Factset Research Systems Inc (FDS) 2003 Q2 法說會逐字稿

Good morning.

Welcome to the FactSet second quarter earnings conference call.

All participants will be in listen mode only.

Please be advised this is being recorded.

If anyone has any objections, please disconnect at this time.

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

You may begin, sir.

Thank you very much.

Good morning and welcome to all conference call.

With me are Phil Hadley our CEO, Mike DiChristina, our President, and Mike Frankenfield, Senior Vice President in charge of Sales and Consulting.

Before I begin to our performance of the second quarter fiscal 2003 year, let me attend to legal formalities.

Throughout the 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 risks and uncertainty 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 important about these and other factors -- more information about these and other potential factors could affect FactSet's business and financial results, which are in FactSet's annual report on Form 10-K for the year ended August 31, 2002 and quarterly reports on form 10-Q for each of the quarters and February 28th, 2002, May 31st, 2002 and November 30th, 2002, all on file with the Security & Exchange Commission.

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

We announced earlier this morning that FactSet posted another record quarter for the period that ended this past February 28th, with revenues rising 12% to $56.7m, operating income increasing 26% to $18.9m, and net income advancing 13% to $12.1m.

EPS on a fully diluted basis for the quarter was 35 cents, up from 31 cents for the second quarter of fiscal 2002.

Note that an income tax benefit of $893,000 was recognized in the second quarter of fiscal 2002, amounting to a 3 cent increase in EPS.

Excluding this benefit, net income and EPS rose 24% and 25% respectively.

Our performance for the first six months of the fiscal year reflected comparable results, with revenues increasing 12% to $111.5m.

Operating income rose 29%, to $36.8m.

Net income grew 23% and EPS increased from 56 cents to 68 cents, a 21% increase.

In the first half of fiscal year 2002, we incurred a $904,000 charge in connection with the move of our New York data center to New Hampshire.

This charge, along with the tax benefit that I just mentioned, amounted to a net one cent increase to EPS in the first half of fiscal year 2002.

Total client subscriptions rose to $230.3m as of February 28th, an 11% gain over the $206.9m we reported a year ago.

Up a bit over $9m from the $221.2m at the end of our last fiscal quarter.

Subscriptions reflect the total annual billings for all services being supplied to clients at any point in time.

Continued belt tightening and significant staff cutbacks, largely in the investment banking sector, resulted in our workstation count declining to 19,400 at the end of February, a loves approximately 2,000 subscriptions, at work stations during this past quarter.

However, the loss in revenue tied with the workstations were more than offset by growth in our business from additional subscriptions to our applications and databases and service upgrades and new clients.

In addition, our acquisition of merger stat increased total client subscriptions by a little over $2m this quarter.

Our net client count rose to 928 up 11 clients during the quarter and 48 over the past 12 months.

Client retention continued to remain over 95%, once again reaffirming the value of FactSet to our clients.

Revenues from our domestic clients grew 12% to $45.7m for the quarter, compared to the same period in fiscal 2002 with incremental subscriptions to databases and applications new clients and expiring discounts being the primary drivers of this growth.

Revenues from our international operations rose 14% for the fiscal quarter to $10.9m.

By region, revenues from European and Pacific Rim operations rose 15% and 9% to $8.4m and $2.5m respectively.

Total international subscriptions total $44.1m representing 19% of our total subscriptions.

Demand for our analytics applications continue to rise in the quarter with 335 clients, representing approximately 2400 users as of the end of February.

An increase of roughly 50 clients and 400 users during the past 12 months.

Moving on to expenses, we have continued to be quite vigilant in managing our cost structure in order to sustain our profitability in this continuing period of uncertainty.

Offset sales as a percentage of revenues declined 130 basis points compared to the same period a year ago largely the result of lower clearing fees and depreciation of computer related equipment as a percentage of revenues.

Given our level of capital spending on technology equipment has been comparatively low during the past year and a half, depreciation expense in absolute dollars has been relatively flat.

