Factset Research Systems Inc (FDS) 2003 Q1 法說會逐字稿

Good morning.

Welcome to the FactSet first quarter results.

All participants are in a listen-only mode until the Q&A session.

In addition, please be advised that this call is being recorded.

If anyone has objections, we ask that you please disconnect at this time.

I will now turn the call over to Ernest Wong, CFO.

Sir, you may begin when ready.

Thank you.

Good morning and welcome to our conference call.

Philip Hadley and Mike DiChristina, CEO and President of FactSet, respectively, are here with me today in our branch office.

Also with us is Mike Frankenfield, Senior Vice President in charge of our sales and consulting group.

Before I begin with a review of our operating financial performance for the first quarter conference of the 2003 fiscal year, let me tend to legal formalities.

Throughout this conference call, there will be certain forward-looking statements within the meaning of the Private Securities Litigation and 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 and assumptions which are difficult to predict.

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

For more information about these and other potential factors that could affect FactSet's business and financial results are on FactSet's annual report on form 10-K for the year ended August 31, 2002; and quarterly reports on form 10-Q for the quarters ended November 30, 2001, February 28, 2002, and May 31, 2002, all of which are on file with the Securities and Exchange Commission.

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

Earlier this morning, we announced that FactSet recorded another quarter, solid quarter, for the period that ended this past November 30th, with revenues rising 12% to $54.8 million.

Prior to a data center relocation charge taking the first quarter of fiscal 2002, operating income increased 25% to $17.9 million, and net income advance 26% to $11.5 million.

EPS on a fully diluted basis for the quarter was 33 points, up from 26 points for the first quarter of fiscal 2002.

With the inclusion of the data center relocation charge, operating and net income rose 33 and 34% respectively.

These results were all achieved under a business environment that continues to be exceptionally challenging.

With the ongoing uncertainty of the global economy and financial markets, many of our clients have continued to defer purchases of incremental services.

Additional staffing rationalizations, largely among our major investment banking clients, also negatively impacted us and resulted in a reduction in a number of subscribed FactSet workstations to 21,500 as of November 30, a loss of approximately 500 during the past physical quarter.

These factors have affected the growth and client subscriptions to FactSet services.

Total subscriptions were $221.2 million, up $2.2 million from the quarter ended August 31.

And an 11% gain over the $198.6 million that we reported a year ago.

On a side note, we have historically used the term "commitments" to reflect annual billings to all services supplied to clients at any time.

You may have read in our report we have changed terminology for better clarity and margin reporting and will now refer to subscriptions when discussing the concept.

Dollar figures captured by the concept have not changed, thus the name we use.

Client retention continued to be over 95%.

Once again confirming the importance of FactSet applications that it services to our client.

In addition, we were able to increase our net client count by five over the last three months, bringing our total client count to 917 as of November 30th.

Revenues from our domestic clients grew 11% to $44.1 million for the quarter compared to the first quarter of fiscal 2002, with essentially all the revenue growth coming from penetration of the investment management market.

Incremental subscriptions to database applications have driven this growth.

Revenues from our international operations rose 15% for the fiscal quarter, to $10.7 million.

By region, revenues from our European and Pacific rim operations rose 16% and 11% to $8.1 million and $2.6 million, respectively.

International commitments now total $42.9 million, representing over 19% of our total commitment.

Despite the difficult market conditions, demand for our portfolio analytic applications continue to rise, and at the end of November, there were over 330 clients, representing over 2200 users who subscribe to the services, an increase of roughly 65 clients and 300 users during the past twelve months.

On the expense side of the P&L, we have continued to focus our attention on controllable expenses in order to sustain our level of profitability in this environment of uncertainty.

This focus on our cost structure has allowed us to sustain and even expand our operating margin in an environment of slowing topline growth.

Cost of sales as a percentage of revenue declined 90 basis points compared to fiscal 2001, primarily the result of lower depreciation on computer-related equipment, communications costs, and computer maintenance expenses as a percentage of revenues.

Because our Cap Ex has been lower in the past several quarters, depreciation expense in absolute dollars has been flat.

Partially offsetting these improvements were increases in data costs.

Regarding selling, general and administrative expenses we experienced a margin improvement in the first quarter, largely from lower spending on office expenses, professional fees and other expenses.

In addition, because we haven't substantially expanded our office space during the past year, occupancy expense was flat and therefore lower as a percentage of revenues.

With respect to capital spending, our capital expenditures were relatively modest this past quarter, totaling $900,000, with most of it appropriated to our data centers and other IT equipment.

Our Cap Ex spending continues to be low relative to prior periods, due largely to the fact our engineers have been able to dramatically improve system performance through software enhancements, as well as [INAUDIBLE] CPU and [INAUDIBLE] upgrades.

