Factset Research Systems Inc (FDS) 2004 Q4 法說會逐字稿

Good morning, and welcome to the FactSet Research Systems, Inc. fourth-quarter fiscal 2004 quarterly earnings conference call. (OPERATOR INSTRUCTIONS) At this time, I would like to turn this call over to Mr. Ernest Wong, Chief Financial Officer.

Thank you.

Sir, you may begin.

Thank you, and good morning to all of you participating with us this morning in this conference call.

With me from FactSet's executive management team for today's call are Phil Hadley, Mike DiChristina, Mike Frankenfield, and Scott Beyer, who are respectively FactSet's CEO, President, SVP of Sales, and Director of International Operations.

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

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 November 30, 2003;

February 29, 2004; and May 31, 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.

The fiscal year that ended this past August 31st marked the completion of FactSet's 26th year in operations, and I'm happy to report that our operating and financial results reflected continued solid performance.

Total subscriptions net of clearing recoveries rose to $272.9 million as of August 31st, a 16.1 percent increase from $235 million a year ago.

On a sequential basis, total subscriptions were up $12 million over our total subscriptions at the end of May.

We define "subscriptions" as the forward-looking revenues for the next 12 months from all services currently being supplied to our clients.

Driving the increased subscription level were the addition of new clients, incremental subscriptions to applications and databases, as well as a greater number of users.

With respect to client count, we gained a net 28 clients for the quarter, giving us a total of 1,059 clients at the end of August.

For the fiscal year, our total client count rose by 89.

Demand for our services has continued to increase, including for our Portfolio Analytics product.

At the end of August, there were 385 clients, representing nearly 2,900 users who subscribe to Portfolio Analytics services.

This compares to a total of 345 clients and 2,500 users a year ago.

In addition, the improving market environment has led our clients, particularly on the sell side, to increase hiring.

This, in turn, has translated into a workstation count that increased by 1,200 for the quarter for a total of 21,100 at the end of August, the largest quarterly increase in users we've experienced in four years.

For the full fiscal year, workstations increased by a net total of 1,900 from 19,200 in August of 2003.

This represents the first year since fiscal 2001 in which we've seen a net increase in total users from the prior year.

The improvements in these operating metrics were reflected in the financial results for the fourth quarter.

Revenues net of clearing fees rose by 17.6 percent to $67.7 million with net revenues from our domestic clients growing to $54 million, up 17 percent.

Net revenues for our international operations rose nearly 20 percent to $13.7 million for the quarter.

By region, revenues from our European and Pacific Rim operations were $10.4 million and $3.3 million, up 1.6 million and 700,000, respectively, from the fourth quarter of fiscal 2003.

Operating income for the quarter just completed increased 13.5 percent to $23.2 million from $20.5 million in the previous year.

As we have noted in our earnings announcement today, included in our operating income this quarter was a $837,000 charge in connection with the consolidation and relocation of our office in Connecticut to our new corporate headquarters in Norwalk.

These costs negatively impacted our operating margin by approximately 120 basis points for this quarter.

Without the inclusion of these relocation expenses, our operating income would have increased by over 17 percent over the previous year.

As you may know, with the scheduled expiration of our leases in our three Connecticut locations and the move to our new headquarters, FactSet has now consolidated all our Connecticut employees under one roof.

Cost of sales as a percentage of net revenues declined by approximately 130 basis points compared to the same period a year ago, largely due to a decrease in depreciation on computer equipment and lower maintenance expenses.

Partially offsetting these declines was an increase in data costs due to additional clients as well as from our CallStreet acquisition last quarter.

Selling, general, and administrative expenses as a percentage of revenues rose by about 240 basis points.

Approximately half of this percentage rise was caused by the consolidation and relocation of our offices which I just discussed.

Increases in travel, rent, and miscellaneous expenses, offset by declines in the amortization of leaseholds and employee compensation as a percentage of revenues, accounted for the remainder of the increase in SG&A as a percentage of revenues.

A reduction of our cash balances and investment portfolio caused by the purchase of 3 million shares from our two co-founders earlier this year was the major cause behind the reduction of other income this quarter.

As a result, net income rose by 8.9 percent for the quarter.

However, due to the 8 percent reduction in share count from our repurchase of shares, fully diluted EPS rose by 18 percent from 38 cents to 45 cents.

For the 2004 fiscal year, net revenues were $251.9 million, a 13.3 percent increase from the prior year's revenue of $222.3 million.

Operating income advanced 14.2 percent; net income grew 13 percent; and EPS on a fully diluted basis rose from $1.48 to $1.72.

Included in the fiscal 2004 and 2003 results were income tax benefits that increased EPS by 5 cents and 4 cents, respectively, on a fully diluted basis.

As for capital spending, our capital expenditures totaled $25.2 million for the quarter and 37.8 million for the fiscal year.

Approximately 30 percent of our capital spending for the year was used for the purchase of technology assets.

The remainder of the expenditures related primarily to the build-out of our new facility, as well as for expansion of several of our locations in the US and overseas.

A little over 50 percent of our total expenditures related to leasehold improvements and are depreciated over the term of the leases, which in the case of our Connecticut facility is 15 years.

Furniture, which constitutes the remaining portion of our CapEx, is depreciated for book purposes on a seven-year double-declining basis.

