Greetings, and welcome to the Fair Isaac Corporation quarterly earnings call. During the presentation, all participants will be in a listen-only mode. 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. Should you require operator assistance at any time, please press star zero. As a reminder, this conference is being recorded Thursday, April 27th, 2023. I'd now like to turn the conference over to Steve Weber. Please go ahead.
Good afternoon. Thank you for joining FICO second quarter earnings call. I'm Steve 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 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 that could cause actual results to differ materially. Information concerning those 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 April 27th, 2024. Now I'll turn the call over to Will Lansing.
Thanks, Steve, thank you everyone for joining us for our second quarter earnings call. On the Investor Relations section of our website, we posted some slides that offer financial highlights of our second quarter. I am pleased to report that we continue to deliver strong results with record revenue and growth throughout our business. Today, I'll talk about this quarter's results and our expectations for the rest of the year. As you can see on page two of the presentation, we reported revenues of $380 million, an increase of 6% over the same period last year. We delivered $102 million of GAAP net income and GAAP earnings of $4 per share. On a non-GAAP basis, net income was $121 million, with earnings per share of $4.78.
On the score side of the business, we continue to perform well. Scores delivered a record quarter with $198 million of revenue, up 8% in the quarter versus the prior year, as you can see on page six. On the B2B side, revenues were up 16%, driven primarily by increased originations revenues. Mortgage originations revenues were up 90% versus last year. Auto originations revenues were up 13%. Credit card, personal loan, and other originations revenues were up 12%. Our B2C revenues continue to face difficult comps, and while up slightly versus last quarter, were down 8% versus the same period last year. In our software business, our FICO Platform provides the power of analytics and AI to enable smarter business decisions at scale.
We're focused on helping clients maximize the customer experience by predicting, analyzing, and optimizing customer interactions in real time to make better customer decisions across the enterprise. These better decisions build trust and loyalty by delivering hyper-personalized experiences through holistic customer management. The strong results we're delivering demonstrated an industry hungry for these solutions. As you can see on page seven, we delivered overall ARR growth of 17% and platform ARR growth of 60%. This represents our 14th straight quarter of platform ARR growth in excess of 40%. Again, our customers continue to increase volumes and find new use cases, as you can see from our net retention rates shown on page eight. Overall net retention rate was 114%. Legacy off-platform NRR was 105% as volumes grew in many of our customers.
Platform net retention rate was 146% due to expanded use cases driven by 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 16% over the same period last year. We continue to see a strong pipeline of opportunities as we help our customers to look at strategic mission-critical decisioning as they pursue their digital transformation. Finally, I'd like to talk a little bit about our FICO World customer event next month. FICO World attendees will be able to discover how to design, build, and deliver a hyper-personalized customer experience across every touch point and within every interaction. Attendees will have access to schedule meetings with FICO's leading thought leaders and experts to discuss best practices and innovative solutions designed to solve business challenges.
General session presenters at FICO World include leading financial services providers from North America, Latin America, Europe, and Asia Pacific. The conference will reveal new products, FICO Score alternative data innovations, software capabilities on the FICO Platform, as well as the company's flagship solutions for AI-powered decisions. We'll also announce a new partnership and other new FICO solutions. We'll talk more next quarter about the event and give more details about how leading financial services providers are using the FICO Platform to design innovative solutions to solve business challenges. I'll have some final comments, including a revision of our guidance in a few minutes, but first let me turn the call over to Steve for further financial details.
Thank you. As Will said, we delivered another very good quarter in both our Scores and software segments. Total revenue for the second quarter were around $380 million, an increase of 6% over the prior year, or 7% when adjusted for divestitures. In our Scores segment, revenues were $198 million, up 8% from the same period last year. B2B Scores revenues were up 16% over the prior year, driven by increased originations revenues. We drove revenue increases in mortgage, auto, and credit card, personal loan, and other originations. This quarter, mortgage originations revenues were up 90% from the same quarter last year. Our originations revenues were up 13%, and credit card and personal loan and other originations revenues were up 12% over last year.
B2C Scores revenues were down 8% from the same period last year, as we'll explain, due to difficult comps. As a reminder, that was an area that experienced outsized growth during the refinancing boom. It peaked in our third quarter of fiscal year 2022 and was up about 1% this quarter versus the first quarter of fiscal year 2023. Software segment revenues in the second quarter were $182 million, up 5% from the same period last year, where we had and as a reminder, last year we had a significant upfront license revenue quarter. Software revenues recognized over time were $136 million or 74% of total software revenues. License revenues recognized upfront or at a point in time were $19 million this quarter and represented 11% of software revenues.
