Altria Group Q2 2023 Earnings Call Transcript

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April 27, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Thursday, April 27, 2023. I'd now like to turn the conference over to Steve Weber.

Operator

Please go ahead.

Speaker 1

Good afternoon, and thank you for joining FICO's 2nd quarter earnings call. I'm Steve Weber, Interim CFO, and I'm joined today by our CEO, Will Lansing. 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 to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995.

Speaker 1

Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning those uncertainties is contained in the company's filings with the on 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 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 G's schedule are available on the Investor Relations page of the company's website atfibo.com or on the SEC's website atsec.gov.

Speaker 1

A replay of this webcast will be available through April 27, 2024. And now, I'll turn the call over to Will Lance.

Speaker 2

Thanks, Steve, and thank you everyone for joining us for our Q2 earnings call. On the Investor Relations section of our website, we posted some that offer financial highlights of our 2nd quarter. I am pleased to report that we continue to deliver strong results with record revenue and growth throughout our business. Today, I'll talk about this quarter's results and our expectations for the rest of the year. As you can see on Page 2 of the presentation, we reported revenues of $380,000,000 an increase of 6% over the same period last year.

Speaker 2

We delivered $102,000,000 of GAAP net income and GAAP earnings of $4 per share. On a non GAAP basis, net income was one $121,000,000 with earnings per share of $4.78 On the SCOR side of the business, we continue to perform well. Scores delivered a record quarter with $198,000,000 of revenue, up 8% in the quarter versus the prior year, as

Speaker 1

you can see on Page 6.

Speaker 2

On the P2B side, revenues were up 16%, driven primarily by increased originations revenues. Mortgage originations revenues were up 90% versus last year. Auto originations revenues were up 13%, Credit card, personal loan and other originations revenues were up 12%. Our B2C revenues continue to face difficult comps And while up slightly versus last quarter, we're down 8% versus the same period last year. In our software business, our FICO platform provides the predicting, analyzing and optimizing customer interactions in real time to make better customer decisions across the enterprise.

Speaker 2

These better decisions build trust and loyalty by delivering hyper personalized experiences through holistic customer management. And the strong results we're delivering demonstrated an industry hungry for these solutions. As you can see on Page 7, we delivered overall ARR growth of 17% And platform ARR growth of 60%. This represents our 14th straight quarter of platform ARR growth in excess of 40%. Again, our customers continue to increase volumes and find new use cases as you can see from our net retention rates shown on Page 8.

Speaker 2

Overall, net retention rate was 114%. Legacy off platform NRR was 105% as volumes grew in many of our customers. Platform net retention rate was 146% Due to expanded use cases driven by the success of our land and expand strategy. And we continue to see strong demand for our software. As you can see on Page 9, Our ACV bookings were up 16% over the same period last year.

Speaker 2

We continue to see a strong pipeline of opportunities as we help our customers to look at strategic mission critical decisioning as they pursue their digital transformation. Finally, I'd like to talk a little bit about our FICO World customer event next month. FICO World attendees will be able to discover how to design, build and deliver a hyper personalized customer experience across every touch point and within every interaction. Attendees will have access to scheduled meetings with FICO's leading thought leaders and experts to discuss Services Providers from North America, Latin America, Europe and Asia Pacific. The conference will reveal new products, FICO Score Alternative Data Innovations, Software capabilities on the FICO platform as well as the company's flagship solutions for AI powered decisions.

Speaker 2

We'll also announce new partnership and other new FICO solutions. We'll talk more next quarter about the event and give more details about how leading financial services I'll have some final comments, including a revision of our guidance in a few minutes, but first let me I'll turn the call over to Steve for further financial details.

Speaker 1

Thank you. As Will said, we delivered another very good quarter in both our Scores and Software segments. Total revenue for the Q2 were around $380,000,000 an increase of 6% over the prior year Or 7% adjusted for divestitures. And our Scores segment revenues were $198,000,000 up 8% from the same period last year. B2B Scores revenues were up 16% over the prior year, driven by increased originations revenues.

