Greetings, and thank you for standing by. Welcome to the Fair Isaac Corporation quarterly earnings call. During the 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 26th, 2023. Now I'd like to turn the conference over to Steven Weber. Please go ahead.
Good afternoon, thank you for joining FICO's first quarter earnings call. I'm Steven Weber, interim CFO, and I'm joined today by our CEO, Will Lansing. 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 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 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 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 January 26, 2024. Now I'll turn the call over to Will Lansing.
Thanks, Steven Weber, 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'll be referencing through our presentation today. I'm pleased with the results we delivered in our first fiscal quarter. Even in these uncertain economic times, the resilience of our assets and the execution of our team allow us to deliver steady growth in both revenues and earnings and value to our shareholders. Page two shows financial highlights from our first quarter. We reported revenues of $345 million in Q1, up 7% from the prior year. Our GAAP net income of $98 million was up 15% over the prior year, and GAAP EPS of $3.84, up 24%.
On a non-GAAP basis, Q1 net income was $108 million, up 6% from the prior year, and earnings per share of $4.26 were up 15% from the prior year quarter. Overall, we are off to a very good start in our fiscal 2023. In scores, revenues were up 5% over the same period last year, as you can see on page six of the presentation. The B2B revenues were up 11% in the quarter versus the prior year, driven by unit price increases, increased volumes in card and personal loan originations, and also by a license renewal in Latin America. In the U.S., auto originations revenues were up 24%, and card and personal loan originations revenues were up 19%.
We continued to see reduced mortgage origination volumes for the U.S. market, where revenues were down about 40% year-over-year. The fiscal 2023 price increases we talked about last quarter take effect primarily in January, so we expect to see much of the impact in our second fiscal quarter. As always, it's difficult to estimate the timing and magnitude of the impact. Our B2C revenues were down 6% versus the prior year quarter as we continue to see difficult comps in our myFICO business due to the economic climate and especially because of the higher interest rates and lower number of consumers preparing for mortgages. In our software business, we continue our focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. Overall software numbers look strong, platform numbers continue to be exceptional.
As you can see on page seven, we delivered overall ARR growth of 11% and platform ARR growth of 46%. Our ARR, our DBNRR, and our ACV numbers are adjusted for the Siron divestiture. Again, our customers continue to find new use cases, as you can see from our net retention rates shown on page eight. Overall, net retention rate was 110%, and platform net retention is 130%, continuing to demonstrate the success of our land and expand strategy. We continue to see strong demand for our software. As you can see on page nine, our ACV bookings were up 31% over the same period last year, and we continue to see a strong pipeline of opportunities as customers look to FICO to deliver strategic mission-critical decisioning.
Earlier this week, I had the opportunity to attend our annual sales meeting, where I met with colleagues from around the world to discuss best practices, current trends, and especially how our customers view our offerings. I heard firsthand how customers were looking to FICO to help solve their most difficult decisions and how those customers were increasingly finding new ways to use the FICO Platform throughout their businesses. I don't think there's ever been a time at FICO where the team has been so excited about the opportunities ahead of us, and I share that excitement. I came away with a renewed appreciation for our unique technological capabilities and the incredible team that we have taking it to the market. Finally, as I've often said, we're committed to becoming the preeminent platform player in decisioning analytics.
The strategic focus has allowed us to exit some non-strategic products and services over the last few years. In November, we announced we had reached an agreement to transition our Siron Compliance business to our partner, IMTF. We closed that transaction in December. While we're proud of the work and the innovation that the FICO team put into Siron to make it an industry-leading solution, we believe we are better positioned if we dedicate our focus and our resources to expanding the capabilities and market penetration of FICO Platform. I'll have some final comments in a few minutes. First, let me turn the call back to Steve for more financial detail.
