$FICO Fair Isaac Q3 2025 Earnings Conference Call

Thanks, Dave, and thank you everyone for joining us for our third quarter earnings call. In the investor relations section of our website, we've posted some financial highlight slides that we'll be referring to during this earnings announcement. We had another strong quarter, increasing our fiscal year 2025 guidance. As shown on page two of the third quarter financial highlights, we reported Q3 revenues of $536 million, up 20% over last year. We reported $182 million in GAAP net income in the quarter, up 44%, and GAAP earnings of $7.40 per share, up 47% from the prior year. We reported $211 million in non-GAAP net income in the quarter, up 35%, and non-GAAP earnings of $8.57 per share, up 37% from the prior year. As shown on page 10, we delivered record-breaking free cash flow of $276 million in our third quarter. We continue to return capital to our shareholders through buybacks, repurchasing 284,000 shares in Q3. We repurchased over half a billion dollars of shares this quarter, the largest single quarter buyback in FICO history. In our Scores segment, as shown on page six of the presentation, our third quarter revenues were $324 million, up 34% versus the prior year. While B2B scores was the key driver of growth, we also saw encouraging growth in B2C scores. FICO Score 10T is the most predictive broad-based credit scoring model in the US industry today. Through our early adopter program, participating clients are already seeing measurable benefits. Even since the recent FHFA announcement, we signed our latest lender deal just last week. And we've now secured adoption from institutions representing over $313 billion in annualized mortgage originations and approximately $1.52 trillion in eligible mortgage portfolios under servicing. All of which underscore the strong momentum and confidence in FICO Score 10T. Lenders in the program have been able to validate the power of FICO Score 10T in real world mortgage underwriting, in loan production, in execution, and in servicing. This quarter, we announced the launch of FICO Score 10 BNPL and FICO Score 10T BNPL. These are the first credit scores from a leading credit scoring provider to incorporate buy now, pay later data. These scores will provide lenders with greater visibility into consumers' repayment behavior, enabling a more comprehensive view of their credit readiness, which ultimately improves the lending experience and will expand financial inclusion by helping more consumers gain access to credit. These scores will initially each be offered side-by-side with existing versions of the FICO Score at no additional fee from FICO. This approach allows lenders to evaluate the new BNPL-enhanced credit scores while continuing to use FICO's industry-leading models that they use today, ensuring a seamless transition and added value. Lastly, our FICO Score Mortgage Simulator penetration is gaining speed in the US industry. We now have multiple resellers and mortgage technology platform providers, hundreds of active lenders, and thousands of orders placed. In our Software segment, we delivered $212 million in Q3 revenue, up 3% from the prior year. The revenue increase was driven mainly by growth in platform SaaS. We continue to drive growth in ARR and NRR through our land and expand strategy, with expand driven by increased customer usage. Pages seven and eight of our investor deck highlight that total ARR increased by 4%, with total NRR at 103%. Both driven largely by the FICO platform. ACV bookings for the quarter were $26.7 million compared to $27.5 million in the prior year. With the help of product innovations announced at FICO World, our pipeline is stronger today than this time last year. Before passing on to Steve, I'll highlight our strong innovation in the software business. The FICO platform revolutionizes how organizations make decisions and apply intelligence across their customer lifecycle. Innovation is at the core of our ability to power an intelligent enterprise. This quarter, we hosted FICO World, bringing together customers and partners from around the world. Participants collaborated on how the FICO platform makes real-time decisions at scale and optimizes interactions with consumers. On the main stage, we unveiled innovations spotlighting advancements that will shape the future of decisioning and enterprise AI. We will bring the next generation FICO platform, enterprise fraud solutions powered by the FICO platform, and the FICO marketplace to general availability in the second half of calendar 2025. These innovations will bring new use cases to the market. They will enable smarter, explainable outcomes. They'll improve performance, speed of deployment, and yield better customer ROI. On the AI frontier, we leveraged our AI principles—trustworthy, ethical, explainable, and responsible—and provided a sneak peek of the upcoming FICO Focus foundation model, the FICO Focus language model, and the FICO Focus sequence model built for financial services, delivering greater accuracy, explainability, and control in high-stakes domains. This will be released for general availability this calendar year. Our industry analysts are delighted with our innovation. Forrester recently recognized the FICO platform as the leader in AI decisioning platforms, for the fourth time. AI decisioning platforms transform how organizations operationalize both human intelligence and AI at scale, enabling faster, more accurate decisions across complex business processes. AI decisioning is an important enabler for agentic AI, which is natively available in the next generation of the FICO platform. Our partners continue to value our innovation. In the quarter, we signed a new strategic collaboration agreement with Amazon Web Services. Under the new agreement, FICO and AWS will amplify their work to bring more organizations worldwide the power of AI-driven automated decision workflows with the FICO platform. In addition, FICO will broaden its participation in AWS partner programs to accelerate client adoption of the FICO platform. Let me now pass it over to Steve to provide further financial details.

