Your FICO score is possibly the most important number in your financial life. It's pretty important for Fair Isaac Corporation (NYSE:FICO), too.

Fair Isaac, which generates revenue on almost any action involving a credit decision, saw its earnings soar in the third quarter. The company said it earned $32.4 million, up 28% compared to the year-ago period, propelled by price increases, volume, and a declining corporate tax rate.

Fair Isaac's fiscal third quarter: By the numbers


Q2 2018

Q2 2017

Year-Over-Year Change

Total revenue

$260 million $231 million 12.3%

Operating income

$48.4 million $41.4 million 16.8%

Net income

$32.4 million $25.2 million 28.3%

Diluted EPS

$1.04 $0.78 33.3%

Data source: Fair Isaac Corporation. EPS = earnings per share.

What happened this quarter

Here are some of the most important themes and events from Fair Isaac's fiscal third quarter:

  • A shift toward recurring revenue continued. Recurring revenue increased 17% from the year-ago period, substantially higher than the 12% increase in total revenue year over year. Fair Isaac is moving toward selling its services through subscriptions, rather than on one-off contracts, resulting in revenue that is more stable and predictable.
  • Scores remain its cash cow. Total scores revenue increased 32.5% year over year in the fiscal third quarter to $92.1 million. The highly profitable scores segment generated $75.7 million in operating income, or an operating margin of nearly 82%. The company noted that business-to-business scores revenue increased 42%, while business-to-consumer revenue increased 15% from the prior year.
  • The company is committed to reducing its share count. On the conference call, the company said it repurchased $107 million of stock in the third quarter, and bought back an additional $55 million of stock in July. Having exhausted its 2017 repurchase authorization, the board approved a new authorization for $250 million of share repurchases.
  • Fair Isaac rolled out a new product this quarter, FICO Score Planner, which enables consumers to pick an ideal FICO 8 score and get a customized road map of actions necessary to achieve that particular score. 
  • Lower taxes helped the bottom line. Net income increased 28% year over year, in excess of the 18% increase in pre-tax income compared to the prior-year period.

What management had to say

Being the go-to provider of consumer credit scores imparts Fair Isaac with incredible pricing power, giving it the ability to increase prices at rates higher than the increase in its operating expenses. 

On the conference call, Fair Isaac's CEO, William Lansing, said: "[T]he way that market works, many of the contracts with the end users are over extended period of time. And so, not all the pricing has completely kicked in. But we haven't had any issues. Things seem to be going very smoothly there," referring to the company's ability to raise prices for scoring products and services without harming demand.

Fair Isaac Corporation's FICO logo

Image source: Fair Isaac Corporation.

He later added, "I think that you can be assured that our Scores people are trying to strike the right balance between not shocking the market with price increases, but at the same time making sure that we are adequately compensated for the value that we're providing."

Considering that the company booked less than $93 million of total credit-score-related revenue in the third quarter, it's safe to say that even after pricing increases, the cost of credit score information is a drop in the bucket for lenders who rely on the company to make credit decisions.

Looking ahead

Fair Isaac reiterated its full-year guidance, which it increased when it reported results last quarter.


Guidance for 2018

Revenue $1.02 billion
GAAP net income $140 million
GAAP EPS $4.47
Non-GAAP net income $200 million
Non-GAAP EPS $6.38

Data source: Fair Isaac Corporation.

Bookings in the third quarter set the stage for a good fourth quarter: Fair Isaac reported bookings of $120 million, up 26% year over year.

Investors can think of bookings as contracts signed in the current quarter for services that will be delivered (and booked as revenue) in future months and years. Notably, bookings for one-off licensing contracts were down 24%, while bookings for recurring "transactional" services were up 44% compared to the year-ago period.