Speaker 1

We drove revenue increases in mortgage, auto and credit card personal loan and other originations. This quarter mortgage originations revenues were up 90% from the same quarter last Our originations revenues were up 13% and credit card and personal loan and other originations revenues were up 12% over last year. GSE Scores revenues were down 8% from the same period last year as we'll explain due to difficult comps. As a reminder, that was an area that experienced outsized growth during the refinancing boom, peak in our Q3 of fiscal 2022 1% this quarter versus the Q1 of fiscal 2023. Software segment revenues in the 2nd quarter were $182,000,000 5% from the same period last year, where we had and as a reminder, last year we had a significant upfront license revenue quarter.

Speaker 1

Software revenues recognized over time were $136,000,000 or 74 percent of total software revenues. License revenues recognized upfront or at a point in time were $19,000,000 this quarter and represented 11% of software revenues. Our professional services revenues were $27,000,000 representing 15% of total software revenue. In the Q2, 84% of total company revenues were derived from our Americas region. Our EMEA region generated 7% and the remaining 5% were from Asia Pacific.

Speaker 1

Our software ARR in the 2nd fiscal quarter of 2023 was $613,000,000 a 17% increase over the prior year quarter. Our platform ARR was $152,000,000 up 60% from last year and represented 25% of our total 2nd quarter ARR compared with 18% last year. Our non platform ARR also grew nicely and was $461,000,000 in the Q1, up 7%. As a reminder, all of our ARR numbers have been adjusted for divestitures. Our dollar based net retention rate in the It was 114% overall versus 109% last year.

Speaker 1

Our platform customers continue to show very strong net expansion from follow on sales of new use cases and from increased usage. Net retention rate for platform was 146% in the 2nd quarter. Our non platform customer software usage increased this quarter due to increased volumes and PPI increases. Non platform NRR was 105%. We had a good quarter of software sales with annual contract value bookings of $23,300,000 versus $1,200,000 in the prior year, an increase of 16%.

Speaker 1

As a reminder, ACP bookings include only the annual value of Software sales excluding professional services. Turning now to expenses for the quarter, our total operating expenses were $221,000,000 this quarter versus $205,000,000 in the prior year $205,000,000 in Q1. Much of the increase was due to salary increases, which took effect in December and some monetized time increases. We also had approximately $10,000,000 of non recurring expense

Speaker 2

from a number of small items

Speaker 1

that were incurred this quarter. We will have some one time expense from our FICO rolled event in the Q3, but we do expect the run rate in the back half of the year to increase slightly from the current levels. Our non GAAP operating margin as shown on our Reg G schedule was 49% for the quarter, same as our Q1 of FY 2023. GAAP net income this quarter was $132,000,000 down 3% from the prior year quarter, where again we had a large upfront license deal. GAAP EPS of $4 was up 1% from the prior year.

Speaker 2

Our non GAAP net income was $121,000,000 for the

Speaker 1

quarter, down 2% versus Last year, our non GAAP EPS was $4.78 up 2% from the prior year. The effective tax rate for the quarter was 26%. We expect our full year 2023 recurring tax rate to be approximately 25% to 26%. That expected recurring tax rates before any excess tax benefit or other discrete items. The resulting net effective tax rate is estimated to be about 24% to 25%.

Speaker 1

Free cash flow for the quarter was $88,000,000 For the trailing 12 months, free cash flow was $439,000,000 At At the end of the quarter, we had $167,000,000 in cash and marketable investments.

Speaker 2

Our total debt at quarter end was $1,920,000,000

Speaker 1

With a weighted average interest rate of 5.1 percent, currently about 67% of our total debt is fixed rate. Our floating rate debt is payable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating debt balances in future periods. Turning to return of capital, we bought back 170,000 shares in the 2nd quarter at an average price of $6.84 per share. At End of the quarter, we had $335,000,000 remaining on the current Board authorization and we continue to view share repurchases

Speaker 2

as an attractive use of cash.