Thank you, Steve. Elevated interest rates and ongoing affordability challenges continue to weigh on the mortgage market, keeping loan originations below historical norms. While the macro environment remains fluid, our strategy, our innovation, and our execution remain disciplined and consistent. I'm pleased to report that today we're raising our full-year guidance as we enter the fourth quarter of our fiscal year. Revenue guidance will remain at $1.98 billion. GAAP net income guidance is $630 million with GAAP earnings per share of $25.60. Non-GAAP net income guidance is $718 million with non-GAAP earnings per share of $29.15. Before we take questions, I'd like to discuss the interim FHFA decision and how we are engaging with the industry. First, I'd like to emphasize that the FICO Score is the industry standard measure of consumer credit risk in the US. The FICO Score is the backbone of safety and soundness in the mortgage industry. Over the last 30 years, the FICO Score has fundamentally transformed the mortgage industry, enhancing stability and liquidity in secondary markets, standardizing credit evaluation for investors, expanding fair and objective access to credit, and empowering cost-effective and sustainable home ownership for Americans. FICO Scores are used across the US and internationally for more than just mortgages. In the US, 99% of all FICO Scores are freely chosen by market participants outside the mortgage market. In the non-conforming mortgage market, FICO is also widely used. Classic FICO was specified over 20 years ago for use by the GSEs while they were publicly traded companies and before the FHFA even existed. As the mortgage industry standard, thousands of industry participants use models incorporating Classic FICO. FICO Scores are critically relied on throughout the mortgage credit ecosystem: in mortgage insurance, in underwriting, in pricing models, in investor credit risk and prepayment models, in models used by the GSEs, in those used by mortgage insurers, by investors, and by prudential regulators for capital requirements, and by credit rating agencies for mortgage-backed securities ratings. Therefore, Classic FICO is critical to driving investor pricing of mortgage-backed securities and ultimately the cost consumers pay. Our innovations are best-in-class, including our latest innovation, FICO 10T, FICO 10T BNPL, and the FICO Score Mortgage Simulator. As you all know, FICO 10T was approved by the FHFA and remains the most predictive general-purpose credit scoring model in the US. While previous FICO Score versions included rental, telco, and utility data, FICO 10T also now includes trended data. During the process required by the Credit Score Competition Act, the GSEs originally concluded based on predictiveness and accuracy that FICO 10T significantly outperforms VantageScore 4.0. We join a long-standing industry demand that FHFA release that analysis and the recommendation of each of the GSEs publicly as part of this process in the spirit of transparency and responsible policymaking. We recently posted a white paper that reached the same conclusion, which can be found on our website. As for lender choice, the FHFA has long rejected the practice because it undermines the safety and soundness of the enterprises and their counterparties, damaging liquidity in the $12 trillion mortgage industry. Lender choice encourages mortgage participants to shop for the most lax score, which drives unavoidable gaming and adverse selection for all risk holders. It creates a race to the bottom by incentivizing score providers to weaken their credit decision criteria to score more consumers and win more business with their score, which will lead to increased costs for consumers. Lender choice will result in higher capital requirements from regulators that the holders of mortgage risk will have to bear, and American taxpayers will bear significant additional risk. Any initiative to promote competition and ultimately lower cost should include the best score, which is FICO Score 10T. FICO Score 10T's superior predictiveness will drive significant loss avoidance savings for market participants and billions of dollars of savings for consumers. Lastly, so long as there is a tri-merge mandate coupled with the credit bureaus' common ownership advantage score, lender choice will harm competition rather than foster it because it further entrenches the credit bureaus' market power. In speaking to numerous market participants since the FHFA announcement, it's clear there are many significant outstanding questions by the industry. FICO will continue to remain engaged with market participants, the GSEs, the FHFA, and other stakeholders. With that, let me turn this call back to Dave and we'll open up the Q&A session.

Good questions, Manav. I'd have to get back to you with the exact number of customers, but I would tell you that the pipeline is strong. There are customers testing it now, and customers who are using it now. There is a certain amount of retooling required, but it is modest.

