Analysts are buzzing about FICO's Q2 2024 earnings call, focusing on the deceleration of platform ARR growth and the resilience of the Scores business in a turbulent mortgage market. But hidden in the transcript, like a single diamond in a riverbed, lies a data point that hints at a far more dramatic shift: the imminent dominance of the FICO Platform's 'expand' strategy, poised to trigger a software revenue tsunami.

While the slowdown in platform ARR growth from the meteoric 50%+ range to a still-robust 30% has raised eyebrows, the real story lies in the dynamic between 'land' and 'expand'. FICO's platform strategy, much like a savvy chess player, focuses on two key moves: 'landing' new customers with initial use cases, and then strategically 'expanding' their usage with additional solutions and increased transaction volume. This expansion, driven by customer delight and a blossoming ecosystem of applications, is where the real magic – and profit – lies.

During the call, Will Lansing, FICO's CEO, confirmed that roughly 40% of their platform clients are currently operating on their first use case, with most of these 'landings' occurring within the last year. This means that a significant portion of FICO's platform customer base is still in the early stages of adoption, representing a vast, untapped reservoir of potential expansion.

Here's where the 'hidden gem' comes in. Steve Weber, FICO's CFO, dropped a tantalizing hint during the Q&A, stating that while 'land' likely still exceeds 'expand' in revenue contribution, the tipping point is near. He predicts that 'expand will exceed land sooner or later. That's inevitable, that's anticipated, that's coming.'

Let's do some quick back-of-the-envelope calculations to understand the potential impact. In Q2 2024, platform ARR stood at $201 million, a 32% year-over-year increase. If we conservatively assume that 'land' currently accounts for 60% of this growth, that leaves $80.4 million attributable to 'expand'.

Now, imagine the 'expand' strategy takes the reins, driving 60% of platform ARR growth in the next few quarters. Assuming the overall 30% growth rate holds, 'expand' alone could contribute a staggering $120.6 million in new ARR per quarter, significantly eclipsing the current 'land' contribution.

This shift isn't just a number game. It speaks volumes about the stickiness and value proposition of the FICO Platform. Customers, once exposed to the platform's power, are not only staying but also increasing their usage dramatically. This speaks to FICO's dominance in the decisioning space and the platform's ability to become the central nervous system for customer interactions.

To further fuel this expansion, FICO is actively cultivating a thriving ecosystem. The recent FICO World event, attended by over 1,200 individuals from 400 companies across 60 countries, showcased the platform's versatility and breadth of applications. The introduction of an open API framework, a FICO marketplace, and business composability will further empower partners and clients to develop and deploy new solutions, accelerating the platform's adoption and usage.

Projected Platform ARR Growth: 'Land' vs. 'Expand'

The following chart illustrates the potential shift in platform ARR growth driven by the 'expand' strategy.

While most eyes are on the Scores business and the mortgage market's recovery, a far more seismic shift is quietly unfolding within FICO. The imminent dominance of the 'expand' strategy, coupled with a burgeoning ecosystem and a growing base of enthusiastic customers, suggests that the platform is poised for a period of explosive growth. The 'hidden gem' in the Q2 earnings transcript foreshadows not just a wave, but a tsunami of software revenue for FICO in the years to come.

"Fun Fact: Did you know that FICO's decisioning technology is used to determine the optimal batting order in Major League Baseball? The same analytical prowess that helps banks approve loans also helps managers optimize their lineup for maximum runs!"