These improvements to our system performance provide us with additional capacity and allow us to defer major purchases of additional hardware.

Additional Cap Ex has declined because we haven't needed to expand during the last year.

As we indicated in our press release this morning, we believe our Cap Ex spending for 2003 will be approximately $12 million, with the bulk of the anticipating spending ear marked for our data centers and other IT equipment.

The current economic environment has made this the most challenging period for both FactSet and our clients.

These conditions will continue to have an impact on client spending and operations in the near term.

Nevertheless, our financial performance this past quarter confirms the strength of our business model.

Longer term, we remain optimistic about our opportunities, both domestically and abroad.

Our product development remains unabated, our sales force is active, and we continue to make enhancements to existing applications.

These efforts should position us well in the marketplace and in improving economic environment.

At this time we'll be happy to take any questions you might have.

If you'd like to ask a question at this time, please press star 1 on the touch tone phone.

Again, please press star 1 now if you'd like to ask a question.

Our first question is from Keith Day with [INAUDIBLE].

Your line is open.

Good morning, guys.

Good quarter, the new client increase of plus 5, which is not as much as prior quarters, how much of that do you see as industry weakness and how much may be related to pricing austicity coming from clients on the new workstation which is at a higher price?

I guess I would say industry weakness is the primary cause.

Okay.

On the pricing issue, I think at the new client level, the value it has today is greater than it has been historically. [INAUDIBLE]

Okay, so you're not -- on a premium work station for new clients, you're not seeing prices as a reason for not signing up.

No, actually new clients start with just a couple of work stations, so it's really not a factor.

The total package and services they end up with is actually at a lower cost than it would have been historically.

And the gross margin, still up 67.6%, that's the highest in a couple of years, to what extent is price improvement helping there?

Well, with respect to that, we've -- a large part of that, I think I mentioned earlier, was due to lower depreciation, due to the lower Cap Ex spending the last several quarters.

We've been monitoring expenses and being careful in terms of expenses related with communications.

Okay.

Finally, you mentioned the new functionality in portfolio analytics in your press release.

How are you filling that, is that an up sell on existing workstation or is that something that's sold as an additional options?

How are you pricing that?

I'll let Mike answer that.

The answer to that is, it's a combination of both.

One of the applications, the PA, is an application that we've had a lot of client demand for and doubled the incremental service that clients will have the option to purchase.

Several of the other enhancements are simply enhancements to make the offering more compelling.

Thanks a lot.

Our next question comes from Craig Huber with Morgan Stanley.

Your line is open, sir.

Good morning, thank you.

I want to just cover, coming up here at calendar year end, a lot of people have concern of the hedge funds and volatility up here, just given the bubble, all the hedge funds coming on the street in the last five years, where do you guys fall as how many hedge funds will go away come January, and just along the same lines, what percentage of [INAUDIBLE] revenues actually come from hedge funds that manage, say 100 million or fewer assets?

Those guys are probably, in my opinion, the most vulnerable to go away here.

Then a follow-on question.

Thanks.

I'll take the second part of the question first.

With respect to the percentage, we don't disclose the absolute percentage of hedge funds that represents, in terms of revenues, not hedge funds, represent; however, I can tell you that it is immaterial.

Is that -- so it's less than 5% then?

Yes.

Okay.

And what's your guys' thoughts this coming January on the hedge front?

It's Phil.

I don't think -- at the client level for us, we really characterize such funds as investment managers and I don't think January is going to be anything unique, relative to what's happened last year.

We have seen in the last year more churn the lower end of the client base, but we still have a great deal of new client activity, which we think will more than offset each other.

I really don't see that as a major factor.

I would say in this quarter the major factor still exists, just the right-sizing of Wall Street.

It's pretty strong in this quarter.

Quite a few large firms laying off people, and I'd say that's still going to happen in this quarter.

Okay.

And just to kind of get in your head a little bit about your thoughts, maybe on next summer.

How many kids out of school, undergrads you're looking to hire [INAUDIBLE] and also the number of sales people and consultants you have on board right now.

Thanks.

This is Mike DiChristina.

We recognize the fact that we have to continue to bring new blood into the company, so we plan on doing a modest level of hiring into both our consulting and engineering groups, and anywhere between 40-60 new people over the summer, and that will give us a chance to push some of the more senior people into further additional responsibilities.

So we continue to be able to invest given that we still have the growth in our commitments and our sales, and the opportunity to invest in personnel and we will continue to do so.

And that's about the same level as it was last year, right?

Correct.

Okay.

And the number of sales and marketing people, please?

In terms of actual sales and marketing people in November was 112.

What about consultants, do you have that?

About 215.

Thank you.

Our next question comes from Joe Lomano with William Blair.

Your line is open, sir.

I have a few questions relating to the operating margin, which obviously was exceptional this quarter.

