FICO: Investment Flash Update | Post-Q2 FY-25 Momentum Check
PLATFORM PIPELINE + ROYALTY POWER OUTWEIGH MACRO VOLUME DRAG; VALUATION RESET CREATES ATTRACTIVE ENTRY — WE ADD 25 BPS
Link to Historical FICO Investment Flash Updates - Link
Link to Qualitative Analytic Bank - Link (Message me for access)
Snapshot: What’s unfolded since the 29 Apr Q2-FY25 print 🔍
Commentary
Momentum check — macro signals diverge.
Mortgage-score revenue jumped +48 % y/y in FQ2 on the back of January’s $4.95 royalty reset and a modest volume tail-wind. Since quarter-end, MBA’s purchase-application index has bounced: +9.4 % WoW for the holiday-adjusted week of 3 July and +9.7 % the week before, the strongest fortnight since early-2023 (Mortgage News Daily). Re-fi remains anaemic (MBA still puts weekly activity roughly two-thirds below the 2019 baseline), so management is prudently assuming no incremental volume lift for 2H-25; FY growth therefore hinges on price realisation that continues to “feather-in” through September.
Platform ARR — usage, not logos, caused the wobble.
The decel to +17 % y/y came almost entirely from Customer Communication Services where several banks throttled outbound fraud-alert/collections traffic amid macro caution and CFPB scrutiny. Bookings health tells the other story: Q2 ACV beat again at $21.8 m (+30 % y/y). Because ARR turns live ~9 months post-booking, a mechanical re-acceleration should appear in FQ1-26 provided CCS message volumes normalise.
Gen-AI proof-points are getting tangible.
At FICO World the team demoed “natural-language-to-rules” tooling that lets risk managers draft decision trees, scorecards and audit-ready governance docs inside Model Governance Center; the artefacts stay inside the customer’s own VPC, heading-off bank data-sovereignty objections. Will Lansing highlighted Lloyds (consumer loans) and IA Financial (life-insurance underwriting) as first wave users; both report 30–40 % faster model-build cycles and automated compliance artefacts (session replay links due on FICO’s YouTube channel later this month).
Channel shift supports the margin glide-path.
Fujitsu (Japan) joined earlier Tata Consultancy (global) and Ikano Experience (Africa) as implementation partners. The move of services work to SIs is designed to add 300-400 bp to Software gross margin once the micro-services stack is fully GA in FY-26 –– guidance that management re-affirmed in multiple break-outs.
Royalty debate looks containable.
Critics focused on mortgage-score fees, yet the wholesale $4.95 royalty still equates to roughly 0.24 % of the $2,050 median closing-cost bundle, only a whisker above the long-stated 0.2 % level when the fee was $3.50 – small relative value that leaves FHFA scant room to paint FICO as systemic.
Insider selling – headline vs. context.
Form-4 filings show CEO Will Lansing & CFO Steve Weber have sold a combined ~24 k shares YTD (≈0.1 % of basic shares) under 10b5-1 plans (SEC). Both retain >90 % of vested holdings; the cadence is similar to prior years and coincides with option-exercise tax coverage. Simultaneously the company retired ~0.45 % of the float in Q2 and has $650 m left on its authorisation, signalling the board’s opposite stance on valuation.
Stock set-up.
FICO closed 9 Jul at $1,584 (-20.42% vs. S&P +17 %) – back to its 12-month EV/FCF average of 54×, nowhere near the “mid-30s” trough printed during the May sell-off. Consensus FY-25 EPS has inched up since the Q2 call, but the bigger lever is free-cash-flow: tax cadence plus FICO-World billings drive FCF and FCF is seasonally stronger in 2H, with Q3 billings from May's FICO World contributing a new catalyst. With buy-backs running at a 0.5 % quarterly clip and no sign of platform churn, we see the risk-reward skewed favourably despite short-term macro noise.
Bottom line: Since the Q2 call FICO has strengthened its tech story (GenAI launch), added a marquee SI partner, and defused immediate regulatory heat while booking another solid ACV quarter. The only negative datapoint—softer CCS usage—looks cyclical, not structural. We stay constructive.
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.