Company Reports

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

Fair Isaac reported a decent fiscal third quarter. Overall revenue grew 12% and scores revenue grew 20%, driven by an 80% increase in mortgage revenue, which benefited from special pricing increases. Overall, we will maintain our wide moat rating on Fair Isaac and expect to increase our fair value estimate of $1,010 by a single-digit percentage. While there are many positive aspects to Fair Isaac’s business model, we regard shares as pricey.

Fair Isaac reported an OK second fiscal quarter. Scores revenue grew 19% driven almost entirely by an 85% increase in mortgage score revenue. Nonmortgage business-to-business and consumer scores revenue were soft. The firm’s software business slowed down a bit, but growth was still healthy. With two quarters left to its fiscal year, Fair Isaac increased its guidance, which was not a surprise to us as the firm’s outlook has historically proven quite conservative. Overall, we will maintain our wide moat rating and $1,010 fair value estimate on Fair Isaac’s shares.

All three credit bureaus—Equifax, Experian, TransUnion—and Fair Isaac have exposure to mortgage volumes, and in recent years, these volumes have proved difficult to forecast. Equifax's 2023 mortgage inquiries were 60% below 2020 levels and 41% below 2019 levels. But it is not just mortgage volumes that are affecting these firms. Regulatory changes at government agencies and outsize pricing increases can be important profit drivers. We see the transition to an optional bi-merge—a credit report with data from just two bureaus rather than all three—for government-conforming mortgages posing the most risk to Fair Isaac, as it does not have the upside that the credit bureaus get from the inclusion of VantageScore, a credit score developed jointly by the three major bureaus. But Fair Isaac also has the greatest upside to differing mortgage scenarios, as it has the highest incremental margins and the most pricing upside.

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

After updating our model on Fair Isaac, we are increasing our fair value estimate on the firm’s shares to $970 from $810 primarily as we are increasing our pricing assumptions in the firm’s business-to-business scores segment as well as our out-year profit growth forecasts. Revenue growth from scores has very high incremental margins and as such, pricing changes almost entirely flow to Fair Isaac’s bottom line. With wide-moat Fair Isaac’s shares trading at roughly $1,270 per share, we believe the firm’s current valuation does not leave enough room for error.

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

Though Fair Isaac maintained its fiscal 2024 outlook, its first fiscal quarter generally missed expectations. Revenue of $382 million, adjusted EBITDA of $188 million, and adjusted EPS of $4.81 were respectively 2%, 6%, and 5% below the FactSet consensus estimates. The culprit appears to be the firm’s scores segment. In addition, the firm’s software segment results were decent in our view, but growth did slow. Fair Isaac’s shares are trading at 54 times the 2024 consensus non-GAAP EPS estimate, which is a 2.4 times premium to the S&P 500 index. This 2.4 times premium is above its 1 year-average of 1.9 times. Overall, we believe Fair Isaac’s valuation leaves little room for error and thus expect a somewhat negative reaction in the firm’s stock. While we recognize many positive attributes of Fair Isaac’s business model, we view the firm’s shares as pricey and we will maintain our $810 fair value estimate and wide moat rating on Fair Isaac’s shares.

After updating our model, we are increasing our fair value estimate for wide-moat Fair Isaac to $810 from $710 primarily as we increase our revenue assumptions for the firm's high-margin scores segment. While Fair Isaac may outperform investor expectations, we believe the firm's current valuation does not provide an adequate margin of safety. Fair Isaac is an attractive business, but we continue to believe credit bureau peers TransUnion and Equifax offer a more compelling risk-reward profile.

