more and more, it's the kind of thing where people get so much information, so many emails, they're flooded with so much, you have to make sure that whatever interaction you have is meaningful.
Mm-hmm.
Otherwise, you're not, you're not a trusted, you know, you're a trusted vendor to the, to the consumer.
Absolutely. So digital personalization at scale.
It's exactly it is at scale. And everybody needs that. It's not just financial services. They're, you know, they're used to making decisions on data, obviously, and they have the highest cost decisions in a lot of cases to make. But if you drive the price down, it's available to a lot of people. So, you know, we do a lot of work in insurance, we do a lot of work in telecom.
Mm-hmm
... we do some work in, in retail. There's a lot of different areas that others could use this. And as we get away from financial services, we're probably gonna rely more on system integrators, because there's a lot of them that, you know, are looking for more IP to build practices around. We've got IP that's growing really dramatically, so there's obviously a desire for it. And they've got a lot of contacts and a lot of domain expertise that we don't have.
Mm-hmm.
So we have a lot more capacity than we will ever be able to distribute.... So I think there's a really good opportunity for us there. But that's probably down the road farther. That won't-
Yeah.
We'll start to maybe announce some of those deals in 2024, but it's 2025 and 2026 before you actually see revenues.
So staging much more runway for growth. And also, just one quick point, there's also the side of the fraud. Have we seen an uptick in fraud? Just because looking at not only kind of the bank workflow itself, but also the consumer protection side, I think that you have a very strong market position within fraud, as well as, customer communications and account management, but-
Uh-huh.
When we think about just the non-platform side, that sometimes gets overlooked-
Right.
It doesn't seem like you're decommissioning these products-
No
... but you still are kind of doing the blocking and tackling.
Right. So a lot of the legacy products that are off-platform for us, you know, they're deeply embedded, they work really, really well.
Mm-hmm.
And they, you know, like our Falcon Fraud Manager, it's typically run on-prem at a bank, on the bigger banks, or it's run through a processor for the mid-market banks. And it runs, you know, potentially billions of transactions a day. If you think about it, if you're a large bank, somebody is using one of your credit cards all the time, 24/7, you know, somewhere in the world. So you can't really just take it down for, you know, to move to a different solution or even. You know, sometimes upgrades are difficult. And it works extraordinarily well, and you know from our point of view, it's profitable for us. It works well, the banks are happy with it, so it'll be a long time before those actually go away onto something new.
We have, you know, we have functionality on the platform that we're rolling out that kind of takes some of it on, and over time...
Mm-hmm
... we'll probably see that happen. But a lot of those products are just—they just really work really, really well, and we don't see them going away anytime soon.
Maybe not anytime soon, but if we take a longer term lens, is there a potential for everything to move to the platform?
Potentially, but I think it's a long time.
A long time.
I mean, I think there's a lot of things that are gonna move to the platform before those do.
Okay.
Right? I mean, even from a bank's point of view, there's a lot of things that they can do right today on the platform, that are pretty easy to get started on the platform, and that they don't already have a product for, right?
Yeah.
So there's a lot of things. I mean, Falcon works really well, but there's a lot of other things they're trying to do that they don't have a product for it today. So if they can get that done on the platform, that's what they wanna do first.
Absolutely. And there also might be regulatory requirements and data requirements, and you work globally with-
Right
... different customers.
Right. And that's always been a challenge. I mean, working globally, you know, for a long time, people thought that banks would never move to the cloud because of the security. Or they'd never let the data leave their four walls. And there's still a lot of regulation around what data can leave the country.
Mm-hmm.
You know, a lot of data needs to stay in country. So for a while, we had to have our own data centers in a lot of countries until AWS was ready for that. But now we use AWS for almost everything. We're trying to decommission our own data centers as much as possible because, you know, obviously, AWS can scale data centers better than we can.
Mm-hmm.
So we're happy to work with them, and they have such a scope, you know, worldwide, so that's been good for us.
Great. Maybe just shifting gears now to capital allocation. FICO has been, as of late, a proponent of buying back their own stock as opposed to M&A. And given-
I'd say it's been more than as of late. I mean, we've been like that for the last probably 15 years, so.