Our professional services revenues were $27 million, representing 15% of total software revenue. In the second quarter, 84% of total company revenues were derived from our Americas region. Our EMEA region generated 11% and the remaining 5% were from Asia Pacific. Our software ARR in the second fiscal quarter of 2023 was $613 million, a 17% increase over the prior year quarter. Our Platform ARR was $152 million, up 50% from last year, and represented 25% of our total second quarter ARR, compared with 18% last year. Our non-platform ARR also grew nicely and was $461 million in the first quarter, up 7%. As a reminder, all of our ARR numbers have been adjusted for divestitures.
Our dollar-based net retention rate in the quarter was 114% overall, versus 109% last year. Our Platform customers continue to show very strong net expansion from follow-on sales of new use cases and from increased usage. The net retention rate for platform was 146% in the second quarter. Our non-platform customers' software usage increased this quarter due to increased volumes and PPI increases. The non-platform NRR was 105%. We had another good quarter of software sales with annual contract value bookings of $23.3 million versus $20.2 million in the prior year, an increase of 16%. As a reminder, ACV bookings include only the annual value of software sales, excluding professional services.
Turning now to expenses for the quarter, our total operating expenses were $221 million this quarter versus $205 million in the prior year and $205 million in Q1. Much of the increase was due to salary increases, which took effect in December, and some other type time increases. We also had approximately $10 million of non-recurring expense from a number of small items that were incurred this quarter. We will have some one-time expense from our FICO World event in the third quarter, but we do expect the run rate in the back half of the year to increase slightly from the current levels. Our non-GAAP operating margin, as shown on our Reg G schedule, was 49% for the quarter, same as our first quarter of FY 2023.
GAAP net income this quarter was $102 million, down 3% from the prior year quarter where, again, we had a large upfront license deal. GAAP EPS of $4 was up 1% from the prior year. Our non-GAAP net income was $121 million for the quarter, down 2% versus the same quarter last year. Non-GAAP EPS was $4.78, up 2% from the prior year. The effective tax rate for the quarter was 26%. We expect our full-year 2023 recurring tax rate to be approximately 25%-26%. That expected recurring tax rate is before any e-excess tax benefit or other discrete items. The resulting net effective tax rate is estimated to be about 24%-25%. Free cash flow for the quarter was $88 million.
For the trailing 12 months, free cash flow was $439 million. At the end of the quarter, we had $167 million in cash and marketable investments. Our total debt at quarter end was $1.92 billion, with a weighted average interest rate of 5.1%. Currently, about 67% of our total debt is fixed rate. Our floating rate debt is payable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating debt balances in future periods. Turning to return of capital, we bought back 170,000 shares in the second quarter at an average price of $684 per share.
At the end of the quarter, we had $335 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 fiscal year 2023 and our revised full-year guidance.
Thank you, Steve. As I said in my opening remarks, we continue to deliver strong results, and I have confidence in our team as we move forward. Our Scores business continues to deliver strong growth, even in a volatile macro environment. As I've said in the past, our diversification through different credit verticals means we're less dependent on specific types of lending, which is very important in a rising rate environment. On the software side, we continue to prove that market demand for FICO Platform is strong and growing. We're delivering valuable technology to customers looking to use the latest analytic and AI technology to optimize their consumer interactions and revolutionize their businesses through digital transformation, and importantly, to do it at scale and with low latency. As always, we're focused on execution and remain committed to delivering value to our shareholders and visibility into our progress.
Finally, today, we're raising our full-year guidance as we enter the back half of our fiscal year. There's still a great deal of uncertainty in the markets we serve, but we have line of sight to much of our revenue and are confident that we can raise our guidance accordingly. We are raising our full-year revenue guidance to $1.48 billion. We're also increasing our GAAP and non-GAAP net income guidance. GAAP net income is now expected to be $406 million. GAAP earnings per share is now expected to be $16.15. Non-GAAP net income is now expected to be $489 million. Non-GAAP EPS is $19.45. With that, let's turn the call back to Steve for Q&A.
Thanks, Will. This concludes our prepared remarks, and we're ready now to take any questions you may have. Operator, please open the line.
Certainly, and thank you. If you would 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 that request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Your first question comes from line of Faiza Alwy with Deutsche Bank. Your line is open.
Yes. Hi. Thank you so much. Wanted to talk about the updated revenue guidance of $1.48 billion. Can you walk us through sort of what's changed? Are there areas of the business where you're feeling more positive about versus are there areas where you've maybe, you know, changed your view around things? Thank you.
