FICO: The Score Behind the Score
One of the best compounders in the market, at the center of the US financial system, has derated despite accelerating growth, elite financials and formidable moats
Along with my friend Shivam, we are releasing the most comprehensive deep dive available into one of our favorite compounders, FICO.
Welcome to the 35th investment case and 29th resilience idea on Crack the Market (and the most comprehensive FICO investment case you will find online)! Join me as I dissect the absolute reference for credit decision making in the US, providing the company with an incredible pricing power, which it has been flexing in the last few years, boosting its growth and leading to elite financials and one of the most attractive Information Services companies, especially after its recent derating.
Twice a week, I will release deep dives into stocks and sectors that fit into the three themes that I see winning in this age of tariffs and deglobalization: resilience, sovereignty & reshoring, China. I will then deep dive into the opportunities in the AI data center value chain.
Take advantage of this once in a generation opportunity to build long term wealth by investing in great stocks that will deliver returns for your portfolio for years to come.
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Cadence (resilience idea): A defensive compounder in the semi space & one of the most profitable software businesses in the world is getting better.
SAP (resilience idea): The unstoppable growth engine behind every business.
Table of Contents
Business Description
Fair Isaac Corporation (also known as FICO) is an Information Services company primarily focused on applied data analytics. FICO views its core domain expertise as encompassing predictive modeling, decision analysis and optimization, transaction profiling, and customer data integration. As of 2024, 92% of FICO’s revenues were derived from financial services customers. The company is ultra dominant in the consumer credit data space, with three-quarters of the largest 100 financial institutions in the US being FICO end users, as are 75 of the largest 100 banks in the world. FICO’s clients also include 600+ insurers, 300+ retailers, and 200+ government/public agencies. Fair Isaac’s business is reported across two segments: Scores and Software.
The Scores division ($900m, 54% of 2024 revenues) produces credit and other behavioral scores, including the flagship FICO Score, which are distributed across two broad sets of channels: business-to-business (B2B) and business-to-consumer (B2C). The FICO Score is frequently viewed as the standard measure of consumer credit risk in the United States. The Scores segment is exceptionally profitable, with 88% operating margins in 2024 (excluding stock-based compensation and corporate overhead), and earns most of its revenues via a royalty model.
B2B scoring solutions (77% of 2024 Scores revenues): Revenues predominantly come from providing various versions of the FICO Score for financial services end users (such as banks and non-bank lenders). The FICO Score is primarily distributed in B2B channels as an analytical overlay to credit files via the three major credit bureaus (Equifax, Experian and TransUnion) which remit volume-based royalties to FICO.
B2C scoring solutions (23% of 2024 Scores revenues): Consists of revenues generated from consumers directly (via myFICO) and through partnerships, most notably Experian’s online marketplace.
The Software division ($800m, 46% of 2024 revenues) provides pre-configured and highly customizable decisioning and analytical solutions, primarily for credit decisioning, but also for account origination, management, customer communication, and fraud detection. Beyond these use cases, FICO offers access to its rules management and process optimization models. FICO's Software is made up of software-as-a-service (SaaS) delivered via the public cloud using third-party infrastructure (50% of 2024 Software revenues), software delivered on-premise that uses the client’s own IT infrastructure (39% of 2024 Software revenues), and professional services (11% of 2024 Software revenues).
FICO Platform (25% of 2024 Software revenues): Consists of revenues earned directly by FICO’s cloud-native decisioning and analytics platform. The FICO Platform’s core use case is for credit decisioning by financial sector clients, although the Platform also offers advanced business analytics capabilities that are useful to non-financial customers. Revenue from the FICO Platform is earned via a combination of subscription and usage-based elements. Over time, FICO’s goal is to migrate all software offerings to the Platform.
Non-platform Software (64% of 2024 Software revenues): Fair Isaac’s collective software applications and tools outside of the FICO Platform. Historically, many of these offerings were developed as on-premise point solutions with narrower applications. Such applications include card fraud prevention, bank-to-customer communication management, account origination, and account management. Heritage business process tools include rules management and optimization models. FICO continues to book new contracts here but intends to transition users to the Platform.
Professional services (11% of 2024 Software revenues): Think of this as a sort of IT Services division. Captures software implementation and configuration, engagements to help clients build out customized analytics, plus some bespoke advisory work. Once a larger part of FICO’s business, these consultative services have been de-emphasized in recent years.