A decade or so. Give or take. So how should we think about capital allocation at a high level, as well as kind of... Given how much free cash you kind of-
Yeah
...blow off, the business model itself is inherently a machine, and with kind of a target leverage ratio of about 2.5-3 times-
Right
... as a rule of thumb, you fit firmly within there. Just looking forward, where do we see kind of capital allocation evolving?
Yeah, it's a great question, and we get it a lot. I mean, I think we always look at different M&A opportunities, but it's hard to find something that doesn't dilute the business, frankly. It might be, you know, fiscally accretive-
Mm-hmm
... but we like the business as it is now. You know, we got two different businesses: the scores business and the software business. Theoretically, there's a lot of software assets we could look at.
Mm.
But, you know, we like the platform we have. We don't really wanna go out and buy another product set that has different architecture, that we'd have to either integrate somehow or run it as a separate business. That doesn't look very attractive to us. So occasionally we'll do things where we will buy technology that we can plug onto the platform pretty easily.
Mm-hmm.
But those tend to be pretty cheap. They don't cost much. On the score side, we haven't done a lot there. There's really not a lot of... We think we can do some things internationally, potentially, but, you know, we, we like the scores business the way it is, we like the software business the way it is, and we- our, our first call for dollars is to invest in those, right? So we, we make investment every year in those, and then the excess cash flow, we tend to either buy- pay down debt or buy shares back.
Mm-hmm.
We don't have a dividend, so... But we like buying back the stock. We think you know, it's worked really well for us. If we can, you know, grow our top line double digit, do a little bit better than that on net income, and at the same time, take out shares, you get even more benefit. So that's kind of our formula, if you will. You know, and with rates being higher, we tend to look at you know, the cost of the debt a little bit more. But still, I mean, this last year, we saw our leverage tick down a little bit, because we didn't, you know, we didn't borrow more to buy shares back.
So, our EBITDA keeps growing, so there's a lot of options for us. But we like to buy back. You know, our CEO, Will Lansing, jokes that we're in a slow-mo IPO, right? That we're just taking them out one at a time, and at some point, everybody will fit in this room, the shareholders, but it gets harder.
I was trying to avoid the slow-moving IPO-
Yeah
... characterization, but I think it's a high-class problem to have. And it also begs the question of, what is the competition like on the software side? And really, who are the main competitors? Are they the banks? Are they external? Is it potentially an in-house solution?
Yeah, I mean, a lot of what we're displacing is in-house solutions. A lot of that tends to be pretty manual.
Mm-hmm.
It's a lot of it's, you know, teams of people that work on something. They, you know, they'll build a model, and then they'll take it down to engineering, and that gets coded in. And then they track it for a while, and then when they wanna make changes to it, they build a new model, and then they take down engineering, have that coded in. So this kind of displaces a lot of that. It gives them the opportunity to be more, to do more tests, and, you know, and to run different scenarios and simulations and see how it works in the test environment. And then they can put it themselves into production without having to go to engineering.
Mm-hmm.
They can track it, and they can make updates more frequently. That's kind of what it's replacing. In terms of competition, it really comes down, for the most part, do they wanna go with point solutions or do they wanna go to platform? Because from a platform point of view, we don't really have any competitors in this space today.
Mm-hmm.
You know, because it is fairly early stage.
Got it. Is there any inherent resistance, or maybe could you frame the roadblocks you're facing within those banks? Is there potentially an in-house point solution that might be trusted and true, but how could that maybe not be future-proofed?
You know, I think there's probably less pushback. I mean, anytime you have new technology, there's always pushback.
Mm-hmm.
There's always concern that, does this work as well as we think it does? Or, you know, what are the problems, and how long is it gonna take to implement, and how much it's gonna cost? And, you know, what do we do if it doesn't work? So those, those are always concerns. I think there's a lot less of that today.
Mm-hmm.
I mean, it's a different way of doing business. You're trusting technology more, certainly. But I think they realize they have to. And again, you know, the days of conducting all your business in a branch office are gone, and they're not coming back. So more has to be done through an app or through the website or through, you know, whatever method you have. And in order to do that, you have to have decisioning behind it.
Absolutely.
