Factset Research Systems Inc (FDS) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FactSet second quarter conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference is being recorded Thursday, March 14, 2002.

I would now like to turn the conference over to Ernest Wong, Chief Financial Officer of FactSet Research Systems. Please go ahead, sir.

Thank you, and good morning, ladies and gentlemen.

It's my pleasure to welcome all of you to our conference call. Our CEO, Phil Hadley, and our President, Mike DiChristina, are here with me today in our Greenwich office.

Before we begin with a review of our operating and financial performance for the second quarter of our 2002 fiscal year, let me first attend to some legal formalities.

Throughout this conference call, there will be certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and beliefs and are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict.

Therefore, actual results may differ materially from what is expressed or forecasted in such forward-looking statements due to changes in economic, business, and/or competitive factors.

More information about these and other potential factors that could affect FactSet's business and financial results are in FactSet's annual report on Form 10-K for the year ended August 31, 2001 and quarter reports on Form 10-Q for each of the quarters ended February 28, 2001, May 31, 2001, and November 30, 2001, all of which are on file with the Securities and Exchange Commission.

FactSet undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise.

I am pleased to report to our shareholders that FactSet achieved another record quarter in revenues and profits for the period ended February 28.

Revenues rose 17.3 percent to $50.4 million. With a slight improvement in our operating margins, operating income advanced 20 percent to $15 million.

Prior to a $893,000 non-recurring tax benefit recorded this quarter, net income grew 17.3 percent to $9.8 million, building an EPS of 28 cents, up from 24 cents in the second quarter of fiscal year 2001.

Our operating results for the first six months of the fiscal year also showed comparable growth, with revenues increasing 18.5 percent to $99.4 million and operating income rising 20.7 percent to $29.4 million prior to a non-recurring charge in the first quarter of this fiscal year.

While these past several months have been characterized by continued uncertainty across the global financial markets, we are quite pleased to deliver another quarter of solid operating and financial performance. Although the number of facts at workstations declined by approximately 1,600 over the past three months to 22,600 at the end of the quarter, mostly due to staffing cutbacks from some of our larger investment banking clients, we continue to maintain our better than 95 percent retention rate and expand our market presence with an addition of 17 net new clients during the quarter, bringing our total client count to 880 as of February 28th.

Commitment growth improved relative to the first fiscal quarter and totaled $206.9 million as of February 28th, an increase of 16.3 percent over the past 12 months. This translates to an average commitment of $235,000, up from an average of $226,000 a year ago.

As a reminder, we define client commitments as representing forward-looking revenues for the next 12 months from all services currently being supplied to our clients.

Our domestic revenues grew 17.5 percent to $40.7 million for the quarter, largely the result of continued penetration of the investment management market.

Besides the addition of new clients, incremental subscriptions to value added services, including portfolio analytics, data warehousing and premium workstations, were the primary drivers of this growth. We now have 285 clients, representing nearly 2,000 users that subscribe to our portfolio analytic services.

This compares with 200 clients and 1,600 users a year ago.

With respect to the sales side, despite the turmoil we witnessed in the investment banking community over the past year, our overall business to this market remains quite stable and actually increased slightly during the quarter.

On the international front, with the continuing uncertainty of the global financial markets, the growth of our international operations were impacted. Total international revenues rose 17 percent in the quarter to $9.6 million. By region, revenues from our European and Pacific rim operations rose 21 percent and six percent respectively.

International commitments now total $39.3 million, up from $34 million a year ago, and represent 19 percent of our total commitments.

Moving on to the expense side of our P&L, cost of sales as a percentage of revenues declined 90 basis points, largely due to decreases in compensation, clearing fees, and computer maintenance expenses as a percentage of revenues.

Partially offsetting these improvements were increases in data costs, depreciation on computer-related equipment, and communications expenses.

Selling, general, and administrative expenses as a percentage of revenues rose 30 basis points for the quarter.

Increases in rent from our expansion both domestically and overseas over the past year along with increased professional and miscellaneous fees were the main drivers of this increase.

Partially offsetting these costs were decreases in compensation and travel expenses as a percentage of revenues.

Although SG&A as a percentage of revenues increased, our operating margin improved this past fiscal quarter as a result of the higher gross margin.

