How FICO Has Made a Fortune Off Your Credit Score
Digital transformation is the single biggest investment theme in a generation. It is changing the way every business makes decisions.
You probably know FICO as a place where you can go to see your credit score for free once a year. But what you might not know is that it’s a publicly traded company, one that is making a fortune from it! In fact, just last week, Fair Isaac Corp. (FICO) reported blockbuster earnings.
When investors think of transforming businesses, this San Jose, Calif., company is probably not at the front of their minds. But that’s a big mistake.
FICO shares are a buy on pullbacks. Let me explain.
Founders Bill Fair and Earl Isaac were ahead of their time. The pair met at Stanford University in the early 1950s. Fair was a brilliant engineer. Isaac was a gifted mathematician.
With a borrowed computer, $800 and one very big idea, they started Fair, Isaac and Co. in 1956.
At the time, the idea was radical. They thought they could transform business with credit scoring. Using math and computation, the pair devised algorithms to study consumers’ past behavior. Then they used predictive analytics to determine the credit risk for new applicants.
Fair wrote letters to the 50 largest lenders in the U.S., according to the corporate website. He wanted an opportunity to explain how these scores could reduce risk and open up new business models. Only one company responded. Two years later, in 1958, the first FICO credit-score system was built.
Innovations followed. FICO automated the credit-score-processing system in 1972. A decade later, the company automated credit-account-management systems, too.
This faster processing led to explosive growth in credit cards.
In 1992, the company developed FICO Falcon Fraud Manager, the first use of artificial intelligence to detect credit card fraud.
Today, FICO technologies underlie 65% of all credit-card decisions. All 100 of the largest U.S. credit-card issuers, and 95 of the largest 100 domestic financial institutions are clients.
The company works with 600 global insurers, and more than 400 retailers and general merchandisers. In 2018, Falcon Fraud protected 2.5 billion credit cards.
FICO credit scoring and its fraud-detection systems have become foundational in global financial services.
The company launched FICO Analytic Cloud and the Decision Management Suite in 2015. The cloud-based platform brought predictive analytics to more businesses at a cheaper price point than ever before. It also offered businesses a full suite of software tools for customer credit, marketing, fraud, cybersecurity and compliance.
Using data science, enterprises could determine the value of new customers from the onset. Understanding this critical metric means better marketing and communications. It means bigger profits.
It’s the underlying promise of digital transformation.
New clients in banking, automotive finance, energy and utilities, government, healthcare, insurance, merchant services and telecommunications flocked to the new offering. Analytic Cloud and DMS marked an important inflection point for the company.
By leveraging its expertise in credit scoring and data science, FICO built a new invaluable cloud-based, business-to-business platform with more predictable sales from applications and subscriptions.
Growth has exploded. Sales grew 5.7% in 2017 to $932 million. In 2018, revenues reached $1 billion for the first time, a 10.7% surge.
2019 has been just as impressive, as CEO Will Lansing navigated this transition well. Following stellar third-quarter financial results Thursday, he told analysts that brisk license renewals pushed sales in the quarter to $314 million, up 23% year-over-year. Bookings rose to $109 million. And net income exploded 116% to $64 million.
The strength was broad. Applications revenues rose by 19%. Transaction volumes advanced by double digits as customers begin to use more products in the FICO portfolio.
DMS is the fastest-growing segment of the business. Revenues increased to a record $33 million, with $37 million in new bookings — up 35% from a year earlier.
Meanwhile, the FICO score business continues to hit records. Sales reached $115 million during the quarter. The direct-to-consumer segment was up 8%. The B2B category shot up a record 36% as companies begin to embrace digital transformation.
International Data Corp. in 2018 forecast the total addressable market for digital transformation spending would grow to $1.97 trillion in 2022, compound annual growth rate of 16.7%.
FICO has the right products, at the right time. And more are planned.
The company has three new products in development with Equifax (EFX), a leading consumer credit reporting agency. Lansing says FICO will begin by integrating Equifax data with DMS; its anti-money laundering and know-your-client software tools, and new FICO marketing software.
FICO is the kind of stock that usually flies under the radar because its business seems one dimensional. However, the company is leveraging what it does well to help companies understand digital data and build lucrative new business models.
Managers have positioned the company as a key player in the digital transformation process. Enterprises, large and small, need its data insights to make better business decisions.
This is the business Bill Fair and Earl Isaac envisioned 60 years ago in their San Francisco apartment.
FICO shares trade at 40.9x forward earnings and 9.6x sales. Although the business is on track to do $1.2 billion in sales, analyst coverage is limited.
The stock is up 88.4% in 2019. However, based on sales growth, bookings, and the total addressable market, the stock could trade to $470 in two years, a gain of 34% from their current price of $352.
Longer-term investors should consider buying the shares on pullbacks.
Jon D. Markman