Factset Research Systems Inc (FDS) 2004 Q1 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 section of the call.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Your host for the conference today, Mr. Ernest Wong, Chief Financial Officer of FactSet Research Systems.

Sir, you may begin.

Thank you.

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

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

Also with us is Mike Frankenfield, Senior Vice President in charge of our Sales and Consulting Group.

You'll have the opportunity to ask us questions following my review of our operating and financial performance of the first quarter of our fiscal 2004 year.

Throughout this conference call, there will be certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The statements are based on management's current expectations and beliefs and are not guarantees or 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, 2003 and quarterly report on Form 10-Q for each of the quarters ended November 30, 2002, February 28, 2003 and May 31, 2003, 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.

This morning, we announced that FactSet recorded another solid quarter for the period that ended this past November 30th with revenues net of clearing fees rising 12 percent to $59.3 million.

Operating income increased 18 percent to $21 million from $17.9 million in the same quarter a year ago.

With a slightly lower tax rate, net income advanced 21 percent to $13.9 million.

EPS on a fully diluted basis for the quarter was 39 cents, up from 33 cents for the first quarter of fiscal 2003.

These results were achieved under a market environment that has improved somewhat from prior periods but which nevertheless continues to be challenging.

Total subscriptions, net of clearing recoveries as of November 30th, were $238.8 million, up 11.6 percent from $214 million a year ago.

Incremental subscriptions to our databases, applications, including our portfolio managers workstation, as well as the addition of new clients were the primary drivers of this growth.

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

As of November 30th, there were 981 client firms who were clients of FactSet, a net increase of 64 from a year earlier and up 11 during the quarter.

Our workstation count was 19,300, which -- while lower than the 21,500 we reported a year ago -- is actually up 100 from our total as of August 31st.

This is the second consecutive quarter in which we have experienced modest workstation growth, suggesting that employment levels in the services industry have finally begun to stabilize.

Client retention continued to remain above 95 percent, once again confirming the importance of FactSet's applications and services to our clients.

Revenues from our domestic clients grew 12.3 percent to $47.3 million for the quarter, compared to the first quarter of fiscal 2003, with the growth coming predominantly from penetration of the investment management market.

Revenues from our international operations rose 11.8 percent for the fiscal quarter to $12 million.

By region, revenues from our European and Pacific Rim operations rose 14 percent from 6 percent to $9.3 million and $2.7 million, respectively.

International subscriptions now total $48.8 million, representing 20 percent of our total subscriptions.

Demand for our portfolio analytics applications continued to increase during the quarter.

At the end of November, there were 355 clients representing over 2,600 users who subscribe to these services, an increase of roughly 25 clients and 400 users during the past twelve months.

On the expense side of the P&L, we have continued to focus our attention on controllable expenses.

This focus on our cost structure has permitted us to sustain our operating margin in this challenging operating environment.

Cost of sales as a percentage of revenues increased by 30 basis points, compared to the first quarter of fiscal 2003, primarily the result of higher compensation due to additional hirings and salary increases related to our Consulting and Engineering groups -- (technical difficulty) -- as higher data costs.

These increased -- (technical difficulty) -- were largely offset by lower depreciation on computer-related equipment, communications costs and computer maintenance expenses as a percentage of revenues.

Depreciation expense has been relatively flat due to our relatively modest levels of capital spending over the past two years.

Selling, General & Administrative expenses as a percentage of revenues improved by 170 basis points relative to the same period a year ago.

This improvement was largely the result of lower expenses as a percentage of revenues in travel, promotion and the amortization of leasehold improvements.

With respect to capital spending, FactSet's capital expenditures for the quarter totaled $4.2 million, of which all but $200,000 was used for the purchase of technology assets.

As I indicated last quarter, we have been upgrading our mainframes.

Three new HP GS-12 A (ph) Marvels as they're commonly called, have been installed and placed in service during the fiscal fourth quarter of 2003.

This past quarter, we added another five Marvels for a total of eight, four in each data center.

These new mainframes significantly increase the number of simultaneous client connections that FactSet can support.

In our press release this morning, we gave guidance that our total capital spending will be in the range of $35 million for the full fiscal year.

This estimate has been revised based on anticipated leasehold and furniture expenditures related to a potential move to a new headquarters site.

