mention company fair isaac (FICO 0.03%) Probably the first thing that comes to mind is its signature three-digit FICO score, which consumers often see on their credit reports. After all, FICO scores play a vital role in how people get approved for various loans.
Those of you familiar with FICO scores are likely aware of another major part of Fair Isaac’s business, its growing software division. This part of the company uses predictive modeling, transaction analysis, decision analysis, and artificial intelligence to help companies do business better. While the FICO scoring division is a great business, it’s the software division that’s really propelled the stock up 35% this year and to new all-time highs.
Let’s take a look at Fair Isaac’s software business and see what its future could mean for the company and the stock.
Fair Isaac’s software offers a wide range of products that help financial services firms and other companies in many industries conduct business more efficiently. These offerings include productivity tools, machine learning models, data retrieval and mapping solutions, real-time data insights, business outcome simulators, and pre-configured solutions such as fraud prevention.
For example, credit card and payment companies Find Reduced debit card fraud losses on its PULSE network by 40% using Fair Isaac’s software solution. Faithful Digitize credit sources using Fair Isaac’s platform. Non-bank institutions such as ACT, a major testing organization, use the software to automate test development.
Fair Isaac has also developed its FICO platform, which uses cloud architecture to bring together data from multiple sources, gain enhanced insight, and bring it to life through real-time operations and workflows. FICO has moved many of its software decisions onto the FICO Platform and is investing heavily to move nearly all of its software solutions onto the FICO Platform.
Selling this type of software involves a long sales cycle, but the company also gets a fairly strong moat because the software is usually sold as a multi-year subscription. The model also has a land and expansion component so customers can earn more profit if they expand their use of Fair Isaac software solutions.
Strong Growth and Future Opportunities
For the year ended September 30, Fair Isaac’s fiscal period, the company generated approximately $1.38 billion in revenue. Just over half of that came from the FICO Scoring division, while nearly 41 percent came from software (the remainder was professional services). Software revenue was up more than 9% from fiscal 2021, while musical score revenue was up about 8%.
But within the software segment, the company breaks down revenue into non-platform revenue and platform revenue from the FICO platform and looks at it on an annualized revenue run rate (ARR) basis. Platform revenue as a percentage of ARR software revenue rose from 11% at the end of 2020 to about 20% at the end of September. Platform ARR has also more than doubled during the same time frame.
Fair Isaac’s software solutions also have international opportunities, being used by businesses in more than 120 countries. During Fair Isaac’s latest earnings call on Nov. 12. On Sept. 9, chief executive Will Lansing said that despite the difficult operating environment, demand for its software solutions remained strong, particularly on the international front, and that deals had not been delayed or scaled back.
Lansing also said on the call that the company’s target market — the top 200 global financial institutions — Fair Isaac has just over 30 clients using the platform, meaning there’s plenty of avenues to add clients. He also sees significant expansion opportunities for existing customers.
business is heating up
The software segment’s strong outlook also translates into incredibly strong guidance for fiscal 2023, with Fair Isaac guiding for double-digit earnings growth for the fiscal year. Previously, Fair Isaac had raised its performance guidance in the middle of the year and repurchased 2.7 million shares in fiscal year 2022. Clearly, Fair Isaac’s SaaS business is a huge value add to the business and a big reason why the stock continues to outperform.
Discover Financial Services is an advertising partner for The Ascent, a Motley Fool company. Bram Berkowitz has no positions in any of the stocks mentioned above. The Motley Fool recommends Discover Financial Services and Fair Isaac. The Motley Fool has a disclosure policy.