Our effective tax rate declined this past quarter to 37.1 percent and going forward into the next quarter will be approximately 37.8 percent.

As a result of certain state income tax planning recently implemented, we have received a favorable ruling from the state which supports our planning retroactive to fiscal year 2000, and that represents the majority of the one-time tax benefits that we are recognizing this quarter.

Turning to capital spending, the company's capital expenditures totaled $2.1 million for the quarter and $4.8 million for the first six months of the fiscal year. The majority of the funds have been used so far for the build-out of our regional domestic and overseas offices.

Our cap ex forecast for the entire fiscal year remains at approximately $15 million, and we anticipate that most of the remaining $10 million will be used for technology spending for our data centers, hardware, and networking equipment.

Although economic conditions have made the business environment more challenging over the last several quarters, we believe that the results of our performance demonstrate the strength of our business model. The profitability and cash flow generated from our business remains strong and have allowed us to continue investing in technology and product development throughout this difficult period. Our pipeline of new products and enhancements that will be introduced over the coming year should position us favorably in the marketplace as the economy improves.

Finally, given all the turmoil and sensitivity in corporate America today regarding accounting practices and disclosures, off balance sheet transactions, conflicts of interest, and the like, I thought I would spend a minute just reviewing some of FactSet's most basic policies and position.

First of all, as I've mentioned regularly in the past, accounting policies we employ at FactSet are very conservative.

Revenues are recognized as they are earned and billed in arrears. We don't capitalize any software development costs, and all of our technology assets are depreciated over a three-year period. Other than real estate, all of our assets are owned.

We have no other off - no other operating leases, nor do we utilize any other off balance vehicles. We don't utilize any derivatives or any complex trading instruments.

The investments that you see on our balance sheet consists solely of highly rated fixed income securities with a maturity greater than 90 days. As you know, we have no debt and our off balance sheet liabilities are limited to a number of standby letters of credit, totaling less than $500,000.

We have a simple corporate structure consisting of four subsidiaries, all of which are wholly owned and consolidated in our financials. We've made only two acquisitions in our 23 years of operation, and both of these have been fully disclosed.

Our outside audit firm, PricewaterhouseCoopers, does not perform any consulting, corporate tax work or internal auditing for FactSet. Several years ago, we made the decision to have the tax compliance and tax planning activities to be performed by another Big 5 firm, and this separation of activities, I believe, has served the company well.

We do not retain or utilize the services of any firm affiliated with our board members.

And finally, as many of you are aware, our business model has provided excellent visibility historically. And we don't see any reason why that should change in the future.

The growth of our revenue and earnings streams is consistent and not subject to great volatility.

At this time, we would welcome any questions you might have.

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the one followed by the four on your telephone.

You will hear a three tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw from your registration, please press the one followed by the three.

If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Our first question comes from

with Morgan Stanley. Please proceed with your question.

Hi. It's actually

for

.

Couple of questions - Ernest, if you could review the new product pipeline for this year and the timeline as far as beta version in actual formal rollout.

And then, secondly, if you have the number of sales and marketing employees and the number of consultants. Thanks.

Well, I'll let Phil answer the first question, but just ahead of his answering that first question, I would mention that we don't usually use these conference calls to announce new products. So, what Phil will probably do is give you a little flavor of where we're going in terms of product development.

With respect to the sales and consulting staff numbers in aggregate for the end of the quarter, we had 328 people in sales and consulting.

Phil, do you want to take the first question?

Sure,

, how are you doing? This is Phil Hadley.

On the product pipeline, I think we released last quarter the transaction-based returns for the

product which is a significant enhancement.

As I mentioned last quarter, that's something that'll take a little while to get traction. It requires us to kind of re-engineer the back end of how our clients get their portfolios into our system, but we're very excited about the value that actually brings to the client.

We announced a data warehousing product in our data warehousing product line. It's really the

database where our clients are able to host their data in the business

on our system.

And then we have several other products that are kind of in the pipeline we've talked about before - being able to distribute real-time quotes.

But that product is something that's probably still a quarter away, and, you know, we'll announce it when the time comes.

Great. Thanks.

Our next question comes from

with Thomas Weisel Partners. Please proceed with your question.

Good morning, and nice solid quarter.