Right? So you can't, you can't just go to an app and say, "Okay, I'd like to apply for a loan," and then, "Get back to me in 2 weeks," right? Those days are gone, too, right? You have to have decisioning built into this that can kinda keep walking you through the process, and they can even make the decision.
Great call. Maybe just, it would be remiss not to mention the regulatory landscape. How are the regulators responding to this? How are they changing, and what has their feedback been thus far?
Oh, on the software side, I think it's all good. I mean, regulators, first and foremost, are concerned with risk, anything that can take a risk out of the system, and they're also concerned with fair lending, right? And access to credit. So really, we spend a lot of time on all of those, right? I mean, we're probably the leader in a lot of areas of risk. Most of what we do is around risk and risk management, and helping regulators understand how much risk is this bank taking. So we're a key part in the, you know, the process as that risk is evaluated. And we're doing a lot on financial inclusion. We're looking for ways to bring in additional data sets to help, you know, to help the underbanked.
Mm-hmm.
Because a lot of people have been kind of shut out of traditional markets because they don't... There's not much information available on that. But as we can pull in things like rental payment data or, you know, cell phone payment data or utility payment data, those are all things that are certainly predictive, but are not typically in a credit bureau report.
Absolutely. And that speaks again to the kind of nature of the FICO Score and the dependability and the benchmark status. Maybe could you just remind people in the room about VantageScore and perhaps some of the most recent developments with-?
Yeah
... FHFA, most recently pushing out the bi-merge, decision from tri-merge?
Right.
Really, FICO's approach to that and any potential regulatory landscape issues that could arise from it.
Yeah, I mean, it's hard to know what's gonna happen and when because... So just for context, the FHFA sets the rules by which conforming mortgages will be accepted. And for a long time, they said you had to have all three credit bureau reports, Experian, TransUnion, and Equifax, and then you have to have a FICO Score on top of each of those. What they did about a year ago now, a little over a year ago, they came out and said that at some point when this is implemented, you're only gonna have to take two of those bureaus. You can take two bureau reports, and then you'll have to have two scores on top of those, one VantageScore and one FICO Score.
They laid out a timeline a year ago, and they keep pushing it back. So they're getting more—they're asking for more response from the industry in terms of what the industry is looking for, concerns they might have, you know, and the industry's coming back with some different concerns, pushbacks. So it looks like it's gonna be a few more years before any of this gets resolved and implemented. But, you know, it's good that they're taking their time because this is a, you know, a pretty big shift, for the industry, and you obviously don't want to change anything, without thought, thinking through all the different permutations.
Absolutely. At most banks, there is going to be a chief or a C-suite or board-level approval at some-
Right
... when you change risk models, when you change different decisioning. And again, just going into, perhaps the shift from kind of the FHFA decision, could you just, again, frame what the kind of complications were with kind of FICO 10T as well as VantageScore? And is there any, potential kind of longer-term ramifications, or do you think this was a justification of why FICO Score is as needed as always?
Oh, yeah, I think FICO Score is as needed as always. I think they went through a long process to determine what to do.
Ten years.
I think they figured they had to do something, so obviously, this is what they did. You know, and they, you know, they took a good faith swing at this whole thing, right? And tried to determine what to do next, and I guess we'll see, you know, when it gets implemented, how it... But it's difficult. It's really difficult because you're dealing with the entire mortgage industry in the United States.
Absolutely. And maybe just one or two more high-level questions, because we're almost up on time. As you look at the business today and take a longer-term view, especially with people who are more focused on the technology side, could there be a potential risk from gen AI or an opportunity from gen AI, or is it less applicable in this space?
I think, well, separating the two up, on the score side, it's, it's not very applicable. It's really difficult to use AI for credit decisioning because, you know, the Fair Credit Reporting Act is such that you have to make sure you don't have disparate impact against protected classes. You have to make sure you can explain the decision you made.
Mm-hmm.
If someone applies for credit and gets turned down, you have to tell them why they were turned down.
Mm-hmm.
