Factset Research Systems Inc (FDS) 2004 Q3 法說會逐字稿

Good morning and welcome to today's conference call.

Following today's presentation there will be a Q and A session.

At that time, instructions will be given.

At the request of the company, today's call is being recorded for replay purposes.

Should anyone wish to object they may disconnect at this time.

I would now like to turn the conference over to today's speaker, Mr. Ernest Wong.

Sir, you may begin.

Thank you very much.

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

With me for today's conference call are Phil Hadley, Mike DiChristina, and Mike Frankenfield, who are respectively FactSet's CEO, President, and Senior Vice President of Sales and Consulting.

You will have an opportunity to ask us questions following my review of our operating and financial performance for the second 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.

These statements are based on management's current expectations and beliefs and are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict.

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

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, 2003; and quarterly reports on Form 10(Q) for each of the quarters ended May 31, 2003;

November 30, 2003; and February 29, 2004, all of which are on file with the Securities and Exchange Commission.

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

I am delighted to report that FactSet had a very solid fiscal quarter for the period that ended May 31.

Total subscriptions net of clearing recoveries, which reflect the total annual billings for all service being supplied to our clients, grew to $260.9 million as of May 31, up 14.4% from $228 million a year ago.

On a sequential quarter basis, total subscriptions were up from 11.7 million from the 249.2 million which we recorded at the end of February.

During the last three months, we also passed the milestone of 1,000 clients, and added a net total of 39, giving us a total of 1,031 clients at the end of May.

Password count also grows by 500 to a total of 19,900, the largest quarterly increase in users since the fourth quarter of fiscal 2001, nearly three years ago.

Driving our growth in subscriptions this quarter, in addition to the significant client and password increases, were incremental subscriptions to our databases and applications moving our portfolio managers Workstation.

Demand for our portfolio analytics applications continue to rise in the quarter with over 370 clients, representing 2800 users at the end of May; an increase of roughly 30 clients and 300 users during the past 12 months.

Client retention continued to remain above 95%, demonstrating once again the value of FactSet's applications and services to our clients.

In the early part of May we acquired CallStreet, a provider of investor call and industry conference transcripts and corporate calendar information for finance and corporate professionals.

This information is increasingly a must-have product for financial professionals, and we're pleased that CallStreet is now a part of FactSet and that its products at this point are integrated within the FactSet service.

CallStreet's existing clients include major firms both on the buy-side and sell-side.

Given CallStreet's size, financials are not material on a consolidated basis.

CallStreet had total subscriptions of nearly $2 million and added one incremental client when we acquired it last month.

We do, however, expect that the operation will be a significant contributor to our business over time.

Moving on to our financial performance, both revenues net of clearing fees and operating income rose 11.9% to $63.6 million and $21.8 million, respectively.

Pretax income rose 10.2% to $22.1 million, net income was positively impacted by a $760,000 tax benefit, or 2 cents a share on a fully diluted basis.

That resulted from certain changes in estimates relating to fiscal 2003, as well as from additional State and Federal tax planning.

This period last year, we also recognized a one-time tax benefit of $1.3 million, or 4 cents a share.

Excluding the tax benefits from both years, EPS on a fully-diluted basis for the quarter increased from 37 cents to 43 cents.

Including these tax benefits, EPS rose from 41 cents to 45 cents.

For the nine months ending May 31, net revenues were $184.2 million, up $19.5 million, or 11.8% compared to the same period a year ago.

Operating income rose 14.4% to $64.4 million, and net income including the respective tax benefits from each year increased 14.2%.

EPS on a fully-diluted basis advanced from $1.10 to $1.27, up 15.5%.

Income tax benefits recognized during the first nine months of this fiscal year, as well as for the first nine months of fiscal 2003 resulted in a 4-cent increase in diluted earnings per share each year.

Geographically, revenues from our domestic clients grew 11.1% to $50.8 million, while revenues from our international operations rose by 14.3% to $12.8 million for the quarter, compared to the same period in fiscal 2003.

By region, revenues from our European and Pacific Rim operations were $9.9 million and $2.9 million, up 1.2 million and $400,000 respectively; from the same period a year ago.

