Factset Research Systems Inc (FDS) 2003 Q4 法說會逐字稿

Good morning and thank you for standing by.

All participants will be able to listen only until the question and answer session of today's conference.

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I would like to introduce your speaker for today's call, Mr. Ernest Wong, Chief Financial Officer.

Sir, you may begin.

Thank you.

Good morning and thank you for joining us on this conference call.

Phil Hadley, our CEO;

Mike DiChristina, President; and Mike Frankenfield, Senior Vice President of our Sales and Consulting Group are here with me today in our Greenwich office.

Following my review of our operating and financial performance for the 2003 fiscal year, we'll be happy to take your questions.

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 uncertainties that 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 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 ended November 30, 2002, February 28, 2003 and May 31st, 2003 and report on 8-K is our most recent press release with financials for our recently ended 2003 fiscal year, 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.

Back in September of 1978, Howard Weili and Chuck Snyder started a company based on their vision of a business that would provide financial analysis of public companies to the investment management community.

That company, which they named FactSet, generated revenues of $64,000 and a loss of $82,000.

Operator, can you hear us?

Yes, sir.

Okay, thank you.

Apologies.

We've just gotten word that we were not being transmitted over here.

At any rate, that company, which they named FactSet generated $64,000 and a loss of $82,000 in its first year of operations.

From these modest beginnings, we have today a firm with over $220 million in revenues with nearly 800 employees that provides vital financial information and analytic tools to virtually all of the major investment management firms and investment banks across the globe.

As we celebrate our 25th year in operation, I am very pleased to report that FactSet experienced another strong quarter and a very solid year in an economic environment that continued to be quite challenging.

Before reviewing the fourth quarter and fiscal year financials, I would like to take a moment to discuss our revised presentation for reporting revenues.

You may have noticed from our press release this morning that we are now reporting revenues net of clearing fees from commission-paying clients.

As those of you who have been following us are aware, many of our clients, who are investment management firms, will pay for FactSet's services through commissions generated from trades executed through our two clearing brokers, Bear Stearns and Broad Corps, a subsidiary of Merrill Lynch.

When clients pay for these services through commissions, FactSet charges the client an incremental amount to recover the clearing fees charged by the brokers.

We have decided to report these clearing fee recoveries as a reduction in the cost of services and no longer as revenues.

This revision in our presentation came as a result of a review of the new EITF number 0021 accounting of revenue arrangements with multiple deliverables.

In doing so, we revisited our presentation of revenues in light of EITF 9919, which deals with growth versus net revenue reporting.

And on further discussion with our auditors, PWC, reached the conclusion that revenues should be presented on a net basis.

As we've indicated in our press release, this change in presentation has no affect on current or previously reported operating income, net income, EPS or cash flow.

The impact on revenue is small reducing our previously reported fiscal 2002 revenue by 3.7% and this year's by 3.5%.

All financial information for periods prior to the fourth quarter fiscal 2003 have been revised to conform to the current quarter and fiscal year presentation.

All other metrics we use to track our financial performance, such as subscriptions, have been similarly revised.

And in order to assist you to bridge the difference between the previously reported revenue and our revised presentation, we have attached two appendices to the press release that we issued this morning.

FactSet's results for the past fiscal year once again affirm the demand for our services even in a very difficult economic environment.

Although we had to deal with continued volatility in the financial markets and additional cutbacks on Wall Street, we were able to grow our business in fiscal 2003 and add a total of 58 net-new clients over the past 12 months, 28 of which came on board this past quarter.

As of August 31st, there were 970 firms who were clients of FactSet.

Total subscription, net of clearing fee recoveries as of the end of this fiscal year were $235 million.

An 11% gain from the $211.5 million a year ago.

For comparative purposes on a gross basis, subscriptions would have been $242.7 million as of August 31st, after adding back $7.7 million in clearing fees charged to commission-paying clients.

Incremental subscriptions to applications, databases and enhanced services by our existing clients, as well as new clients were the primary drivers of this growth.

Subscriptions at a given point in time represent forward-looking revenues for the next 12 months from all services currently being supplied to our clients.

I'm also pleased to report that our client retention over this past year has continued to remain above 95%.

As of August 31st, the number of FactSet work stations was 19,200, a decline of approximately 2,800 year-over-year but a slight increase over the 19,000 that we reported last quarter.

The entire decrease in work stations during the past year can be attributed to the investment banking side of our business, not at all surprising given the continued head count reductions that have occurred in the industry.

As we've indicated in prior quarters, the number of work stations subscribed to by our investment management clients remain fairly constant throughout the last 12 months.

While it remains to be seen whether there will be more belt tightening among the investment banks, the bulk of the work station reductions took place during the first six months of the fiscal year.

And as I mentioned earlier, did increase modestly in this past quarter.