Thanks. As Will said, we delivered another solid quarter in both our Scores and Software segments. Total revenues for the first quarter were $345 million, an increase of 7% over the prior year, slightly ahead of our internal plan. In our Scores segment, revenues were $178 million, up 5% from the same period last year. B2B Scores revenues were up 11% over the prior year. As has been the case for several quarters, mortgage originations revenues were down from the previous year. This quarter, those revenues were down 40% from the same quarter last year and 29% from Q4. Again, that was offset by growth in other areas. Credit card and personal loan originations revenues were up 19% over last year, auto originations revenues were up 24%.
We also renewed a multiyear license, which had a positive impact on the quarter. B2C Scores revenues were down 6% from the same period last year, and we expect B2C revenues to be down modestly from current levels throughout the rest of the fiscal year. Software segment revenues in the first quarter were $167 million, up 9% versus the same period last year. Software revenues recognized over time were $133 million or 80% of total software revenues. License revenues recognized upfront or at any point in time were $12 million this quarter and represented 7% of software revenues. Our professional services revenues were $22 million, representing 13% of total software revenues. This quarter, 85% of total company revenues were derived from our Americas region.
Our EMEA region generated 9%, and the remaining 6% were from Asia-Pacific. Our software ARR in the first fiscal quarter of 2023 was $583 million, an 11% increase over the prior year quarter. Our Platform ARR was $133 million, up 46% from last year, and represented 23% of our total first quarter ARR, compared with 17% last year. Our non-platform ARR was $450 million in the first quarter, up 4% when adjusted for divestitures. Our dollar-based net retention rate in the quarter was 110% overall versus 109% last year. Our Platform customers continue to show very strong net expansion from land and expand follow-on sales and increased usage.
The net retention for Platform was 130% in the fourth quarter. Our non-Platform customer software usage is mature and relatively stable, with retention this quarter at 103%. Software sales were again strong this quarter, with annual contract value bookings at $21.5 million versus $16.4 million in the prior year, an increase of 31%. 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 $205 million this quarter versus $207 million in the prior year and $215 million in Q4.
While we continue to focus on expense efficiency, we do expect our total expenses to trend up in FY23 from salary increases and modest headcount increases. Our non-GAAP operating margin, as shown on our rate sheet schedule was 49% for the quarter, representing a 400 basis point non-GAAP margin expansion versus the same period last year. GAAP net income this quarter was $98 million, up 15% from the prior year quarter. Our non-GAAP net income was $108 million for the quarter, up 6% from the same quarter last year. The effective tax rate for the quarter was 17% and included $10 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. We expect our full year fiscal 2023 recurring tax rate to be approximately 25%-26%.
That expected recurring tax rate is before any excess tax benefits or other discrete items. The resulting net effective tax rate is estimated to be about 24%. Free cash flow for the quarter was $92 million. For the trailing 12 months, free cash flow was $471 million. At the end of the quarter, we had $166 million in cash and marketable investments. Our total debt at quarter end was $1.92 billion, with a weighted average interest rate of 4.9%. Currently, about 67% of our total debt is fixed rate. Our floating rate debt is pre-payable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods.
Turning to return of capital, we bought back 180,000 shares in the first quarter at an average price of $418 per share. We have $451 million remaining on the current board authorization, and we continue to view share repurchases as an attractive use of cash. With that, I'll turn it back to Will for his thoughts on the rest of FY23.
Thanks, Steve. I'm really pleased with our Q1 results. I'm pleased with the progress we're making on strategic initiatives, and I'm pleased with our positioning for the balance of fiscal 2023. Our Scores business continues to deliver growth even in a turbulent market. As I said in the past, our diversification across different credit verticals means that we're not dependent on one specific type of lending. On the software side, our platform strategy continued to drive strong results. The strategic mission-critical nature of our decisioning FICO Platform means that customers are not delaying purchases and implementations. This is evident in the 13 straight quarters of 40%+ of platform ARR growth and the continued strong net retention rate of current customers. We're confident we have the best-in-class capabilities in an emerging marketplace that's poised for sustained growth.
