Executive Summary / Key Takeaways

• FICO maintains a dominant position in the credit scoring ecosystem, underpinned by the ubiquity and trust in the FICO Score, which continues to demonstrate significant pricing power, notably evidenced by the 2025 mortgage score royalty increase.
• The Software segment, particularly the FICO Platform, represents a key growth vector, driven by a strategic "land and expand" approach, increasing customer adoption for diverse use cases (fraud, originations, customer management), and expanding indirect channel partnerships.
• Recent financial performance, highlighted by robust double-digit revenue and EPS growth in the first half of fiscal 2025, reflects the strength of both segments, with the Scores segment benefiting from pricing and mortgage volume recovery, and Software showing ARR growth despite macro-related usage headwinds.
• Management's reiteration of strong fiscal 2025 guidance, forecasting 15% revenue growth and ~20%+ EPS growth, signals confidence rooted in conservative assumptions regarding interest rates and visibility from recurring revenue and booked software deals.
• Key factors for investors to monitor include the pace of FICO Platform adoption and usage growth, the timing and impact of potential interest rate changes on lending volumes, regulatory developments regarding credit scoring standards (especially FHFA timelines), and the execution of the expanded indirect channel strategy.

The Bedrock of Credit and the Evolution of Decisioning

Fair Isaac Corporation, known globally as FICO, was founded in 1956 on a simple yet profound premise: leveraging data intelligently can fundamentally improve business decisions. This foundational principle gave rise to the FICO Score, which has since become the undisputed standard for measuring consumer credit risk in the United States, deeply embedded in the fabric of the financial system. Beyond the score, FICO developed sophisticated software designed to operationalize analytics, enabling businesses across more than 80 countries – from leading banks and credit card issuers to insurers, retailers, and telecommunications providers – to make timely, data-driven decisions at scale. This dual focus on predictive scoring and analytical software forms the core of FICO's business, organized into its two reportable segments: Scores and Software.

The industry landscape in which FICO operates is characterized by an increasing imperative for digital transformation among financial institutions, a growing reliance on data and analytics for risk management and customer engagement, and the emergence of new data sources like Buy Now, Pay Later (BNPL) transactions. FICO's historical journey, marked by continuous innovation in scoring and software, has positioned it as a leader in this environment. While facing competition from major credit reporting agencies like Equifax (EFX), Experian (EXPN), and TransUnion (TRU), particularly in data provision and some overlapping analytical services, FICO's competitive moat is primarily built on the predictive power and brand recognition of the FICO Score and the advanced capabilities of its FICO Platform. Unlike competitors whose strengths often lie in data breadth or specific niche lending areas (like Upstart (UPST) in AI lending), FICO's differentiation stems from its deep expertise in predictive analytics and its integrated decision management technology.

FICO's technological differentiation is a critical component of its investment thesis. At its heart is the proprietary methodology behind the FICO Score, a complex algorithm refined over decades that distills vast amounts of credit data into a single, highly predictive number. This score is not merely a data aggregation tool; it's a sophisticated analytical engine that enables lenders to assess risk efficiently and consistently. The tangible benefits are widespread: it facilitates approximately $2 trillion in mortgage originations annually, streamlines lending decisions, and underpins the secondary mortgage market. Beyond the score, FICO's software, particularly the FICO Platform, operationalizes analytics and AI for real-time decisioning. This platform offers quantifiable benefits demonstrated by customer successes: Lloyds Banking Group achieved a 2.5% credit card approval uplift and doubled new-to-bank consumer loan approvals, resolving over 50 system limitations; Nationwide reduced credit decisioning time by 50% and accelerated strategy rollout by 30%; and Yapı Kredi (YKBNK) reduced fraud losses by 98.7% over seven years, maintaining a card fraud ratio 50% lower than peers. These examples highlight the platform's ability to drive efficiency, improve outcomes, and enable rapid adaptation.