Well, I think that it's not so much that things have changed as, you know, with the benefit of half a year behind us, we have more confidence in what we expected. As you know, we're typically conservative in our guidance, and so we're really just stating officially that we're comfortable with the direction that things are headed. There's not really any surprises there, and there's not any dramatic changes.
Okay. Understood. Maybe just to follow up on expenses, Steve, I know you mentioned something about $10 million of expenses that were more one-time in nature this quarter. Just walk us through sort of what your expectations are for the back half of the year again on expenses.
Yeah. We had a number of things that, you know, a lot of times they take place throughout the year. A lot of them just kind of happened this quarter. We accrued a little bit more for incentives, which we typically probably don't do till the third quarter, so we did that now. We had the success, our sales events. We had a few other kind of true-up things that typically happen throughout the year, but we got more of them this quarter. The rest of the year, I mean, we have FICO World coming in our third quarter, so that's there's an expense associated with that.
We expect that, you know, if anything, the expenses in the back half of the year will probably be similar to our second quarter or potentially even drift down a little bit in the fourth quarter because there aren't any one-time events there. A lot of that depends on the revenue we get, too. You know, but we don't. It looks like there's a step function here, but it's not as much as it probably as it looks like on the surface because it's an aggregation of a lot of one-time things in one quarter.
Understood. Thank you.
Your next question comes from line of Manav Patnaik with Barclays. Your line is open.
Thank you. Will, just a broad macro comment, especially since you're raising your guidance. You know, just, you know, a lot of your peers don't seem to be too worried about the incremental pressure from the bank failures and so forth, but I just wanted to see if you had any, you know, unique insight from what you're seeing on how, you know, you assess the risks here.
You know, I wish that I had unique insight to share with you. As you know, our revenues tend to lag the bureaus. They tend to lag. We're not a leading indicator. What we do see is sequentially from last quarter to this quarter, you know, we've stabilized and we seem to be moving upward a little bit. That, you know, that's a positive sign. I wouldn't say that I have that we, FICO, have any kind of unique insight into the future. We have.
Got it.
We certainly haven't felt any fallout right now. We're not sensing any fallout.
Got it. Okay, that's helpful. Just on the, you know, originations revenues, you know, I think we all have a good sense, from the bureaus on the mortgage volumes, but I was just hoping you could give us some color on what, you know, auto, card, and personal loan did from a volume perspective this quarter.
Yeah. I mean, they were both up. Auto was up a little, not a lot, but it was up year-over-year. Card was also up. They were both up, at least modestly.
Got it. All right. Thank you.
Your next question comes from line of Kyle Peterson with Needham & Company. Your line is open.
Great. Thanks. Good afternoon, guys. Just wanted to touch on, you know, the software side of the business, the ARR, particularly on the platform side, you know, looks, you know, really strong this quarter from an acceleration, at least in terms of a year-on-year growth rate, compared to last quarter. Just wanted to see, you know, if you guys could dive into, you know, what drove, you know, that acceleration, especially kind of in an environment where, you know, I think there's a lot of speculation, you know, the bank IT budgets, you know, could tighten just given all the ongoing volatility in the market.
Yeah, it's a good question, Kyle, and certainly the backdrop for IT spending and software is a little softer. You know, but not for us. The good news is that our offerings, particularly our Platform offering, but our software offerings are so critical and so much a part of kind of the strategic future for our big customers that they're not getting the same kind of, you know, cancellation and squeeze that some other software products are. In fact, we've seen our sales cycle shortening a little bit. We see continued expansion of existing sales of Platform. We're actually running into less competition out there than one might expect. Most of the competition comes from homegrown.
There's not really competitors out there who have offerings that are on a par with ours. Our platform offering is so much more powerful and fully featured and what the customer needs that it tends to be a less competitive kind of situation, a much more of a strategic buy. That's really what we're seeing. No, we have not slowed down in spite of the software spending environment.
Got it. That's helpful. You know, maybe just a follow-up, you know, on the software side of the business, you know, particularly the talent side of things. I know, you know, historically, you guys have kind of been, you know, a bit supply constrained, you know, per se, kind of having a hard time, you know, filling seats in some key roles. Has that gotten any easier given, you know, some of the labor market changes, call it in the last, you know, six to eight months, you know, particularly in, you know, white collar tech per se? Just wanted to see, you know, if it's gotten any easier, and maybe if part of that's contributing to the higher expenses.
I'd say that we have never had any trouble attracting talent to FICO. Not years ago, not last year, not this year, not even when times are tight, you know, when employment's very tight. Yes, there are some salary and cost pressure, and I'd say that's more a year ago than today. We have had no issues whatsoever with attracting talent or retaining talent for that matter. I think that we offer our engineers and our people super challenging roles. You know, they're working on industry-leading critical stuff, and they like it. We've been able to attract great talent that way. I wouldn't, you know, with the exception of what Steve mentioned from a salary and stock comp expense standpoint, you know, bonus standpoint, I wouldn't say that there's disproportionate pressure on compensation or anything like that.
