Fair Isaac Corporation (NYSE:FICO) Q4 2023 Earnings Call Transcript
Fair Isaac Corporation (NYSE:FICO) Q4 2023 Earnings Call Transcript November 8, 2023
Operator: Greetings and welcome to the Fair Isaac Corporation Quarterly Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, November 8, 2023. I'd now like to turn the conference over to Dave Singleton, Vice President, Investor Relations. Please go ahead.
Dave Singleton : Good afternoon and thank you for joining FICO's fourth quarter earnings call. I'm Dave Singleton, Vice President of Investor Relations, and I'm joined today by our CEO, Will Lansing; and our CFO, Steve Weber. 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 with the prior quarter to facilitate an understanding of the run rate of our business. Certain statements made in this presentation are forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many risks and uncertainties that could cause actual results to differ materially. Information concerning these risks and uncertainties is contained in the company's filings with the SEC, particularly in the Risk Factors and Forward-Looking Statements portion 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 the 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 Schedule G 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 November 8, 2024. Now I'll turn the call over to our CEO, Will Lansing.
William Lansing : Thanks, Dave. Thank you, everyone, for joining us for our fourth quarter earnings call. In the Investor Relations section of our website, we've posted some slides that we'll be referencing during our presentation today. I am pleased to report we had a strong quarter, which completed another outstanding year with record annual revenues and record earnings, meeting the guidance that we raised last quarter. Page 2 shows financial highlights from our fourth quarter. We reported fourth quarter revenues of $390 million, up 12% over the prior year; and $1.514 billion of revenue for the fiscal year, up 10% versus the prior year. We delivered $101 million of GAAP net income in the quarter and GAAP earnings of $4.01.
For the full fiscal year, we delivered $429 million in GAAP net income, which equates to $16.93 of earnings per share. On a non-GAAP basis, Q4 net income was $127 million with earnings of $5.01 per share. Full year non-GAAP net income was $500 million, up 10% over last year with $19.71 of non-GAAP earnings per share, which is up 14% versus the prior year. We continue to deliver strong free cash flow with a record $163 million in our fourth quarter. For the full year, we delivered $465 million of free cash flow. We continue to return capital to our shareholders through buybacks. In fiscal 2023, we repurchased 615,000 shares at an average price of $659 per share. In our scores segment, as you can see from Page 6, our fourth quarter revenues were $196 million, up 12% versus the prior year.
For the full year, our revenues were $774 million, up 10% versus last year. On the B2B side, the current quarter revenues were up 21% versus the prior year and up 18% for the full year. This is a strong result, considering the impact of rising interest rates on loan origination volumes. On the B2C side, the current quarter revenues were down 6% versus the prior year and down 8% for the full year due to difficult comps. Fourth quarter mortgage origination revenues were up 147% versus the prior year and accounted for 24% of our scores revenues and 12% of our total company revenues. Auto origination revenues were up 2%, while credit card and personal loan origination revenues were down 2% versus the prior year. We continue to innovate in scores.
We're happy to see traction with our latest score, FICO Score 10 T. This quarter, we announced that Movement Mortgage, a top 10 retail mortgage lender, has become an early adopter of FICO Score 10 T. They're using it to analyze their nonconforming loans in conjunction with the classic FICO Scores. As a first-in-market user of FICO Score 10 T, Movement Mortgage will work with FICO to share early-use insights for nonconforming products to help the mortgage industry understand the benefits of the most predictive credit score in the space. Movement Mortgage's use of FICO Score 10 T will provide opportunities to evaluate risk more efficiently in credit positioning. The improvements in the predictive power of FICO Score 10 T can help lenders avoid unexpected credit risk and better control default rates while making more competitive credit offers to more consumers.
And this all occurs without sacrificing the trusted FICO Score minimum scoring criteria and user experience. A more predictive score will help project cash flows with more precision, potentially increasing the value of securitized assets on the secondary market. In our software segment, we delivered $194 million in Q4 revenue, up 11% from last year. We delivered $740 million in fiscal year revenue, up 10% from last year. We continue to drive strong growth in ARR and NRR through our land-and-expand strategy with expand driven by increased customer usage. As shown on Page 7, total ARR was up 22% with platform ARR growing 53% and non-platform ARR growing 14%. Total NRR for the quarter shown on Page 8, was 120% with platform NRR at 145% and non-platform NRR at 111%.
We continue to see strong demand from new customers. Our total ACV bookings for the year were $94 million, up 10% year-over-year. There continues to be strong demand for our FICO Platform. We've built a strong pipeline of prospects interested in using this advanced decisioning technology to optimize interactions with our consumer customers. And we continue to be recognized for our technology. Chartis ranked FICO #1 for innovation and risk management technology for the seventh consecutive year, and we're in the top 5 as a risk and compliance technology provider for the second year in a row. Forrester identified FICO as a leader in AI decisioning platform, and Juniper Resources awarded FICO Platform the Future Digital Award for Banking Innovation of the Year.
I'll highlight the fiscal year 2024 guidance in just a few minutes. But first, let me turn the call back to Steve -- over to Steve for further financial details.
