Fair Isaac Corporation FICO Moat

Key data

The moat

A lender deciding whether to give someone a mortgage needs a number, and for Fannie Mae and Freddie Mac to buy that mortgage the number has historically had to be a FICO score. The requirement is not in a contract with the lender. It is in the rules those enterprises operate under, which means FICO's customer is not really the bank.

That is a regulatory franchise, the most durable kind of moat, and it explains the pricing. The company has raised the per-score royalty roughly sixteenfold in five years, and lenders have paid it, because there was no alternative model the buyer of their loans would accept.

What the moat produces is visible without ambiguity: the company's own explanation for scores revenue growth names higher unit prices in every quarter but one.

Widening or narrowing

The pricing power is at maximum and the software business is splitting in two.

Platform retention of 148% is exceptional and non-platform at 82% means the legacy software book is shrinking by nearly a fifth a year. Those are two different businesses being reported as one segment, and only the smaller one is compounding.

The overrated case, and it is the whole read. Scores growth of 49% on price rather than volume is usually the strongest possible moat evidence. Here it is the opposite. A franchise granted by a regulator, monetised sixteenfold in five years, has given that regulator every reason to act, and the regulator has: the Federal Housing Finance Agency approved an alternative model for mortgages the enterprises buy, and is in discussions to bring credit score costs to as low as 99 cents. FICO's own annual report states plainly that if other models are approved or its score is not approved for continued use, it could have a material adverse effect on revenues. The company has priced its moat as though the granting authority would never notice.

On profit pool, FICO takes a tiny slice of an enormous one and has been enlarging it aggressively: $10.00 on a mortgage where the origination costs thousands. That is what made the increases possible and what makes them conspicuous.

The moat is narrowing, despite the pricing.