Greetings. Thank you for standing by. Welcome to the Fair Isaac Corporation quarterly earnings call. During our presentation, all participants will be in a listen-only mode, and afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. This conference is being recorded Thursday, January 27, 2022. Now I'd like to turn the conference over to Steve Weber. Please go ahead.
Thank you. Good afternoon, everyone, and thanks for joining FICO's first quarter earnings call. I'm Steve Weber, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing, and our CFO, Mike McLaughlin. 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 to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties, including the impact of COVID-19 on macroeconomic conditions and the company's business operations and personnel that could cause actual results to differ materially.
Information concerning these uncertainties is contained in the company's filings with the SEC, in particular in the risk factors and forward-looking statements portions 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 a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the investor relations website at fico.com or on the SEC's website at sec.gov. A replay of this webcast will be available through January 27, 2023. Now I'll turn the call over to Will Lansing.
Thanks, Steve, and thank you everyone for joining us for our first quarter earnings call. In the investor relations section of our website, we've posted some slides that we will be referencing during our presentation today. We delivered a strong start to our fiscal year, with double-digit growth in software ARR and Scores revenue, and we continued to deliver strong earnings and free cash flow. Page two shows financial highlights from our first quarter. We reported revenues of $322 million in Q1 and $85 million of GAAP net income in the quarter. On a non-GAAP basis, Q1 net income was $102 million, up 25%, and earnings per share of $3.70, up 35% from the prior year quarter. We continued to deliver strong free cash flow growth as well.
Q1 free cash flow was $124 million, up 66% from the previous year. For the trailing twelve months, free cash flow was $465 million. We're off to a good start in our fiscal 2022, and we continue to be very focused on our strategy. In our software business, we continue to focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. When I started at FICO, we had a software business consisting of separate tools and endpoint applications. We evolved that business into a vision of an open and extensible platform uniting advanced analytics, decision modeling, and AI. Historically, our software business has been separated by function, allowing us to deepen our expertise in various disciplines, optimize role-based resourcing, and drive process consistency.
This month, we made an important change that better aligns our software organizational structure by integrating our entire software business under Stephanie Covert. Stephanie has led our sales, marketing, and services organization, where her strong leadership has effectively embraced strategic change, resulting in early wins and a growing pipeline of enterprise platform deals, prioritization of software IP, increased deal level profitability, and clear segmentation of direct and partner channels. I'm confident that by placing all elements of our software business under Stephanie's leadership, as we did years ago with the Scores business under Jim Wehmann, we'll see better alignment, faster and more effective decision-making, improved resource allocation against top priorities, and stronger end-to-end operational rigor and discipline. Last quarter, we made several important improvements to our external reporting to provide more visibility into the progress we're making.
Today, I'm happy to report that we continue to drive impressive growth in our software ARR, as you can see on pages seven and eight of the presentation. Total ARR was up 10% in Q1, and the platform ARR grew at a rate of 67%. Our net retention rate was also impressive. Total NRR was 109%, and platform NRR was 143%. We continue to increase the value of the new deals that we're signing. As you can see on page nine, our ACV bookings were up 37% over the same period last year. We are excited about the depth of interest in our platform offering. This quarter, we signed a deal with a major U.S. financial institution to use the platform.
The multiyear deal is our biggest platform sale to date, and it enables the automation of much of the day-to-day customer decisioning using cloud-based FICO analytics. In Scores, we're continuing to innovate and to align our pricing with the value they provide. We had a very good quarter in our Scores segment, with strong growth in both B2B and B2C. Scores were up 17% in the quarter versus the prior year, as you can see on page six. On the B2B side, revenues were up 13% in the quarter versus the prior year. We continue to see a slowdown in mortgage origination volumes for the U.S. market, where revenues were down about 17% year-over-year. That's more than offset by other areas in the U.S. where revenues are growing rapidly.
Auto origination revenues were up 27%. Card and personal loan originations revenues were up 39%. The fiscal 2022 price increases we talked about last quarter take effect primarily in January and are not yet in our numbers. Our B2C revenues continue to be strong, up 27% versus the prior year quarter. We saw strong growth through both our own myfico.com platform and also through our partner channels. As always, we continue to be focused on shareholder value. Last quarter, I said we would continue to aggressively buy back our shares. I'm pleased to say we repurchased more than 1.2 million shares in our first quarter and more shares in January. Our buybacks reduced the outstanding shares by 9% versus Q1 of last year. This morning, we announced a new $500 million board repurchase authorization. I'll have some final comments in a few minutes, but first, let me turn the call over to Mike for more financial detail.
