FICO: Investment Flash Update | Barclays Americas Select Franchise Conf. (8-May-24)
CEO COMMITS ≥5 YRS, HINTS AT EVENTUAL SOFTWARE SPIN; PRICE-POWER & BUYBACK ENGINE STAY INTACT—ADD ON WEAKNESS, HOLD FOR OPTIONALITY.
Link to Historical FICO Investment Flash Updates - Link
Link to Qualitative Analytic Bank - Link (Message me for access)
WHAT’S NEW — CHANGE LOG
Management reiterated: (i) CEO succession visibility—Lansing “here for another five years”; (ii) structural road-map—software carve-out or strategic sale “not unlikely” once scale is larger, tax-efficient spin favoured; (iii) platform growth glide-path—>30 % ARR “sustainable”, constrained mainly by sales-capacity; (iv) reaffirmed leverage target 2.5-3× and intent to deploy all FCF + opportunistic debt to buybacks. No change to FY-24 guide posted 25-Apr.
KEY DELTAS BOX
∆ Strategic optionality: First explicit public signal that Scores & Software split is on the table when market values platform appropriately.
∆ Management horizon: Clear ≥5-yr leadership commitment reduces succession overhang.
∆ Platform ARR cadence: long-term run-rate “high-20s/30s %” after 15 quarters >50 %.
∆ Distribution constraint: only ~100 quota carriers; indirect SI/ISV ecosystem + open-API push to accelerate.
∆ Capital return: leverage currently <2.6×; expect accelerated repurchase when spread widens or stock dislocates.
QUICK MODEL REVISIONS
TAPE CHECK
COMPETITIVE EDGE ASSESSMENT
Scores moat endures: regulators, investors and securitisation markets still anchor on FICO; Vantage volumes largely “free inserts,” no paid share loss evident. Mortgage price transparency ($3.50 pull) neutralises political optics while leaving ample gap vs. $6 k closing-cost bundle. In Software, decision-latency IP (15 ms) and 500 MM R&D sunk cost create high replication barrier; competition remains “build in-house”—>$100 MM vs. $4 MM TCV to buy. Open-API + marketplace unveiled in April unlock horizontal TAM and lever partners’ domain expertise.
CATALYST MAP
Jul-24: F3Q print—watch Platform NRR re-acceleration, buyback pace.
Aug-24: FHFA update on conforming 10T timeline; buy-merge decision.
2H-24: Launch of public API/Marketplace—initial SI deals disclosed.
FY-25: Potential capital structure step-up if leverage drifts below 2.3×.
BEAR COUNTERPOINTS & REBUTTAL
Platform ARR decel signals saturation. → Base effect; 30 % on $200 MM still top-quartile; sales-force build + indirect channels can re-accelerate.
Software undervaluation persists; spin unlikely. → Lansing openly floats separation once scale larger; tax-free spin path outlined.
Regulatory push (buy-merge, Vantage) erodes Scores economics. → CEO: FHFA reevaluating; FICO economically neutral; lenders face high switching friction.
ACTIONABLE TAKEAWAY
Maintain 205 bps active weight; add +15 bps on any pullback below 31× FY-25 EPS (~$1,120). Review thesis if Platform ARR growth <30 % for two consecutive quarters or leverage >3.5× without EPS accretion.
Disclaimer
This commentary is for informational purposes only and reflects the author’s views as of the publication date. It does not constitute investment advice or an offer to buy or sell any security. Information is believed reliable but accuracy is not guaranteed. Forward-looking statements involve risks and uncertainties. The author or affiliates may hold positions in securities mentioned. Conduct your own due diligence or consult a professional before investing.