All right. That's helpful. Thanks, guys.
Your next question comes from the line of Surinder Thind with Jefferies. Your line is open.
Thank you. I'd like to start with a question on the Scores B2C side of the business. It looked like revenues were sequentially flat quarter-over-quarter versus the declines that you've seen in the last couple of quarters. Any color there in terms of the dynamic? Does it look like things have stabilized at this point? Then maybe in terms of the new additions versus the number of people that are rolling off. Any color there?
You know, I think things have stabilized. It feels like they've stabilized. you know, for myFICO, we've had some success with the free program. you know, and I think for our partners, volumes are stabilizing. you know, I think that's kind of the general picture there.
Fair enough. In terms of just the dollar-based NRR, obviously there was a material acceleration in the figure from 130% last quarter to 146% this quarter that reverses the slowing trend that we had been seeing. Can you provide some additional color there? Like how much of that is sensitivity to FX? How much of that is just like the international business there?
Very little of it is FX, frankly. You know, you gotta remember this is a fairly small number of customers, so you know, a customer coming on and really expanding their use case can have a pretty dramatic impact when they do that. I mean, you're gonna have, you're gonna have volatility in both that number and the ARR number. I mean, we're seeing pretty much across the board with our customers, you know, as they start to use it, they find additional use cases, and they drive more volume to it. You know, we're really encouraged by that.
Thank you. one follow-on in terms of when I think about the new clients that you've been adding to the FICO Platform or the new use cases, that's consistently been growing at about a mid-teens pace. That was true last year, that was true this year. It was true through most of 2022. It doesn't seem like there's really any impact from macro. You've kind of quantified it as, you know, there's maybe not a lot of sensitivity there given the importance of the FICO Platform. Can you discuss the conversations you're having with the new clients in terms of h ow you're courting them, what does that pipeline look like at this point? Like, the conversions that you're seeing or that we're seeing now, is that conversations from last year?
How, when I say last year, meaning a year ago, or how should we think about that in the current pipeline?
For starters, I would say the pipeline is as strong as it has ever been. It's not like we're working off old pipeline from last year. I think that the future is every bit as bright as the present. I'd lay that out there. The conversations are strategic. We're operating at a higher level in our customers. We're talking to Chief Digital Officer, the Digital Transformation Officer, the C-suite, the CIO, the Chief Risk Officer. You know, the conversation has been elevated, and that continues to be the case. I think the couple of things to distinguish our sales approach here are, one, we have something that nobody else has, which the industry very much wants.
They want to be able to have this 360 degree view of the customer and optimize every interaction and leverage all the data that they know about every consumer to make the smartest kind of an interaction they possibly can. That's, you know, that's an imperative for the industry and certainly the biggest and most forward-thinking banks and lenders are already well down this path. They see that we have the right offering for that. The other thing is the payback is very rapid.
Unlike, some of the software that we sold in the past where, you know, it'd be a long sales cycle and then it would be a long install and then the payback might take a two, three years and then it would get the license would be renewed for another three years and another three years. I would say that was kind of the typical software, kind of approach, five years ago. Today, the payback is extremely rapid. It can be within a year, it can be less than a year. It's very easy to get started. You don't have to commit to a monster project to get started. You can start with one portfolio with one or two or three use cases, see how it goes, and then expand from there.
As a result, it's very easy for our customers to give it a try. What they do is they try it, and they fall in love with it, and then they expand. I think between the very rapid ROI, the very strong references we get from our customers who talk to our would-be customers and the strategic nature, I think those are all the things that are powering this.
Thank you.
Your next question comes from the line of George Tong with Goldman Sachs. Your line is open.
Hi. Thanks. Good afternoon. With fiscal year 2Q now complete, you have visibility into the flow-through of your scores, special pricing increases. Can you discuss the traction of your special pricing increases and how much of it is reflected in your updated guidance?
I mean, if you're asking, is there any special pricing on top of the guidance that we've provided, if that's what you're asking, I would say, yes, there is. We don't quantify it. I mean, we really There's enough uncertainty out there that, you know, we'll know what the special pricing is at the end of the year when the numbers are counted. You know, the short version is there is some special pricing above the guidance that we've provided today, but I wouldn't want to quantify it today.
Yeah, George, you follow the funnel, you realize we're conservative with the way we guide, and we don't want to put final point on anything. We always, you know, update what we can. We'll provide more context when we can, you know, this is pretty much consistent with what we've done in past years.