What is the FICO Score?
The Score is a predictive measure that ranks an individual’s credit risk, that is, their propensity to repay debt based on the information in a person’s credit file at a particular point in time. The Score helps lenders and others predict how likely people are to make their credit payments on time. Since 1995, Fannie Mae and Freddie Mac have required lenders to furnish FICO Scores as a precondition for buying their mortgage loans.
The FICO Score is the most widely used consumer credit score in the US. According to the company, 90% of the largest US lenders use the FICO Score. Around 14 billion credit scores are calculated annually, or 41 per US citizen.
The FICO Score is firmly embedded in the workflow of US lenders, even those that use their huge proprietary data and AI: The US’ largest banks utilize their own extensive, proprietary data sets in underwriting, rather than relying solely on a credit file and external credit score. But even they still extensively leverage the FICO Score. First, many large institutions continue to use credit scores as a primary credit quality indicator. Also, refreshed credit scores can serve as a quick, low-cost, and externally calculated indicator for how a portfolio’s credit profile is trending. Finally, credit score aggregates (especially based on FICO Scores) are often shared with investors, regulators, and other counterparties to give stakeholders a sense of the underwriting standards and risk underpinning a lender’s book of business.
In the US a FICO Score is based solely on information in a consumer credit report from one of the three credit bureaus (Equifax, Experian, and TransUnion). The bureaus typically distribute credit scores alongside the credit reports they furnish to financial institutions. Credit reports and scores are then used, in conjunction with an institution’s own data and analytics, to inform decisions on loan originations, marketing, portfolio risk management, and securitization.
The FICO Score uses a standardized scale, spanning from 300 to 850. The other credit scoring firm, VantageScore (jointly owned by the credit bureaus), uses the same numerical range. The higher a prospective borrower’s credit score, the greater their projected propensity to repay debt.
Reflecting how prevalent it is, borrowers are often segmented by their FICO Scores. Typically, consumers with FICO Scores below 620 are considered “subprime”, borrowers scored between 620 and 659 are considered “near-prime,” and a score of 660+ is considered “prime”. There can be further gradations, like “deep subprime” (often less than 580) or “super-prime” (720+), but these are less common.
What are the usual criteria for the FICO Score?
FICO considers both positive information (like past repayments) and negative information (like missed payments) in the formulation of a Score.
The calculation generally approximates the set of weights shown below, although the exact impact of each factor is dynamic and depends on the individual credit history of the person being scored. Weights can also vary for industry specific scores (like auto loans for example).
Payment history (35% of the Score weight): Considers whether payments are made on time, as well as any late payments, bankruptcies, or collections. FICO Scores generally include all accounts that are listed on consumer credit reports, these can include credit cards, retail accounts, mortgage loans, and installment loans (like personal loans and auto loans). Collection accounts and personal bankruptcies are also considered for a number of years. Also interesting to note, many Buy Now Pay Later (BNPL) lenders do not currently report payment history to the credit bureaus.
Amounts owed (30%): Examines total debt, credit utilization (how much is owed relative to credit limits), and amounts owed across different accounts. An individual’s FICO Score considers the amounts owed on all credit accounts (both individually and in total), as well as the number of accounts with an active balance, and the percentage of available revolving credit that a borrower utilizes.
Length of credit history (15%): Looks at how long accounts have been open, factoring in the age of the oldest and newest accounts. A person's FICO Score also reflects the average age of a borrower’s accounts, the age of an individual’s oldest and youngest accounts, and how long specific accounts have been open. Note that to receive a FICO Score, a credit report must include at least one account opened for six months and one account reported within the last six months. VantageScore relaxes these criteria and asserts doing so promotes financial inclusion.
Credit mix (10%): Takes into account the different types of credit used (credit cards, mortgages, installment loans). Consumers can have a range of different types of credit (like installment vs revolving credit), and having a breadth of different credit accounts can, at the margin, help an individual’s FICO Score.
New credit (10%): Reflects recent credit inquiries and newly opened accounts. Applying for new credit generates a “hard inquiry” (a note is made on a consumer’s credit report). Such inquiries appear on a consumer’s credit report for two years, although FICO Scores consider inquiries made only in the last 12 months. Hard inquiries on their own generally have small impacts on one's FICO Score, but repeatedly opening new accounts can signal riskier behaviors.