Portfolio analytics - what is the penetration goal? Is this a product that you - in your view, all clients should have?

And also with, you know, 285 clients and 2,000 users, can you give us a little more color on the pricing and trends with that product?

Well, certainly the goal would be that all clients on the buy side would have that product.

There are some applications on the sell side, but it's certainly primarily a buy side product.

The pricing of the product - standard list price for the current daily product is $10,000 a workstation and there are some other fees associated with loading of the portfolios.

OK. Is there pricing pressure on the product, or are you finding that customers pretty much want to have it?

No. It's definitely - it doesn't really have a comparable product in the marketplace. There are products that do other kinds of attribution, but - real time attribution against any benchmark of a client's choice.

It's really the only product if that's the function they're looking for.

OK. And looking at the password reduction number, do you guys feel like - are we reaching a point of stabilization there?

Or given what you're seeing going on with password, do you feel like you're in a position where new clients and new product can continue to offset that?

Well, it's - the password reduction is almost all the password you see is on the cell side.

I don't honestly know what's happening there or what will happen there. I don't think it's completely done yet, and I read the paper like everybody else.

And you see large firms adjusting their investment banking headcount. From a business perspective, it's not something we really control.

So, we focus on all the rest of our business. And when that part of the business finds its natural equilibrium, then it'll start to help us again.

But, as you illustrated, it's material in that I'd rather have growth than not. But as you've seen, we've been able to grow our business even with the contraction.

Right. OK. Thanks a lot, guys.

Thanks.

Our next question comes from

with Piper Jaffray.

Please proceed with your question.

Hi. Good morning, and nice job as well.

My question relates to the pricing environment. I guess - I'm trying to get my arms around how the increase in average revenue per client - what's the driver there?

Is it coming from new products or is it pricing in general? Fill in earnest.

And if you could kind of break down for us the pricing - the relative mix up front fees versus seat licenses and how that's changed over time. Thanks.

Just to kind of walk you through the components that can change that number, obviously the number of clients affects that number. If you have mergers, it positively affects that number, which is something that we've had for more than the last decade.

So, that's one of those factors that kind of probably falsely place that number in some respects. Obviously, if two major firms joined each other our revenues go up and the divisor goes down by one or sometimes nothing depending on how many different areas of the world they're in.

I guess the other simple side of it is just our continuing just on more product to our clients. Obviously, every time we sell a workstation that increases the average revenue per client.

Our standard list price for our workstation is $6,000 in commissions. So that's changed over time, and our clients are continuing to purchase the more expensive workstation, and we continue to sell more product.

So clients are purchasing more workstations in general? Or are there add-on features, Phil, that are kind of - just kind of driving the increase in average revenue per client?

Certainly

would be a great example where every single time somebody purchases that - you know, that fee-based product and going to increase the average revenue per seat as well as per client.

And obviously, on the sell side, you know, the

workstation and the product line that goes along with that to create the premium product on the - on that side of the business is also increasing the average revenue per client.

OK. And any change in terms of the upfront fees that you're charging?

No, they've been the same for decades.

OK, great. Thank you.

Our next question comes from

with

. Please proceed with your question.

Yes, thanks. I just wanted to follow up a little on this.

I know that you've tried to give it as good a cut as you can, but just trying to get a sense of whether or not your sense is that you have reached low ebb in the - on the sell side, or, you know, generally whether you think the total number of passwords will stabilize and start to increase going forward.

I guess, you know, if I were to kind of go back through the last year, I would say that, you know, there was a certain portion of that ID adjustment that I would categorize as the sell side clients just becoming more attune with how many people they had and making sure that they were managing their ID counts as accurately as they possibly could in a very cost-conscious mode.

The other factor really is just the number of investment bankers that exist. That part of it, you know, since we don't have contracts for our services and they can adjust their ID count on a real-time basis, I - we usually see probably the headcount adjustment before you see it in the paper.

Right.

I - you know, I think there are still a few firms out there that have some headcount adjustments to go, but I think it's probably at this point as much what's happening in the market and has the market found its equilibrium and

headed up?

And, you know, will that ultimately open the door for, you know, investment banking to be a profitable - a more profitable business where

feel comfortable with the headcount they have?

I don't honestly know exactly when that'll happen - whether it's this quarter, next quarter, or whether we're - whether it's behind us already.