Speaker 1

With that, I'll turn it back to Will for his thoughts on the rest of fiscal 2023

Speaker 2

and our revised full year guidance. Thank you, Steve. As I head in my opening remarks, we continue to deliver strong results and I have confidence in our team as we move forward. Our sports business continues to deliver Strong growth even in a volatile macro environment. As I've said in the past, our diversification through different credit verticals means we're less dependent on specific types of lending, which is very important in a rising rate environment.

Speaker 2

On the software side, we continue to prove that market demand for FICO platform is Strong and growing. We're delivering valuable technology to customers looking to use the latest analytic and AI technology to optimize their consumer interactions and revolutionize their businesses through digital transformation and importantly to do it at scale and with low latency. As always, we're focused on execution and remain committed to delivering value to our shareholders and visibility into our progress. Finally, today we're raising our full year guidance as we enter the back half of our fiscal year. There's still a great deal of uncertainty in the markets we serve, but we have line of sight to much of our revenue and are confident We can raise our guidance accordingly.

Speaker 2

We are raising our full year revenue guidance to $1,480,000,000 We're also increasing our GAAP and non GAAP net income guidance. GAAP net income is now expected to be 406,000,000 GAAP earnings per share is now expected to be $16.15 Non GAAP net income is now expected to be $489,000,000 Non GAAP EPS is $19.45 And with that, let's turn the call back to Steve for Q and A.

Speaker 1

Thanks, Will. This concludes our prepared remarks and we're ready now to take any questions you may have. Operator, please open the line.

Operator

Certainly, and thank line of Faiza Alwy with Deutsche Bank. Your line is open.

Speaker 3

Yes. Hi. Thank you so much. I wanted to talk about the updated Revenue guidance of $1,480,000,000 Can you walk us through sort of what's changed? Are there areas of the business where you're feeling more Positive about versus are there areas where you've maybe changed your view around things?

Speaker 3

Thank you.

Speaker 2

Well, I think that it's not so much that things have changed as with the benefit of half a year behind us, We have more confidence in what we expected. And so we're able as you know, we're typically conservative in our guidance. And so we're really Just stating officially that we're comfortable with the direction that things are headed. There's not really any surprises there and there's not any dramatic changes.

Speaker 3

Okay. Understood. Maybe just to follow-up on expenses. Steve, I know you mentioned something about $10,000,000 of expense That were more one time in nature this quarter. Just walk us through sort of what your expectations are for the back Half of the year again on expenses?

Speaker 1

Yes. So we had a number of things that a lot of time they take place throughout the year. A lot of them just kind of happened this quarter.

Speaker 2

We accrued a little bit more

Speaker 1

for incentives, which we probably don't do till the Q3, so we did that now. We had to success our sales events. We had a few other kind of true up things that typically happen throughout the

Speaker 2

year, but we got more

Speaker 1

of them this quarter. So the rest of the year, I mean, we have We're all coming in our Q3, so that's an expense associated with that. But we expect that if anything The expenses of the back half of the year will probably be similar to our 2nd quarter or potentially even drift down in the 4th quarter because there aren't any one time events there. A lot of that depends on the revenue we get to. So, but we don't it looks like there's a step function here, but it's not as much as it It probably looks like on the surface because it's an aggregation of a lot of ones happening in 1 quarter.

Speaker 3

Understood. Thank you.

Operator

Your next question comes from the line of Manav Patnaik with Barclays. Your line is open.

Speaker 4

Thank you. Will, just a broad macro comment, especially since you're raising your guidance. Just a lot of your peers don't seem to be Too worried about the incremental pressure from the bank failures and so forth, but I just wanted to see if you had any unique insight from what you're seeing and how you assess the risks

Speaker 2

I wish that I had unique insight to share with you. As you know, our revenues tend to lag the bureaus, they tend to lag. And so we're not a leading indicator. What we do see is sequentially from last quarter to this quarter, we've stabilized, we seem to be Moving upward a little bit. So that's a positive sign.

Speaker 2

But I wouldn't say that I have that we FICO have any kind of unique Inside into the future. We certainly hadn't felt any fallout right now. We're not sensing any fallout.