FICO’s Origins
FICO was founded in 1956 by two colleagues in Stanford University’s labs, engineer Bill Fair and mathematician Earl Isaac. Their idea (which proved incredibly prescient) was that applying analytics to enterprises’ data would yield better commercial decisions (something visionary at the time).
The business started as consultants to the financial industry to improve analytics and decision making. Starting in the 1980s, FICO began to develop credit scoring applications for financial institutions. In 1989, the firm created the ubiquitous FICO Score, which was made available by all three credit bureaus (Equifax, Experian and TransUnion) in 1991.
Over the next few years, the FICO Score made its way into the US financial system and gradually became the reference for credit decision making, being adopted by Fannie Mae and Freddie Mac for the mortgage market in 1995 and the consumer credit monitoring website myFICO being launched in 2001.
In 2012, with the arrival of CEO Will Lansing, the company entered a new era of using its dominant position and pricing power, after decades of not touching the price of its iconic FICO Score. FICO began a multi-year process of renegotiating license agreements with each of the credit bureaus, allowing the firm to adjust base royalty rates for FICO Scores once per year.
The cost of a FICO Score for mortgage applications (just one of the use cases, maybe 1% of scores, but an important one given its ASP) rose from a few dozen cents per mortgage application to $4.95 in 2025. This explains the growth acceleration these last years.
Investment Case
FICO is a solid core holding given its true compounder status.
An unusual Information Services model: How can an Information Services business be so profitable and powerful despite not owning its own dataset (something that usually at the core of the build it one time and sell it many times model of the industry)? FICO leverages data that is owned by the three credit bureaus (Equifax, Experian, and TransUnion). But what FICO owns is even more important. It has the formula of the FICO Score. Due to the Score, FICO earns most of its profits by providing a standardized measurement that informs key business decisions across its end market (including for lenders, risk officers, regulators, and the securitization market). Because risks are often measured, communicated and priced via the FICO Score, the firm’s core business is very similar to that of credit ratings agencies (Moody’s and S&P Global).
FICO is the absolute reference for credit decision making in the US, providing the company with an incredible pricing power which it has been flexing in the last years boosting its growth and stock price.
FICO has been the embedded score across industries beyond mortgage, making up the mid-90% range of the securitized mortgage market, reiterating that the fundamental moat comes from having the most predictive credit score in the industry, and that risk-bearing entities naturally gravitate toward the most accurate score. Extensive models and infrastructure is built around FICO Classic across mortgage insurance, underwriting and pricing models, regulators, investors, and rating agencies, establishing significant switching barriers.
FICO is an applied data analytics company best known for producing credit scores. The FICO Score is used by 90% of the largest U.S. lenders and has become the standard measure of consumer credit risk in America. We believe that most lenders, even those that have holistically embraced “big data,” still extensively leverage the FICO Score. Since 2018, FICO has meaningfully accelerated revenue growth, primarily via significant price increases in its Scores business (54% of F2024 revenues). Also, the firm’s Software business (46% of F2024 revenues) has been upgraded via the early success of FICO Platform, a cloud-native environment for credit decisioning and business analytics. As a result of these developments, FICO possesses best-in-class EPS growth and returns on invested capital versus an impressive Info Services peer group.
The unique pricing power of its B2B Scores (thanks to its unique place in the mortgage ecosystem) has turbo charged growth (20-30% per year on half of the company).
Upside from further price increases or mortgage market recovery (though difficult to predict but could be helped by lower interest rates).
Value Chain
Credit bureaus as Core Distribution Partners
In the US, all the FICO Scores are based solely on information found within consumer credit reports from the three consumer credit bureaus (Equifax, Experian, and TransUnion). Financial institutions request, and the bureaus then subsequently distribute, credit scores alongside the credit reports that they furnish to lenders. As a result, the three credit bureaus are the core distribution channel for the FICO Score. The scoring algorithm resides at the bureau, which generates and gives out a Score (at the same time as a credit report) when requested by a lender. FICO then receives a royalty payment from the bureaus in arrears and that can lag by four to six weeks.
The amount of data aggregated by credit bureaus and leveraged into the FICO Score are incredible (data from over 1 billion accounts in a month: bankcards, retail revolving credit, student loans, auto loans, mortgage loans etc).
Growing Dependence on Bureaus
Over time FICO’s interdependence with the bureaus has been growing when measured as a percentage of FICO’s consolidated revenues, from 16% in 2015 to 45% today. This increase has been driven by two factors:
Significant pricing actions since 2018 have increased B2B Scores revenues.