We are not aware of anyone moving to VantageScore since the announcement. There are significant challenges at every step of the way. With the FICO Score, which has been in place now for over 20 years, virtually every participant in the industry has built models and infrastructure around that score. It's the only score that has actually been in use and for which we have data going through a full economic cycle, including the 2008 downturn. Anytime you make any kind of a move away from that, you have to think through the implications for remodeling. I'm talking about everything from consumers to mortgage originators to lenders, to the government-sponsored entities, Fannie Mae and Freddie Mac, and downstream to the securitization market, the mortgage-backed securities players, the mortgage insurers, and ultimately the prudential regulators. All of these participants, or nearly all of them, have models that are built and have risk assessment understood around the FICO Score. So it's not a simple thing to just swap three digits out and swap new three digits in. It really isn't that simple. So I would say there are significant obstacles, and I think that's why the industry has a lot of concerns and is thinking through under what circumstances how it could work.

I think probably everyone on this call is curious about what FICO's pricing strategy is going forward in light of some of the pronouncements from the FHFA. Here's what I would say. First of all, no decisions have been made. We make our decisions about pricing towards the end of our fiscal year, and they go effective January 1 of the subsequent year. So it's early days still. What I would say is that we continue to believe there's a pretty big value gap between what we charge and the value we provide. So we're always looking at how we are going to close that gap. We don't want to do it in a reckless way. We don't want to do it in a rapid way. We want to do it in a very understandable, predictable way so that the people affected can budget for it and see where it's going. So we continue to be committed to that philosophy on price change. I would just say I'm not sure how much different the world is today after these pronouncements because we have been competing with VantageScore virtually everywhere for the last 15 years, and we remain the industry standard for all kinds of good reasons. Obviously, mortgage is an important business for us and a lot of people focus on mortgage pricing, but we welcome competition. At some level, the way we go about running our business is unchanged.

Well, we have always been relatively close to the people at FHFA and at the GSEs, at Fannie Mae and Freddie Mac, because they rely on our data. They build models around the FICO Score. They're interested in the innovations coming along, and frankly, we've just been through a multi-year process in which they were deeply involved in evaluating the benefits of FICO Score 10T. So those relationships are in place and the communication is there, and I would imagine that would continue with respect to other industry participants. I believe that there's a lot of industry input still to come on the latest recommendations because we went through this multi-year process with a lot of industry input, with all kinds of evaluation and analysis, and this is a fairly rapid reversal of the conclusions that process brought us to. So I think quite a few members of the industry have been taken a little bit by surprise. But I'm confident that given the importance of safety and soundness in the industry and the importance of the mortgage market in the United States, rash things will not occur. Careful, thoughtful, measured analysis and evaluation will occur. So some of the problems that we've been pointing out around gaming and adverse selection and risk to safety and soundness, I don't imagine that those issues will be ignored. I imagine they have to be wrestled with and evaluated. So we participate in that, but frankly, it's not just a FICO thing; it's really the whole industry.

Every year we look at everything. We do billions and billions of scores per year, and each year as we think through our growth strategy, we think about different parts of the market. That continues this year as it has in every year of the last decade. So again, no real change in terms of whether we look broadly across the portfolio to see where the growth opportunities are. So I think that's largely the same.

We continue to grow nicely. We continue to have customers very interested in the platform. We're bringing them on. I think that we are not completely immune to the care that goes into IT spend right now, but we feel pretty good. We're not growing at the rate we were a couple of years ago, but we're growing nicely.

The rate we were over the last 40 quarters. We're more like the rate we have been the last several quarters. I continue to hope that that'll tick upward. I mean, I would love to see us growing in the 20s in the platform. And our bookings feel pretty good and so from a visibility standpoint, we think that's potentially achievable. So we'll have to see.

Yeah, I mean there's most of it's related to pricing. Obviously, we had some pricing there. There was a little bit of a growth on the volume side as well, but most of it's related to pricing. I don't think it was a significant shift in mix. You know, we have seen in the past sometimes the mix shift between the different tiering levels can have an impact, but there wasn't a lot of that. It was primarily just a combination of price and volume.

You know, I think that that's going to be a decision made by the industry. FICO 10T is available. It's been approved by the FHFA. There are lenders using it today and we imagine that will continue. It really is far and away the most predictive score and so if you're in the risk business, if you actually retain any kind of risk, you care about these things. And so I think that leads us to a pretty bright and rosy future for 10T. That said, there's a lot of reasons why in parts of the industry we're in 10, we're in FICO what we call FICO classic, and that's likely to continue for quite a long time. It's a highly tuned optimized score developed over 20 years with 20 years of models built around it with all the historical data that you could possibly need. And so I don't imagine the switch away from classic will be rapid. But to the extent that you have people who bear the risk, who care about the risk, 10T is a pretty good alternative.