Partially offsetting these improvements were increases in data costs and a slight rise in computer maintenance expenses as a percentage of revenues.

General and administration expenses as a percentage of revenues improved by 220 basis points, benefiting from lower levels of spending, as a percentage of revenues in promotion, occupancy costs, office expenses and professional fees.

An increase in miscellaneous expenses, partially offset these gains.

With regard to capital spending, our capital expenditures totaled $3.1m this past fiscal quarter, primarily for technology spending in our data centers and other IT equipment.

During the first six months of the fiscal year, capitol spending totaled $3.9m.

As we have indicated previously, our CAPEX spending continues to be relatively low, largely as a result of significantly improved system performance that our system engineers have achieved through software enhancements as well as through CPU and upgrades.

These enhancements and upgrades have provided additional capacity and have permitted us to defer major purchases of additional hardware.

We expect our CAPEX spending in fiscal 2003 will total approximately $12m with the bulk of the anticipated spending earmarked for data centers and other IT equipment later in the fiscal year.

Unfortunately, the economic climate has not improved during these last several months.

This combined with all the global political uncertainty ahead of us will not have a positive impact on client spending and our operations in the near term.

Despite these challenging times, our financial performance this past quarter reaffirms the strength of our business model.

As we emerge from this difficult period, we are confident about our opportunities both here and abroad.

We continue to invest in product development, to enhance our breadth of applications, and our sales force continues to be very active.

We expect that these efforts should position us well for the continued growth and an 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 your touch-tone phone.

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

Our first question from Brett Manderfeld with Piper Jeffrey, your line is open.

The question for you relates to sequential revenue in the quarter.

Can you talk about contribution from merger stat in the quarter?

The rest of the growth, is that mainly from access fees from new clients or price increases on a per workstation based?

Thanks.

Sure.

Not a problem.

With respect to merger stat, I think we indicated both in the press release and my earlier comments that merger stat totals about $2m in subscriptions at this point in time, a little over $2m.

We owned merger stat for all of about five, six weeks before the quarter close.

That represents approximately 10% of a year, you can do the math there to figure out what revenues we extrapolated from that, in terms of what revenue got represented in the second quarter.

In terms of the sequential growth on subscriptions, it came from all areas.

It was, as I indicated earlier, from additional subscriptions, to our databases and applications, service upgrades, and to a small extent, new clients.

Great.

And just to follow-up to the merger stat acquisition, can you talk a little bit about your acquisition strategy going forward?

Will we look to acquisitions as a key part of growth going forward?

Thank you.

I'll let Phil answer that we question.

How you doing?

It's never been a key strategy for us.

The two that we've done recently the institutional holdings and the other were opportunistic and fit into our product line and were important for us to provide our clients with a quality option in those areas.

We weren't able to do it any other way.

But at this point in time, we don't have any particular strategy, based on acquiring our growth.

There's no particular companies or areas where you feel --

No.

You should be focused?

No.

Excellent.

Thank you.

Our next question comes from Douglas Arthur with Morgan Stanley.

Your line is open.

It's actually Craig Huber.

Congratulations on the quarter.

Mul-techs obviously -- it was just bought.

Were you guys interested in that?

If so, why?

A change over your whole culture and balance sheet, et cetera.

And I have a couple of follow-up questions.

I guess I'll answer the question by saying we would never comment on whether we were interested or party to any negotiation for an acquisition.

Just stepping back a step, that the transaction took place, in the marketplace Reuters is a company we have a good relationship with.

We're suppliers to them in a couple areas, they're suppliers to us.

It will be a good relationship going forward.

As far as what life were to look like, the rest of it is all theoretical.

Okay.

Then, you had a nice pick-up in the number of clients in the quarter.

Can you describe the clients, the increment of clients you picked up in the quarter, please in terms of what their size is?

Thanks.

The mix of clients we've been adding really for the last couple of years is pretty normal.

