Fair Isaac Corporation (NYSE:FICO) is the most dominant player in the U.S. credit scoring industry. The company holds a near-monopoly market share in the U.S B2B credit scoring market , largely due to the universal adoption and trust in the FICO Score as the leading credit assessment standard among financial institutions. This dominance translates into exceptionally high profit margins and growth rate for FICO, as reflected by its perfect GF score of 10 out of 10 for both growth and profitability. FICO has been an exceptional compounding machine with an astounding annualized compound annual growth rate (CAGR) of 41% over the last ten years. While I think FICO is worth following in the long term, currently FICO's stock is extremely expensive as the stock has a P/E ratio of more than 110 times, indicating significant overvaluation.

Founded in 1956, FICO has a rich history spanning across almost six decades. Initially, the company gained prominence for its pioneering work in credit scoring. Later it invented the FICO Score, which remains the industry gold standard. The launch of FICO Score was an instrumental event in the history of the U.S lending market. Over the past few decades, FICO has evolved from being a credit scoring company to a provider of comprehensive decision management solutions. Today FICO operates in two primary segments: Scores and Software.The Scores segment is primarily focused on credit scoring and analytics, while the Software segment offers a suite of enterprise software solutions aimed at automating and optimizing decision-making processes. This platform-based strategy has enabled FICO to address a broader range of use cases and customer needs.

Over the last three years, the revenue split between the two sectors has been fairly balanced, with each contributing around 50% to the company's overall revenue.

While the revenue split between the Scores segment and the Software is even, the Scores segment has a significantly higher operating margin and contributes disproportionately more to FICO's overall operating income.

As demonstrated by the table above, FICO's Scores segment enjoys an impressive operating margin of 88%, while the operating margin of the Software segment is only 33%. Notably, the operating margin of the Software segment has been increasing every year, due to operating leverage.

FICO's Competitive Advantages

A business operating with an 88% operating margin undoubtedly holds significant competitive advantages. In the case of FICO, I believe the competitive advantages are manifold.