You know, we have always believed that what would happen with the platform adoption is we would initially penetrate a large number of the top 300 global financial institutions and then the growth would shift more to expand. So we very much a land and expand strategy and over the last several years we've now penetrated roughly half of the top 300 financial institutions globally. And so it's not surprising to us. It's exactly per our plan that the shift is now coming more in the direction of a bit more expand business and not quite as much land business. That's not to say that we don't win new customers. We are. But the customers who've been using it for a while, they very much expand their usage. And so we're seeing more revenue there.

Well, we would like to see the FHFA and the GSEs release the data in the evaluation process that led to 10T being identified as the most predictive score in the market. We've obviously done that analysis independently and we've put it into a white paper which you can find on our website. There are some pretty significant advantages to 10T. It's more predictive. It has higher KS. What does that translate into? It translates into lower credit defaults than you would get with classic FICO and lower credit defaults than you would get with Vantage score. So, there's a real benefit that comes with it and yet it's a new score and so it takes time to adopt and there's all the transition issues that go with that.

I think that the transition for existing platform customers to the new FICO platform will be very straightforward. Seamless is probably an overstatement, but straightforward because we planned for it and it will work nicely. I think that the benefits of the platform are more realized around the returns to scale that we get. If we have a lower cost structure in serving our customers, that'll translate into lower pricing for them. And I think those are some of the benefits. There's definitely a cost benefit. And then the new platform has a lot of new features and ease of use. And so I think you'll see some of that. I think our customers, existing platform customers and new ones, will be delighted with the new platform.

Well, thank you for that question. You know, we're always looking for ways to provide more value and benefit to our customers and to potential new customers. And an obvious place for us to do it is to give the securitization market, the downstream investors, the ability to refresh the score. And so today, the pricing and models are typically built around the score that was used when the mortgage loan was originated. But over time that becomes a stale score. It's frozen. It's not dynamic. And so we are very much looking at how we would be able to deliver to the securitization market the ability to refresh those scores.

Well, it's funny how people talk about moats around the FICO business. I mean, what is the moat really? The moat is that we have the most predictive score. That's the moat. If you're in the business of measuring risk and you benefit when you reduce the risk and you suffer when the risk comes home to roost, you want the most predictive score. You want to avoid as much credit default as possible. That's what you achieve with FICO 10T. And with respect to FICO Classic, I would say it's also very, very good. And it's not just very good for a 20-year-old score. It's very, very good in absolute terms. Not as good as FICO 10T, but still very, very good. And it has the advantage of having been the backbone of the system for all this time. And so it's extremely well understood. All the models, everything's optimized around it. And that's truly the moat. It's not some government conferred monopoly. That's not what makes us successful.

Thanks for that. We have always believed that we should run FICO with kind of an optimal capital structure and not have on hand more cash than we need. And we've historically returned it through share buyback and I would expect that will continue. We've obviously done a lot in the last quarter, but we've done a lot in the last 13 years and that'll continue. We say that we're not market timers. We target spending our free cash flow on stock buyback each year but over a period of time that results in the leverage dropping to levels that are unacceptably low and so periodically we dial up the amount we buy back to maintain a healthy level of leverage somewhere between two and three times. We also are mindful of corrections in the stock price. So when you see things like what have occurred over the last couple of months, that represents a big opportunity and so do we lean into that? Of course we do and you can see it in the buyback pace that we had over the last quarter. We have a lot of dry powder, a lot of capacity and although we're not going to spend it all in one week, we're buyers at this level.

Kyle, we lost you.

I think we lost Kyle. We lost the second half of that question. I was going to say operator, we can just go to the next question and we'll see if Kyle jumps back in the line.

No. It's a good question and we do not see any traction of Vantage Score gaining market share. As I mentioned earlier, we've been competing with Vantage Score for a very long time, well over a decade, and we have not experienced any kind of significant share loss to Vantage. And I would say that's because of the two things that we talked about before. One is that we have the best score and second that there's a lot of benefit to working with the industry standard which is FICO.

You know, that's a question no one can answer because it hasn't happened.

Well, I think it's up to the FHFA to decide to implement and I think from an industry standpoint, you don't want to stagger implementations of multiple scores because it requires much more complicated retooling on the part of the industry. So, I would imagine that we're going to get to a point where 10T is not just approved, but implemented sooner rather than later. So we'll see. We're in a conversation with the FHFA about how to make that happen.