After a lengthy search over the past two years, we have narrowed down our options and expect to finalize our decision soon.

The primary rationale for a new headquarters site is that it would allow us to consolidate our three Connecticut offices to one location and provide us with further expansion capabilities.

We expect we would begin consolidating our Connecticut operations in the late summer of 2004.

To wrap up, our financial performance this past quarter once again confirms the strength of our business model.

Although past markets and economic conditions have had an impact on clients' spending, in the longer-term, we remain optimistic about our opportunities, both domestically and abroad.

We remain committed to our product development efforts, we continue to make enhancements to existing applications, and our sales force is active.

These position us well in the marketplace with an improving economic climate.

At this time, we will be happy to take any questions you might have.

At this time, we're ready to begin the formal question-and-answer session. (OPERATOR INSTRUCTIONS).

Brett Manderfeld of Piper Jaffray.

Good morning.

Could you give us some insight, Ernest, in terms of the new headquarters, what that means from an amortization standpoint or D&A standpoint?

I think you mentioned leasehold, so I'm assuming it's a fairly long amortization period.

That's correct.

The option, or the proposal, ahead of us is going to be a lease that we expect to be at least fifteen years.

Of the incremental capital expenditures, probably about two-thirds of it is going to be related with leasehold improvements, which we would straight-line over the term of the lease, and the rest would be related to furniture and other equipment.

We would not begin -- (technical difficulty) -- of those expenses until after we began occupancy, which, as I indicated, probably would not occur until the late summer, so sometime in middle or late August would be when we would anticipate that happening.

Okay.

Another question, if I may?

Just an update on what your clients are saying as it relates to the use of soft dollars.

Obviously, there's been a lot of controversy on that topic;

I've heard recently that there is a fund industry group that has a proposal to try to eliminate the use of soft dollars as it relates to software.

I'm not sure how that might affect your business but just a sense for what your clients are saying and where you think this might shake out.

You know, that question continues to come up and I think it's one where I don't think any of us really understand or know what the answer is until it kind of those through its political process through Congress and to the SEC.

As I've said before, it's certainly a discussion that has occurred for the last 20 some-odd years.

You know, in our business, a significant portion of our clients pay cash for our product, so I feel pretty comfortable with the value point for our product (inaudible) established both on a commission and a cash basis, so at this point, I don't really see it as a negative, certainly not as a material one, but we will have to see where it goes.

Phil, have you had any of your clients kind of come to you and say, "In order to be as transparent as possible, we're going to eliminate the use of soft dollars, even though there hasn't been any formal legislation or SEC mandate"?

You know, I've been (inaudible) for the last 18 years, and I would say that the trend has been that way, sometimes at a faster pace, sometimes at a slower pace, over the last 18 years.

Some clients think that's a squeaky clean way to go; others certainly tighten up their policies and make (indiscernible) are allocated properly, but I feel pretty comfortable, given the client base we have, the use of soft dollars in the way that I can see them managing it from our side is very is very efficient in the way that the SEC would interpret for research services (sic).

Thank you.

Ernest, if I may, just one more in terms of the margins in the second half of this year?

Would you expect them to be fairly similar operating margin-wise as the first quarter and what you are guiding to in the second quarter?

As you know, we typically have not given guidance beyond one quarter at a time.

If you look at history, our margins have not moved tremendously from quarter-to-quarter.

Joe LaManna of William Blair.

Yes, a follow-up on the soft-dollar question -- can you help us by quantifying a little more your exposure in that area, whether it impacts you (indiscernible) remains to be seen but is it correct to assume that about 45 percent of your revenue is paid through soft-dollar arrangements?

If so, then what percentage of that 45 percent is actually paid by mutual fund providers versus other buy-side firms?

It's probably a little lower than that at this point in time.

If you look at the numbers that we provided in the press release, you can back into it.

Commission dollars through our two brokers, Bear Stearns and (indiscernible) Corp., represented a little over a quarter of our total gross revenues for the quarter, and then there is probably another 15 percent plus or minus that would be coming through other third party brokers.

So about 40 percent would be a better round number to use?

Roughly.

Then of that 40 percent, how much is being paid via mutual fund companies versus other buy-side firms?

You would have to guess.

I mean, I would guess that our client base is typical of the industry.