I'm confident we have the correct strategy and a strong team in place to deliver on the remarkable opportunities ahead. As always, we remain focused on execution, and we're committed to delivering outstanding value for our shareholders. As a reminder, when we announced our CFO transition, we also reiterated our guidance with an adjustment for the transition of the Siron Compliance solution to our partner. We are guiding revenues of $1.463 billion, GAAP net income of $401 million, GAAP EPS of $16, non-GAAP net income of $487 million, and non-GAAP EPS of $19.42. I'll turn the call back to Steve, and we'll be taking questions.
Thanks, Will. This concludes our prepared remarks. We are now ready to take your questions. Operator, please open the line.
Thank you. If you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. Once again, that's one, four to register for a question. One moment, please, for the first question. We have a question from the line of George Tong with Goldman Sachs. Please go ahead. Your line's open.
Hi. Thanks. Good afternoon. When you presented your fiscal 2023 guidance last quarter, you had assumed Scores revenue growth of 7% composed entirely of pricing increases and flat origination volumes. One quarter into fiscal 2023, does that assumption still hold on your end? Are you seeing anything that could challenge those trends?
I think the assumption still holds. You know, the future remains uncertain, but, right now, the assumption holds. We think we're right on track.
Great. Switching to the software side, ARR year-over-year growth accelerated in fiscal 4Q from fiscal 3Q, and you mentioned in your prepared remarks that customer demand remains strong. Can you overall elaborate on the overall spending environment for enterprise software and if you're seeing any second derivative slowdown in spend?
As I mentioned, I think that because the platform software is so mission-critical, it's a little bit less subject to our customers pulling in their budgets and pulling in their spend. There's no question that there is budget pressure out there. I mean, everyone's under budget pressure. The kinds of solutions we provide with the platform are such a perfect fit for the strategic needs of some of these customers that it's something that just can't wait. When the customers adopt the platform, it's a transformation of their business, really, and it's not the kind of thing that's easy to put off.
The other thing I would say is we're demonstrating incredibly rapid return on investment, and we have testimonials from customers that, you know, with amazing returns, within year returns. That word's getting around. Our customers are finding out that this stuff pays for itself within a year. As a result, we have not seen any slowdown in the spend on our platform business.
Very helpful. Thank you.
Our next question is from Surinder Thind with Jefferies. Please go ahead. Your line's open.
Thank you. I'd like to start with a question on the Scores business. Can you provide any other additional color on kind of the licensing deals or the magnitude of that? When I kind of think about where the volumes were, the B2B revenues came in a bit higher than I was anticipating. Any color on how licensing deals compare this year to last year in terms of the revenue impact?
I would say that the license deal that we referenced is kind of par for the course. We get these deals from time to time, renewal deals, sometimes they're bigger renewal deals. They happen every year. We can't really predict what quarter they happen in, so we get a little bit of lumpiness there, and that's what we've got here.
Got it. Then in terms of the B2C business, I think you mentioned that maybe you're expecting some modestly lower revenues on a go-forward basis. Is the expectation just of sequential declines on a quarter-over-quarter basis throughout the year at this point? Any color that you can help us provide on how to think about the amount of drag that perhaps there might be on a go-forward basis?
Yeah, Surinder, this is Steve. It's relatively modest that we see right now. I mean, there's two pieces of that business, as you know. There's the partner side and then the myFICO side. The myFICO side has been challenged by the economic environment, right? The fact that people are not getting the same mortgages. If mortgages, you know, increase in the stream, the rates come down and that increases that, then that business will probably pick back up again. As it looks right now, we're projecting it to be sort of, you know, a little bit less than it is today, but not expecting there to be a turnaround any time soon.
Got it. Just a clarification on that, Steve. Is the partner side holding steady at this point or the drag is mostly from the myFICO side?