Do you adjust your pricing at all to keep incentive in place for them not to cut a password?

No, that's not something we've ever done.

OK.

Some of the larger clients had some very large commitments to us, where on the margin they were less expensive IDs. But other than that, no.

And just to give us a sense of the types of clients that you are adding, you added 17 in the quarter, I think on a net basis.

Right.

Can you give us some just kind of the demographic profile of those clients as the relative size? How many sell side?

How many buy side? How many - I guess the portfolio analytics clients is baked into that number, right?

Yeah. That ...

That was a ...

That's a product where many of those probably subscribe to that product, but we wouldn't break that out on a new client basis.

OK.

To characterize it, it's primarily by side for a variety of reasons. Obviously, it's apparently a much stronger business segment as well as they're just always going to be a higher count of buy side potential clients in both that we have as well as potential.

In the particular quarter, almost all of them were investment management firms, though we had a net of two on the investment banking side. So, it's certainly positive.

And then in this particular quarter we closed more in Europe than we did - on a net basis, than we did in North America.

From a client count basis, we published a net number.

Most of the activity on the negative side occurs on the very small clients. So, it tends to be somebody subscribing to our base subscription.

On the new client side, you'll see some of the - some of them being small, but also us closing managers, where they manage to the integrator and that stuff.

OK. That's fine. And one final question.

What is the dynamic currently in Asia? It's obviously the slowest growing component.

What is your outlook there?

We're a global firm.

Our clients are global. We're there to serve our clients on a global basis.

Japan obviously being the largest opportunity there, has been pretty stagnant for quite a while. I don't know when that'll come around.

The other factor there is that the sell side - large sell side firms all have a global presence. And when they're adjusting their seat counts, it's something that's happening worldwide, probably materially affects on a percentage basis both Europe and Asia, sometimes greater than it does here in the states, just because of the base of business they have.

Right. Are the majority of your clients in both Europe and Asia related to U.S. - our U.S. arms - sorry, our international arms of U.S. firms?

I don't know if I'd answer a majority, but it could - and I'm guessing a little bit. I would say at this point, there's a

relationship in my head. But it's really hard to tell anymore, depending on the kind of firm where you would classify, you know, the core of their business.

OK.

So many of those firms are so global.

So, it's kind of hard to answer that question. You know, either the European firm or the American firm kind of depends on what you're looking at.

OK. All right. Thank you very much.

You bet.

Our next question comes from

with Deutsche Bank. Please proceed with your question.

Hey, Phil.

I guess this is a follow-on to some of the earlier questions, but the revenue per password has grown pretty sharply here over the last couple of quarters, I guess.

And specifically, I'm just trying to understand maybe how far that can go in the context of, you know, what you've got on the plate in terms of new product offerings.

And specifically, I'd like to know, too, you have not instituted any price increase in the last 12 months - correct?

The price change that we did make was that we discontinued selling our old workstation.

In other words, our standard list price for our workstation for many, many years was $3,600

commission. That product is no longer for sale, but the new product - what we had been calling our premium workstation

sells for $6,000.

OK.

At some point in time in the future now that the - they're two different products. The $6,000 workstation comes with a great deal more built into it than the old workstation did.

At some point in time in the future, clients will begin to phase from the old to the new.

OK. So existing clients can keep the

for the time being.

For the time being - yes. But at some point, we will discontinue that product. But if you were a new client subscribing today, you wouldn't have the option to subscribe to that old workstation.

OK.

And then, depending on how you're looking at average revenue per workstation, you know, every time we sell access to a new database or benchmark, you know, that's going to affect average revenue per workstation.

OK. And then what's the timeframe under which you think you might discontinue completely the $3,600 station?

Don't honestly know the answer to that.

I don't - I really don't know the answer to that at this point.

I think it's when we truly feel it's the right decision for the client where I can in good conscience say that even though it's more money, it's a better product and the client's going to truly get better value for it.

So if they make the decision and I kind of strongly encourage them to do so, they look at it as more of a, "Gee, that's a good idea. And I'm glad I did it," as opposed to in hindsight.

We did that with the wide-area network, as well.