You know, there's a lot of steps along the way to protect the consumer. And then on the risk side, you know, regulators demand that any time you make changes to your models, you explain that risk, and you understand the risk associated with that. What are the changes? Why did you make them? What's the impact gonna be? And it's difficult to do that with AI, right? Because AI is not built for that. AI is built to just continually update and, you know, generate better and better results. But if you go down that path, it's difficult to meet the requirements of the law from a regulatory environment and still get the benefit out of AI.
Mm-hmm.
Where we are using AI is much more on the software side, like, things like fraud. We've used AI for more than 20 years on the fraud detection side. Like, Falcon has AI built into it to help improve the model, help find the fraud that's out there and then continually update the models. Yeah, and then, and beyond that, we're using generative AI and things like, you know, coding. Sometimes you do it for idea generation around different things, but typically, then it does pass over to a human to push the process along.
Absolutely. And not even to mention the risks of hallucination and bias and other-
Yeah, there's-
... things that really cannot be tolerated under that regulatory structure, which-
That's what, that's what happens. I mean, that's what you have. That's what ends up happening. You basically get digital redlining.
Digital redlining. Of course. Again, anything else that you would like to mention to investors today or how FICO should be thought about? Because, again, it was seen as more of a FICO Score, and now that you have a software business, that's 50% of your revenues and growing at a very healthy clip, especially on the platform side, a lot to be excited about. What should we take away from this conversation, and what should we think about for the future of FICO, give it about 10 years and let's talk about it?
Yeah. I think it... The business has changed dramatically in the last—I mean, our Will Lansing came in, I think, 12 years ago, dramatically changed the business, right? So, looked at the software business as a completely different way in terms of taking, you know, really legacy products and putting them in the cloud first, and then building a platform that could really grow. Because we were a low single-digit grower on the software side.
Mm-hmm.
Wasn't much room for growth there. On the score side, you know, looking at that business and realizing that there's a lot of untapped value there, and we need to somehow capture that value.
Mm-hmm.
And, it really has changed the business completely, and we now have two really strong segments that are both performing very, very well. Very different.
Mm-hmm.
They have, you know, same customer bases, but they're very different. So, I mean, from the outside, it's hard to kind of figure that out. If you're a specialist, you might not know much about software, but you do about the services and vice versa. So it can be difficult from that point of view, but it's an exciting time because we're-
Mm-hmm
... we have a lot going on, and we're really starting to see, you know, the last several years, we've seen a lot of growth on the score side, but now we're really starting to see the software business, what that can become. And there's a lot of... You know, we're not focused on near-term margin expansion-
Mm-hmm
... but there's gonna be a lot of margin expansion to be had there as that business scales.
Just to characterize, would that be more of a 5-10-year timeframe?
I think it's closer than that.
Closer than that?
I think it's... I mean, we saw some in the last few years, we've seen some-
Okay
... expansion. You know, there's some reinvestment we're doing next year, but I, I think in three to five years, you're gonna see, you know, some decent margin expansion. A lot of it depends on what the growth trajectory looks like. If it's growing fast, we'll, we'll keep reinvesting.
Mm-hmm.
But there's, I mean, we could drive margin expansion really quickly, but that would have an impact on the growth. So, you know, we always look at that. But it, you know, there's-
Yeah
... we're beginning to see, even in the last couple of years, pretty significant margin expansion for us.
Absolutely. And then with the final question, I think it's a perfect segue. Just, is there a reason in the longer term that the two businesses need to be combined, or could they stand alone as a scores business and a software business? Because it sounds like the opportunity for the software side is so large and at such an early stages-
Yeah
... that there could be a reason to maybe potentially spin or sell. How do you think about that at a high level?
It's certainly. They don't have to be together. I think there's a lot of advantages to having them together. I think, you know, in some cases, having them together has given us a little more cover to do some of the harder decisions, that would've been, you know, in investing in some of these things. But they don't have to be. I mean, if there comes a point in time where the consolidation discount's too much, we could certainly split the two, if we wanted to. But I don't think the time's not there yet. I think there's a lot of, lot of value that's gonna be seen on the software side in the next 2-3 years. That, you know, I'd like to have the current shareholders get the benefit of that.
That's great color. Thank you again for taking the time today, and we'd like to host you here at Newport-
Great
... or, California. Sorry.