Speaker 4

Got it. Okay, that's helpful. And then just on the originations revenues, I think we all have a good sense from the bureaus on the mortgage volumes, but I was just hoping you could give us some color on what auto, card and personal loan did from a volume perspective this quarter?

Speaker 1

Yes, they were both up. Auto was up a little, not a lot, but it was up year over year and covered was also up. We don't need all the details of the piece of it, but they were rolled out at least modestly.

Speaker 4

Got it. All right. Thank you.

Operator

Your next question comes from the line of Kyle Peterson with Needham. Your line is open.

Speaker 5

Great. Thanks. Good afternoon, guys. Just wanted to touch on the software side of the business. The ARR, particularly in The platform side looks really strong this quarter from an acceleration at least in terms of the year on year growth rate Compared to last quarter, just wanted to see if you guys could dive into

Speaker 6

what drove

Speaker 5

That acceleration, especially kind of in an environment where I think there's a lot of speculation, the bank IT budgets Could Titan just given all the ongoing volatility in the market?

Speaker 2

Yes, it's a good question, Kyle. And certainly the backdrop For IT spending and software is a little softer, there's but not for us. So the good news is that our offerings, particularly our platform offering, but our software offerings are so critical And so March, a part of kind of the strategic future for our big customers that they're not getting the same kind of Cancellation and squeeze that some other software products are. We're in fact, we've seen our Sales cycle shortening a little bit. We see continued expansion of existing sales of platform.

Speaker 2

And we're actually running into less competition out there than one might expect. Most of the competition comes from homegrown. There's not really competitors out there who have offerings that are, on a par with ours. Our platform offering is so much more powerful and fully featured and what the customer needs that it tends to be a less competitive kind of situation, a much more of a strategic buy. And so that's really what we're seeing.

Speaker 2

And so no, we have not slowed down in spite of the software spending environment.

Speaker 5

Got it. That's helpful. And then maybe just a follow-up on the software side of the business, In particular, the talent side of things, I know historically you guys have kind of been a bit supply constrained per se, kind of having a hard time Selling seats in some key roles, has that gotten any easier given sort of the labor market Changes,

Speaker 4

call it, in

Speaker 5

the last 6 to 8 months, particularly in white collar tech per se. Just wanted to see if it's gotten a little easier and maybe a part of that contributing to higher expenses.

Speaker 2

I'd say that we have never had any trouble Attracting talent to FICO, not years ago, not last year, not this year, not even when times are tight, When employment is very tight, yes, there are some salary and cost pressure and I'd say that's more a year ago than today. But we have had no issues whatsoever with attracting talent or retaining talent for that matter. I think that we offer Our engineers and our people, super challenging roles. They're working on Industry is meeting critical stuff and they like it. And we've been able to track great talent that way.

Speaker 2

I wouldn't with the exception of what Steve mentioned from a salary and stock comp expense standpoint, I mean, a bonus standpoint, I wouldn't say that there's disproportionate pressure on compensation or anything like that.

Speaker 5

All right. That's helpful. Thanks, guys.

Operator

Your next question comes from the line of Surinder Thind with Jefferies. Your line is

Speaker 7

open. Thank you. I'd like to start with a question on the Scores B2C side of the business. It looked like revenues were sequentially flat quarter over quarter versus the declines that you've seen in the last couple of quarters. Any color there in terms of the dynamic?

Speaker 7

Does it look like things have stabilized at this point? And then maybe in terms of the new additions versus the number of people that are rolling off, any color there?

Speaker 2

I think things have stabilized. It feels like they've stabilized. For myFICO, we've had some success with a free program. And I think for our partners, volumes are stabilizing. So I think That's kind of a general picture there.

Speaker 7

Fair enough. And then in terms of just The dollar based NRR, obviously, there was a material acceleration In the figure from 130% last quarter to 146% this quarter, that reverses the slowing trend that we had been seeing. Can you provide some additional color there? Like how much of that is sensitivity to FX? And then how much of that is just like

Speaker 1

Yes, very little of it. You got to remember, this is a fairly small number of customers. So a customer coming out and really expanding their use cases can have a pretty dramatic impact when they do that. So I mean you're going to have volatility in those in both that number and the ARR number. But I mean we're seeing pretty much cross border with our customers.