Thanks, Will, and good afternoon, everyone. As Will said, we are off to a strong start to our fiscal year, driving growth throughout our business. Total revenues for the first quarter was $322 million, an increase of 3% over the prior year, or 9% after adjusting for the divestiture of our collections and recovery product line last June. In our Scores segment, revenues were $169 million, up 17% from the same period last year. B2C Scores revenues were up 13% over the prior year. As expected, mortgage origination revenues continued to decline, down 17% from the same quarter last year, but that was more than offset by growth in other areas. Credit card and personal loan originations revenues were up 39%, and auto originations revenues were up 27%.
B2C Scores revenues were up 27% from the same period last year. Both myfico.com and partner B2C revenues grew significantly. Software segment revenues in the first quarter were $153 million, down 9% versus the same period last year. Adjusting for the divestiture of our collections and recovery business, software revenues were up about 1%. As we've discussed for several quarters, we continue to see reduced upfront licensed revenue recognition due to the change we made to our revenue recognition policy for on-prem software license subscriptions, and we are seeing reduced professional services revenues as we focus our sales efforts on higher-margin software. On-prem software license revenue recognized upfront or at a point in time, as it is referred to in our 10-Q, was just $7 million this quarter, compared to about $13 million in our Q1 last year.
Our professional services revenues were $27 million, down from $41 million in the same period last year. This quarter, 82% of total company revenues were derived from our Americas region, our EMEIA region generated 12%, and the remaining 6% was from Asia Pacific. Turning to the new software metrics that we introduced last quarter, our software ARR in the first fiscal quarter of 2022 was $547 million, a 10% increase over the prior year quarter. Our platform ARR was $92 million, representing 17% of our total first quarter ARR and a growth rate of 67% versus the prior year. Our non-platform ARR was $455 million in the first quarter, which was 3% higher than the prior year. Our dollar-based net retention rate in the quarter was 109% overall.
As we've said, our non-platform customers' software usage tends to be mature and relatively stable, which is reflected in a non-platform net retention rate of 102% this quarter. On the other hand, our platform customers continue to show very strong net expansion from land and expand follow-on sales and increased usage. The DBNRR, or dollar-based net retention rate, for platform was 143% in the first quarter. Software sales were strong this quarter, with annual contract value bookings of $16.6 million versus $12.1 million in the prior year, an increase of 37%. As a reminder, ACV bookings include only the annual value of software sales, excluding professional services. Turning now to our expenses for the quarter.
Total operating expenses were $207 million this quarter, a decrease from $225 million in the first quarter last year, before accounting for the gain on sale from our ESS product and our JV in China. The year-over-year decrease is due to the divestiture of our collections recovery business, as well as various cost savings implemented in 2021. Our non-GAAP operating margin, as shown on our Reg G schedule, was 45% for the quarter. We delivered non-GAAP operating margin expansion of 900 basis points over the same period last year. GAAP net income this quarter was $85 million, down 2% from the prior year quarter due to a higher effective tax rate in 2022 as a result of lower excess tax benefit and the previously mentioned gain on sale last year.
Our GAAP EPS was $3.13, up 5% from the prior year. Our non-GAAP net income was $102 million for the quarter, up 25% from the same quarter last year, and our non-GAAP EPS was $3.70, up 35% versus last year. The effective tax rate for the quarter was 19%, including $6 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. We expect our FY 2022 recurring tax rate to be approximately 25%-26%. That expected recurring tax rate is before any excess tax benefit or other discrete items. The resulting net effective tax rate is estimated to be about 24%. Free cash flow for the quarter was $124 million, up 66% from last year.
For the trailing twelve months, free cash flow was $465 million. At the end of the quarter, we had $197 million in cash and marketable investments. Our total debt at quarter end was $1.65 billion, with a weighted average interest rate of 3.74%. In December, we issued $550 million in senior notes as an add-on to the $350 million of notes we issued in 2018. We used the proceeds of the notes to reduce the draw on our revolving line of credit and to fund share repurchases. Turning to return of capital, we bought back 1,244,000 shares in the first quarter at an average price of $397 per share.
We repurchased nearly 400,000 additional shares in the month of January, which exhausted our current board authorization. As Will mentioned, we announced today a new $500 million repurchase authorization and continue to view share repurchases as an attractive use of cash. With that, I'll turn it back over to Will for his thoughts on FY 2022.