FICO earns B2C revenues from an ongoing partnership with Experian, whose consumer facing marketplace model has been highly successful.
3 Categories of B2B FICO Scoring Solutions
Pre-screening/marketing scores: which are pulled in order to decide which customers a financial institution will pitch credit products to.
Applications/Origination scores (by far the biggest revenue contributor given just mortgage applications represent 44% B2B Scores revenue given the $5 price take per application): which are pulled when a lender wishes to make a credit decision (like extending new credit). FICO is paid at application no matter the credit decision.
Account management scores (usually lower cost batch credit score refreshes): which are accessed with some regularity to evaluate a lender's existing portfolio.
Breakdown of B2B FICO Scoring Use Cases
As expected, credit decisions represent the overwhelming majority of the Scoring business:
Mortgage origination: over 40% of revenues.
Credit cards, personal loans or other personal credit: 15-20% of revenues.
Auto loans: 15-20.
Pre-screening and account review: 15-20%.
International and other use cases represent a tiny part of the Scoring business (less than 5%).
B2C Scores: A Powerful Partnership with Experian
FICO’s B2C Scores consists of two main revenue streams: direct-to-consumer (DTC) subscription offerings, called myFICO, and B2C partnerships, most prominently with Experian.
Its DTC offering could be running at $100m/year (half of the division): This is a paid subscription credit monitoring service ($30-40/month) but growth has plateaued. myFICO allows consumers to purchase FICO Scores, credit reports associated with the scores, explanations of the factors affecting their scores.
Its Experian partnership has been extremely successful and is driving growth (FICO earns royalties providing scores to consumers within the bureau’s marketplace platform): the partnership started in 2014, and Experian offers free basic credit monitoring and advertises credit products getting referral fees from lenders, FICO provides credit refreshes and receives royalties. This offering has gone from 4m customers in 2016 to over 70m now. In 2019 it released a Boost feature where customers can link their bank account to their Experian account to boost their FICO scores (with already over 16m users), further benefiting FICO.
Growth Drivers
1. The unique pricing power of its B2B Scores (thanks to its unique place in the mortgage ecosystem) has turbo charged growth (20-30% per year on half of the company):
Enhanced consumer awareness surrounding the importance of the FICO Score in accessing credit has reinforced the business’s competitive positioning, including in B2B applications.
Initially, pricing between the bureaus and FICO was set in 1989 and remained at those low amounts for decades due to contractual and technical constraints. Starting in 2012, however, FICO began a multi-year process to renegotiate its contracts with all three bureaus to allow for annual price increases, with advance notice.
In 2019, FICO began to take meaningful price increases after decades of not doing so. FICO’s B2B Score price increases have been sizable and broad, and have served as the primary driver of the growth in recent years (adding $100-200m/year of revenue, not bad in a $700m division). The exact areas FICO applies these price increases differs from year to year, but they have taken on two broad flavors:
Special pricing: Generally sharper price increases to specific pockets of B2B scoring solutions for which FICO management sees large price-to-value gaps (like mortgage applications which have jumped in recent years). Such price increases often meaningfully raise the cost of a Score for a given use case.
CPI price increases: Taken far more broadly across the B2B Scores portfolio. This touches virtually the entire portfolio and is usually in the mid to high single digit range (much higher than the CPI despite the name).
2. FICO’s prices for mortgage applications have jumped thanks to its unique position in the mortgage ecosystem:
FICO has hiked prices across major categories within consumer credit (like credit cards, auto loans, home loans). However, the firm’s most pronounced price increases have been associated with mortgage applications. In 2018, FICO’s royalty for mortgages was revised up to 50-60 cents per application. In 2023, FICO again took significant price increases for mortgage applications, establishing a volume-based tiering structure that re-set the royalty per associated Score to a range between 60 cents and $2.75. Entering 2024, the tiering structure was removed, and the cost of all mortgage application pulls was set at $3.50. Starting in 2025, the price per application for a FICO Score in a mortgage application will rise to $4.95.
FICO’s pricing power is the product of the Score’s unique role in the mortgage ecosystem: Historically, the FICO Score had been the only credit score required for conforming mortgage loans sold to the US government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Presently, the Federal Housing Finance Agency (FHFA) has directed the GSEs to require a “tri-merge” credit report (a report from all 3 credit bureaus at the same time, thus requiring 3 FICO Scores) when buying mortgage loans from lenders. These credit reports and scores are then delivered to the lender, who submits them to the GSEs as part of a conforming mortgage. While the price for many FICO Scores can be measured in cents, FICO earns $14.85 for each “tri-merge” report, making trends and market structure in the US mortgage market especially important topics for investors to watch.