International subscriptions now total $53.1 million representing 20% of our total subscriptions.

On the expense side of our P&L, cost of sales as a percentage of revenues declined about 40 basis points compared to the same quarter a year ago.

Lower depreciation and maintenance expenses on our technology equipment was partially offset by higher data costs and increases in compensation for consulting and software engineering groups, which was partially due to increased staffing levels.

Selling, general, and administrative expenses as a percentage of revenues increased by 40 basis points.

Increases in T&E, rent, professional fees, and miscellaneous expenses were the primary contributors to this rise.

Lower employee compensation and amortization of leaseholds as a percentage of revenues partially offset these increases.

The net result is that our operating margins stay stable at 34.3% for the quarter.

We indicated in this morning's earnings release that we had increased reserves this past quarter to account for certain isolated events that were settled during the quarter.

These reserves impacted our margin by over 100 basis points.

As these matters have been resolved, no further reserves will be needed in future quarters with respect to these items.

Turning to capital spending, our CapEx for the quarter totaled $6.1 million, of which nearly $4 million was used for the purchase of technology assets and the remainder for the expansion of various offices in the U.S.

Our capital spending has totaled $12.5 million year-to-date, and our guidance for the full fiscal year is $35 million.

A significant portion of the remaining budget is targeted for expenditures related to our new corporate headquarters in Norwalk, Connecticut, which we anticipate moving into at the end of August.

In connection with this move, we also expect to incur approximately $1.2 million in relocation expenses during the fourth quarter.

New headquarter space will afford us -- will give us the opportunity to consolidate our three Connecticut operations in one location, and afford us greater expansion flexibility in the future.

One other highlight before we take your questions.

Early in the third quarter, we took the opportunity to purchase 1 million shares of common stock from Charles Snyder, one of the company's co-founders.

This purchase reduced our weighted-average share count by 833,000 for the quarter that just ended.

In future quarters, the weighted-average shares outstanding and on a fully-diluted basis will reflect a decrease of 1 million shares that we purchased.

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

Thank you.

We will now poll for the Q&A portion of today's call. [Caller Instructions].

And our first question or comment comes from Douglas Arthur.

Hi, it's Lisa Monaco for Doug.

Ernest, could you just elaborate on these reserves that were taken in the quarter, and if you could just talk a little bit about your fourth quarter and going-forward cost expectations and headcount as well, where it stands now and where you see it over the next quarter.

Thanks.

With respect to the reserves that we took, these were commercial matters in nature, and we're bound by confidentiality provisions within the settlement, and I really can't disclose any further information other than that as we indicated in the press release this morning that they had impacted our operating margin by over 100 basis points during the past quarter.

Okay.

And with respect to the guidance on headcount for the next quarter, we've got, let me turn this over to Mike DiChristina.

We plan on having a full slate of summer hiring in both our consulting and engineering groups.

I would estimate somewhere between 40 and 50 new individuals will be starting at FactSet over the summer.

Right now where does headcount stand versus a year ago?

It's at 851.

Okay.

Great.

Thanks.

Last year was 754.

Okay.

Thank you.

Thank you.

Our next question comes from Fred Macrea [ph].

Good morning, everybody.

Ernest, quick question with regards to the commitment levels, nice increase there.

Does that come proportionately -- I'm assuming proportionately larger on the additional database side, but is that growing at a faster clip than the passwords or was there symmetry there?

We actually had some pretty significant password growth as I indicated, we increased our password count by 500, and that had a pretty positive impact on our overall subscription growth.

Databases and MW as I mentioned also were major contributors to the growth in subscriptions this quarter.

Okay.

Any significant change in terms of percentage, or relative percentage contribution between the two you'd still go with the password [inaudible].

Relative to prior quarters certainly the password increase was significantly higher.

As you know prior quarters we had incremental increases of about 100 Workstations per quarter.

Are we connected?

Operator?

Yes, sir.

Are we still connected?

Yes, we are.

Okay.

Shall we go to the next question?

Sure thing. [Caller Instructions].

Operator, our screen says Q&A has not been enabled by your operator.

Are there any additional questions?

No.

