FICO: Investment Flash Update | Morgan Stanley TMT 2024 (3.5.2024)
FICO PLATFORM GAINS STEAM, SCORE PRICE-POWER INTACT—VAL-CREATIVE BUYBACKS KEEP EPS COMPOUNDING; STAY OW, USE DIPS.
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 >40 % ARR growth for FICO Platform, called Q1 software margin “the bottom,” and confirmed FY-24 buy-back fire-power via 2.5-3× leverage. Mortgage-tier collapse and January price resets unchanged; international push hinges on AWS latency fixes.
KEY DELTAS BOX
∆ Platform ARR: $190 mm run-rate, +43 % y/y; “breakeven fully-loaded today.”
∆ Platform NRR: ~140 %, improving from 136 % in Q1.
∆ Software margin: trough hit in Q1; scale drives multi-year +300 bps lift.
∆ Scores growth: Pricing still main driver; volume still at “historic lows” in mortgage.
∆ Cloud migration: 100 % of new workloads on AWS; private DC shut-down lowers cap-ex to <1 % rev.
∆ Cash-flow guide: leverage ceiling 3.0×; incremental FCF earmarked for $500 mm buy-back.
QUICK MODEL REVISIONS
TAPE CHECK
COMPETITIVE EDGE ASSESSMENT
We believe FICO’s moat is widening. Score ubiquity plus regulator reliance underwrite durable pricing action; collapsing mortgage tiers levels the field without sacrificing yield. Platform wins—100 of top-300 FSIs landed, 55 enterprise-wide users—confirm adoption; NRR ~140 % evidences strong expand motion. Explainable-AI patent trove (220) and 15 ms decision latency defend against gen-AI challengers. Cloud pivot strips cap-ex and accelerates SI channel build-out, while disciplined refusal of end-quarter discounting signals demand strength.
CATALYST MAP
🆕 Apr-24 FICO World—GA of open APIs & SDK; partner marketplace launch
Jun-24 FHFA bi-merge implementation update
Jul-24 FQ2 print—first full quarter of 2024 pricing
Sep-24 SDK-driven SI use-case announcements
FY-25 Software margin inflection (+300 bps y/y) as scale benefits land
BEAR COUNTERPOINTS & REBUTTAL
AI will commoditise credit scores.
Rebuttal: Fair-lending rules demand explainability; FICO’s reason-code framework baked into lender workflows—AI likely augments, not replaces, the score.Platform TAM limited to top-tier banks.
Rebuttal: Management targets next 200 FSIs directly; horizontal push via open-API ecosystem brings SIs/ISVs to telecom, insurance, retail.High SBC dilutes returns.
Rebuttal: SBC ≈5 % rev.; buy-backs >2× offset, EPS CAGR still mid-teens on cash basis.
ACTIONABLE TAKEAWAY
Add +30 bps to core position (active weight now 180 bps); fund from TRU. Review stance if Platform ARR growth dips below 30 % for two quarters or FHFA mandates non-FICO bi-merge.
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.