On account basis, there are more smaller firms, when I say smaller firms, maybe 1b, or give or take.

Every quarter, we tend to add one incredibly large one that should have been a client forever that just managed to come around.

In this last quarter we picked up one in California that manages $36b that managed to elude for a long time.

The mix has been really what it's always been.

At the other end of the spectrum we have more churn at this point in time than we had before.

We report the net number, so marginal firm certainly feels a lot of pressure, but I don't think the churn we have, at least from what we determine is really for competitive reasons, really stresses on the market and our clients.

Then, finally, historically, you guys have described the number of passwords as translating into revenues at FactSet at only about 30% of the revenue base, kind of one for one basis.

Does that still hold today?

What's your comments there, please?

I couldn't tell you exactly, but my gut would tell me it's not materially changed, even though we obviously reported a substantial decrease in the count.

That was really a couple of firms changing their deployment from a complete deployment to a limited deployment.

The pricing in those particular clients goes from pretty aggressive on our part, when everybody gets it to much closer to a list price, when they reduce their deployment.

We've had a very strong product line out there, and the migration to our current fully loaded workstation is progressing nicely.

Would you be willing to tell us how much those two firms accounted for, the drop in the passwords in the quarter?

Substantial.

As in way more than the majority.

Okay.

Very good.

Thank you.

Next question comes from Joe LaManna with William Blair.

Your line is open.

I think this was partially answered in the last question, but just to clarify, can you talk a about buy side versus sell side, in terms of the reduction in users versus the additional subscriptions to the applications and databases in the new clients?

In other words, would it be correct to say that most of the reduction in pass words was from sell side and most of the new business and additional subscriptions was from the buy side

I would go so far as to say, on the password side, darn close to all on the sell side.

As far as the product side of it, we've got activity on both sides.

So, I think our growth on the investment management side of the business has always been more stable and it's still growing substantially greater than the sell side at this point.

We do actually have like growth on the sell side at this point.

Certainly, when you add the merger stat revenue to.

Is there new client growth on the sell side as well?

Yeah.

A couple here and there.

In the last quarter, I think we were up a handful of clients on the sell side.

In a follow-up related to that, the mix of sub descriptions at the end of the quarter, buy side versus sell side, has that changed materially from the past?

Not materially, other than the sell side has got a much lower growth rate than the buy side, so that over time, assuming that whole, I think the buy side will become a greater percentage of our revenue.

You're talking about basis points per quarter; not something that is too bad.

Still about 75% buy side?

Right.

It hasn't changed that much.

Thank you.

The next question comes from Keith Gay with Thomas Weisel Partners.

Hi, guys, congratulations on the quarter.

Phil, you mentioned more churn but you're still above the 95% renewal rate.

Is it your sense that has settled down, in terms of keeping the client count up or keeping the client count growing is what I'm getting at?

Do you feel like a large part of your client base has sort of made that budgetary review and has ended up keeping FactSet although they may be reducing passwords?

I guess my feeling toward the market, this is completely gut, is that you know at least what we've seen for the last six to nine months is a pretty consistent choppiness in the marketplace.

So coming into this quarter, what I actually thought was going to happen, given what I knew the market hitting lows in October, I'd have to say, we ended up doing a little better than I thought we were going to.

But with that said, I don't think my outlook for the next quarter or next two quarters is any better than I thought it was in October.

We came pretty darn close to hitting lows again, which really causes everybody to reevaluate where they are.

Right.

Wherever we are, it seems like status quo.

I don't know, Mike, would you add any color to that?

You summed it up well.

Looking at the drop in passwords, you're still sustaining pretty, on a relative basis, strong growth rates in this type of environment.

Just sort of asking the question a different way, is the magnitude -- more magnitude of the growth coming from additional products, such as portfolio analytics such as impact on pricing on the migration to the premium workstation?

Definitely.

For us to continue to do what we're doing, we probably have a product line and it's not something you could even potentially describe on a call like this, that depending on how many ways you put it, if you approach hundreds of different products, all contribute.

