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.

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.

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…

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…

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.

Thanks, Will. This concludes our prepared remarks, and we're now ready to take questions. Operator, please open the lines.

[Operator Instructions] And your first question comes from the line of Faiza Alwy with Deutsche Bank.

So I wanted a little bit more color on 2024 revenues and EPS. One, you mentioned that origination volumes have been slower. It looks like there's been some tightening, but it seems you're confident in the growth around the scores business. It seems that you are taking some pricing on the -- sort of incremental pricing on the mortgage side. So give us some more color around how you're thinking about all those variables around volume and pricing across the various verticals.

So what our forecast reflects is lower volumes than last year, so a decline versus last year, and roughly flat volumes from the level we're at today. That's how we think about the volume side. And as you know, we take price action for CPI, and sometimes in excess of CPI, every year. And so this year is no different. We will be doing that again.

Okay. Understood. And then I'm curious on the expense side. Steve, I think you made some mention around moderate increase in expenses. Give us an idea of how we should think about expense growth in 2024.

Yes. I mean it is pretty modest. I mean you can -- when you build out your model, you'll see there's some additional expense in there but not a lot. But a lot of it's reprioritization, right? We're looking to invest on the software side. We're putting a lot of money into the platform as we've done, and we're putting money into security to make sure that we're secure as possible. So it's relatively modest. But we definitely are adding some additional investment there from what we've seen in the past few years.

Your next question comes from the line of George Tong with Goldman Sachs.

You typically set your rate card in your scores business in the beginning of September. After your scores prices were set, did you notice a negative inflection in credit volumes in September and October, particularly among sub-prime consumers? And if you did, do you believe your scores pricing increases next year are as high as they need to be to sustain your growth momentum?

Yes. I mean that's a good question, George. The volatility on the card side can be pretty dramatic and it could be pretty short-lived. So I mean nothing surprised us beyond what -- we saw that coming, right? The sub-prime has been trending down for quite a while. So there's nothing that happened in September that kind of caught us by surprise. So we're satisfied that we have the right rate card in place.

Great. That's good to hear. And then secondly, software ARR growth accelerated to 22% in the quarter from 20% in the prior quarter. Can you elaborate on your overall software platform strategy and the traction that you're seeing with clients?

Yes. The software strategy is going exactly as expected. We continue to penetrate enterprise platform customers. We've moved to -- we now have 55 of the top 300 financial services customers worldwide on the platform. And that's 55 what we call them EPCs, 55 of these enterprise customers who are using multiple use cases of the platform. If it's just a question of how many have taken the platform, that number is over 100. And so we have pretty good penetration. As I've shared in the past, we actually expect that the expand side of land and expand is significantly bigger than land. So we land the business, and then our customers find all kinds of new ways to use the platform. And the expansion revenue typically exceeds the land revenue by quite a bit, and that has continued. And that's part of why we're seeing the success that we're seeing.

And your next question comes from the line of Ashish Sabadra with RBC Capital Margins.

Just wanted to follow up on that point on the non-platform business. We've seen some pretty robust acceleration there compared to historical levels. There was a call-out on increased usage as well as CPI base pricing. On the usage front, I was wondering if you could provide any incremental color. Is there more modules that are adopted, more feature functionality? And how do we think about this sustainability of this accelerated growth in the non-platform side?

I would say that most of that is from transaction volume growth. We do invest in features and functionality in our historical products and our legacy products. And so it is all about keeping them up-to-date and useful to our customers. Again, as we've discussed in the past, the -- many of these solutions go into a customer of lending institution. And they might go in for a 3-year term initially, but they're typically renewed again at the 3-year mark and again at the next 3-year mark. And we can have these solutions operating for 12 years or more. And so it's incumbent on us to maintain the features and functionality, make sure the security is good and the functionalities that our customers want. We do all that. So we're pretty proud of our classic products. But I would say that the increase that you're seeing is largely just volume-related.

That's very helpful color. And maybe just switching to the special pricing for scores for next year. Our understanding was that mortgage fees were different for Tier 1, Tier 2 and Tier 3 institution. And there's a potential for the Tier 1, Tier 2 to start paying the same cycle fees as Tier 3 for fiscal year '24. Is that assumptions appropriate? I was wondering if you can comment on that.

Yes. We really don't go into the detail around the pricing within the segment. We have studied it, and I think that the price increases that we put into the segment are what are fair and appropriate for the market. We're pretty comfortable we've done the right thing, but we don't go to a lot of detail on that.

Your next question comes from the line of Seth Weber with Wells Fargo Securities.

For the last several quarters, you've talked about some shortening of the sales cycle. I'm wondering if that -- if you're continuing to see that dynamic and if you could maybe just give us some color on U.S. versus international.