3. Software is driven by the penetration of its FICO Platform at financial clients (SaaS offering):
FICO’s Software business is $800m in annual revenues and should grow at mid to high single digit.
The business does not have the same margins as the Scores division (30s% adj operating margins vs 80% for Scores), after SBC it could even be a breakeven business, meaning all the profitability today is in the Scores business. Because SaaS software can have attractive margin profiles at scale, the continued growth of the FICO Platform will be a key driver of Software segment profits.
The company offers a myriad of solutions and capabilities that span predictive modeling, decision analysis and optimization, transaction profiling, and customer data integration. Helping clients apply highly sophisticated analytics to complex business problems, most prominently in credit decisioning.
In the last decade, FICO started repackaging its core modeling tools and applications into a single comprehensive, modular, SaaS-delivered platform offering. This has cost the company around $1bn in investments and has driven a lot of the growth in its Software division as it aims to land and expand the use of its Platform amongst its financial services clients (it is currently at 50% penetration within the largest financial firms).
This FICO Platform is a highly flexible software environment for deep analytics, primarily used for credit decisioning today, but with advanced modeling capabilities that can be applied to businesses beyond financial services. What is truly powerful is that the Platform lets users leverage FICO’s modeling tools to create their own analytical solutions to a number of business optimization and automation challenges. Clients can leverage their own data as well as data sets from a number of integrated providers, including the credit bureaus.
The Platform represents 34% of the division’s ARR up from 8% 5 years ago, now $250m in revenues (up from $170m less than 2 years ago).
Within Software, FICO, like all software vendors, has deemphasized licenses (which can be chunky) and low margin services to focus on recurring subscriptions and usage based fees (80% of the division’s revenues vs 58% in 2016). The business is more tilted towards usage based fees and the company is trying to drive more consumption of its tools at clients. This has coincided with more SaaS (50% of revenues vs 29% in 2019) vs on premise software.
Risks & Threats
Importance of the US housing and mortgage market
Consumer borrowing growth (over $5tn of consumer credit is outstanding in the US today) has usually trended with nominal GDP growth (in the mid single digits since 2000). But FICO’s revenues from Scores are impacted by other cyclical factors, notably the volume and mix of new credit applications (something where no authoritative data is available). Mortgage activity is especially cyclical and currently at a low point (after a boom post covid at twice the normal rate 13-14m applications/year in 2020 and 2021), but is it difficult to predict a recovery.
Relationship and competition with Experian
Experian is focused on commercializing its integrated platform, Ascend Technology Platform and could become a formidable direct competitor to FICO for its FICO Platform (core to its Software strategy), especially given its extensive and deep connections to the US financial sector.
Execution risks for FICO’s pricing-led strategy in Scores
FICO’s sharp price increases have attracted pushback and dynamic responses from stakeholders. Both policymakers and credit bureaus, who raised the prices of credit reports to protect their margins, have also pushed back. However, the cost of a mortgage credit report is still $80-$100, which is small relative to closing costs of $5,000-$6,000 for a median home purchase. The price could rise by $20 this year, which may attract more scrutiny. However, this comparison could be misleading, as not all mortgage credit inquiries result in a closed loan.
Execution risks in scaling Software
Sustaining enhanced performance depends heavily on successfully scaling the FICO Platform.
FHFA regulation and potential pricing pressure
The 1995 requirement by Fannie Mae and Freddie Mac that home loans they acquired had a FICO Score played a meaningful role in the adoption of the Score as a de facto standard for much of the lending industry in the US (though it was not the only reason of course).
Over the years, the Federal Housing Finance Agency (FHFA), which regulates Fannie and Freddie, has revisited the Enterprises’ credit scoring model usage. In October 2022 the FHFA finally announced plans to modernize the credit scoring methods used by the GSEs. Going forward, the FHFA will require that lenders furnish two validated and approved models: the FICO Score 10T as well as the VantageScore 4.0. This could create an opening for a challenger scoring system to become embedded in the financial system.
