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The Art of Being a Patient Investor

April 25, 2023

My kind of investing needs patience and the key to being patient is to really believe in the shares that you hold. Apart from the 3G thing (great growth, great chart, great story) I like to see three characteristics with every share I buy. Instead of the property mantra of location, location, location, I like to see quality, quality, quality. If you only buy the best, in the stock market as with property, you will win in the end.

The US stock market is full of examples of high quality shares, what I sometimes call win in the end shares. A case in point is a business called Fair Isaac Corporation, which has been a fantastic performer over many years.

FICO shares up 1,292 times since the late 1980s

Since the late 1980s the shares have climbed 1292 times, which is a staggering performance. FICO is a financial shares, many banks are customers, so the shares suffered in 2008-09, coming down from a peak $48 to under $10, since when they have made strong progress.

Like many shares they took a hit in the 2022 correction but have since more than recovered all the lost ground.

The group’s core business is a scoring system for testing individual creditworthiness. This is used by bank’s when making loans and by individuals as a retail product to find out how they are perceived by the banks. This business has grown steadily over the years with the massive expansion of credit in the USA. A huge number of people are now accustomed to living with debt in a way which would have been unthinkable to earlier generations.

Artificial intelligence, especially in its new high-powered generative form, could be perceived as a threat but is likely to be an opportunity since FICO has the resources and the customer base so it will be a no-brainer to incorporate AI into what they do.

Just to recap on how they are trading, 2022 was as excellent year for the business and for its shareholders.

In fiscal 2022, our platform strategy in the software business and our continued leadership in the scores business led to an outstanding year with record revenues, record earnings and record cash flows. We reported record revenues of $1.38bn, with $374m of GAAP net income and $14.18 of earnings per share. We delivered free cash flow of $503m, up 21pc from the previous year.* This enabled us to be aggressive in returning capital to shareholders through our share repurchase program. In fiscal 2022, we repurchased nearly 2.7m shares at an average price of $409 per share.

Annual report 2022

You can see how a company like FICO can turn a stock market correction to its advantage. The average purchase price for shares in the buyback programme in 2022 was $409 versus a latest price over $700.

There is also something new happening at FICO which bodes well for an exciting future. They have a product called FICOPlatform which is storming ahead.

Our software revenues were $671m, up 1pc from the previous year on a GAAP basis, while our business divestitures in the prior year had an 8pc negative impact on software revenues for fiscal 2022. Our total Annual Recurring Revenue (“ARR”) was up 9pc and the ARR for FICO® Platform grew 52pc. Our Annual Contract Value (“ACV”) bookings were up 37pc over last year.

These metrics validate the potential we see in our platform strategy. Customers on FICO® Platform are expanding their total usage, and we are increasing platform sales to other customers. FICO Platform truly is next-generation decisioning technology, which allows businesses to optimize interactions with customers, reuse capabilities across different product lines, manage the customer journey more effectively and roll out new services more quickly.

Annual report 2022

They are working to drive growth at this product as fast as possible.

Our software strategy to become the leading analytic decisioning platform provider has tremendous potential, and to accelerate this strategy we made further organizational changes in fiscal 2022. The most significant of these was the consolidation of our software technology, product management, service, sales and marketing functions into a single unit. Stephanie Covert became the first leader of the software group, having previously led our sales, marketing and services organization. With this change, our product development and go-to-market strategies are in sync, which has already led to improvements in prioritization and delivery. We intensified our focus on the market segments and individual companies that represent the best targets for FICO® Platform, and pursued a more aggressive partner strategy with a dedicated worldwide team aimed at delivering our technology to smaller end-users.

Annual report 2022

In the past most people simply were not creditworthy and only the rich could borrow money; now almost everybody has mortgages, buys cars on credit, phones, fridges and everything else on instalment plans so almost everybody out there is either lending money or borrowing it or both, which creates a powerful following wind for FICO products.

In their words:

FICO® Platform is the right solution for businesses that need to change faster and understand their customers better, using our powerful analytics. 

Annual report 2022

So what exactly is FICOPlatform

This segment [software] also includes FICO® Platform, a modular software offering designed to support advanced analytic and decision use cases, as well as stand-alone analytic and decisioning software that can be configured by our customers to address a wide variety of business use cases. Our offerings are available to our customers as software-as-a-service (“SaaS”) or as on-premises software.

Our software harnesses the power of analytics and digital decisioning technology to help businesses automate, improve, and connect decisions across their enterprise. Most of our solutions address customer engagement, including acquisition and pricing, onboarding, servicing and management, and fraud protection. We also help businesses improve non-customer facing decisions such as supply chain optimization, scheduling management and policy adherence.

FICO provides software solutions to business customers in more than 120 countries around the world. Our software can be deployed in the cloud utilizing third-party cloud services, or on-premises using our customers’ IT infrastructure. We typically sell our software as multi-year subscriptions, with payments based on usage metrics such as the number of accounts, transactions or decisioning use cases deployed, often subject to contracted minimum payments.

A significant and growing number of our software solutions run natively on FICO® Platform, a modular software offering designed to support advanced analytics and decisioning use cases. While not all our software runs on FICO Platform today, we are investing significant development resources to enable substantially all of our software to run on FICO Platform in the future.

Annual report 2022

More on FICOPlatform

Our goal is to move substantially all of FICO’s current software products onto FICO® Platform. For example, FICO’s industry leading rules-based decisioning engine, FICO® Blaze Advisor® decision rules management system, is now available on FICO Platform as FICO® Decision Modeler. In addition, some FICO pre-configured solutions are now available on FICO Platform. We believe this strategy of moving our software products to FICO Platform will result in revenue growth through follow-on “land and expand” sales to existing Platform customers and more sales to medium-sized businesses typically served through value-added resellers and systems integrators.

Our annual recurring revenue (“ARR”) from FICO® Platform based products was $114.2m as of September 30, 2022, representing 20pc of our total software ARR.

Annual report 2022

You can see why this business is so exciting.

Annual recurring revenue (ARR) is arguably a better metric to analyze its SaaS platform. In this case, I was pleasantly surprised to see an ARR of $114m, which increased by a rapid 52pc year over year.

The company also reported a strong dollar-based net retention rate of 128pc, which means customers are staying with the platform and spending more. Average Contract Value (ACV) bookings increased from $25.8m in Q4 ’21 to $29.5m in Q4 ’22, which is a positive sign.

Seeking Alpha, 10 January 2023

At the moment FICOPlatform at $114m is a small part of total revenue of around $1.5bn expected for 2023 but given the group’s plans and the explosive growth being achieved it is likely to become much more important in the future.

This gives investors comfort that whatever happens to the shares in the short-term they are likely to move substantially higher in the longer term.

Strategy

FICO is a classic high quality business with a superb customer base, a long track record of success and exciting new products coming through. Who ever knows when exactly is the best time to buy shares in a business like this but long term they should continue to do as well as they have done in the past.

Share recommendations

Fair Isaac Corporation. FICO Buy @ $711

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