Some in a small way, and some in a much larger way.

It's the combination of all of those really driving the growth at this point.

Okay.

On the migration to the premium workstation, you said that's tracking favorably.

Can you give us a sense of, as customers do come up for renewal or when the sales force gets back in there, I think in the past, you would say, well grandfather passwords will stay at the old price.

But it appears from a sales effort, you're trying to more aggressively migrate the customer to the premium workstation.

Is that something you're doing aggressively?

And what's been the receptivity to that?

Mike, I'll let you answer that.

We're certainly giving clients -- the sales force is actively in the marketplace place introducing the capabilities of the new workstation.

The workstation that we've created is a vastly superior product than the old workstation that we had in the market place.

And we're certainly incenting clients to not just purchase additional new workstations on the margin, but to consider converting all of their workstations over.

We're finding success that seem to be going extremely well.

So, we're really pleased with the way the product's being received.

We anticipate clients really taking a hard look at the product that we're offering and making the decision to do a wholesale switch.

Finally, can you comment on competitive tactics or reaction to the fact that you are adding -- you're starting to add news and quotes to your capabilities?

I don't think we're material enough to have anybody worried about it at this point.

Okay.

Thanks, guys.

The next question comes from Steve Recio with Bear Stearns, your line is open.

Hi, guys.

A couple of questions.

Did you mention anything about -- I know you mentioned portfolio analyzer product.

What about the optimizer?

It's doing quite well on our system, for those that aren't familiar, we have a relationship with North Field, a company based in Boston.

We integrated the optimizer and analytics product.

It's done quite well.

So the uptake is it's been pretty strong then, or has it been improving or flattening out?

I guess relative to history, I would say, it's certainly been picking up more clients on a quarterly basis than prior.

Great.

Again, I may have missed this, but Europe, could you just maybe provide a couple more details on that?

How are things going there?

I would say at this point, Europe really mirrors the United States, as far as complexion of the clients signing up as well as the stressors on the marketplace there.

Obviously, you're probably doing better on the buy side than the sell side, so to speak?

Yes.

The mix of business is really very similar for us.

Okay.

Thanks a lot.

The next question comes from Steve Shapiro with Intrepid.

Your line is open.

I'm confused with the acquisition and the charges, and all the rest of that stuff.

I'm hoping you can clarify it.

Could you just please tell me what revenue would have been and earnings would have been in the just completed quarter, you know ex the charge, ex the gain, without acquisition, and also, could you indicate how much revenue are you expect the acquisition to add to the may quarter?

How much of the $57-$58m you guided is coming from this new acquisition?

I think perhaps you were confused about the charges that we took last year in connection with the data center move.

That has nothing to do with the acquisition of merger stat.

Merger stat itself comprises in total subscriptions, a little over $2m.

We owned the company for all of five weeks during the second quarter.

So roughly 10% of that subscription value got recognized as revenue in our quarter.

I'm not sure --

OK, and the tax benefit was this past quarter or the prior year?

That was the prior year as well, the tax benefit

So 10% of the revenue came from --

No. 10% of the $2m.

10%, 200,000, it add 200,000 to this quarter.

Right.

Gotcha, should I just quarterize that to add about $1m to next quarter

No.

About $500,000.

On an annual basis talking over $2m, a little over $500,000.

Gotcha.

How many licenses are substantive to add to the total count you gave?

We do not consider any of the clients in merger stat, in our FactSet client count unless they pick up a full-fledged FactSet service, including paying base fee.

So in the numbers of clients that we gave you, that does not include any from acquisition from merger stat.

At some point, next quarter, will you start including them in the count or you're going to maintain a separate count for the two?

No.

We only count we will be giving will be clients that are actually subscribing to the FactSet service.

There are other clients, relatively small clients at merger stat who will purchase, let's say, a book or part of their database, which we would not include in our data, in our client count.