Competition with VantageScore
There are only two main companies providing credit scores in the US: FICO and VantageScore (a JV of the 3 credit bureaus founded in 2006), both using analytics on credit reports to give a score between 300 and 800. Historically, VantageScore has not been a real competitor to FICO with very little uptake amongst large US financial institutions.
The real difference between the two is that VantageScore, as the challenger, tries to push the public policy benefits of its score by saying it can add 33m previously unscorable consumer vs previous conventional models and cover 95% of the US credit eligible population. How? By using machine learning to create trendlines in accounts that have dormant or a too thin credit history. This is in contrast to FICO which does not relax the 6 month credit history rule and is therefore viewed as safer by lenders (a big advantage). Through credit bureaus, FICO can score 205 million consumers and has alternative scoring products (using public record, bill payment data or consumer permissioned access to bank accounts) to score an additional 27 million individuals.
The FHFA will soon require lenders to furnish two credit scores for conforming mortgages: the FICO Score 10T and the VantageScore 4.0. We believe this regulatory shift is the headline reason for why the stock price has dropped significantly. Investors are concerned that this decision negatively impacts FICO potentially weakening its moat, margins, and pricing power. While this is a risk, we do not believe it is as material a threat as the consensus believes for several reasons:
Data Collection Limitations - VantageScore differentiates itself by providing credit scores based on alternative data such as rent, utility, and telecommunication payments. However, these payments are not automatically filed with credit bureaus, and most landlords in particular avoid reporting them because they add costs and administrative burdens that would negatively impact their cap rates. As a result, we view this type of data as very inconsistent and limited.
Thin Credit File Users - By design, VantageScore provides credit scores to individuals with thin credit histories. Generally speaking, individuals with thin credit histories often choose that path intentionally since they are not looking to borrow much. We believe this model adds little incremental value towards lending volumes, therefore limiting the utility of VantageScore for lenders.
Established Market Position - For over two decades, FICO scores were the only acceptable option for loans sold to Fannie Mae and Freddie Mac. Today, FICO is still used in over 90% of all consumer credit decisions, including almost all mortgages. Due to their long track record, FICO has developed institutional trust and familiarity that makes the adoption of competing models more difficult.
Minimal Cost Burden - Even after price increases, a FICO score costs roughly $5 per score. On a $100,000 loan, this represents less than 0.01% of the loan value! This is similar to the dynamic in the bond market, where borrowers willingly pay Moody’s, S&P Global, or Fitch for ratings because it will boost investor confidence and reduce their interest rates. We believe FICO will experience a similar phenomenon where lenders will prefer paying for their scores to maintain investor confidence and reduce funding costs.
Financial Robustness & Capital Allocation
Information Services companies are natural compounders with high barriers to entry, mid-single digit organic revenue growth, and strong operational leverage driving double-digit EPS growth over long periods of time. Above all, they have strong pricing power due to their proprietary datasets and complementary analytics, which are widely used in their end markets, making them a “need to have” product.
FICO is also a true compounder:
5% revenue growth over the last two decades but significantly accelerating in recent years: much lower around the GFC and much higher in the mid teens in recent years thanks to the price increases. What needs to be noted though is that the vast majority of its revenues (¾) are from embedded transactions, meaning they are not fixed subscriptions and can be impacted by end market demand (like royalties on mortgage applications for example). FICO’s growth should continue to be in the mid teens range in the coming years. What is key is the continued price increases in its Scores business.
The significant operating leverage inherent in this business model (the royalty revenue model in its Scores business, a formula built once and sold many times) and efficient use of capital result in attractive margins (45% adj EBITDA), cash flow generation (over 110% of net income), and return on invested capital (ROIC) in the 30-40% range. For reference, the Scores division has 90% incremental adj operating margin and the division (half of the business and growing much faster) is approaching 90% adjusted operating margin with the smaller software business being in the mid 30% range on an adjusted operating margin basis.
Best in class EPS growth in a very high growth sector in the last decade. We are talking about 23% EPS CAGR from 2014 to 2025 vs 13% for the Information Services and 8% for the S&P 500. This is due to the combination of its high ROIC business model (in the 30-40% range now) with a shareholder-friendly approach to capital allocation (with FCF usually being returned to investors in the form of buybacks).
Elite financials that should continue this decade:
Revenues: FICO generated $1.8bn during 2024.
Scores Division (54% of the business):
Grown at a 20% CAGR in the last 7 years (2018-2024) with around 15-16 points of this from pricing actions.