I'm wondering why, in your expectations for the second quarter, you seem to be looking for a slightly lower operating margin than you just reported, 31.5-32.5.

You just reported 32.6.

Was there something unusual in this quarter that led it to be so strong, or is there something expected to hold it back or bring it back a little bit in the next quarter?

I think we had a number of benefits that we experienced this quarter.

It may not occur.

In particular related to professional fees and miscellaneous. expenses.

It may be, as a result, reducing the operating margin.

So they were unusually lower this quarter?

Yes.

And the next question is, in terms of sequential decline in [INAUDIBLE], is that coming from cell side and investment banking, or has there been any increase in -- you're seeing an attrition from the buy side as well?

Exactly as you indicated, largely on the sell side, buy side has been relatively flat.

Okay.

Thank you.

Our next question comes from Andy Graves from Compass Point.

Your line is open sir.

Yes, hi.

Thank you.

I wonder if you could give us guidance about tax rate and your buy-back over the next twelve months.

I noticed your tax rated was down about 100 basis points year-over-over, and share counts relatively flat.

The tax rate that we have for this quarter, the provision was 37.5%.

I would expect that provision to be comparable in the next quarter.

What about going over the next twelve months?

We don't give guidance for beyond the next quarter.

If you've noticed our provisions for taxes hasn't been terribly volatile.

Right.

It's down about 100 basis points from last year.

What enabled you to do that?

Basically tax planning.

We've been able to take advantage of some tax planning at the state tax level, which allowed us to bring down our effective tax rate.

Right.

And just given the tough environment out there on the sell side, buy side excluded, but on the sell side, has there been any experience, at least in the past, where you could get a major step down for some reason in passwords or usage, you know, at the end of the year, or the end of the budget cycle or whatever it might be?

There are no rules.

We're obviously in an environment [INAUDIBLE] I have not experienced, I think one of the benefits to the way we sell our service is not based, the clients ready to adjust the service on a month to month basis which, I think, has smoothed out the changes from the client side.

When they let off their employees, we get that information realtime, [INAUDIBLE].

As opposed to a service that's contractually based where everything is set for a January 1 renewal.

With that said, I think Wall Street is still in a mode trying to find out what the right side is and I think you can use this quarter much the way you've seen it in the last four quarters.

So there wouldn't be any so-called stair step down or anything, as they right-size their businesses here or internationally, just a sort of a slide?

Yes.

I mean, if they decided to lay off everybody in the same day, it's possible.

That doesn't seem to be the way that it happens.

No.

[INAUDIBLE] for just a period of time, and the exhale based on their own complication cycles or what their feeling of opportunity in the marketplace is.

Okay, thank you very much.

Our next question comes from Brian Dasalle from US Bank Corps.

Your line is open.

Hi, guys.

Wondering if you could give us the split between the soft dollars to fee income, and maybe give us a sense if you're seeing any change in the way you wish to pay, given the regulatory environment?

The split for the first quarter was roughly 71% cash versus 29% commission.

That's relative to the first quarter of last year.

It hasn't really changed all that much.

And your expectations are that will stay the same going forward?

Well, if the investment management market continues to be stronger than the sell side, you may see a shift more toward commissions but, again, relatively small.

Okay, great.

And wondering if you could provide color on how the migration of taking your clients from the existing $3400 desk top to premium workstation, maybe give us an overall fix between the two workstations?

This is Phil.

Well, we're not going to publish the numbers, not something we've chosen to do at this point.

It is something that is progressing well on the client base and I think well received from the client.

Okay.

And finally, it looks like deferred [INAUDIBLE] declined 2 million sequentially.

Can you give us a sense of what happened there?

There's really nothing beyond what you'll see historically, it's that number does vary from roughly 9 million to 11 million in any quarter so I don't think there's anything to read.

Great.

Thank you.

Our next question comes from Dan Farb with Highfields Capital.

Your line is open, sir.

I work at a $5 million hedge fund, and we were a FactSet customer up until very recently.

We just canceled and the reason was just it came down to price.

Last year we paid over 200 million for all FactSet related stuff, and we repriced it with the competing product, paying $100,000 for the same functionality.

And I guess the question is, how are you guys going to be able to stop people from eventually price shopping and why don't margins ultimately get eroded as more and more people look at products?

Your product is excellent, it's just a question of, it's just extremely expensive compared to competitors and how do you think about that going forward?

We've really taken a value approach.

We have a strong client base of 900 plus, who feel the value of what we charge for the service is greater than what we charge for it.

In your particular case, I don't know the exact situation.

Our service gets used so differently from firm to firm, it very much depends on the end users in your firm, whether you're a user of TA products or not, whether our particular product fits into your investment style compared to others, we are not all things to everybody.

We certainly try and try to learn from your expense and where we can add more value, but we haven't taken the approach that, gee, we need to cut price to sell more service.

