FICO Financial Analysis

Analysis Date: 2/5/2025

Business Model

FICO operates through two segments: Scores and Software. The Scores segment generates revenue through business-to-business (B2B) and business-to-consumer (B2C) channels by providing access to credit and other scores. The Software segment generates revenue from on-premises and SaaS software solutions and professional services, offering pre-configured analytic and decision management solutions and the FICO Platform.

Revenue Sources

• Scores Segment: B2B Scores (predictive credit and other scores for businesses), B2C Scores (myFICO.com subscriptions).
• Software Segment: On-premises and SaaS software licenses and subscriptions, Professional services (support, implementation, consulting).

Revenue Distribution by Channel

• Scores Segment: Business-to-business (77% of Scores revenue in Q1 2025), Business-to-consumer (23% of Scores revenue in Q1 2025).

Income Statement Analysis

• Revenue increased by 15.2% year-over-year, indicating strong business growth momentum.
• Cost of revenue increased at a slower pace (4.7%) than revenue growth, contributing to improved gross profitability.
• Selling, general, and administrative expenses increased significantly by 22.6%, outpacing revenue growth, potentially due to increased investments in marketing and personnel.
• Operating income increased by 18.6%, demonstrating healthy profitability despite higher SG&A expenses.
• Net income increased significantly by 26.0% year-over-year, driven by revenue growth and a favorable income tax benefit in the current quarter compared to an income tax provision in the previous year quarter.

Balance Sheet Analysis

• Cash and cash equivalents increased significantly (22.3%), suggesting strong cash generation or financing activities.
• Accounts receivable decreased by 17.7%, which could indicate improved collection efficiency or seasonal factors.
• Deferred revenue increased by 5.4%, signaling healthy future revenue pipeline.
• Long-term debt increased by 9.7%, potentially used to fund share repurchases or other investments as cash also increased.
• Total stockholders' deficit increased, primarily driven by treasury stock increase from share repurchases, despite net income.

Capital Allocation

FICO's capital allocation strategy is focused on returning value to shareholders through share repurchases. In Q1 2025, the company repurchased $159.7 million of common stock. They also utilize debt financing to support these repurchases, as seen by the increase in long-term debt and borrowings under the revolving credit facility. Business reinvestment is evident through increased R&D spending and capitalized internal-use software costs, although R&D as a percentage of revenue slightly decreased. Dividends are not mentioned, suggesting share repurchases are the primary mechanism for returning capital to shareholders. Management emphasizes using free cash flow for buybacks and maintaining leverage at a comfortable level. (Source: Q1 2025 Earnings Call Transcript, Management's Discussion and Analysis)

Management Commentary

We had another strong quarter and are reiterating our fiscal twenty twenty five guidance.

We reported quarter one revenues of $440,000,000 up 15% over last year.

We delivered free cash flow of $187,000,000 in our first quarter and $673,000,000 over the last four quarters, an increase of 36% over the prior period.

Software segment revenues for the quarter were $204,000,000 up eight percent from the prior year hindered by foreign exchange rate impact.

Platform ARR grew 20% versus the prior year, while non platform grew 1% to $501,000,000 this quarter.

Overall Sentiment: Positive. Management expresses confidence in the company's performance and reiterates guidance. They highlight strong revenue and free cash flow growth, particularly in the Scores segment. While software growth is mentioned as slightly hindered by FX, the overall tone is optimistic about the business outlook and continued execution of their strategy.

Recommendation

Rating: Buy

Reason for Rating: Based on strong financial performance in Q1 2025, including robust revenue and net income growth, strong cash flow generation, and positive management outlook, a 'Buy' recommendation is warranted.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 6:05:37 AM