Gotcha.

Merger stat itself, is it profitable or unprofitable?

How would you characterize it -- how would you characterize their financials

I guess I would say it's immaterial.

It's not going to move numbers either way this point.

The next question from David Snyder with Hoover Investment Management.

Your line is open.

I was wondering if you can describe merger stat a little bit, as far as what it does?

Merger stat is a mergers and acquisition database which means it tracks all of the company's buying other companies and the terms of those deals.

That can be determined by the public information out there.

It's primary end-user is somebody in M and A business or corporate finance.

I think it does have potential on buy side as part of valuation analysis for equity analysts.

Okay.

Does that --

Yeah.

As far as during this conversation, when people are talking about their premium workstation, is that synonymous with marquee?

The reason the return premium came along was there was a point in time when we were actually selling the previous combination we had at the workstation with a $3600 workstation we sold for 15 years.

The premium workstation is the workstation.

I think it only gets used to reference there was something different.

Yes, that workstation includes the marquee product, but it also includes many other things.

So it's a much more bundled workstation, as far as service level a client receives in that product.

Okay.

I guess that's it for me.

Thanks.

Our next question comes from Charlie Carter with CSFB.

Your line is now open.

Most of my questions have been answered.

I have a quick question on the balance sheet.

Just notice you all have over $100m in investments, which is close to half of the total of assets number.

Could you just provide some color on that?

Why an increase of $20m or so over the last six months?

Are you referring to cash versus investments here?

You had the cash and equivalents, and then you have --

There really is no difference other than the fact that investments are securities, marketable securities that have a maturity greater than 90 days.

That's all.

Also, just as a portion of total assets, the increase, what's the driver behind that

Profitability, and cash generation.

Okay.

Good enough.

Thanks.

Our next question comes from Brian, I'm not sure how to pronounce your last name?

Nigel with Thomas Weisel Partners?

One question regarding international business.

The growth continues to be pretty solid there.

Can you give us a sense of, is that wholly foreign based investment or investment management firms or is it also in that number, the, perhaps expansion by domestically based investment firms increasing their internationally focused product?

The answer would be both.

In that, if anybody would get a large presence outside the United States, some of those are European firms based -- you would think would be European based we also have here in the states.

Many would be the large U.S. firms that would have non-U.S. operations.

And then there are many that are purely European or purely Asia Pacific.

Is there anyone beyond the base package, is there any one product that seems to be resonating better with firms that have more of a global focus approach?

Does PA sell better to that end of customers versus another?

The global product line, at least investment style on a simple level, is much more top down so the economic information and benchmark information is the start of their process versus, I would say the U.S., there are many of our clients who really start with security analysis and work their way back to portfolio analysis.

Overall, the product line worldwide is a similar product line.

Many of the global firms we have actually subscribe to our service because they have the same product everywhere in the world.

They may choose to configure their subscription slightly different, just manage their costs as opposed to giving everybody everything.

All in all, it's actually a very similar product.

One follow up relative to merger stat.

Can you give us a sense of -- you guys are offering increased functionality and capability into the workstation.

But what would be the total market opportunity just for the merger stat type of product?

It's hard to define.

Given what we know about that particular slice currently, that data is not public, I'm pretty comfortable, it's probably between $50m and $100m total market, if you look at the other suppliers of that data.

Thanks a lot.

Our next question comes from John Neff with William Blair.

Your line is now open.

Two quick questions on the share buyer-back on the total since July of 2002, you bought 73% of the total here in this past quarter.

I'm wondering to what extent we should view that as being opportunistic?

Was there a seasonal reason behind that heightened activity and how much is left on that buy back plan?

Let me take the last question first, in terms of the aggregate purchases.

We have north of 700,000 shares we purchased.

The program that has been approved by the board was for 1m shares.

Is there no time limit, in terms of when we need to complete the program.

In terms of purchasing shares, there is really no seasonality to that and we will buy shares as we see opportunities.

