Thread by @investing_city

FICO is an interesting business.

You know that credit score you get?

Yeah, FICO makes more than 100% of its profit from those. Think about how asset-light they are.

Quick [THREAD]

1/ The key is the industry dynamics.

Here is a simplified version of the value chain:

- someone applies for a loan
- the bank needs a credit report and FICO score to assess risk
- credit bureaus supply data to FICO and distribute FICO scores

2/ FICO services 98 of the top 100 financial institutions globally. These lenders have FICO scores embedded in their processes for determining risk.

FICO's brand has power.

This is why the credit bureaus can't cut FICO out. They tried with VantageScore but not successful.

3/ It's a very rare dynamic for a company to be a supplier and a distributor and not have ultimate leverage.

This is the case with credit bureaus and FICO.

Bureaus can't raise prices too much on their data either because FICO would raise its royalty rates.

4/ Hence the crazy margins for FICO scores.

86% EBIT margins!!

That's EBIT, not gross.

5/ FICO has 3 revenue segments and "Scores" made up 36% of sales last year.

6/ However, at the segment level, "Scores" accounted for more than 100% of total EBIT.

End/ Clearly FICO's business is driven by its Scores.

Anyone seen a business with higher than 86% operating margins?