Fair Isaac Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Scores Segment: Launched FICO Score 10 BNPL and FICO Score 10 T BNPL, incorporating Buy Now, Pay Later data. FICO Score 10 T has secured adoption from institutions representing over $313 billion in annualized mortgage originations and $1.52 trillion in eligible mortgage portfolios under servicing. FICO Score Mortgage Simulator penetration is gaining speed in the U.S. industry.
• Software Segment: Hosted FICO World, unveiling next-generation FICO Platform, enterprise fraud solutions, and FICO Marketplace. Entered a strategic collaboration with Amazon Web Services. Utilizes a land and expand strategy, driving ARR and NRR growth.
• Financials: Q3 revenues totaled $536 million, with GAAP net income of $182 million (up 44%) and non-GAAP net income of $211 million (up 35%). Delivered record-breaking free cash flow of $276 million in Q3. Repurchased 284,000 shares in Q3, with over $0.5 billion repurchased in the quarter.

Segment Performance

• Scores Segment: Q3 revenues were $324 million, up 34% year-over-year. B2B Scores drove growth, with mortgage origination revenues up 53% year-over-year. B2C Scores also saw growth, including new FICO Score 10 BNPL and FICO Score 10 T BNPL. FICO Score Mortgage Simulator penetration is increasing. This segment contributed approximately 60.4% of total revenue ($324M out of $536M).
• Software Segment: Q3 revenues were $212 million, up 3% year-over-year. Driven by platform SaaS, with ARR increasing 4%, NRR at 103%, and platform ARR growing 18% year-over-year. This segment contributed approximately 39.6% of total revenue ($212M out of $536M).

Guidance

• Raised full-year fiscal 2025 guidance: Revenue is expected to be $1.98 billion, GAAP net income $630 million (GAAP EPS $25.60), and non-GAAP net income $718 million (non-GAAP EPS $29.15). Fourth quarter revenues are expected to be $505 million, down sequentially due to lower point-in-time revenues, including Insurance Scores licenses and Software licenses.
• Scores originations volumes are expected to be slightly lower due to seasonality and sequential decline in professional services revenues.

Risks

• Macro Environment: Elevated interest rates and ongoing affordability challenges weigh on the mortgage market, keeping loan originations below historical norms.
• Industry Transition: Challenges associated with transitioning to new credit scores (e.g., FICO Score 10 T) and potential impacts of lender choice on pricing, market dynamics, and competition.
• Regulatory and Adoption: Uncertainties related to regulator engagement and industry adoption of new credit scoring models, including implications for pricing and market share.

Question and Answer

• Q: Manav Patnaik asked about FICO 10 T customers, pipeline, and system upgrade.

A: Will Lansing responded that the pipeline is strong, there are customers testing and using it, and modest retooling is required.

• Q: Jason Haas inquired about Mortgage Score pricing.

A: Will Lansing discussed that no decisions have been made on pricing, but there is a perceived value gap and they aim to close it predictably.

• Q: Faiza Alwy asked about software platform feedback and bookings.

A: Will Lansing stated that the platform is growing nicely, with customer interest and good bookings, though IT spend caution exists.

• Q: George Tong asked about FICO 10 T industry migration.

A: Will Lansing mentioned that FICO 10 T is the most predictive score and likely to have a bright future, but transition from FICO Classic will be gradual.

• Q: Kyle Peterson asked about capital allocation and buybacks.

A: Will Lansing and Steve Weber discussed ongoing share buybacks, maintaining leverage, and taking advantage of stock price corrections.