Yeah, it's mostly on the myFICO side because the myFICO side is more, you know, The partners have a lot of different business models they can, they can cycle off to, right? There's a premium. There's a lot of different things they can do. MyFICO side is we don't spend a lot in marketing. You know, it's a lot more tied to the mortgage market.
Got it. One quick question on just capital allocation. The stock has obviously performed really well over the past year and especially over the previous quarter. Does it still kind of make sense to be fully allocating all of your Free Cash Flow towards share repurchases, or should we start to think about maybe paying down some of the floating rate debt at this point?
We're still in love with our stock, and the plan is to continue to return capital to shareholders through stock repurchase. That said, we'll keep an eye on rates and, you know, we're at a weighted 4.9% on the interest expense right now. You know, I just when I look at FICO stock, when you look at FICO stock, I think you believe that's a better, you know. That's a good balance. For now, still on stock buyback.
Understood. Thank you. That's all my questions.
Our next question is from Kyle Peterson with Needham & Company. Please go ahead. Your line's open.
Great. Thanks, guys. You know, just wanted to, you know, get your, like, sense of appetite, you know. I guess, like you guys just mentioned, you know, FICO stock's really attractive. You know, how are you guys feeling, you know, about the buyback and, you know, capital allocation, you know, in this environment? Kind of if you could rank order, Steve, your, like, use of capital, that'd be really helpful.
Yeah. Okay, Kyle, it's a good question. One of the things we're really working on hard, frankly, is we're bringing back as much cash as we can from around the world. Even if there's a slight expense to that, you know, when the rates are higher, it just makes more sense to do that as much as possible. That we're bringing as much cash into the U.S. as we can, and then we look at the trade-offs between the rates and, you know, the what kind of stock we can buy back. As Will said, we're concentrating on buybacks, but that can change as the markets change.
You know, we look at that, we model it out, and we're still comfortable that, you know, buying as many shares back as we can, you know, conceivably. We're not gonna do like we did last year, where we went all in and, you know, we ratcheted up our debt when we said we had the opportunity. I think you'll see us spending the free cash flow this year on buybacks.
Mm-hmm. Yeah. I mean, that makes sense, and I mean, I think you guys went hog wild on it last year, but, like, yeah, we're all about that. Yeah, I guess, like, just, you know, as we're thinking, yeah, into the next year, is there anything different or should we expect more or less status quo? I get that the messaging from you guys historically has been, you know, cash flow is, it's your money as shareholders, not ours, and we wanna return that if we can't find a better use of that. Is there any different messaging, or is it, yeah, more of the same, you know, with you at the helm, at least for now?
Look, I think Steve said it well. I mean, we, you know, try to return Free Cash Flow every year, then periodically we do more than that. For the last two years, we've done considerably more than that, and it's because the stock price was depressed, like really, in our minds, quite depressed relative to its value. Also it was a lower interest rate environment. Now we have higher interest rate environment. The stock's a little bit pricier. I still think it's a bargain, but it's more expensive than it was. We're back to thinking about stock repurchase in terms of our Free Cash Flow, our annual Free Cash Flow. I would say that things have changed.
I mean, we, you know, we were really piling up the debt to buy in the shares over the last 2 years, and we will not be quite as aggressive in the future, or at least right now under these circumstances.
Again, you know...
Mm-hmm
Two-thirds of our debt is fixed. We have no rate risk there at all. Even with the rates increasing. You know, we're just talking about the variable rate, and, you know, we're happy with where it is right now, but we, you know, continue to monitor it, and if rates were to go up significantly, then we'd probably pare back the buybacks. It's always just a calculus we have to do.
Yep. Makes a ton of sense. Thanks, guys. Next quarter.
Thank you. Our next question is from Manav Patnaik with Barclays. Please go ahead. Your line's open.
Thank you. On the auto and card side, you gave us, so you showed some healthy revenue increases, but I was hoping you could just help us parse down what volumes are doing in those two categories. The flat volume assumption for overall volumes and scores, I guess, what are you assuming for auto and card to get to that flat number?