We are seeing shortening. I mean the sales cycle a year ago was over a year long. And today, it's 2/3 of that. We're very happy with that progress. There's a lot of reasons for it, but it's kind of the cumulative effect of us moving out the process and scaling up, and things are going faster. I'd also say that the demand is really hot for our offering. The customers are really interested and they're in a hurry to get it going. And it's pretty easy for us to get it up and live. So all those things have contributed to a shorter sales process. And I would say that's true overseas as well as in the U.S.

Okay. And then maybe just going back to the expenses again for a second. The fourth quarter software expenses were a little higher than what we were expecting. Did that -- does that already include some of these new investments that you're talking to? Or will these investments be incremental to sort of this fourth quarter run rate?

Yes. I mean it's maybe a little bit incremental. We do have some onetime expenses, a lot of our -- around incentives in the fourth quarter that ramps up. And a lot of our people are in software. So you're going to see a little bit higher expense there. But our run rate is not going to increase significantly off of where we -- our exit rate from the fourth quarter.

Your next question comes from the line of Jeff Meuler with Baird.

Can you give us any sense of what you included in the guidance versus what you held back around pricing? For instance, last year, I think you talked about the original guide had the CPI-like pricing increases, but it didn't have the specialty increases. Just any way to help us kind of like understand what's assumed versus what could still be on the come?

Yes. Jeff, I know you'd love for us to put a number on it. And you know us, we never do. And so it's not going to happen today either. The way we think about it is we look at the volumes, we make our forecast built around the volumes. We put on a CPI increase, and then we put what some people call special pricing, but we have some additional increases beyond CPI. And then because the timing of those is uncertain, we leave some of that out of the guidance. And so call our guidance conservative. It's designed to reflect the fact that we just don't know how quickly the full-price effect will be ramped into our numbers. And so I hesitate to put any kind of a number on it for you. Is it safe to think about it the way we have in years past? Yes. So think about it the way we do it every year. We haven't changed our methodology.

No, I would say the only change is that there's probably more volatility in terms of volumes had in the past. So I mean, if you could tell me what the interest rate is going to be in 6 or 9 months, I could give you a better idea. But I don't think anybody knows that.

That's right. Okay. And then I guess I was surprised to see the departure of Stephany just given how well software has been doing for a while now. Can you just comment on just any, I guess, reasoning why there's a change now, when you expect to have a new leader announced, if they're likely to come as an internal promotion, external? Just any perspective on that would be helpful.

Yes. Stephanie has done a great job with us. She's done a lot of good things for FICO and for the software business in particular. She decided to pursue other professional opportunities, and so we wish her well with all that. We -- FICO graduates a lot of talent. I mean it's not -- Stephanie is not the first talent who's left us. And we have a really strong team, and I'm confident that our software business will continue very smoothly. In terms of leadership, I'm taking over the leadership of the software business directly, so -- which is what I did before Stephanie took it over. And so I'm pretty comfortable with that. Might we have another leader besides me in the future? We might, but that's not the plan right now. So I'm going to run it for the time being, and we'll see.

[Operator Instructions] The next question comes from the line of Manav Patnaik with Barclays.

Will, just on the software side, I mean, a lot of good numbers this quarter. You talked a lot about the visibility going into next year. So maybe just help us in terms of the '24 guidance. How should we think about the components of the software growth in there?

Software business is growing double digit just like the scores business. I mean it's very strong. And where -- it continues to be strong. Where we haven't decelerated in any way in terms of our platform growth rates, which, as you know, were very high. And we -- trees don't grow to the sky, but we expect that to continue for quite some time. I mean there's a lot of demand. The pipeline this year is stronger even than a year ago. And so yes, we're very optimistic.

And Manav, the business has changed a lot from the days when we had -- when we were relying on term licenses. So now a lot of the deals -- a lot of the revenue we have visibility to because of the deals are already signed, right? We're just implementing them. So we'll be standing up more of these -- the recurring revenue in the coming quarters. So we have pretty good line of sight to that. And then there's still a lot of people who are working with from the customer success side to expand their usage. So we're far less dependent on making sure we sign deals at the end of the quarter to pull revenue in.

Got it. And then, Steve, in looking at the EPS guidance, can you just talk about the assumptions there on -- just help us out with share count. I don't think you include additional buybacks, interest expense and maybe any other items that could change year-over-year.

Yes. I mean the share count, it's anybody's guess. So we kind of try to leave that relatively flat because that's just kind of upside for us. The interest expense, we've actually done a pretty good job of paying down a little bit of debt on the revolver, so we're saving a little bit there. We don't have any big plans to really pay that down. We'll probably be maintaining that debt or depending on how the market works, we're sometimes opportunistic if there's a market downturn. So we're basically planning on that to be relatively flat, but we'll react as we always do, depending on what the market conditions look like.

And there are no further questions. I'll turn the call back to Dave Singleton for closing remarks. Thank you very much.

Thanks, everyone, for attending the call, and a great year.

And all, that does conclude the conference call for today. We thank you very much for your participation. You may now disconnect.