You know, all of our mutual fund clients would probably also be managing ERISA (ph) or tax-exempt money as well.

It would be hard to guess.

I would say whatever the industry mix is probably what we have.

Craig Huber of Morgan Stanley.

Actually, first, (indiscernible) Phil, I was wondering if you could just give a quite historical perspective on how you've experienced and adjusted to soft-dollar regulation in the UK?

Then wondering if you could just update us on the demand trends -- any different trends you are starting to see on the sell side and any major account activities you can comment on?

Then I think Craig's got a couple of follow-ups.

In the UK, at least from what I know -- and I'm certainly not an expert -- as you travel around the world, the use of soft dollars in the UK is a newer phenomenon than it has been in the United States.

I thought I had read recently that they had eliminated it but when I was in the UK last week, they haven't, so we have some clients who pay us in the UK via commission dollars.

It's not as significant as it is in the States, just because the practice isn't as widespread, which again points to the value point of the service and commissions versus cash isn't really a deciding factor (sic) as to whether somebody actually purchased the product or not.

As far as the demand for the products, in the market -- IM (ph), IV (ph), or the sell-side, you know, as you can kind of see from our growth rate, it definitely feels like the market has stabilized somewhat and we're starting to see positive signs.

As I had said last quarter, I think there is definitely a lag affect in that no one runs downstairs to their market data group and says, go spend like you did two years ago!

I think everybody is still in a very cost-conscious and very cautious at adding service but the downdraft that we were in for the last two years definitely seems like it has stabilized.

As a follow-up, could you just update us on where your total employees were at the end of the quarter?

Then also, I was curious, can you just update us on what your thoughts are now on the number of graduates you're hoping to hire next summer and how that may or may not change versus this year?

Craig, with respect to the first question, in our 10-K, I think we reported slightly over 800 employees at the beginning of November.

(inaudible) and we have plans to do our traditional summer hiring for engineering, as well as for our consulting groups and I'll be looking for a similar percent-change in the number of employees (indiscernible) that we had last year, somewhere in the range of 10 to 15 percent new employees.

Then lastly, is it safe to assume for fiscal '05 the CapEx spend would drop back down to 15 or 20 or there's some other step-ups you've got to do on the IT spending?

Thanks.

From an IT spending perspective, I think 2003 was a more typical year as far as -- I don't think it will go back to what it was historically, just based on what I see on the technology front.

Just as far as -- the expenditure we're making for the corporate headquarters is roughly 50 percent of the space we have worldwide, so it's a material chunk and it's obviously, has Ernest mentioned, a 15-year time horizon so it's certainly got a large one-time nature to it.

You definitely, with the positive signs in the marketplace, picked up a couple of leases (sic) in various places and we will certainly have a few of those but none as material as this year.

John Neff of William Blair.

My questions have been answered.

Thank you.

Provine Chuckavarti (ph) of Thomas Weisel Partners.

Good afternoon.

I had two specific questions concerning competition, what you guys are seeing -- any new competition or any new trends on the competitive side.

Somewhat-related, but my second question is, any plans for the cash balance that you have on the balance sheet, about $180-odd million?

Any specific plans on what you might want to do with that cash?

On the competitive front, I don't think the landscape has changed much in a while.

The main players in the industry -- everybody is kind of (indiscernible) the desktop that they feel they are strongest in.

I don't really see anything material that's happened in the last couple of years in the marketplace when it comes to the competition.

As far as the cash balance, currently, we pay a dividend.

We have a share repurchase program out there as well and we've obviously made two small, selective acquisitions but it's not something that -- (indiscernible) we've focused on as a major issue.

John Britton of Select Equity.

Yes, good morning.

Just a quick question on the commitment value and the commitment per-client -- I think it's down sequentially for the first time that I've seen in a while.

I was just wondering if you could elaborate on that, just that dynamic?

John, I think perhaps you may be comparing gross versus net on the commitment value.

I'm not sure what numbers you're showing.

Okay, so what was --?

The commitment, or the subscription value, that we reported at the end of the fourth quarter was 235; just reported today is 238.8, an increase of $3.8 million.

Okay, I had 242.7, so that was a gross number?

That was probably the gross number, yes.

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions.

Well, thank you very much, everyone, for listening in.

We look forward to chatting with you next quarter.