Yeah. Right now, auto is relatively flat. You know, it's up some months and down some months, but it's relatively flat. Card is still up. It's been probably decelerating, but it's still up. Most of the increase year-over-year on revenues on the auto side came from pricing. Most of the increase on the card side came from volumes. Not, you know, not 100%, but most of it was. As we go forward now, you know, next quarter we'll have the benefit of the new price increases. There's a lot of different variables in there.
it's hard to really say what we're expecting in terms of overall volumes because, you know, there's a lot of different tiers involved and there's different pricing tiers, so you have to really dig under the covers to see all of that. We're not seeing anything in the market that's really changing the way we looked at it when we issued guidance, you know, three months ago. You know, mortgage is probably a little bit weaker than it was then, but we knew it was gonna be weak. This, none of that really surprises us. You know, we'll see how things progress in the next couple quarters. If, you know, housing pricing comes down and the rates come down a little bit and that market picks up, you know, then we'll get some more acceleration there.
Right now we're pretty much tracking to what we thought we would see, you know, three months ago.
Got it. Helpful. Then just on the software side, you know, the platform business, you know, always had a five handle next to it in terms of growth. I know it's probably just nitpicking this time as 46, but even in your prepared remarks, you said, you know, 40% plus type growth. Is there, you know, is it just the law of large numbers? Is there something, you know, timing wise or just talk to us a little bit around that, please.
It's a little bit of both. You know, we knew we were never gonna be able to keep the 70% number, right? Now we've been 50, now we're a little less than 50. Looking at the rest of the year, we think we'll probably be in that, you know, high 40s to low 50s%. There is some timing around some of these things, but we don't see it really decline. I mean, it's declined for the last few quarters, but we think we're pretty comfortable operating in this range, give or take a few points.
Got it. Okay. Thank you, guys.
Our next question is from Ashish Sabadra with RBC Capital Markets. Please go ahead. Your line's open.
Thanks for taking my question. Just a question on the special pricing. Our understanding is that tends to be in the $40 million-$60 million range, usually. Is that the expectation this time as well based on initial feedback as you have rolled out these special pricing increases?
You know, we never confirmed that number. It's... I won't be doing it today. There is still some special pricing, but I can't confirm a number for you today. It's easy to do in hindsight. You know, there's a lot of volatility, right, in the marketplace. You know, if you can tell us what the interest rates are gonna be in six months, we can probably give you a better number.
Okay, no, that's fair. Maybe just a follow-up question on portfolio rationalization. Is it fair to assume that the Siron divestiture could also potentially help on the growth profile? Are there other opportunities for portfolio rationalization within the software portfolio?
I would say, I would say yes and no. Yes, you know, our platform growth rate is substantially higher than the Siron business that we divested. Divesting it does contribute to a higher growth rate for FICO. Are there other opportunities in our portfolio? Not really. I mean, never say never. We're always looking to be as streamlined and efficient as we possibly can be, but we're pretty happy with the set of assets and the set of solutions that we have today. Even our older application solutions are still quite popular with our customers. We continue to invest in them and make sure that they have the features and functionality that the market needs.
As you know, the renewals on these typically have a cycle of kind of three years, and they get renewed multiple times. You know, it could be a nine-year or 12-year kind of an arrangement. I think we'll be probably, hanging on to the vast majority of our portfolio. There are no obvious candidates for divestiture at this time.
That's very helpful, Caleb. Maybe if I can sneak in one last question on the B2C side. As you mentioned, some of it is tied to the mortgage weakness, but I was wondering if there's anything that you can do from a product perspective or marketing perspective in order to improve or moderate the headwinds that are causing from the weak mortgage market on the B2C side.