FICO continues to invest heavily in R&D to extend its technological lead. Recent innovations include the development of FICO Score 10 T (which incorporates trended data) and the upcoming FICO Score 11, aimed at enhancing predictive power. The launch of FICO Score 10 BNPL and FICO Score 10 T BNPL signifies the strategic move to integrate new data sources like Buy Now, Pay Later into credit assessments, aiming to improve financial inclusion and risk evaluation. The FICO Score Mortgage Simulator is designed to empower mortgage professionals and consumers by allowing scenario analysis. On the software side, investments focus on new Platform capabilities, including AI integration, open APIs, and the FICO Marketplace, intended to build an ecosystem and expand distribution beyond direct sales. These R&D efforts are designed to maintain FICO's competitive edge, support its pricing power, and fuel future growth, reinforcing its position as a preeminent platform for decisioning.

Performance Reflecting Strategic Strength

FICO's financial performance in the first half of fiscal year 2025 underscores the strength of its core businesses and the early returns on its strategic initiatives. Total revenues for the quarter ended March 31, 2025, reached $498.7 million, a 15% increase year-over-year. For the six months ended March 31, 2025, total revenues were $938.7 million, also up 15% compared to the prior year period. This growth translated into robust profitability, with GAAP net income rising 25% to $162.6 million in the quarter and 26% to $315.1 million for the six months. Diluted EPS saw even stronger growth, increasing 28% to $6.59 and $12.73 for the respective periods.

The Scores segment was a primary driver of this performance. Revenue grew 25% to $297.0 million in the quarter and 24% to $532.7 million for the six months. This was largely attributable to a higher unit price in business-to-business (B2B) scores and increased royalties from indirect channels in business-to-consumer (B2C). Mortgage originations revenue, in particular, showed significant year-over-year increases (48% in Q2 2025, 110% in Q1 2025), contributing substantially to B2B growth. Auto originations also saw growth (16% in Q2 2025), while credit card and personal loan originations were flat or slightly down, reflecting broader bank conservatism in those areas. The segment's operating income grew in line with revenue, demonstrating strong operating leverage, although the operating margin percentage saw a slight decrease in Q2 2025 compared to the prior year quarter.

The Software segment contributed $201.7 million in revenue in the quarter, a 2% increase year-over-year, and $406.0 million for the six months, up 5%. Growth was primarily driven by an increase in license revenue recognized at a point in time and SaaS growth for Platform products, partially offset by a decrease in professional services. Software operating income saw a slight decrease in the quarter (-1%) but a 4% increase for the six months. Segment operating margin decreased in Q2 2025, primarily due to increased third-party data center hosting costs. Key software metrics showed mixed trends: total ARR grew 3% year-over-year to $714.6 million, with Platform ARR growing a strong 17% to $234.7 million (33% of total ARR), while non-platform ARR declined 3% to $479.9 million. Total DBNRR was 102%, with Platform NRR at 110% and non-platform NRR at 96%. Management attributed the non-platform ARR decline and NRR moderation to usage headwinds in Customer Communication Service (CCS) products, reflecting customer conservatism rather than churn or delayed new use cases. ACV bookings for the quarter were $21.8 million, contributing to a healthy pipeline.

Financially, FICO maintains a solid position. As of March 31, 2025, the company held $146.6 million in cash and cash equivalents. Net cash provided by operating activities was strong at $268.9 million for the six months ended March 31, 2025, a significant increase from the prior year, driven by higher net income and non-cash items. The company's total debt stood at $2.53 billion, primarily consisting of term loans and senior notes with a weighted-average interest rate around 5.6%. FICO was in compliance with all financial covenants. Capital allocation remains focused on returning value to shareholders, primarily through share repurchases. The company bought back $207.0 million of common stock in Q2 2025 and $366.8 million for the six months under its $1 billion authorization, with $394.1 million remaining. Management views the stock as an attractive use of cash and aims to manage leverage between two and three times EBITDA.

Outlook and the Path Forward

FICO is reiterating its fiscal year 2025 guidance, projecting continued double-digit growth. The company forecasts revenues of approximately $1.98 billion, representing a 15% increase over fiscal 2024. GAAP net income is expected to be around $624 million, up 22%, leading to GAAP EPS of approximately $25.05, a 23% increase. Non-GAAP net income is guided at roughly $712 million, a 20% increase, resulting in non-GAAP EPS of approximately $28.58, also up 20%.