Growth should continue in the 20% range, but it depends on the company’s pricing strategy (which is not publicly discussed).
Software Division (46% of the business):
Grown at a 6% CAGR in the last 7 years (2018-2024) and
Should accelerate to double digits in the next few years driven by high growth ARR expanding at a 20-30% clip (thanks to further penetration and scaling of its FICO platform).
Profitability
FICO reported an adjusted EBITDA margin of 52.6% before SBC in 2024 (vs 29% in 2016). Stock-based compensation has generally been in the ballpark of 8.5% of revenues in recent years.
FICO's adjusted EBITDA margin post-SBC was 43.9% (vs 23% in 2016).
In recent years, pricing-led growth in the higher-margin Scores business (which operates using a royalty model) and enhanced scale/profitability in FICO’s Software unit have both contributed to higher consolidated margins. This trend should continue (with a better mix) with adjusted EBITDA margins climbing above 50% post SBC in the next few years.
Cash Flow Generation
Capital light business (1% capex per year and small working capital requirements).
Produced $600m in FCF in 2024, which should trend towards $1bn in the next few years.
The business has one of the best FCF conversion rates (from EBITDA to FCF) in the sector at above 75%.
Balance Sheet and Capital Returned to Shareholders
Net debt/EBITDA of 2.7x at the end of 2024 with a target range of 2-3x.
Policy of returning all FCF to shareholders ($4bn worth of shares repurchased since 2017).
FCF acceleration makes FICO very attractive.
Earnings Growth
EPS should continue to compound at the mid-20% range with some execution risk around Scores pricing.
M&A History
FICO has not been a very acquisitive company in its recent history (in this century). In the early 2000s, it bought HNC Software for $795m (improving its predictive analytics edge) and London Bridge Software for $310m (extending its reach to UK and EU clients). FICO's most recent notable acquisition was customer communication software provider Adeptra, acquired for $115m in 2012. Under the current management team, also in place since 2012, FICO has largely avoided M&A and generally focused on buying businesses only for specific talent and technological capabilities. More recently the firm has been a seller in the market, divesting Software applications for scoring companies’ cyber risks (2020), consumer debt collections and recovery management (2021), and compliance/anti- money laundering management (2022).
Outlook & Guidance
Despite the FHFA’s new mandate requiring the use of both FICO and VantageScore for mortgages, we believe FICO still has a favorable long-term outlook. As mentioned in our Risks & Threats section, FICO’s robust data collection, established market dominance, and minimal cost burden position it well to withstand any threats from VantageScore and other potential competitors.
In their latest Q3 earnings report, CEO William Lansing stated “We had another strong quarter and are increasing our fiscal year '25 guidance.” Q3 revenues were $536 million (+20% YoY) and GAAP EPS was $7.40 (+47% YoY).
In his full year guidance for 2025, Lansing stated that revenue will remain at $1.98 billion. He raised GAAP EPS guidance to $25.60 and Non-GAAP EPS to $29.15. In Q4, the business is also expecting an increase in interest, marketing, and some onetime item expenses that could exceed $10 million. These expenses are factored into their full year guidance.
Despite these short-term macroeconomic and regulatory pressures, the business is continuing to innovate by recently introducing a buy-now-pay-later scoring model and securing a strategic partnership with Amazon Web Services (AWS) to boost AI-driven workflows. We believe FICO’s outlook balances near-term pressures with a favorable long-term growth runway for the business. The company’s Q3 performance, raised guidance, continued innovation, and durable competitive advantages all point towards sustainable long-term fundamentals. Investors should closely monitor the company’s Q4 performance and regulatory pressures, but the fundamentals provide us with a confident forward outlook for the business.
Governance & Management Quality
FICO’s current shareholder friendly strategy has been inaugurated by the appointment of Will Lansing as CEO in January 2012. There is a slightly higher key man risk at FICO than for other Information Services companies, but the CEO has built a solid team around him and has received in 2023 a $30m retention award vesting through 2028 to secure him.
CEO William Lansing: Has been CEO of FICO since January 2012. He has served on FICO's board of directors since February 2006. Earlier in his career, Lansing was an e-commerce executive who served as CEO of Fingerhut and NBC Internet. Lansing was also a General Partner at PE firm General Atlantic from 2001-2003, before serving as CEO of TV/internet retailer ValueVision from 2004-2007. Later, he served as CEO of meta-search firm InfoSpace from February 2009 to November 2010. Lansing also serves on the board of location data firm SafeGraph. He lives in Montana, where FICO is now headquartered. He holds B.A. from Wesleyan University and a J.D. from Georgetown University.
