Mention the company Fair Isaac (FICO 2.33%) and the first thing that probably comes to mind is its trademark three-digit FICO score that consumers regularly see on their credit reports. After all, FICO scoring plays a critical role in how people get approved for a variety of loans.

What those who know about the FICO scores may be aware of is the other main part of Fair Isaac's business, its growing software division. This segment of the company leverages predictive modeling, transaction profiling, decision analysis, and artificial intelligence to help companies better run their business. And while the FICO scoring division is a great business, it's really the software division that has driven the stock 35% higher this year and to record highs.

Let's get to know Fair Isaac's software business and see what its future might hold for the company and for the stock.

The FICO platform

Fair Isaac's software has a wide array of offerings that help financial services companies, and others across many industries, run their businesses more efficiently. These offerings include productivity tools, machine learning models, data retrieval and mapping solutions, real-time data insights, business outcome simulators, and pre-configured solutions such as fraud prevention.

Two people on computer in office.

Image source: Getty Images.

For example, the credit card and payments company Discover used Fair Isaac's software solutions to reduce debit card fraud losses on its PULSE network by 40%. Truist used Fair Isaac's platform to digitize credit originations. Non-banks such as the major testing organization ACT used the software to automate test development.

Fair Isaac has also developed its FICO platform, which uses cloud architecture to bring data from multiple sources together, gain enhanced insights, and put those to work through real-time actions and workflows. FICO has moved a lot of its software decision onto the FICO platform, and is investing significantly to move nearly all of its software solutions to the FICO platform.

Selling this kind of software involves long sales cycles, but the company also gets rewarded with a pretty strong moat because the software is typically sold for multi-year subscriptions. There's also a land and expand component to the model, so customers can become more profitable as they expand their usage of Fair Isaac's software solutions.

Strong growth and opportunities ahead

For the year ending Sept. 30, which is Fair Isaac's fiscal cycle, the company generated roughly $1.38 billion of revenue. A little more than half of that came from the FICO scoring division, while nearly 41% came from software (the remainder is professional services). Software revenue grew more than 9% from the fiscal year 2021, while scores revenue grew about 8%.

But within the software division, the company breaks revenue out into non-platform revenue and platform revenue from the FICO platform and looks at it on an annualized revenue run-rate (ARR) basis. Platform revenue went from 11% of ARR software revenue at the end of 2020 to about 20% at the end of September. Platform ARR also more than doubled in this same time frame.

Fair Isaac's software solutions also have an international opportunity and are used by businesses in more than 120 countries. On Fair Isaac's most recent earnings call held on Nov. 9, CEO Will Lansing said the demand for its software solutions remains solid, specifically on the international side where deals are not being pushed out or downsized, despite the difficult operating environment.

Lansing also said on the call that of the company's target market -- the top 200 financial institutions globally -- Fair Isaac only has slightly more than 30 customers using the platform, meaning there is ample runway to grow customers. He also sees significant expansion opportunities for existing clients.

The business is heating up

The strong outlook for the software division also translated to incredibly strong guidance for the fiscal year 2023, in which Fair Isaac is guiding for double-digit percentage earnings growth. This comes after Fair Isaac already raised its guidance mid-year and bought back 2.7 million shares in the fiscal year 2022. Clearly, Fair Isaac's SaaS business has been a fantastic value add to the business and is a big reason the stock continues to outperform.