We sold it, you know, kind of a stand-alone product for a very long time. And then it came to the point where modems were not the right technology anymore, and we implemented the process of saying, "Everybody has to have it,"- that's probably been three or four years ago at this point - at the end of the year. But I don't think any client can look back at it and say, "Gee, I still I was dialing up on a modem."

OK. Maybe two questions for Ernest. Ernest, the operating margins here in the high 20s, is that the right sustainable level, do you think?

And, number two, $15 million in capital spending, is that - should we think of that as the ongoing rate as well?

With respect to the operating margin, I think our guidance has been that, at least for the next quarter, the operating margin will probably be around the average of the operating margin for the first six months.

And the cap ex $15 million is probably the right number this quarter of this year. Going forward, it's difficult to say, simply because there's new technology coming out in the following year in 2003.

There would be some strong likelihood that we would be involved in procuring that technology. So, I couldn't give you a number for 2003 at this point.

How about back to the margin then? High 20s, though, you feel comfortable with as a sustainable number beyond the next quarter?

I think for now it's probably a reasonable margin to consider going out beyond third quarter.

OK. And last for Phil.

Anything new or different in terms of the competitive dynamic that you're seeing in the marketplace in terms of the players and the product offerings?

Not relative to the last quarter or any comments I made last quarter, no.

OK. Great. Thanks.

Our next question comes from

with Credit Suisse First Boston. Please proceed with your question.

Yes. Good morning. Ernest, looking at the trailing four quarter revenue and then its relationship with commitments from two quarters ago, how should we look at this quarter's disconnect between the two?

Because it's actually a little bit more - fairly sizable disconnect versus what you have historically reported. And any forward implications for that metric?

Well, essentially if you take a look at the commitment number that we have given at the end of the second quarter at February 28th historically, that's a pretty good indicator of what our total revenues are going to be for the full year six months out. A simple way of looking at it is that the number that we report at the beginning of the quarter is going to be essentially one-quarter of the commitments that we report for some assumed level of growth in commitments.

OK. Well, I mean, I guess any specific comment on, you know, the distance between the two - about six million versus, you know, really a more - tighter range for the past, you know, couple years?

Not sure where you're getting that number,

.

I mean from what I have - and I'm sorry if this is incorrect, but 198 in commitments from Q4 of '01

quarter off of the Q2 '02 number.

...

One-ninety-eight was the Q1 number, I believe - not the Q4.

OK. So do you actually have the Q4 numbers, then?

Was 195.

It was 195.

Right.

OK. Thank you.

Ladies and gentlemen, as a reminder, to register a question, press the one, four.

Our next question comes from

with Deutsche Banc Alex. Brown. Please proceed with your question.

Morning, guys. Don't mean to double-team you from Deutsche Bank, so I'll be brief.

Just a couple of quick questions on the international side - could you just break down the number of customers on the international out of the 880? How many of those were international?

And also on the commitments, what part of the 207 comes from international?

On the commitment side, roughly 19 percent of our total commitment is international. And then in terms of international clients, they represent slightly over 200 of our 880.

"Slightly over" being, like, 205 - 210?

Probably closer to the latter.

OK. Great. Thanks, guys.

Ladies and gentlemen, as a reminder, to register a question, please press the one, four.

Our next question comes from

with Wachovia Securities. Please proceed with your question.

Thank you. Good morning, gentlemen, and great job.

Ernest, little picky, but I've been noticing here that the deferred revenue in the liabilities (or) deferred cash fees and commissions has been trending down a little bit. Is - do you know what's going on there off the top of your head?

Absolutely. There's really nothing to read into that. I think it's just that some of our clients have not been prepaying us as much as they had in the last six months.

And there was some cleanup, needless to say, in the - at the end of the fiscal - at the end of the calendar year and that's probably one of the reasons why you see a decline in deferred revenues.

OK. That's it. And could you - you gave the cap ex of about $15 million for this year.

Do you have about what you expect D&A to come in at?

We haven't given that number, but it wouldn't be too far off of annualizing the existing.

Got you. OK. So, somewhere around 20.

OK. Thank you.

Mr. Wong, there are no further questions at this time.

I will now turn the call back to you. Please continue with your presentation or closing remarks.

OK. Well, once again, ladies and gentlemen, thank you very much for your support and listening in. And if you have any further questions, please feel free to give me a call.

Thank you, and have a good day.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.