For the fiscal quarter that ended on August 31st, revenues net of clearing fees rose 11.2% to $57.6 million from $51.7 million for the fourth quarter last year.

For comparative purposes had the revenues of $57.6 million been reported on a gross basis, they would have been $59.7 million after adding back $2.1 million in recovered clearing broker fees.

Operating income increased 18.1% to $20.5 million from $17.3 million in the previous year.

Aided by a lower provision for income taxes, our net income increased 20.8% to $13.5 million from $11.2 million last year.

Fully diluted EPS advanced to 38 cents for the fiscal forth quarter of 2003 versus 32 cents for the same period in 2002.

For the 2003 fiscal year, revenues net of clearing fees were $222.3 million up 12.1% from the prior fiscal year.

Again, for comparative purposes had the revenues of $222.3 million been reported on a gross basis, they would have been $230.3 million after adding back $8 million in recovered clearing fees.

Operating income grew 23.9% to $76.7 million.

Net income advanced 25.9% to $51.4 million and EPS on a fully diluted basis rose from $1.17 to $1.48.

As we indicated in the last fiscal quarter, we recognized an income tax benefit of $1.3 million resulting in a four cent increase in diluted EPS for the fiscal 2003.

In fiscal 2002, the company incurred a data center relocation charge of $904,000 and an income tax benefit of $893,000, which together netted to a one cent increase in diluted EPS.

Revenues from our domestic clients grew 12.1% to $178 million for the quarter, virtually all coming from further penetration of the investment management market.

Incremental subscriptions to databases and applications, as well as additional clients fueled this growth.

Demand for our portfolio analytics applications has continued to rise and at the end of August, there were over 345 clients representing 2500 users who subscribe to these services.

This compares to 320 clients and 2,200 users a year ago.

Although our international operations have continued to be impacted by the overall weakness of the global economy, total international revenues also rose 12.1% for the fiscal year to $44.2 million.

By region, revenues from our European and Pacific rim operations rose 14% and 6% to $34.1 million and $10 million respectively.

Looking at the expense side of the P & L, given the uncertainty in the operating environment, we continue to focus our attention on our cost structure to sustain our level of profitability during the last 12 months.

The net result is that our operating margin increased to 34.5% up from 31.2% in the previous year.

Cost of sales as a percentage of revenues declined approximately 60 basis points compared to fiscal 2002 primarily due to a decrease in depreciation on computer-related equipment.

Our depreciation on technology assets has actually been flat and fallen as a percentage of net revenues simply because of the lower levels of CAPEX spending this past year.

Selling, general and administrative expenses as a percentage of revenues improved by over 260 basis points relative to a year ago.

Part of this improvement is due to the $900,000 expense we took related to the move of our data center in fiscal 2002, which we didn't incur in fiscal 2003.

We also benefited from improvements in travel and promotion, occupancy expenses, fees for professional services and other miscellaneous expenses.

With respect to capital spending, the company's capital expenditures totaled $8.5 million for the fiscal year.

Virtually all of these expenditures were related to purchases of equipment for our data centers and communications network, as well as for PCs and other IT equipment.

This past quarter, we upgraded our data centers by purchasing and installing three HPGS 1280 mainframes for our data centers.

Fourth one has been installed in Greenwich several weeks ago and we are midway through an upgrade of our mainframes with four new machines to be installed before the end of the calendar year.

When completed, these new HPGS 1280s will more than double the number of simultaneous client connections and FactSet that can support at a higher performance level.

We've come a long way in the past 25 years and we are certainly proud of our achievements.

Needless to say, economic and market conditions have made the business environment far more challenging during the past several years.

The results of our performance this past fiscal year, however, demonstrates once again the strength of our business model.

The profitability and cash flow generated from our business remain very strong and have allowed us to continue investing in product development and technology throughout this difficult period.

Our pipeline of new products and enhancements to existing applications should further our growth opportunities both domestically and internationally in the years ahead.

Thank you for listening on this call.

At this point, we'll be happy to take your questions.

Thank you.

At this time, we are ready to begin the question-and-answer session.

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One moment, please.

Mr. Craig Huber of Morgan Stanley, you may ask your question.

Good morning.

Thank you.

Phil, two questions.

One, this 970 clients that you put in the press release, what do you look at when you look at the whole market in the U.S. and overseas, what do you look at the opportunities set out there?

How many thousands of by side, sell side firms do you think are potentially out there.

When I say by side, maybe the guys that manage 200 or 300 million or more.

That's my first question.

I think for us it's a moving target depending on how our product continues to change configuration.

But our target market right now is somewhere between 3,000 and 4,000.

As we enhance the product that number always moves up on us.

Can you explain that further?

Is that more as they get into more fixed income or what do you mean exactly?

Well, each firm has different styles in how they use our product.