Thanks, Mike. As I said in my opening remarks, I'm extremely pleased with our Q1 results and the momentum we take into 2022. Our Scores business continues to deliver strong growth, and our diversification through different credit verticals means we're not dependent on specific types of lending. On the software side, we remain laser-focused on our platform strategy and continue to drive strong results. We've delivered nine straight quarters of platform ARR growth in excess of 40%. We're confident that we have the best-in-class capabilities in an emerging marketplace that's poised for explosive growth. We remain focused on execution. We're committed to delivering value to our shareholders and visibility to the progress we're making. We'll now turn it back to Steve for Q&A.
Thanks, Will. This concludes our prepared remarks, and we're now ready to take any questions you may have. Operator, please open the lines.
We do have a question from Manav Patnaik with Barclays. Please go ahead. Your line's open.
Thank you. Good evening, guys. Well, maybe just, you know, I know you maintained your guidance, which is usually what you like to do, but, you know, given the strong quarter, just curious if you could just walk us through, you know, maybe some of the assumptions for the rest of the year that you're looking at.
We're not changing our guidance, Manav. I mean, we obviously hope that things improve over the year, and we're in a position to do better, but at this time, our guidance is our guidance.
Okay. In terms of the volume assumption in there, you know, you gave us some of those origination numbers for the first time, so thank you for that. Just curious how we should think about how you're thinking of how those trend.
In origination specifically or just generally? I think first quarter is usually our hardest quarter. This quarter, we exceeded our internal plan for first quarter, so that's good news for us. It gives us a lot of optimism about the way the year's gonna turn out. I'm not ready to go out on a limb on volume forecasts.
Okay. Just lastly for me, you know, you mentioned price increases usually start January 1st . It's not in your numbers, but just, you know, curious if you could give us any color on if you did put some of those out and in which areas.
You know, as we discussed earlier, we have strategic pricing kind of mixed across the board. It's not in one particular spot. We did some tier-based pricing. Some areas were untouched, other areas were touched a little bit harder. You know, as you know, it's kind of a once-a-year event. We did it, and now we watch as it plays out. There's not any revision to it going on.
All right. Thank you.
Our next question is from Kyle Peterson with Needham. Please go ahead. Your line's open.
Hey, good evening, guys. Thanks for taking the questions. Just wanted to touch on the platform ARR growth. You know, that looked, you know, really impressive this quarter. Was that, you know, a couple large deals that just kind of happened to kind of fall into place for you guys, or was it more broad-based? Just any color on the acceleration would be great.
It was a couple of large deals that fell into place, but they weren't an accident, they were planned. I think it just underlines the fact that we've got the right kind of capability, the right kind of platform capability for big enterprise customers. It's being proven out in the marketplace. We're, you know, seeing the uptake. As you know, for us, it's a land and expand strategy where the platform gets installed, and then the customer really focuses on all the incremental use cases that they can get with the platform in place. We love landing the platform in large customers, which is kind of what's happened this quarter, and which we anticipate will continue to occur over the year as we go forward.
Great. That's helpful. I wondered if you could just touch a little bit on the professional services line. I know it's kind of expected to take a leg down sequentially this quarter. Are we kind of at the point now where things are leveling off a little bit and maybe the services kind of trends with kind of the non-platform side of the software business, or are there any more, you know, near-term kind of runoffs that, you know, we should keep in mind relative to the 1Q run rate of, like, $26.5 million?
Kyle, it's Mike. I think we are more or less at a run rate, if you want to put it that way. A big part of the decline was the divestiture of a collection recovery business, as we disclosed in the 10-Q, about $16.3 million of revenue that we had in the first quarter last year that we don't have this year. About half of that was professional services. The rest of it is a combination of, you know, lower bookings. There was a little bit of push out of already contracted PS, which will catch up, just scheduling issue and milestone issues that are typical with any PS business. The sort of $26 million a quarter, 17%, 18%, 19% of revenue, it feels consistent with the rate at which we're selling new PS business going forward.
All right, that's helpful. Thanks, guys.
Our next question is from Surinder Thind from Jefferies. Please go ahead. Your line's open.
Good afternoon. My first question is about the land and expand strategy. Can you maybe provide a little bit more color in terms of how that work actually works out at a client? When they buy the platform, do they tend to port over existing functionality first and then kind of build use cases? Or do they kind of reverse that, which is they'll keep existing functionality from existing products and then maybe build new functionality on the platform? Just trying to understand the way clients are approaching it.