Great.

Thank you.

Our next question comes from Douglas Arthur with Morgan Stanley.

Your line is open.

Hi, it's Doug Arthur.

Obviously the results today answer a lot of these questions, but I was wondering if you could just step back and make some broader sort of environmental comments?

Obviously, this is a pretty unusual part in the cycle.

I guess my question is, based on how you've handled these cyclical lows before, is the price competition worse than you've seen in prior lows, or about the same?

Are the kind of conversations you're having with major customers, in terms of renewals, worse than you experienced in the past, or not, and how do you view competition from lower price products today versus, say the last cyclical low over the '90s?

Thanks.

I guess, my perspective is an 18 year perspective.

I started back in June of '85.

In my career, nothing comes close to this cycle.

The dip in '87 and the recession in early '90.

I don't know whether we were growing through it or it seemed like a speed bump compared to the Grand Canyon we seem like we're in at this point.

I don't have any reference point at least from factual perspective.

As far as conversations with the client, the general outlook, I wouldn't change what I feel, as I said before, that I don't think the market's gotten any better for us.

Everybody who's on this call is in this business, probably in one form or another.

It's just not easy.

We really have to roll with our clients and make sure we configure our subscriptions, as they see fit.

I think our noncontractual policy with our clients, though, from this cycle, they can adjust their subscriptions, the second they lay somebody off as opposed to waiting for the contract to come up.

Hopefully, that will work in our favor on the other side of the cycle, when they're hiring people back and can bring them on and worry about, gee, I'm sending a two year contract for this seat.

As far as the price component of it, FactSet has never been the low cost supplier of information always been a high value service product.

I think in many cases, since our service has broadened so much over the last 10 years, we're able to serve such a broad function inside of a client, that on an effective basis, from the client's perspective, in some cases, and maybe in many cases, we've actually been able to save the client money by them picking up two more workstations on FactSet, and eliminating some functionality they might be getting in other products.

As far as our competition with low priced products in the marketplace, nothing's changed.

It's really just a value battle of we've got to demonstrate high value to get a high price and they have to demonstrate a lower value to get a lower price.

Great.

Thank you.

Our next question comes from Ken Winston with Lee Munder.

Your line is open.

Hi.

Just wanted to ask you a question about how you calculate client retention in churn and do you think that the statistics for this quarter are sustainable going forward?

Sure.

With respect to client retention what we do is we look at the clients and total commitments that we had at the end of February of 2002, and we compare that against where we are at the 12 months later, 2003.

And look at the cancelled clients during that period, during the 12 month period.

We aggregate the total number of subscriptions, resulting from those cancellations and compare that against the beginning number, from the end of February 2002 to come up with the retention number.

That retention number is dollar weighted, oh obviously, a client of significant size is going to have a much greater impact than a small client with $50,000-$60,000 in subscriptions.

And how do you calculate churn and what have been the churn statistics?

We don't publish anything that relates to churn.

That was comment I made that in this part of the cycle, we're still adding a substantial number of clients, but the turnover in the smaller client is higher than it has been historically.

As Ernest described, turnover in a small client in a account level isn't really the way we calculate our retention rate; it's a dollar weighted retention weight.

A final summary question.

Your pass words are going down significantly.

But you're growing your client base every quarter and each client is actually spending more with you because of these new products.

So, would you think that going forward the next three or four quarters, would have the same trends, lower pass words, but greater client count and greater spending per client?

I would give anything to have three or four quarters worth of visibility at this point.

We rarely give guidance for the next quarter.

The recommendation I've always given everybody, take what we did last quarter and pretend that's the world going forward.

I would say in this particular quarter, the client, workstation count was an unusually high number attributed to a couple of clients.

That was a sell side phenomenon.

And the clients that changed those subscriptions were really just change configuration.

They're still very large, very healthy clients for us.

They just had some needs to configure the subscription to meet some cost constraints they had on their side.

We accommodated them as best we could.