As we enhance the portfolio products, the marketplace finds that appealing extend, one natural example would be typical planned sponsors are not our core client base as the portfolio products get stronger, they become prospects for us.

As you mentioned, as we expand content, fixed income is an area, economics is an area, our market opportunity just continues to expand based on those being solutions we can provide.

Okay.

And then my second question, can you just explain to us or just update us on how you're migrating existing clients over to the new work station to marquee and new pricing model of $6,000 per pass versus $3,600.

My understanding is that when somebody -- why don't you explain it.

I believe you're doing it when you --

Well, we started selling as a stand- alone product, an enhanced work station and we used to call it premium work station, I think it's been three years ago, now.

Many clients chose that product just because it had the features and the configuration they wanted to.

Then we started mandating it.

When did we start mandating it?

The beginning of 2002 we started with all new work stations being sold, our under $6,000 work station.

And for many of the smaller clients it's actually a total key reduction, at the work station level it's actually an increase but, based on the combination of services of they subscribe, they no longer have to pay some access fees that they would pay otherwise.

So it allowed our entry point and value point to be much higher at the lower end of the marketplace.

Then our largest clients are basically in a transition mode where they're determining the value and moving towards the $6,000 work station.

But if I'm an existing client and I make substantial changes to the databases that I get through FactSet, does that mandate that I have to switch over to the $6,000 work station if I'm an existing client?

There are a variety of things that would ultimately mandate it.

We typically take business combinations as an opportunity for us to basically start from scratch inside of a client.

Then it's really a client by client basis based on the configurations they currently have and what their long-term goals are for FactSet.

Marquee is a component of that product where it's not a purchased decision for them to get that product, but the value beyond Marquee is what we feel comfortable with at $6,000.

And then lastly, is your goal to migrate all existing clients over to the new work station, new pricing model within three years of when you launched Marquee roughly a year ago?

We haven't made the decision to mandate it at this point on a hard time line.

But I do think that somewhere in the rough two, three-year time horizon is a point that we've kind of chosen in the marketplace where we feel comfortable that it would be a great decision for the client.

But we're very pleased with how the clients are choosing to do it without us mandating and that's really more of our style.

Great.

Thank you.

Keith Gay of Thomas Weisel Partners, you may ask your question.

Hi.

How would you characterize this investment banking recruiting season for MBA's this year over last year and just what are you seeing in terms of status of overall south side head count?

I'll make a comment then maybe Mike Frankenfield might have something to add to it.

I would say we were pleasantly surprised this summer in that it seemed like things stabilized a little bit.

Obviously, that market is very sensitive to what the public market is doing and hitting new lows in March or last October didn't help it.

By the time the market's sort of moving along, it seemed like some of the pressure had come off.

I think if the market continues to not retrace its steps, it certainly seems like things are a little looser than they were than the six months prior.

Yeah, overall on the investment bank side the head count has stabilized.

You do see a little bit of new business creation, new investment banks being created and people with new opportunities out there.

This is one of your better quarters for new client additions in recent memory.

Any particular causes driving that?

I think it's just the flavor of the marketplace.

Our business definitely is strongly correlated to other financial markets are doing.

And I think people felt better and were able to make decisions.

Okay.

And this decision to change from reporting on a gross versus net basis, can you go into a little more detail about what spurred that process?

Was it internally coming from FactSet?

Then the second part of that, somewhat related is, given some of the scrutiny that's going on with soft dollars right now, might you try to get more clients to shift to a cash basis versus soft dollar basis?

I'll answer the second part of that and I'll let Ernest answer the first part.

On a commission basis, even though we're changing for reporting, nothing changes for the client.

Our change in reporting is strictly just the accounting profession invents, new accounting standards and you have to live by what GAAP says is GAAP.

So I think from a presentation perspective, as a public company, our goal is really to give you transparency .

For anybody that's following our company, you really didn't find out anything today on our new presentation that you didn't know already, clearing fees or something that we disclosed both on our 10-K as well as, people generally know our clearing rate is essentially 90% is what we retain and 10% was a clearing fee.

So I think our clients' behavior is something that is really their choice, and just to remind everybody, the cash fees that we received, many of our investment manager clients paid third party where they are not using our clearing brokers to pay so they are still using commissions to pay for our service, it just shows us as cash.

Now the ones that we're showing commissions or commission line, which is something I think we still plan to disclose, will show on the top line as cash but they're still paying commissions for our product.

The scrutiny part of it, I still answer the question by saying that we have many clients that pay strictly cash from their firms for our product.

I feel very comfortable with our value point where somebody's paying in commissions or cash.

That's really just a business decision on their part as to how they want to allocate their resources.

Thanks.

Brett Manderfeld of Piper Jaffray, you may ask your question.

I related to one of the earlier questions, can you give us a sense of just how far along you are in terms of moving to the $6,000 seat?