You know, it's a bit of both, and it depends on the customer. It's not atypical for a customer to put the platform in with some fairly specific idea about the use. But it's typically not as narrow as our legacy solutions. Typically, you know, the customer will think through half a dozen or a dozen uses for the platform, you know, at the get-go and phase the introduction of those different solutions. Then it's not uncommon for the customer to figure out within 12 months, within six to 12 months, that there's a whole bunch more things they can do with the platform. So they immediately start planning the next phase.
What we're seeing is that the idea of, you know, embedding the platform, providing the tools, really is the right strategy for getting incremental business from these customers. You know, and for them, it's a great value proposition because they make the big initial investment, and then incremental utility comes at very low cost, you know, having done so much of the data plumbing and so on. I mean, that's typical. Sometimes it's to replace existing functionality. I would say that's a lot of the time in the initial land piece, but the incremental functionality comes very quickly.
That's helpful. Then turning to the B2C business, obviously solid growth there in terms of the revenues. Trying to break that down a little bit further. Any color on that. Typically, this quarter generally has some $6 million-$7 million of licensing, or at least it has the past couple of years. Was that also true this quarter as well in the B2B side of the business?
No, typically those licenses are in the fourth quarter. You can't take that to the bank in any given year, but that's what we've seen in the last couple of years. Q1 for the last few years has not had a one-time event like that, so it's a pretty clean year-over-year comparison.
Got it. Okay. Then just maybe a question on just color on the quarter's volumes. Auto revenues actually seemed to accelerate or it showed stronger growth, but volumes were actually down quarter-over-quarter, so it was a little confounding. Are just people looking harder for auto vehicles at this point that's pushing up overall inquiry volume, or how should we think about that?
Surinder, when you say volumes are down, are you referring to some external third party source for that?
Oh, I'm sorry. I'm referring to sales volumes. Obviously your revenues were up in auto.
Yeah. Okay
Y ou know, pretty meaningfully. I think they were up 19% last quarter and then 27% this quarter.
Yeah.
When you look at actual sales activity in terms of physical units of vehicles sold, both the used market and the new market, those volumes are actually down pretty meaningfully.
Yeah.
I'm trying to reconcile the difference.
The data we track, we think there's pretty good data out there about new car sales. Actual volumes for used car sales is pretty squishy as far as we're concerned. It's we really don't know whether they were up or down, but more or less, let's call it a push in terms of volumes. Our volumes in terms of Scores and auto were up a little bit. Remember, our Scores revenue doesn't require the car to sell. It just requires somebody to look for credit, right? It's possible that we could have more volume increase than the actual number of cars sold. But if you think about the total revenue increase, that was not volume. Little bit of volume contribution, as I said, but it was the pricing actions that we've taken and how we feathered that through the tiers of the users of that score.
Got it. That's helpful. One clarification on a comment that you made during the prepared remarks about the special price increases, and then I think there was a follow-up question about it. I think you used the language that they're primarily take effect in January, meaning that is something like you think kind of roughly 75% will hit this quarter, then maybe another 25 next quarter? Or is it just the vast majority kind of went into effect on January 1st of this year?
I mean, the vast majority, but we can't control the timing because some of these things phase in later in the year. But I would say, yeah, the majority is upfront.
Okay. Thank you. That's it for me.
75% is probably a little too strong, but more, you know, more than a majority. More than half and less than 75%.
Thank you. Our next question is from George Tong with Goldman Sachs. Please go ahead. Your line's open.
Hi. Thanks. Good afternoon. I wanted to dive deeper into the Score special pricing increase. As you did your tier-based price for this year, how does that increase compare with the prior special pricing increases? Is it consistent? Did you step it up, step it down? Especially in light of inflationary trends, did you keep it consistent or did you step it up? And then how has customer receptivity been so far to these pricing increases?
I would say consistent with prior years. We didn't take extra action in light of inflation and inflationary expectations. Consistent would be the answer to that. Customer reaction is as it's always been. No one loves price increases, but they actually understand that the value that we provide, you know, it makes sense what we charge for it. You know, very similar conversations to those we've had in the past with our customers, which is they understand why we do it. You know, do they wish that we didn't raise prices? Of course, they wish they didn't. We, you know, of course they wish that, but they understand us.