Aside from guidance, just in terms of what's the receptivity and what's the traction of your special pricing increases?
Well, they go through. We, you know, we wind up publishing the new prices and then they go through and they flow through. You know, if we were to face attrition because of the pricing, I suppose we would start to learn about it now, but we certainly haven't seen anything like that.
Perfect. Very helpful. Secondly, you mentioned auto and card volumes are up modestly. Can you describe what you're seeing with origination volumes from a, from a trend perspective? How are they trending? Are things getting better?
Yeah.
Are they stable?
I mean, obviously-
Are they getting worse?
-card origination is probably trending down. I mean, it was very hot there at the end of last year, that calendar year. It's probably trending down a little bit, auto bounces around a lot. It's been pretty stable throughout, you know, the last couple of years. You know, if you frankly, you probably get the data from industry sources than you're gonna get from us. Again, it looks like we see it all moving in one.
Got it. Thanks very much.
Your next question comes from line of Ashish Sabadra with RBC Capital Markets. Your line is open.
Thanks for taking my question. Steve, maybe a quick clarification when you talked about the expense growth in the back half of the year. Is that increasing in the back half of the year? Is that excluding the $10 million one-times in the second quarter, or does it include that?
No, I mean, on a run rate basis, we'll probably be pretty flat to that $10 million or maybe, you know, that's probably the high end of where it would be. You know, again, a lot of it depends on how much revenue we get. If we get revenue, that'll probably be on our guidance. There's some costs associated with that. You can kind of back into it on your model if you take our guidance and kind of see what's, what's the implied expenses in the back half of the year. You know, we, you know, personnel is up 6%, I think, the personnel costs were. Not all that obviously is payroll increase and head count. We had very little head count expansion.
We, you know, we had some true ups of some incentives both in the U.S. and other parts of the world. There's a little bit of. We had a number of different kind of one-time things that kind of get to that total $10 million number. There's a lot of noise in the number. I don't want people to think that our, you know, our expenses are ramping up that dramatically.
That's very helpful color. Maybe just a quick question on the FHFA press release that came out on March 23rd. It mentioned that it currently estimates the bi-merged credit implementation could occur by 1st quarter of 2024. I was just wondering if you had any thoughts on the implementation?
You know, your guess is as good as ours. It has always seemed like a somewhat aggressive timetable to us. You know, time will tell whether it happens at that time or later. I mean, one could imagine that it could happen on the timeframe that's been announced.
Okay. That, that's helpful. Thank you. Thanks.
Your next question comes from the line of Jeff Meuler with Baird. Your line is open.
Yeah. Thank you. Software looks great. Look forward to seeing you at FICO World, I guess next month. I do have another question on the guidance methodology. Just wanna make sure I'm understanding it correctly. I think you said, Will, that like you took a similar approach to prior years. There was another question, it didn't sound like the environment is all that different than what you were expecting. The magnitude of the increase this year was obviously quite a bit less, at least at the EPS line than some prior years, what you did during Q2. I just, I'm not understanding if like you're holding back more of the pricing benefit this year given uncertainty or if there's offsets in volumes. You mentioned card getting worse or just anything like that.
Is this a pretty full view of the calendar 2023 special pricing impact, similar to what you've incorporated in prior years with a little bit of conservatism?
Yeah. I think there's probably more conservatism than we've had in the past because of so much uncertainty, right? I mean, you go back a couple years and we pulled guidance completely. I mean, there was a lot of uncertainty there. We have a fair amount now as well, you know, we're obviously dealing in a pretty volatile environment where a lot of our peers are cutting their guides. We're trying to be as prudent as possible.
Got it. Just can you comment on free cash flow? I get that it can be lumpy quarter to quarter. I think we've had.
Yeah.
quarters in a row now where it's been lower. Just what's going on there or any sense of like when you'd expect that to normalize?
I think it'll probably normalize the back half of the year. I think what happens is you see it mostly in our, in our accounts receivable. I think as our stores revenue jumps up, it hits the receivables, and then it takes a while for it to flow through to cash. A lot of that's, you know, fairly late in the quarter. I think you'll probably see a lot more flow through next quarter. But there's nothing changing in any of that. I mean, if you look at it over a longer period of time, you'll see the flow through.
Okay. Thank you.
There are no further questions. I'll turn the call back to your presenters for closing remarks. Thank you.
All right. Thank you all for joining today, and we look forward to speaking with you again soon. Thank you. This ends the call.
That does conclude the conference call for today. We thank you very much for your participation. You may now disconnect your lines.