I'm not showing any questions at this time, sir.

I'm showing the screen is working fine.

We do have a question coming from Justin Martos [ph].

Hi, a follow-up question.

So on the operating margin impact, it's this quarter only you can't really disclose it and you really don't foresee any of it happening again over the next future quarters.

Is that correct?

Correct, Justin.

And then on the tax issue, the tax rate, it's a little bit lower this quarter.

What's the sort of thing going forward you gave guidance, why was it lower than expected on the tax rate issue?

The tax rate issue is that we were able to as I mentioned earlier, we made some adjustments to our fiscal '03 reserves and that impacted our overall tax provision for this quarter.

That was the major driver to that.

And then on a commission paying -- revenues coming directly from commission, it was a little bit less decrease in the last quarter.

Do you suspect it's going to be bottoming out the next quarter or what are your feelings on that?

This is Phil Hadley.

I think in the last quarter we had about half a dozen clients switch from paying us either commissions via third party or commissions through our broker dealer through cash, but the net change in subscriptions for those half dozen clients was either mutual deposits.

As far as where the trends is in the marketplace there, I think that's consistent with what happened last quarter, I guess it would be consistent what's happening in the coming quarters as well.

So you continue to see, it sounds like you feel like the commission decline is going to sort of bottom out sooner or at least continue to decline, it was only 500,000 last quarter -- this past quarter and probably will be a little bit less going forward?

Keep in mind that our -- that the number you're looking at is really one of two payment methods that somebody could pay on commission.

So they could actually pay us in commissions where we're showing it as commissions and switch to a third party which we had several do last quarter.

That wouldn't be in the half dozen I'm talking about.

And our revenue, as we describe, it would actually show up then as cash in the future.

The change we made in the accounting a year ago basically makes it so cash is coming from either one of those two sources.

Thank you.

Thank you, our next question or comment comes from Brett Manderfeld.

Hi, good morning, guys.

Related to the subscriptions, can you give us a little more color in terms of the increase whether they're coming from the buy- versus the sell-side?

And then related to that, how the traction in the Marquee product is going, thanks.

As far as the mix of business I think it was very consistent with the current mix of clients we have.

It was both on the buy- and the sell-side.

You might have noticed the international was a little stronger than has been in the past so that has started to accelerate as well.

As far as where it was across the distribution of our product, it was very even, Workstations contributed, based on what you can project our price roughly a quarter of that increase in commitment.

New clients were a significant contributor as you can tell by the net increase in client count and the with rest would be applications and database access fees. [inaudible] Marquee is doing very well in the marketplace, and is certainly exceeding our expectations.

Was that a meaningful contributor in the sequential increase?

It's not a product at this point that has a revenue attached to it so it's going to show up in the Workstation growth as well as the client count growth.

And so I know you've done some work in the past looking at the soft dollar issue.

Have you done any more work there and I guess what are your clients telling you these days about their thoughts toward soft dollars?

Thanks.

There's only two new data points that I saw in the industry last quarter.

There were two hearings by the Senate banking committee that you could go listen to on the Senate website where there were five players in the industry talking to the Senate banking committee about soft dollars.

As you read through what would be 60 pages of transcript to get to the very end of it, the gist I basically get out of it is disclosures where the political leaning is towards, and I really don't see our business at risk unless they -- eliminating commissions to pay for full service research, for example, Piper Jaffray research, so I think it's going to fall in a limited disclosure and at this point, from a business level, I consider it a non-issue.

Great.

Maybe one final question.

Just in terms of stock repurchases.

Anything else that we should be looking for going forward?

I guess you mentioned that, you know, Charles -- Yeah, that Chuck had sold some stock to you.

Howard has as well.

Is there any other tranches between those two or anyone else that you will be buying back in the near-term?

Thanks.

I couldn't officially comment on something like that were going to happen but from the company's perspective those were both opportunities for the company to buy attractive blocks of stock that would be difficult to purchase in the marketplace at an attractive price.

So the company would continue to evaluate opportunities as they arose.

Great.

Thank you.

Thank you.

Our next question comes from Julie Kotosan [ph].