Speaker 1

As they start to use it,

Speaker 2

they find additional use cases and

Speaker 1

they drive more volume to it. So we're really encouraged by that.

Speaker 7

Thank you. And then one follow on in terms of when I think about The new clients that you've been adding to the platform or the new use cases, that's consistently been growing at about a mid teens pace. That was true last year. That was true this year. It was true through most of 2022.

Speaker 7

So it doesn't seem like there's really any impact from macro. You've kind of quantified it as there's Maybe not a lot of sensitivity there given the importance of the platform, but can you discuss the conversations you're having with the new clients in terms of How are you quoting them? And what does that pipeline look like at this point? Like the conversions that you're seeing or that we're seeing now, Is that conversations from last year or how when I say last year, meaning a year ago or how should we think about that in the current pipeline?

Speaker 1

Well, for starters,

Speaker 2

I would say the pipeline is as strong as it has ever been. So it's not like we're working off old pipeline from last year. I think that the Future is every bit as bright as the present.

Speaker 1

So I

Speaker 2

would just lay that out there. The conversations are strategic. So we're operating at a higher level in our customers. We're talking the Chief Digital Officer, the Digital Transformation Officer, the C Suite, The CIO, the Chief Risk Officer, the conversation has been elevated And that continues to be the case. And I think that the couple of things to distinguish Our sales approach here are, 1, we have something that nobody else has, which the industry very much wants.

Speaker 2

They want to be able to Have this 360 degree view of the customer and optimize every interaction and leverage all the data that they know about every consumer To make the smartest kind of an interaction they possibly can. And that's an imperative for the industry. And certainly, the biggest And most forward thinking banks and lenders are already well down this path and they see that we have the right offering for that. The other thing is the payback is very rapid. So unlike Some of the software that we sold in the past were it'd be a long sales cycle and then it would be a long install and then the payback might take Couple of 3 years and then it would get the license would be renewed for another 3 years and another 3 years.

Speaker 2

I would say that was kind of the typical software kind of approach 5 years ago. Today, the payback is extremely rapid. It can be within a year. It can be less than a year. And so what and it's very easy to get started.

Speaker 2

You don't have to commit to a monster project to get started. You can start with 1 portfolio with 1 or 2 or 3 use cases, And as a result, it's very easy for our customers to give it a try. And what they do is they try it and they fall in love with it and then they expand. And so I think between the very rapid ROI, the very strong references we get from our customers who talk to our Would be customers and the strategic nature, I

Speaker 1

think those are all the things that are powering this.

Speaker 7

Thank you.

Operator

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

Speaker 8

Can you discuss the traction of your special pricing increases and how much of it is reflected in your updated guidance?

Speaker 2

I mean, if you're asking, is there any special pricing on top of the guidance that we've provided, If that's what you're asking, I would say, yes, there is, but we don't quantify it. I mean, we really there's enough uncertainty out there We'll know what the special pricing is at the end of the year when the numbers are counted. So I would the short version is There is some special pricing above the guidance that we've provided today, but I wouldn't want to quantify today.

Speaker 1

Yes. And George, you followed the point up, you realize we're conservative with the way we guide and we don't want to put the final comment on anything. So we've obviously we'll update what we can. We'll provide more context when we can, but this is pretty much consistent with what we've done in the past years.

Speaker 8

And then aside from guidance, just in terms of what's the receptivity and what's the traction of your special pricing increases?

Speaker 2

Well, they go through. We wind up publishing The new prices and then they go through and they flow through. And If we were to face attrition because of the pricing, I suppose we would start to learn about it now, but we certainly haven't seen anything like that.

Speaker 8

Perfect. Very helpful. And then secondly, you mentioned auto and card volumes are up modestly. Can you describe what you're seeing with origination volumes From a trend perspective, how are they trending? Are things getting better?

Speaker 8

Are they stable?