This guidance is underpinned by management's characteristically conservative assumptions, particularly regarding the macroeconomic environment and interest rates. The outlook assumes that interest rates will not decrease significantly in 2025, a view that management believes is more cautious than some market expectations. This inherent conservatism, combined with the visibility provided by FICO's recurring revenue base and booked software deals, provides confidence in achieving the stated targets.

Looking ahead, management anticipates expenses to be moderately higher in the second half of fiscal 2025, primarily due to events like FICO World and increased marketing activities. However, the overall year-over-year expense growth rate is expected to be lower than in fiscal 2024, contributing to anticipated margin expansion. Free cash flow is also expected to accelerate in the second half of the year. In the Software segment, management expects ARR growth to accelerate in the coming quarters, driven by the conversion of recent strong ACV bookings into recognized revenue, which typically occurs with a 6-9 month lag. While the timing and magnitude of the impact from pricing initiatives beyond the core guidance remain subject to volume fluctuations, the company's strong market position supports its ability to realize value from its offerings.

Despite the positive outlook, several risks warrant investor attention. The fluid macroeconomic environment introduces uncertainty that could impact lending volumes, software usage (as seen with CCS headwinds), and potentially the timing or likelihood of closing new Platform deals. The ongoing antitrust lawsuit presents a legal risk, although management has stated they do not have a material exposure currently. Regulatory developments, particularly the uncertain timeline for the FHFA's implementation of new credit score requirements for conforming mortgages, could affect the pace of adoption for FICO 10 T in that specific market segment, although non-GSE adoption continues strongly. Customer concentration, with a substantial portion of revenue derived from the three major consumer reporting agencies, remains a factor. While FICO manages interest rate and foreign currency risks through various means, these external factors can still introduce volatility.

FICO's competitive positioning remains robust. In the Scores segment, its long-standing relationship with the major credit bureaus and the deeply entrenched nature of the FICO Score in lending decisions, particularly mortgage, provide a significant moat. While competitors like Equifax, Experian, and TransUnion are also major players in the data and analytics space, none possess the same level of predictive scoring authority and brand trust as FICO in the core credit risk assessment market. In the Software segment, the FICO Platform is positioned as a preeminent solution for AI-driven decisioning at scale. Management believes there is no meaningful competition offering the same breadth of features and functionality, making the choice for customers often between building a costly homegrown solution or adopting FICO's proven platform. The strategic focus on expanding indirect channels through partnerships with global SIs like TCS (TCS) and regional players like Fujitsu (6702) and iSON Xperiences is aimed at leveraging their distribution and domain expertise to penetrate new verticals and geographies more efficiently than relying solely on direct sales. This strategy directly addresses a potential vulnerability in global reach compared to larger, more diversified competitors.

Conclusion

FICO stands as a foundational pillar of the credit ecosystem, leveraging decades of expertise in predictive analytics and decision management. The enduring strength and pricing power of the FICO Score, coupled with the growing adoption and potential of the FICO Platform, form a compelling investment thesis. Recent financial results demonstrate the company's ability to deliver strong growth and profitability, even amidst macroeconomic uncertainty, driven by strategic pricing, operational efficiency, and the inherent value of its offerings.

While challenges such as market volatility, regulatory timelines, and competitive dynamics persist, FICO's technological leadership, strategic focus on high-growth areas like the Platform and alternative data integration, and commitment to returning capital to shareholders position it favorably. The reiterated guidance for fiscal 2025 reflects management's confidence in the business's trajectory. For investors, FICO represents a durable business with significant moats, offering a blend of stable, high-margin Scores revenue and the promising, albeit earlier-stage, growth potential of its innovative Software segment. Monitoring the execution of the Platform expansion strategy and the impact of the macro environment on lending volumes and software usage will be key to assessing the realization of this potential.