Steven Weber : Thanks, Will, and good afternoon, everyone. We had another outstanding fiscal year, and we are excited about our momentum as we head into fiscal 2024. As Will mentioned, total revenue for the quarter was $390 million, an increase of 12% over the prior year. Full year revenue of $1.514 billion was up 10% over last year. Scores revenues for the quarter were $196 million, up 12% from Q4 of 2022. B2B revenues were up 21% driven by mortgage originations as other areas within B2B were relatively flat to the prior year. Our B2C revenues were down 6% versus the prior year due to primarily to our myFICO.com business, where our B2C partner business was relatively flat compared to the prior year. For the full year, scores revenues were $774 million, up 10% from the prior year, despite sizable headwinds in the mortgage originations market.
Software segment revenues in the fourth quarter were $194 million, up 11% versus Q4 of 2022, with full year software revenues of $740 million, up 10% from the previous year. This quarter, 85% of total revenues were derived from our Americas region, which is a combination of our North America and Latin American regions. Our EMEA region generated 9% and the Asia Pacific region delivered 6%. Our total software ARR was $669 million, a 22% increase over the prior year. Platform ARR was $173 million, representing 26% of our Q4 ARR, up from 21% in Q4 of 2022. Platform ARR grew 53% versus the prior year, while non-platform ARR grew 14% and ended the year at $496 million. Our customers continue to show very strong net expansion from land-and-expand follow-on sales and increased usage.
Our dollar-based net retention rate in the quarter was 120% for the total software business. Platform NRR was 145% versus 129% in the prior year, while our non-platform NRR was 111% versus 101% in the prior year. Non-platform was driven by customers' increased usage and some CPI increases. Our software ACV bookings for the quarter were $28 million versus $29 million in the prior year. And as a reminder, Q4 of 2022 contained one very large deal. ACV bookings increased 10% for the full year to $94 million versus $85 million in the prior year. And as a reminder, ACV bookings include only the annual value of software sales and exclude professional services. Turning now to our expenses for the quarter. Total operating expenses were $224 million this quarter versus $215 million in the prior year, an increase of 4%.
For the full year, our expenses were $871 million versus $835 million in the prior year, also an increase of 4%. In fiscal 2024, we maintain our focus on efficiencies and are committed to prioritizing resources to our most strategic initiatives. In the next year, we'll be focused on investment to accelerate development and distribution of FICO Platform. We also plan to invest in cybersecurities to continue to remain a top standard for both the protection of our clients and the FICO assets. The incremental investment is relatively modest and built into our guidance. Our non-GAAP operating margin, as shown in our Reg G schedule, was 51% both for the quarter and the full year. We delivered non-GAAP margin expansion of 300 basis points for the full fiscal year.
GAAP net income this quarter was $101 million, up 12% from the prior year quarter. Our non-GAAP net income was $227 million for the full -- for the quarter, up 30% from the prior year quarter. For the full year, GAAP net income was $429 million, up 15% from last year. And non-GAAP net income for the current year was $500 million, up 10% from last year. The effective tax rate for the full year was 22%, including $13 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards, and $9 million reduction associated with the valuation of our R&D tax credits. We expect our fiscal 2024 effective tax rate to remain around 22%, while our recurring tax rate is expected to be around 26%. Again, the recurring tax rate is before any excess tax benefits and other discrete items.
Free cash flow for the quarter was a record breaking $163 million. For the full year, the free cash flow was $465 million. At the end of the quarter, we had $170 million in cash and marketable investments. Our total debt at quarter end was $1.86 billion with a weighted average interest rate of 5.1%. Currently, about 70% of our total debt is fixed rate. Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods. As Will said, we bought back 136,000 shares in the fourth quarter at an average price of $859 per share. In fiscal 2023, we repurchased 615,000 shares at an average price of $659 per share for a total of $406 million. At the end of the quarter, we had $121 million remaining on the current Board authorization, and we continue to view share repurchases as an attractive use of cash.
And with that, I'll turn it back to Will for his thoughts on fiscal 2024.
William Lansing : Thanks, Steve. As we enter fiscal 2024, I remain excited about our future. Both our software and scores businesses are best in class, and our continued investment will accelerate our competitive advantage. We continually look for ways to build our brand and expand our outreach. Last quarter, I talked about our financial literacy efforts. Today, I'd like to discuss the launch of the FICO Educational Analytics Challenge. This program, which we've created for students at historically black colleges and universities, features remote mentoring from FICO data scientists and in-person lectures by FICO's Chief Analytics Officer, Dr. Scott Zoldi. The FICO Educational Analytics Challenge is a program created to help promote diversity in data science, engineering and technology.
Today, we announced the departure of Stephanie Covert, who has led our software business. Stephanie was instrumental in driving FICO software growth and platform transformation, and we wish her well in her future endeavors. Before we open for questions, I'll review our fiscal '24 guidance. While we don't break out our segments, we do expect growth in both our scores and software segments. As with prior years, we expect the pricing initiatives in fiscal '24 to have an additional impact beyond our guided numbers. And because of uncertainty in volumes, it's difficult to estimate the timing and magnitude of that impact. Our fiscal 2023 bookings, strong pipeline, recurring revenues and diversified product portfolio give us considerable visibility into fiscal 2024.
So today, we're guiding double-digit growth for both revenue and earnings, as shown on Page 13 of the presentation. We're guiding revenues of about $1.675 billion, an 11% increase versus last year. We are guiding GAAP net income of approximately $490 million, an increase of 14%; GAAP EPS of approximately $19.45, an increase of 15%; non-GAAP net income of about $566 million, an increase of 13%; and non-GAAP earnings per share of about $22.45, an increase of 14%. With that, I'll turn the call back to Dave, and we'll take some questions.
Dave Singleton : Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.
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