FICO - Investment Flash Update @ Morgan Stanley Technology, Media & Telecom Conference, 8 Mar, 2023
REITERATE ADD — FIRESIDE CHAT REAFFIRMS PRICING POWER, PLATFORM TAM, AND POTENTIAL SUM-OF-PARTS UNLOCK
Link to Historical FICO Investment Flash Updates - Link
Link to Qualitative Analytic Bank - Link (Message me for access)
WHAT’S NEW — CHANGE LOG
Management used the Morgan Stanley TMT stage to:
underscore AI-native heritage and differentiate on explainable / regulated AI,
frame the software platform as “next-gen CRM” growing 40-50 % with runway to eclipse Scores,
signal continued score price lifts (CPI-plus) and deep value gap,
hint that a separation of Scores and Software could “unlock $5-10 bn” of latent equity value,
reiterate no slowdown in platform demand despite tighter IT budgets, and
confirm capital-return priority remains buy-backs funded by FCF; leverage will not expand like FY-21/22.
KEY TAKEAWAYS & DATA POINTS
AI positioning: FICO has deployed neural nets since the 1990s; focus is applied + explainable AI for regulated lenders.
Regulatory moat: FHFA mandate of FICO Score 10 T plus longstanding regulator partnership underpins incumbency.
Pricing headroom: Scores priced at “basis-points to low single-digit dollars” against decisions worth hundreds/thousands—ample room to edge closer to value delivered.
Platform scale: ~$100 m ARR, +40-50 % growth; 150 direct reps cover top-200 FIs (<20 % penetrated); expects partner channels to reach rest of market and cross-verticals.
Down-market vs. cross-vertical: Will pursue both Tier-2/3 FIs and non-bank B2C verticals (retail, telco).
Budget resiliency: Digital-transformation ROI < 12 months keeps projects funded even as banks trim discretionary IT.
Capital allocation: Plan to deploy annual FCF (~$500 m) to buy-backs; tone less aggressive on incremental leverage amid 4.9 % blended debt cost.
Sum-of-parts math: Management asserts Scores alone justify current $17.5 bn market cap; software could be worth an incremental $5–10 bn “in next few years.”
QUICK MODEL IMPLICATIONS
No change to FY-23 guide (revenues $1.463 bn; non-GAAP EPS $19.42), but commentary supports:
Scores: confidence in 7 % growth on pricing despite mortgage volumes –40 %.
Software: sustained 40 %+ platform ARR drives FY-24 software growth > 15 %.
We maintain FY-23 EPS $19.80 and lift prelim FY-24 EPS to $22.30 (vs. Street ~21.6).
CATALYST WATCH
January-’23 special price increases flow through Q2 print (late April).
FICO World (May 2023) should refresh pipeline data points.
FHFA Score 10 T implementation timeline (expected guidance 2H 23).
Potential strategic review / structure debate could resurface at June investor day.
ACTIONABLE TAKEAWAY
Maintain overweight; use any pullbacks to build position toward 2.3 % sizing. Upside levers: Q2 pricing beat, continued 45 %+ platform ARR, and clarity on optional score–software separation. Re-evaluate if platform ARR growth dips below 40 % for two quarters or if buy-back pace materially slows.
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.