It's focused on the value side.

I guess just a follow-up to that.

Are you seeing this a lot as more and more are essentially reviewing their budget and sort of price-shopping, is this pricing pressure increased, and how do you sort of deal with it in a sense when, you know, what I did was I called four different vendors and said, this is the functionality that I need and I'm trying to price it out and the prices were all over the place with you guys being by far the highest.

Is this something you are seeing a lot of and how are you dealing with it?

You know, there's no such thing as apples to apples in this industry.

I have no idea what services you chose, and essentially for whatever functionality you chose maybe there was a better value other places. [INAUDIBLE] This deeply into the process, the value is there.

In this particular environment, certainly clients are exploring options to save money.

We happen to, in most cases, been a place where people save money.

We have given several clients the opportunity to spend more with FactSet but save in total spent for marketing services.

Mediating other software products and essentially getting more dollars per customer?

Right.

Who would you say -- I guess the question is for basic search functionality, that's what I used it for, essentially we were screening for stuff, is that something that you see becoming a less important part of your business going forward?

That's very much a portion of our product, and really depends on what level you want to do.

If you want to do a very simple level on current information and not get complex, there are many products in the marketplace to do that.

The second you launch a screen relative to a particular industry or deeper calculations on the data, there isn't anybody with the functionality.

And what percentage of your customers would you say use the product as I do, in terms of screening for various historic, financial and confidential information.

All do at various levels.

Whether they place huge value on that portion of the business varies.

It's a huge value if you're more trading and looking for simple idea-oriented, you know, like I said there are many places to get simple screening.

And -- because your margins are phenomenal.

So going forward, do you see those going under pressure now as a result of more intensive price shopping?

I know, I guess, a lot of financial firms' year ends are coming up.

Is that something you guys are concerned about, or not really in the near term?

Actually from an historical perspective we've been in one of the strongest competitive positions than we've sat in.

Okay, great.

Thank you.

Our next question comes from Michael Lipper with Lipper Advisory Services.

Your line is open, sir.

Good morning.

Two questions, but probably not related.

First, when you look at your investment management clients, and you see which services they take and how much time they spend on your workstations, does it break, in terms of quantitative shop verse a more fundamentally driven shop.

Does it break in terms of somebody's primary interest as large cap versus small caps, and then I have a second question.

I'm not sure there's a simple answer to that question.

I guess I could make generalizations. [INAUDIBLE] They tend to be heavy users.

They have particular processes that they run on a weekly basis to produce and take half an hour or hour to produce a particular report that they might be after.

As far as the rest of the client base, it really varies dramatically based on their investment file.

Obviously when you get into the news products, when the market is open, it's one of the products used when the market is open.

Everything else, you know, varies dramatically, whether it's ad hoc or daily routine.

When you look, and hopefully we'll all enjoy at some point in he future, maybe five years from now when we have another bull market of some nature.

What do you think the nature of your customer base will be?

Do you see a large number of increases in the number of clients, will those clients, in your judgment, be more quantitative or more market-related and also -- I'm going over the investment banking side, do you see that you'll have a larger number of investment banking organizations?

I guess there's several answers to the question.

As far as the opportunity in the marketplace, we have 900 clients across world wide, and we feel like they are 3-4,000 real prospects for the product in the current configuration in the product. [INAUDIBLE] That exists both on the buy and sell side.

As to the complexion of the clients going forward, [INAUDIBLE] gave an excellent speech in a PA conference in Atlanta, talking about the hybrid of quantitative and active management.

His view was that the hybrid is the wave of the future.

All I can say is it's facts objectives and whatever flavor clients are after, will be the future.

Thank you.

Our next question comes from Neil Goffey with [INAUDIBLE].

Your line is open, sir.

Good morning.

Phil, I was just hoping you could expand on a response to a previous question when you said that you felt looking back historically, FactSet seems to be in a stronger competitive position than it ever has been before.

Could you just give us a little more commentary on that?

My thought there is that FactSet is a complete solution to the client who uses not just a niche of our product, whether it's screening or, as one caller mentioned, but the service in its entirety.

There isn't a replacement for it in the marketplace at this point.

The PA products are very unique, the quantitative products are very unique, the functionality that we have and the depths of screening and spreadsheet still are not available on the marketplace.

The data at some level is a commodity, but the ability to integrate it and the service we have doesn't exist; but not to say in particular verticals or niches somebody can't find the product less expensive.

But for the major clients we offer a complete solution and continue to expand that solution.

Okay, thanks.

And Mr. Wong, no further questions at this time.

Well, ladies and gentlemen, thank you for listening in.

If you have additional questions feel free to call me direct.

Thank you.

This does conclude today's conference call.

We thank everyone for their participation.

All parties may disconnect at this time.