Would you discuss the margin impact of moving into your new headquarters building?

As we indicated I think in the prior quarter substantial part of our incremental capital expenditures is going to be related with Capex.

The change in capital spending from our guidance from 18 million to 35 million last quarter was related to the increase in spending for the headquarters.

It's our expectation that the impact of the new headquarters building relative to where we are right now would be somewhere around 150 basis points.

You're saying that there's 150 basis point margin attrition as you move into the new headquarters?

Part of that is one time, basically.

Of that 150 basis point includes --

That's for basically the moving charges that in effect that we mentioned in the press release this morning, the $1.2 million that we referenced.

But on an ongoing basis, maybe I should ask it differently.

What's your cost per square foot, your rental cost per square foot, after you move compared to before?

On a per square foot basis our rental cost is actually going to decline significantly.

Okay.

Half the increase is by 40%, so -- the real answer to your question is certainly from an operating basis the new headquarters is going to have, put pressure on us from an expense level but it's something we've been preparing for for a long time.

I guess the other factor is that we're at the end of our leases in all of the space that we're replacing, in fact, past the end of some of our leases to the point where there are no write-offs occurring in those leases, so it's somewhat artificially low at this point.

But given the business outlook it's something that's already built into our plan.

If I characterize your business as a software business, your last few acquisitions I could characterize as content acquisitions.

And I'm wondering if there is a change in the competitive environment that makes it more necessary for you to own the content that you provide access for, either because some of your competitors such as Standard & Poor's now has their own software, or other reasons?

I think we really don't look at our business as a software company.

I think we look at our business as a service to our clients and a productivity tool and we base the content we can define in the marketplace plus as you mention some that we create on our own to try to provide the best solutions that we can to the marketplace.

At no point in any strategic plan that we have would be take a product like Standard & Poor's and want to replace it.

It's a wonderful product in the marketplace and we would support that no matter what kind of strategy we had internally, because it provides a particular need in the marketplace.

They've done a wonderful job in their systems for many, many years.

How would you characterize the kind of businesses you would be interested in acquiring?

Are you particularly focused on content acquisitions or is it just coincidence that the last few have been content acquisitions?

No.

I think we look at, like any business we evaluate a make- or buy-scenario in a particular area and make business judgments accordingly.

It's not a core strategy that we are an acquisition-oriented company.

As you can see the vast majority of our growth has been built on an organic basis.

So we take opportunities as they arise.

Thank you very much.

Thank you.

Our next question comes from Douglas Arthur.

Hi, it's Lisa Monaco for Doug again.

Could you just provide some color on the competitive environment right now, what you're seeing, if anything, that's different now with the market improving?

Thanks.

Lisa, it's Mike Frankenfield.

The competitive environment in fact remains very, very consistent as the last caller just mentioned, all of our suppliers have software products that deliver their information into our client.

So we both cooperate and compete with all of our data suppliers.

The product suite that FactSet has right now is extremely strong in the marketplace and as evidenced by the growth this past quarter and previous quarters we continue to have a lot of traction.

So there are no big new competitors that have emerged.

We remain in a competitive environment that is consistent in terms of the players, yet is always evolving due to technology changes and it requires us to constantly innovate to keep our product in the forefront.

Would you be willing to quantify -- I believe Thomson is the largest content provider, what percentage of your content that's through FactSet comes from Thomson?

That would be, would you have to define the definition of what percentage of the content.

Off the top of my head I would say that they maybe have three or four databases.

On a percentage of databases basis, three or four percent, we have hundreds of databases.

On a more subjective basis on a use basis, obviously Worldscope is a global database that's on our system and the estimate [ph] databases are also very significant on the system.

But as, how big a piece of the business they are?

I would have to say, I'd call it 10%, 20%, maybe on a [inaudible] basis.

Okay.

Thank you.

Our next question comes from Peter Everett [ph].

Ernest, this is about $2.3 million year-to-date decline in depreciation and amortization expenses, is that exclusively due to the leasehold issue that Phil mentioned earlier?

No, it's not.

As you may recall, Peter, from back in 2001 we upgraded our mainframe, our data centers back then and our Capex peaked at about 31 million back then.