And second, the overall reception to the Marquee product, was that driving the increase in seats this quarter.

And if you could talk a little about if there's been a competitive response from some of the other players that provide realtime quotes?

Thanks.

On the Marquee product, I think it's gradually gaining acceptance and I think the market feedback we've got is very positive.

It certainly is a value to our clients, both because it's something that allows them to integrate more service on FactSet.

It certainly has a positive effect on our C count.

So far, the strongest value for that product is by-side centric because the clients have our portfolios.

But if that product continues to gain more content, I think it will help drive the south side piece as well.

So are you more than halfway through your existing style base to get that 6,000-seat level?

At this point, Brett, we haven't actually disclosed that information.

But I guess I'd answer the question by saying we've been at it for several years and I gave the three-year time horizon roughly.

So, I think that's probably the best answer to the question.

Okay.

And in terms of the seat driver, was that Marquee or was it new hires in I-banking or something else?

Typically, our clients both buy and sell side hire in the summer like many do out of the schools.

So if you go back and look at it historically, the fourth quarter tends to have a positive effect for ID count.

So I think that was one of the primary drivers.

I think the other driver is just the marketplace is feeling better than it did a quarter ago.

For us, the fourth quarter is kind of a strange quarter because people start to defer their decisions to January, so, our visibility will get much clearer as the calendar 2004 begins.

And just related to the Marquee, are you selling a lot of seats that are just pure Marquee or is it pretty much the $6,000 seat when you sell Marquee?

Is that along with kind of the core of that offering?

We do give a client who wants to just put Marquee on seats as opposed to the traditional sites of an option that purchases the lower product that's just Marquee.

And there have been several firms who have taken that option because quotes [ph] inside of a firm tend to go deeper than traditional facts that might go.

Then finally, just competitively, have you seen anything out of some of the bigger firms?

Well, there's been obviously a lot of press.

Will [ph] Thompson has their Thomson 1 out there, Reuters released their Reuters Knowledge.

On the seats that we participate in currently, you know it's's always been competitive pressure, there always will be.

I don't feel any more or less than we've had historically.

There's a lot of marketing but when it really gets down to which clients are using which products, not much has changed.

But as you've illustrated in your research, there's a lot of competitive forces out there that force us to continue to enhance our product.

That's what we've been doing for the last 25 years.

Doug Whitman of Whitman Capital, you may ask your question.

Going back to the earlier question about the change potentially in soft dollars, what percentage of your by side clients are paying as far as you're aware through use of soft dollars?

And if you could go back a little bit over when the historical years will also, when you'll come out with a restatement for the historical years from the revenue recognition change?

Well, the answer to the second question is easy because it's in the appendix to the press release.

The answer to the first question is the commission dollars that clients pay us, whether it be indirectly or directly, for the most part applies mostly to our U.S. investment management clients.

Roughly 60% of our revenues in the U.S. investment managers, something like that?

Right.

You recall that roughly a third of about 30% of our revenues historically has come through commission dollars that gets cleared through Bear Stearns or Broad Corps and there's probably another 15% of revenues that would be cleared through a third party broker.

Thanks.

Jennifer Foster of Chilton [ph] Investment Company, you may ask your question.

Yeah, I just wanted to ask a question about the CAPEX guidance.

It was, I think for $18 million, which is an uptick from this year.

Is that mostly for the new mainframe spending?

No, actually.

We've got several new leases we've signed in various locations so a pretty good portion of that is we sold [ph] improvements which obviously have a lot longer depreciation schedule than our updated thing.

Just to follow up on that, of the $18 million, roughly half of it is going to be on technology equipment and the other half is what Phil had mentioned in terms of leasehold improvements.

We typically depreciate technology equipment over a period of three years or less.

Our leaseholds are depreciated over the term of the lease generally which are typically ten years or more.

Okay, great.

Thanks.

John Neff of William Blair, you may ask your question.

Thanks.

Just two questions.

One, can you tell me what the Mergerstat revenues for the quarter were?

We haven't disclosed that, John.

I think when we made the acquisition, earlier this year, we did indicate that when we acquired it, it had revenues slightly north of $2 million.

Great.

And also, the sequential decline in SG&A, I thought you guys were going to do some hiring over the summer so I was surprised to see that decline.

I was just wondering if you could speak to that.

The decline in SG&A quite frankly came everywhere as I look at the P&L.

It came from travel promotion, occupancy expenses, professional fees and other miscellaneous expenses.

So no one area that I would focus on.

The other thing in terms of engineers, the engineers would actually go into the cost of services line, not in SG&A.

Okay.

And that was where the hiring was concentrated?

To a large extent, yes.

Okay.

As well as the consultants.

Thank you.

At this time, there are no further questions.

Thank you, everyone, for listening in to our conference call.

We look forward to speaking with you again next quarter.