Speaker 1

I mean, I think card origination is I mean it was very hot at the end of last year, calendar year. It's probably trending down a little bit. Auto has bounced around a lot. It's been pretty stable throughout the last couple of years. But if you're finding you probably get us to the data from industry sources and you're going to get from us.

Speaker 1

And again, it looks like we see it all in the years anyway.

Speaker 8

Got it. Thanks very much.

Operator

Your next question comes from the line of Ashish

Speaker 9

Steve, maybe a quick clarification when you talked about the expense growth in the back half of the year, is that increasing in the back half of the year? Is that Excluding the $10,000,000 one times in the Q2 or does it include that?

Speaker 1

No. I mean, on Run rate basis will probably be pretty flat to that $10,000,000 or maybe that's probably the high end of where it will be. Again, it's a lot of times how much revenue we get. We get revenue above or beyond our guidance. There's some costs associated with that.

Speaker 1

But you can kind of back into it on your model Take our guidance and kind of see what the implied expense is in the back half of the year. But we personnel was up 6%, I think The personnel costs were not all that obviously is payroll increase and headcount, we have vertical headcount expansion. We had some true ups of some incentives both in the U. S. And other parts of the world.

Speaker 1

So there's a little bit of and then we had a number of different kind of one time things that kind of get to that total $10,000,000 number. So there's a lot of noise in the number.

Speaker 2

I don't want people

Speaker 1

to think that our expenses are ramping up that dramatically.

Speaker 9

That's very helpful color. Maybe just a quick question on the FHFA press release that came out on March 23. It mentioned that it currently estimates the biomercial I was just wondering if you had any thoughts on the implementation?

Speaker 1

Your guess is as

Speaker 2

good as ours. It has always seemed like a somewhat aggressive timetable to us, but Time will tell whether it happens at that time or later. But one could imagine that it could happen on the timeframe that's been announced.

Speaker 9

Okay. That's helpful. Thank you. Thanks.

Operator

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

Speaker 6

Yes. Thank you. So software looks great. Look forward to seeing you at FICO World, I guess, next month. I do have another question on the guidance methodology.

Speaker 6

Just want to make sure I'm understanding it correctly. I think you said, Will, that like you took a similar approach To prior years, there was another question and it didn't sound like the environment is all that Different than what you were expecting, but the magnitude of the increase this year was obviously quite a bit less, EPS fine than some prior years, what you did during Q2. So I just I'm not understanding if like you're holding back more Of the pricing benefit this year, given uncertainty or if there's offsets In volumes, you mentioned card getting worse or just anything like that or is this a pretty full View of the calendar 2023 special pricing impact, similar to what you've incorporated in prior years

Speaker 1

Yes, I think it's probably more conservative more conservatism than we've had in the past because So much uncertainty, right? I mean, you go back a couple of years, you're going to pull time completely. So I mean, there was a lot of uncertainty there. We have a fair amount now as well, but we're obviously feeling in a pretty volatile environment where A lot of our peers are cutting their guidance. So we're trying to be as prudent as possible.

Speaker 6

Got it. And then just can you comment on free cash flow? I get that it can be lumpy quarter to quarter. I think we've had a couple Yes.

Speaker 1

Orders in a row now

Speaker 6

where it's above lower. So just what's going on there or any sense of like when you'd expect that to normalize?

Speaker 1

I think it will probably normalize the back half of the year. I think what happens is you see it mostly in our accounts receivable. So I think as our stores revenue jumps up, It hits the receivables and then it takes a while hard to flow through the cash. So a lot of that's fairly late in the quarter. So I think you'll probably see a lot more flow through next quarter.

Speaker 1

There's nothing changing in any of that. So I mean, if you look at it over a longer period of time, you'll see the fall.

Speaker 4

Okay. Thank you.

Operator

And there are no further questions. I'll turn the call back to your presenters For closing remarks, thank you.

Speaker 2

All right. Thank you all for joining today.

Speaker 1

And we look forward to speaking with you again soon. Thank you. This ends the call.

Operator

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

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