Well, I can assure you that our talented management team is doing everything they can on the marketing side and the customer acquisition side to keep the business growing as much as possible. You do have a macro environment that just results in the kind of performance that you're seeing right now. That business is a completely data-driven, science-based kind of a business where we spend on customer acquisition up to where it ceases to be economically smart to do so. That is always optimized. That business is optimized at whatever levels, you know, we have in the marketplace. The short answer to your question is we're doing just the right amount. I really think it's optimized. I don't know that more would make things better.
You might be able to get the growth rate up, but it wouldn't be better, from an economic standpoint.
That's very helpful color . Thank you. Thanks.
We have a question from Faiza Alwy with Deutsche Bank. Please go ahead. Line's open.
Yes. Hi. Thank you. First, I just wanted to pick on a comment that you made, saying that you thought revenues were ahead of plan. Maybe you could talk about what areas in particular were better than your expectations in the quarter.
Yeah, I mean, it was modest, but it was on the software side. I mean, the scores number is pretty much dead on plan, and software came in a little bit ahead of plan. It's encouraging to see that, you know, that happened.
Okay, great. On the software side, I'm curious how we should think about the non-platform revenues. I think previously you had talked about those revenues being roughly flat, and, you know, they are, they were down just a little bit on a year-over-year basis. I'm talking about the recurring revenue. So that $450 million, is that sort of the right way to think about it going forward? Or do you expect sort of more, you know, some declines from here in that business?
You know, I think someday we will have declines, but I think for the time being, flat is the right way to think about it. Obviously, we can manage that number. You know, we choose to end the life of some products, and that can contributes to shrinkage. It's a balancing. It is really a balancing act that we are in. I think that we're in a good place right now at flat. You know, that's just about the right balance where we can
Close down end of life the products that would result in us having a lot of technical debt were we to continue them without really shrinking that business. The day will come no doubt when we will shrink that business somewhat, but that day is still a ways away.
Got it. Then just on expenses, I think you mentioned that expenses are going to go up a little bit as we go through the year, mostly driven by personnel expenses. I'm curious, is that something that, you know, that's something that's already put in motion? Maybe you wanna talk about the magnitude of that increase, if you can. Secondly, like how much flexibility you have on that. Like should the-
Yeah, I mean.
... extent revenues don't come in line, is that something you can pull back on?
It's not a lot of money, I mean, we put. You know, we have salary increases that take place in December, so, you know, we'll have three full quarters of that. There'll probably be some, you know, some additions to headcount, but we expect to have more revenues too. I mean, we can delay the headcount hires if the revenues don't come in. We do have control over it to some degree, but it's not a step function in expenses.
Got it. Thank you so much.
Our next question is from Jeffrey Meuler with Baird. Please go ahead, your line's open.
Yeah, thank you. It's even Steven Pucelik on for Jeff. I was just hoping to get a little color on some of the non-origination B2B scores and particularly, the marketing and pre-screen side of things. How is that trending into this quarter?
Pre-screen is down slightly from last quarter. Some of that's seasonal. You know, we still see pretty strong pre-screen numbers, but they're not what they were in the fall. We'll, you know, we'll see what happens, you know, after the first of the year. Typically, that's a lower marketing quarter. You know, we'll be monitoring that and, you know, we'll see. It's still strong, but it's not as strong as it was in the fall.
Okay.
In terms of account management scores, account review scores, those are actually stronger. There's a lot of different factors on that, but it's a little bit stronger than it was in the prior quarters.
Appreciate that. Then on the software side of things, is there a usage component that benefited in the quarter or is it just strong growth?
There's some usage in it. I mean, it's a combination. Most of the platform especially, it's all based off of usage. You it can either be increased usage of the same functionality or additional use cases that are brought on board.
Is there like a, I guess a transactional or is there a revenue benefit to, like the increased usage that's specifically tied to that?
Yes. Yes. Yes.
Okay. Okay. Appreciate it.
That concludes our Q&A session for today. It also concludes the call. We thank you for your participation and ask that you please disconnect your line.
Thank you, everyone.