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

Fair Isaac reported a mostly in-line fiscal fourth quarter. Revenue of $390 million was in line with the FactSet consensus estimate of $389 million. However, adjusted EPS of $5.01 missed the consensus estimate of $5.29 which is attributable to an elevated tax rate and investment spending in the software segment. Pricing in the firm’s scores segment continues to be strong which we think exemplifies our wide moat rating on Fair Isaac. As is customary, Fair Isaac gave its initial fiscal 2024 outlook; while revenue was in line with expectations, adjusted EPS of $22.45 missed the consensus expectation of $23.70. Fair Isaac’s outlook was not bad in our view and Fair Isaac tends to be conservative. However, Fair Isaac’s shares currently trade at 40 times the consensus 2024 adjusted earnings which leaves little room for error and thus we expect a negative market reaction. Overall, we will maintain our fair value estimate of $710 of Fair Isaac’s shares and we regard shares as pricey at current levels.

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

Fair Isaac reported a solid fiscal third quarter. Revenue grew 14% to $399 million, which came in 4% ahead of the FactSet consensus of $382 million. Adjusted EBITDA and adjusted EPS also beat the consensus estimates by 6% and 8%, respectively. Despite the strong quarter, Fair Isaac only modestly increased its full-year guidance which we attribute to management conservatism.

In initiating coverage on Fair Isaac Corporation, we peg its fair value estimate at $660 per share. Fair Isaac is best known for its FICO scores, and over three quarters of the firm’s profit is from its scoring segment as this segment has very high operating margins. Fair Isaac’s positive business attributes, including strong pricing power, are well appreciated by the market, in our view, and with shares currently trading at approximately $780 per share, we regard shares as moderately overvalued.

Founded in 1956, Fair Isaac Corporation, or FICO, established itself as the industry leader in credit scores, which turned out to be a very lucrative business. Credit scores are used for more than just individual lending decisions; they are benchmarks used by investors, lenders, and the industry overall.

We are dropping coverage of Fair Isaac. We provide broad coverage of more than 1,700 companies across more than 140 industries and adjust our coverage as necessary based on client demand and investor interest.

As Fair Isaac had previously announced, its fiscal fourth quarter came in a little weak. Revenue increased 2% year over year, with modest year-over-year growth of 5% on the services side partially offset by a 12% decline in license sales. Management noted that a few large license sales fell out of the quarter, and it's not uncommon to see quarterly volatility in this area. But management also struck a fairly conservative tone, noting that it has been seeing sales cycles lengthen, suggesting this could be an ongoing issue. Still, from a long-term perspective, the gains on the service side are more important, given the generally recurring nature of this revenue, and the growth rate here is in line with our long-term expectations.

Fair Isaac released preliminary revenue and earnings-per-share figures for the quarter. The quarter will come in below expectations, as the company continues to see delays in application license sales to North American banks. While we don’t view this news as material to the company’s long-term outlook, it does help confirm our view that the growth rate implied by the current stock price is overly optimistic. We will maintain our fair value estimate and moat rating.

Fair Isaac FICO reported good headline numbers for its fiscal third quarter, but a deeper look shows some issues. Reported revenue rose 15% year over year, but all but 1 percentage point of this growth was attributable to acquisitions. The applications segment was the lead top-line performer, buoyed by the acquisitions of Adeptra and CR Software. Further, the company said it is seeing the sales cycle with North American banks lengthen and modestly lowered its full-year guidance as a result. Operating margins excluding one-time items and amortization fell to 21.2% from 24.1%, as the acquired businesses generate lower margins. While the company expects margins to improve as it realizes synergies and expands the acquired businesses, it is worth noting that these businesses appear to only benefit the top line at this point. In our view, the relatively lackluster organic growth supports our thesis that the long-term growth prospects for Fair Isaac are fairly modest, and the growth rates implied by the current stock price are overly optimistic. We will maintain our fair value estimate and moat rating.

We believe that credit scoring, Fair Isaac's main business, has a wide economic moat. However, the rest of the company's businesses are not quite as attractive, and the maturity of its best business will limit growth. The past few years have been difficult for Fair Isaac, given its ties to the financial industry, but the company is moving beyond this headwind.