Fair Isaac Corporation (FICO)

Credit scoring and analytics company FICO (NYSE:FICO) met Wall Streets revenue expectations in Q3 CY2025, with sales up 13.6% year on year to $515.8 million. On the other hand, the company’s full-year revenue guidance of $2.35 billion at the midpoint came in 1.9% below analysts’ estimates. Its non-GAAP profit of $7.74 per share was 5.2% above analysts’ consensus estimates.

Company Overview

Creator of the three-digit number that can determine whether you get a mortgage or credit card, Fair Isaac Corporation (NYSE:FICO) develops analytics software and the widely used FICO Score, which is the standard measure of consumer credit risk in the United States.

A combination of increasing reliance on data and analytics across various industries and the desire for cost efficiency through outsourcing could mean that companies in this space gain. As functions such as payroll, HR, and credit risk assessment rely on more digitization, key players in the data & business process services industry could be increased demand. On the other hand, the sector faces headwinds from growing regulatory scrutiny on data privacy and security, with laws like GDPR and evolving U.S. regulations potentially limiting data collection and monetization strategies. Additionally, rising cyber threats pose risks to firms handling sensitive personal and financial information, creating outsized headline risk when things go wrong in this area.

FICO's competitors in the credit scoring market include VantageScore (a joint venture of the three major U.S. credit bureaus), CRIF Ratings in Europe, and in-house analytics developed by financial institutions. In software, FICO competes with Experian (EXPN), Equifax (EFX), Nice Actimize (NICE), Pegasystems (PEGA), SAS, IBM, and Adobe across various application areas.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $1.99 billion in revenue over the past 12 months, Fair Isaac Corporation is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Fair Isaac Corporation’s 9% annualized revenue growth over the last five years was solid. This is a good starting point for our analysis because it shows Fair Isaac Corporation’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Fair Isaac Corporation’s annualized revenue growth of 14.7% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

Fair Isaac Corporation also reports its annual recurring revenue (ARR), or the revenue it expects to generate from its existing customer base in the next 12 months. Fair Isaac Corporation’s ARR reached $747.3 million in the latest quarter and averaged 8.2% year-on-year growth over the last two years. This number is lower than its normal revenue growth. If ARR growth continues to trail revenue growth, the company could see lower valuation multiples because topline growth will be coming from less recurring sources. Holding everything else constant, this is a negative sign as it should lead to better multiples over time.

This quarter, Fair Isaac Corporation’s year-on-year revenue growth was 13.6%, and its $515.8 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 21.8% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and implies its newer products and services will spur better top-line performance.

Fair Isaac Corporation has been a well-oiled machine over the last five years. It demonstrated elite profitability for a business services business, boasting an average adjusted operating margin of 49.7%.

Looking at the trend in its profitability, Fair Isaac Corporation’s adjusted operating margin rose by 14.7 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q3, Fair Isaac Corporation generated an adjusted operating margin profit margin of 54.4%, up 2.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Fair Isaac Corporation’s EPS grew at an astounding 25.1% compounded annual growth rate over the last five years, higher than its 9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Fair Isaac Corporation’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Fair Isaac Corporation’s adjusted operating margin expanded by 14.7 percentage points over the last five years. On top of that, its share count shrank by 19%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Fair Isaac Corporation, its two-year annual EPS growth of 23.2% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q3, Fair Isaac Corporation reported adjusted EPS of $7.74, up from $6.54 in the same quarter last year. This print beat analysts’ estimates by 5.2%. Over the next 12 months, Wall Street expects Fair Isaac Corporation’s full-year EPS of $29.91 to grow 35.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Fair Isaac Corporation has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging an eye-popping 34.5% over the last five years.

Taking a step back, we can see that Fair Isaac Corporation’s margin expanded by 5.5 percentage points during that time. This is encouraging because it gives the company more optionality.

Fair Isaac Corporation’s free cash flow clocked in at $210.8 million in Q3, equivalent to a 40.9% margin. The company’s cash profitability regressed as it was 7.5 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Fair Isaac Corporation’s five-year average ROIC was 53.4%, placing it among the best business services companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Fair Isaac Corporation’s ROIC has increased significantly. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Fair Isaac Corporation reported $134.1 million of cash and $3.07 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.11 billion of EBITDA over the last 12 months, we view Fair Isaac Corporation’s 2.6× net-debt-to-EBITDA ratio as safe. We also see its $53.88 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Fair Isaac Corporation beat analysts’ EPS expectations this quarter. On the other hand, its full-year revenue guidance missed and its ARR fell slightly short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 1.3% to $1,722 immediately after reporting.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Fair Isaac Corporation, you should also grasp the company’s longer-term business quality and valuation.

Fair Isaac Corporation is truly a cream-of-the-crop business services company. To begin with, its revenue growth was solid over the last five years, and its growth over the next 12 months is expected to accelerate. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, and its impressive operating margins show it has a highly efficient business model.

Fair Isaac Corporation’s P/E ratio based on the next 12 months is 43.1x. A lot of good news is certainly baked in given its premium multiple, but we’ll happily own what we believe is one of the best businesses in our coverage. Investments like this should be held patiently for at least three to five years as they benefit from the power of long-term compounding, which more than makes up for any short-term price volatility that comes with high valuations.

Wall Street analysts have a consensus one-year price target of $2,023 on the company (compared to the current share price of $1,722).