I think a lot of it's coming out of FICO World. We saw a lot, we developed a lot of new functionality as we'll talk about and there's a lot of excitement at FICO World. So, with that coming online, there's just a strength in our pipeline. We see a lot of people that see the advantage of the current platform and with the new version coming online, they're excited about that. So, we think there's just a lot of industry understanding it more and having more proof cases. At FICO World, we had a lot of companies get up and talk about how they've been successful using the platform. So, you end up at a point in time where you start gaining some momentum and that's what we're seeing now.

A little early to say. I mean, we're optimistic. Every one of these things helps us, but we'll just have to see how that plays out.

We are working with them to get the data out.

But are you talking about mortgage or across the board?

Across the board. Mortgage volumes across the board are down. They're, from the peak, not down as much as in mortgage elsewhere, but down some. Which gives us a lot of optimism about volume growth going forward, particularly in a declining rate environment if that ever happens. So I think there's upside there. I'm not sure exactly what you're getting at, but...

Oh, so our scores are being used more widely than ever. We introduced new scores. We have all kinds of new scores based on alternative data. We talked about the BNPL score. We have scores that are built around telco and utility payment data off the Equifax NCTUE plus database. So we're finding adoption of additional scores and scores are being used more frequently than they were in the past in things like account management. So it's not just like the scores volume goes up and down with GDP. I think that it's fair to say that we're finding new uses and expanding market for scores.

Yeah, I think that everything is always under review. I mean there are many other pricing models besides the ones that we've used historically and so we look at everything and there probably are models that we don't use that would be better for everybody, that would be better for the industry, but again because it's such a big and important industry you don't make any kind of changes rashly. You study them and you figure out whether it's going to work and the last thing we want is unforeseen consequences. And so although we've evaluated many other pricing models and obviously that includes pricing differently in different markets, but it also goes to structure of how we price and how the IP is used and how the IP is monetized. We look at it all the time but I think whatever we discover, and we've discovered some pretty interesting things, we think about implementing with quite a big measure of caution.

No. I mean, we don't separate that out, but you can kind of take a look at our overall numbers in terms of how much point in time revenue we had that's in the queue and you can, that's included in that number. So, you can kind of look at it that way. I mean, it's a pretty significant number for this quarter.

Well, we only got two months to go, so there's not a whole lot of uncertainty. We guided what we got. We're pretty confident in that and if I was to say something else, then it wouldn't really be guidance anymore. So that's the number we put out there. And again, when we guide for the full year, there's a lot of things that can happen, but when you're only guiding with a couple months left, there's not nearly as much uncertainty.

You ask that again, which you talking about revenue or the expense?

The biggest piece of expense in our scores business is in our BTOC business where we actually have a cost of goods sold, higher cost of goods sold, we have to pay for credit file and data. And so as that grows, you're going to see a little bit of movement on the expense side. Apart from that, I can tell you that we have hired more people and we're doing a lot more innovation there than ever before. And so that also drives a bit of expense, but not enough to move the needle dramatically. And I think one of the things you'll see there is that it's a relatively low cost model. So when you have some additional incremental cost it can skew the numbers because the margins are so high, but it is a fairly fixed cost model except for the BTOC piece which I mentioned.

Yeah, we're probably at a higher level. Again, it's not all that significant in the scheme of things, but it's going to fluctuate a little bit. We're putting some more money into marketing, particularly on the BTOC side. So we see some opportunities there that we're pursuing and that's what's driving the biggest portion of it. Again, because we think, we did some testing on this last year and we saw there's a pretty big payback on this. So, we're willing to invest a little more heavily in this because it drives some pretty good growth on the BTOC side.

There's been external third party analysis done on this and it's in the mid 90s probably. If you look at securitizations that take place, it's very high. It's in the high 90% range. So it's hard to come up with exact numbers on this because it's not really reported anywhere, but from third parties that have done the actual work on this, it's a pretty high number.

I'm sorry. You re... the amount of the raise on the guidance relative to the beat looks like you beat by more than you raised. Was conservatism or anything to kind of call out just based on where the quarter versus how much the full year guidance was increased?

Yeah. Well, I mean, we did have, we talked about in the script, we've got some one-time expenses that we're going to have in the fourth quarter, and there's some of that that probably wasn't in earlier in the year. There's some things, as we get to the end of the year, we can take some charges and we've done in the past and I think we'll probably be doing some of that this year as well. So, that's probably the delta.

No, I think if we take where we are today as the status quo, which is what it is, I think you're looking at years to figure out how market share settles out because it's not easy to switch and because we have a better score. So under what circumstances and whether at all there's share shifts, we'll see, but it won't happen fast. It will take time.