Got it. That's helpful. If you had to quantify on a blended basis how much that step up is, where would you place that number that's consistent with prior years?
I can tell you what you guys plug, but we've never provided guidance on the exact amount. You know, it's been on the order of $50 million, I think, in your models for years now.
Great. With respect to the software business, can you discuss a little bit more, what's changing with the appointment of Stephanie to the head of the group? How you plan to execute that, and what the optimal outcome is of that restructuring in terms of leadership?
Yeah, that's a great question. As you can imagine, we're so focused on execution that, you know, we've spent a lot of time on this in recent months. Stephanie's been with us for many years. She's an extremely effective leader. Everything that she's had, she has just done a phenomenal job with, you know, with sales and marketing, and then we gave her professional services, and she did a great job with that. Now we've tucked product and technology underneath her as well, and so she has the entire software business. I think that it will. It's, as I said, it's gonna lead to more streamlined decision-making.
You know, you could look at it as we have a little more of an SBU, a little more of a business orientation around that business as opposed to being strictly functionally organized. It used to be the P&L didn't really roll up until me. Now it rolls up to her. That, you know, there's those benefits. I think what we really have here is she's a tremendous leader, and so we're excited about her having the entire software business.
Great. Thanks very much. Very helpful.
Our next question is from Jeff Meuler with Baird. Please go ahead. Your line's open.
Yeah, thanks. On platform software pipeline, can you just help us understand how it's changing? I guess the lead in would be, are you starting to see a lot more large financials in developed markets in the pipeline? I feel like for a while we were hearing about, like, large LatAm-based financial institutions, and then this quarter, there was a call-out on a large U.S.-based institution.
Yeah. Look, I wouldn't read too much into what you hear in any one particular quarter, but I would say that we do have a very strong pipeline, software pipeline for platform with major financial institutions all around the globe, not just LatAm, not just North America. This quarter was strong for North America, obviously. But that's where our direct sales force is putting its energy right now, is into our enterprise customers and into getting the platform put in place. And so it's, I mean, that's what's happening. We're happy with it. It doesn't signal a shift. It's just, you know, this quarter it was North America and, you know, the quarters before LatAm was very strong. You know, I expect to see that shifting around as we go forward. I mean, the pipeline's full of opportunities all over the world.
What's the typical length of those contracts when you're winning a client, on the platform capabilities?
Typically around three years. You know, as you know, you put in the platform and we fully anticipate that the platform will be in for many, many more years, 10 years and beyond. Typical contract would be three years.
Yeah. Okay. Last for me. What's the company's, I don't know, steady state leverage target? How much would you go above that? Just, obviously leverage has come up a little, but it's still fairly low, with the new repurchase authorizations driving the question. Thank you.
Well, look, we're as in love with our own stock as we've ever been. Can we continue to buy at the pace we've been buying? Probably not. We're quite comfortable with our leverage where it is today, you know, kind of mid-2s. We could go higher. You know, our intent is to spend all of our free cash flow. We have been spending in excess of that, but our intent is always to spend at least our free cash flow. There's certainly more dry powder, but I don't think you could count on us buying at the same rate into the indefinite future.
Yep. Thank you.
We do have a question from Ashish Sabadra with RBC Capital Markets. Please go ahead. Your line is open.
Thanks for taking my question. I just wanted to follow up on Manav's question on the guidance, which is focused on the EPS guidance. The prior guidance didn't include buyback, and you've done significant buyback just year- to- date. I was wondering how should we think about increasing the guidance for those? Is it fair for us to assume that you'll increase guidance on the second quarter along with special pricing increases?
I think that if you wanna adjust your numbers to reflect our aggressive stock buying recently, you can do that. That's not a crazy thing to do. We're not providing different guidance.
Okay. That's helpful color. Just wondering if you had any color on the FHFA timeline and any updated thoughts on that front. Any color will be helpful. Thanks.
Yeah. We've been following that process. We participate in the process, you know, exactly as laid out by law and by the regulators and by the agencies and by the FHFA. We're awaiting the news, such as it is when it comes. We don't have anything else to share right now. You know, we continue to be confident that we have very good product and highly predictive and so on, but I think we'll just have to wait and see what they do.
Thanks for the color.
There are no further questions at this time.
Thank you. Thank you everyone for joining today, and we look forward to speaking with you again soon. This concludes today's call.
That concludes the call. We thank you for your participation. Please disconnect your line.