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Fair Isaac’s (NYSE:FICO) future revenue will grow at a CAGR of mid single digits in the next five years driven by its technologically advanced scoring and software product portfolio. Its scoring and software products enjoy strong demand in the marketplace. I believe the company will perform well in the competitive environment and capture competitors’ market share with the help of its differentiated products in the long term. As a result, the company’s share price will rise significantly in the next five years. Long-term investors can buy the company’s shares during pullbacks.
FICO is a predictive analytics and decision management software company which offers solutions and services to its customers for automating and improving decision-making process. Its scoring solutions help companies in the field of finance win new customers and increase customer value. For predicting customer behavior, the company incorporates big data and mathematical algorithms in its predictive analytics and decision management systems.
Growth Drivers
Scoring Solutions and Services
FICO’s scoring solutions and services are one of its main growth drivers. The company’s business-to-business (“B2B”) scoring solutions offer its clients access to predictive credit and other scores. These scores can be integrated into the transaction streams and decision-making processes of the company’s clients, who are major banks, credit card issuers, mortgage lenders, and auto loan originators. As a result, they are immensely benefited in terms of customer retention and new customer wins. FICO’s business-to-consumer (“B2C”) scoring solutions, including the FICO Score, the standard measure of consumer credit risk in the U.S., are sold directly to consumers through its myFICO website and other direct-to-consumer channels. I believe FICO’s scoring solutions will drive its revenue growth at an impressive rate in the long term due to strong and sustainable demand for financial products in the U.S., once the present macro crisis in terms of inflation is over.
Software Solutions
FICO’s software solutions constitute its another growth driver. The company’s software solutions offer analytics and digital decisioning technology to customers. As a result, its customers can grow their business based on automating and improving decisions across their enterprise. In addition, FICO also helps its customers make decisions in supply chain optimization, scheduling management and policy related matters with its software. These are the reasons why the company’s software solutions perform well in competitive environment. I expect the company’s software solutions will drive its revenue growth meaningfully in the coming years.
Competition
The financial software and decision management space is highly competitive. FICO competes with companies like Intuit (INTU), Pegasystems (PEGA), Equifax (EFX), Experian (OTCQX:EXPGF), and Salesforce (CRM). FICO competes with these companies based on scoring product expertise, advanced financial analytics offerings, and price.
FICO’s primary competitive advantage is that it develops software which are capable of addressing challenges such as customer engagement in terms of customer acquisition and pricing. The company’s software are also capable of addressing challenges related to onboarding, servicing and management, and fraud protection. The company’s another competitive advantage is that it offers an excellent mix of predictive analytics software and related services, and advanced integration of predictive analytics with decision management software. As a result, the company’s software market share is growing consistently. Both the competitive advantages will help the company boost long-term revenue growth.
Second Quarter Fiscal 2022 Results
FICO delivered second quarter fiscal 2022 revenue of $357.2 million, up 8% year-over-year. Non-GAAP EPS for the quarter came in at $4.68, up 53% year-over-year. Net cash for the quarter arrived from operating activities at $122.6 million, down 20% year-over-year.
The company delivered mixed results for the second quarter of fiscal 2022. Revenue increased driven by unit price increases, and B2B segment and myFICO growth. Earnings increased driven by the company’s focus on efficiency. The company’s software ARR (annual recurring revenue) was up 11%, which contributed to overall revenue growth. I expect revenue will continue to increase in the next five years driven by B2B and B2C business growth, which will lead to consistent net income expansion as well. Net cash in the quarter grew at a negative rate due to inflated operating expenses (which is a short-term phenomenon), which was a bit disappointing but not a major cause for concern.
I expect the company’s revenue from credit card and personal loan originations will increase in the coming years, albeit at a lower rate, due to inflationary pressure. In a weaker economy, credit card and personal loan businesses generally perform well due to increased need for liquidity. However, FICO’s revenue growth from auto and mortgage segment is expected to remain soft in the coming years as a result of macro weakness. Overall, the company’s revenue is expected to grow at a CAGR of mid single digits in the next five years.
Valuation
FICO’s competitors include Intuit, Pegasystems, Equifax, Experian, and Salesforce.
|
FICO |
INTU |
PEGA |
EFX |
EXPGF |
CRM |
|
|
Non-GAAP (FY1) P/E |
27.11x |
34.36x |
63.30x |
24.85x |
– |
36.56x |
|
TTM Price to Sales |
8.96x |
8.71x |
3.06x |
4.83x |
4.85x |
6.05x |
|
TTM Price to Cash Flow |
25.97x |
27.84x |
119.90x |
24.77x |
16.94x |
26.82x |
(Data Source: Seeking Alpha)
FICO is attractively valued compared to its competitors. It has a balance sheet consisting of $174.2 million of cash and equivalents, and $1,842 million of debt. FICO is available at an attractive valuation because it is indebted. However, its revenue will grow at a CAGR of around mid single digits in the next five years, which will drive its share price in the upward direction. FICO’s scoring solutions enjoy significant demand in the U.S. financial market, and its software solutions also have meaningful and growing market share. I expect the company will be able to boost the demand for its financial products in the next five years driven by its differentiated product portfolio. Long-term investors can buy the company’s shares during pullbacks.
Assuming FICO’s revenue will grow at a CAGR of 5% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $1,352.3 million, and at a CAGR of 5% the company’s mid-2027 revenue will be $1,726.00 million, or $66.56 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 5x and 12x. I expect in the next five years the company’s price to sales multiple will touch a high of around 10x driven by growing market share. Applying a price to sales multiple of 10x on FICO’s mid-2027 revenue per share, I get $665.60 as the company’s mid-2027 share price.
Risks
FICO generates a significant portion of its revenue from a smaller number of products. Its product portfolio includes scoring solutions, fraud protection solutions, marketing solutions, customer management solutions, and decision management solutions. If the market does not accept one or more of FICO’s solutions, the company’s revenue growth and profitability could be adversely affected.
FICO’s future growth depends on developing new products and solutions on a continuous basis. Since the company has a product portfolio consisting of smaller number of solutions, developing new products is needed seriously compared to its competitor companies. If the company fails to develop new products in a regular interval, its revenue growth and profitability could be negatively impacted.
Conclusion
FICO is an indebted company. If the company cannot reduce its debt load gradually over the next three to five years, its net income growth could be adversely affected. I expect the company will be able to lower its debt burden over the next few years driven by its consistent revenue growth. As a result, its bottom-line will grow, which will positively impact its share price. Long-term investors can buy the company’s shares on pullbacks to maximize their gain.
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