A lot of that Capex then was related with our technology assets and they're just falling off.

We'll work hard to get that depreciation back for you in the first quarter.

Well, I guess that's the issue.

The question is, could you quantify for us and you sort of danced around this a little bit, the incremental D&A expense, number one associated with the new facility, and then, number two, any thoughts in terms of incremental technology capital spending I guess that might be due now that -- this equipment is getting a little bit older and how that might impact the D&A expense going into next year?

I'll answer the second one and let Ernest answer the first one.

As far as the technology assets, actually the reason it dropped is because we replaced the equipment and the new equipment was roughly a third of the price of the old equipment, we were just depreciating a much lower cost asset.

So the equipment we have is actually first generation new leading-edge technology.

This is the '01 capital spending cycle, Phil, you're referring to?

That '01 [inaudible] was replaced basically the fall of '03 and a little bit in the spring of '04, 100% replaced at that point.

So we shouldn't worry I guess is the message about a step up in D&A expenses associated with the technology capital spending cycle?

Don't particularly see that in the way technology is laid out and the way our CapEx lines are, we don't see the same kind of peak we had in '01 occurring in the near future.

Great.

How about the incremental leasehold expense?

The incremental leasehold expense is roughly 100 basis points.

Thank you.

Our next question comes from Craig Huber.

Yes, hi, thank you.

A few questions.

This -- the 39 new clients you had in the quarter, could you just give me a sense of approximately how many of those clients are buy-side clients, let's say, or smaller end that manage less than half a billion dollars?

First question.

Buy-side versus sell-side, Craig, 31 were net on the buy-side and five net on the sell-side and three fell into other categories.

As far as the characterization I would characterize it very consistent across our client base.

Obviously our share on a client basis is very high at the large end, so for the most part [inaudible] happens at the lower end of the spectrum.

Would you ballpark it then, 15 to 20 out of those 31 buy-sides that you said would be half a billion or smaller.

Just roughly.

That's hard to gauge.

I would certainly be comfortable with that, but I'm guessing.

Okay, and then back on your comments about soft dollars earlier on about your idea that you think the whole thing is moving away of fuller disclosure and all that, and obviously if it happens by Congress, I've got to think, not to put words in your mouth, that that's a 2005 event or if the SEC steps in, I'm sure you don't think it's going to happen this year, do you?

No, Given the activity I've seen, I don't see anything happening in the short time horizon.

Then would it be fair to say that the number of Marquee users out there, out of the almost 20,000 passwords you have, is 4 to 5,000 a reasonable expectation of where the number sits at right now?

It's hard to say what the total number of Marquee users are.

We've been on an aggressive plan to convert all of our users from the old product to the new product.

We are making a lot of progress.

By year-end we'll have completed the process within the U.S.

But there are always -- that's more from a billing perspective there's always technology adoption issues and it takes a long time to roll-out technology.

Using some data I have, again, it's a rough.

I'd guess that number's little high.

4 to 5,000 is a little high?

If I were guessing, I would probably say 3 to 4.

I appreciate that.

This idea, Ernest, you talk about the reserves and I know you can't speak specifically about it but can you give us a little better sense of what we are talking about here?

Unfortunately I can't.

As I mentioned earlier these are commercial in nature and we are bound by confidentiality.

I assume that means with your vendors?

I'm sorry.

I assume that means with your vendors?

I'm not sure what you mean, commercial?

I can't make any reference to the specific matter.

I think the most important factor is it's a one time event and it's fully disclosed at this point, and it's no [ph].

It's a one time event.

Okay.

Thank you.

Our next question comes from Fred Mc Cray [ph].

Good morning.

A quick follow up on the international markets, solid performance there this quarter.

Could you give us an idea of the overall opportunity there in terms of buy- and sell-side accounts and your current penetration?

This is Phil Hadley again.

Right now, as far as a percentage of our client base, roughly 20% of our revenue comes from non-U.S. business.

From the way we've sized the business and from the data we have, we believe that the market opportunity outside the United States is roughly a 50/50 split between the United States and the rest of the world.

From an opportunity perspective, we're less penetrated internationally than we are domestically so we see the opportunity is very positive.