CFO Steve Weber: Has been CFO of FICO since May 2023. He leads FICO’s global finance organization.
and has worked at the company since 2003. Weber previously served as Vice President – Treasurer, Tax, and Investor Relations. Before that, he served as head of FP&A at FICO. Weber's experience at FICO has included steering strategic financial planning, debt raises, and M&A. He holds an MBA from the University of Minnesota's Carlson School of Management.
EVP Scores Jim Wehmann: Since April 2012. He previously served as SVP - Marketing at Digital River, an e-commerce solutions provider, from 2003 through March 2012. Prior to joining Digital River in 2003, Jim worked in marketing roles at Fingerhut, Bank One, and Brylane. He received his bachelor's degree from the University of Minnesota's Carlson School of Management and his MBA from Northwestern University's Kellogg School of Management.
EVP Software Nikhil Behl: Since July 2024, and oversees the segment's technology and go-to-market functions. He previously served as FICO’s EVP and Chief Marketing Officer and most recently, as its EVP for software sales and marketing. Behl joined FICO in 2014. His prior experience includes 12 years in executive roles at Hewlett Packard and serving as COO of Mercantila. Nikhil holds a B.S. in Business Administration from Menlo College.
Valuation
Since FICO has experienced a lot of volatility in its valuation, we believe it’s important to separate the contribution of organic EPS growth from that of multiple expansion. FICO ended 2020 trading at a TTM P/E of 53.8x and EPS of $9.76. By our estimates, EPS will reach $25.67 by the end of 2025, implying a TTM P/E of 56.6x at the current stock price of $1,505. Based on these numbers, 95.2% of FICO’s stock price appreciation over this period is due to EPS growth and 4.8% of it is due to multiple expansion, or shifting investor sentiment. Even as earnings have compounded at a rapid rate, FICO’s forward P/E multiple has compressed to 42x, highlighting that the valuation has become cheaper relative to growth. This implies that investors today are paying a lower multiple for a business with stronger fundamentals, as we believe the business will continue to have pricing power in the future. With this context in mind, we can now move forward into a deeper valuation assessment.
NTM P/E Ratio: 42x
5-Year Mean: 43x
Using Benjamin Graham’s 2G rule, FICO would need to grow earnings at roughly 21% annually to justify today’s 42x forward multiple. Since we are so close to the end of fiscal year 2025, we start with the analyst EPS expectation of $29.52, but instead of taking it at face value, we apply a margin of safety to the underlying growth assumption. With a haircut of just over 30% to the projected growth rate, we arrive at an adjusted EPS estimate of $26.57 for FY2025. This still implies ~30% YoY EPS growth — an impressive result given the backdrop of declining loan volumes.
Looking ahead, we assume EPS grows at 24% annually over the next three years, which is slightly below analyst forecasts. If earnings grow at that rate, FICO could end 2028 with $50.66 in EPS. Let’s assume one purchases FICO today at $1,505 and examine its CAGR potential using different multiples:
As you can see, at the current valuation, we would have to assume an ending multiple of 40x or more to have a double-digit compounded annual return. While FICO can potentially trade at such a valuation due to its competitive advantages, wide moat, pricing power, and long growth runway, I prefer not to rely on that assumption, as the business would have to greatly exceed expectations to achieve this.
At $1,505, we believe FICO is trading at a premium valuation with no margin of safety. We believe FICO is a good consideration for investment at $1,294 and we believe it is extremely attractive closer to $1,180, where we can reasonably expect a double-digit return with a conservative 31x ending multiple.
Final Thoughts
Overall, we believe FICO is a high quality business with sustainable competitive advantages, pricing power, and favorable long-term growth prospects. While there are macroeconomic and regulatory pressures currently, we believe the business will have limited negative impacts due to its strong market position and low-cost services. Their recent earnings report further reaffirm management’s ability to deliver superb performance and raise guidance amid a lower mortgage volume environment, and continue to innovate through ventures such as its BNPL model and AWS partnership. With strengthening fundamentals alongside forward multiple compressions, we believe FICO has a favorable outlook.
Disclaimer: The information provided on this Substack is for general informational and educational purposes only, and should not be construed as investment advice. Nothing produced here should be considered a recommendation to buy or sell any particular security.
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