Very good.

Thank you.

Our next question comes from Neil Godsey.

Good morning.

Three questions but I think they are all quick ones.

First, I was just wondering if I heard you correctly regarding the CallStreet acquisition, did you say that that added 2 million to your subscription value and one incremental client?

That's correct.

Okay.

Second question, if you can disclose it regarding the reserve in the quarter, was there any cash payment associated with this?

There was.

Again, it's a one-time item as we indicated earlier.

We're settled on the matters.

Okay.

And lastly just wonder if I could get a comment on how sales of the Mergerstat and the Lion's Shares [ph] products are going?

Thanks.

That's it.

Both products are doing well but we don't comment on particular line items as far as the product line.

If we got to that point, we'd have to describe 50 products in our system and exactly how each are doing.

Operator, shall we take the next question?

Sure, thing, sir.

Our next question comes from Valerie Libby [ph].

Good morning.

I was wondering if you could discuss whether or not you're seeing clients voluntarily switching from soft dollars to hard dollars and how this may or may not be affecting password levels?

Thanks.

As we commented on earlier, we roughly had a half dozen clients switch voluntarily last quarter and each of the subscriptions either remained the same or increased, so we didn't see any negative effect in the last quarter from somebody voluntarily switching.

Okay.

Thank you.

Thank you.

Our next question comes from Justin Martos.

Within the Workstation product, users have been going up 100 a quarter and clients that you see, any sort of step function that you see increase it or is it sort of a nice controlled roll-out?

What's the sort of revenue impact incrementally as you add those new clients and users on the Workstation product?

I think the answer to your question, we added 500 new passwords last quarter.

Some of those come because we added new clients.

So a new client by definition starts with two passwords, and may choose to have a dozen or more passwords.

The incremental revenue impact from a password falls at roughly $6,000.

Thanks.

Next question, John Neff.

John Neff with William Blair.

One quick follow-up to the point you made earlier.

I think you said you were planning to have the conversion to the Marquee product done by year end.

I didn't know if that was your fiscal year or calendar year end?

And did I understand right that you estimated probably 3 to 4,000 passwords already converted by application and are you expecting to convert the remaining roughly 15,000 or so by year end?

And can you explain or clarify a little bit more what you meant from the differentiation between a billing type of conversion versus a technology conversion?

Thank you.

A couple years ago FactSet redefined the definition of what a basic Workstation is.

We bundled several news feeds and added several enhancements to the Workstation, one of which was Marquee.

And we came up with a new Workstation price for all of our existing clients.

We allowed them to continue on a grandfather basis with the existing Workstations that they had at the old Workstation price but all new Workstation prices, all new Workstation sales were conducted at the $6,000 price point that Phil just alluded to.

Once a client has converted to the new Workstation pricing model they are then eligible to get Marquee They are not obligated to take it.

They have an option to take it.

And they typically choose to take it once they feel that the feature set is going to do what they need it to do.

So we expect to finish converting all of the existing U.S. investment managers by calendar year end to the new Workstation pricing and with Marquee, it's difficult to give you a time line on the roll out of Marquee because that is really going to be dependent upon how clients want to deploy that product in their firms.

To maybe clarify that point, there's a difference between the clients being able have Marquee and actually using Marquee, and I was referring more to the usage of it. [inaudible] firms, they will install a site server and enable the technology to exist inside of the firm, some firms control that.

So, as I mentioned in November, we were roughly at 50/50 on the conversion between the old pricing and the new pricing.

We are past that at this point, and as Mike mentioned, we expect to have that completed by the end of the year.

So since 50/50 would mean roughly 10,000 users are available [inaudible] Marquee at this point, or would have been in November, the percentage of Marquee users who actually use it versus those who could use it is a substantial difference.

Great.

That's helpful.

Thank you.

Our next question comes from Craig Huber.

Actually, you just answered my follow up.

Thank you.

And sir, I show no further questions at this time.

Okay.

Well.

Thank you all for listening in.

If you have any additional questions feel free to give us a call.

Thanks.

This concludes today's teleconference.

Everyone have a pleasant afternoon.