On September 1st, we closed our acquisition of the JCF Group of companies.

JCF, as you may recall, is a provider of global broker estimates and other financial data to institutional investors.

We're very excited about the addition of JCF to the FactSet family, and have made already significant progress to integrate its business into our operations.

The addition of JCF will add an incremental 329 clients to FactSet's client count of 1,059, as well as an additional 2,000 users to our current 21,100.

These clients, plus an additional 39 who are already FactSet clients, will add an additional $17.7 million to our total subscriptions.

As of September 1, our aggregate subscriptions, including JCF, is $290.6 million.

Thank you all for listening on in this call.

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

(OPERATOR INSTRUCTIONS) Dan Farb (ph).

Hi.

Dan Farb at Highfields (ph).

Congratulations, guys, on the good results.

I had a question relating to McGraw-Hill's purchase of this Capital IQ product.

I was wondering if you guys have a view on how that may or may not change the competitive landscape dynamics, and if you looked at that asset.

On the competitive landscape, Capital IQ has been in our space now for three years.

I don't think ownership by McGraw-Hill is going to change their role in the marketplace.

I think it's certainly an interesting asset for McGraw-Hill to purchase, and it's synergistic to some of the content they have available.

As far as whether we looked at it or not, that's not something that we would comment on.

Do you anticipate that to change the environment or not really, because they don't really compete directly in your analytic space?

To say they don't compete would probably be an overstatement, but I think -- they're one of the players in our space and have a product that allows you to do some equity research, both on the buy and the sell side, so they are certainly out there on the margins.

Louie Telma (ph).

John E. Levine & Co. (ph) Nice quarter, guys.

Just want to get some clarification on the guidance.

The 73 to 75 includes what kind of assumptions of revenues coming from the acquisition?

We indicated in the acquisition that JCF has subscriptions of about $17.7 million as of September 1st.

Their business model is very similar to ours in that it's subscription-based.

And as you probably are aware if you have been following us for awhile, the total subscription number that we give at the beginning of a quarter is a pretty good indicator of where our revenues will be for the next quarter out.

Okay, so about 4.5 million -- is that in the ballpark?

That's in the ballpark.

Craig Huber.

Lehman Brothers.

Two questions.

One, out of the 21,000 passwords, I was just wondering if you could just give us an update of roughly how many of your clients or passwords are using Marquee -- have Marquee available on their desktop or are paying the higher price; maybe I should just say it that way.

And then secondly, what percent would you say of your data that's available on FactSet (ph) do you guys own right now?

I'm just curious just given the number of small acquisitions you have done in recent years.

Craig, the answer your first question is I would say we're probably 60 or 70 percent completed.

I'm going to say I guess 70 percent completed where most of the clients would have access to Marquee -- keeping in mind that all of our international workstations, that is not a very interesting product yet, because it's only sourcing U.S. quotes at this point.

(multiple speakers) content owned.

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

If you go through the major categories -- a better way to look at it would be that we're dual-sourced in every major category at this point, and in some categories, even triple-sourced.

The only major category at this point where we don't own data is the fundamental area.

Carla Cooper.

Robert Baird.

Just quick on JCF -- when you initially announced the acquisition, we recorded anyway that it had about 500 clients.

What's the delta between the number you're giving us now?

I think at the time when we made the announcement, we were looking at the list of clients that we had from doing the due diligence.

In going through the list and scrubbing it, we put some threshold factors in terms of how we define a client using similar definitions as we do for FactSet.

And in doing so, we reduced to the number from approximately 502 to 460 -- 368, I'm sorry.

And then I wonder if you could talk at all about any changes to your international strategy now that you own this non-US-based company.

Should we expect anything?

Clearly, it gave us content control in an important space, in the earnings estimate space.

That's one item.

Secondly, the market tier that the JCF product suite caters to particularly well is one that we had not approached before.

It's the smaller continental Europe and UK regional brokerage firms, and the smaller fund management firms that we, again, had not been approaching in that marketplace.

So I guess from a strategic sense it gave us a product offering with a different price point for a marketplace that we had not previously approached.

Those are probably the two most significant things I would point to.

And I guess just finally with that one, when you talk about the process of integration, what has occurred that's been significant?

What should we still look for in terms of sort of completing the integration process?

From a personnel perspective, we're in fairly good shape.

That didn't take us very long.

I think this opens up the opportunity for us to add client count at a much more rapid pace or accelerate that rate of new client acquisitions going forward.

Additionally, we have loaded -- completed the process of loading up the JCF content inside our Directions application.

The two companies, FactSet and JCF, had highly complementary offerings in that -- or revenue streams, in that JCF's revenue stream is largely from continental Europe, and FactSet has obviously a large penetration in the States.

So by placing that content onto FactSet Directions and making it available in United States market, we perceive that as a very, very large opportunity for us going forward, and we have begun to sell that already.

Jeff Neff (ph).

John Neff, William Blair.

A few questions, guys.

It looked like for the first time in about a year and a half, the proportion of total revenues from cash actually declined sequentially.

I was wondering if in any way are you prepared to say that that's any kind of a statement about the current atmosphere surrounding soft dollars and soft dollar reform?

And also, what percentage -- I know you lump a certain amount of revenues into cash that are effectively coming from soft dollars.

Can you give the total breakout of soft versus hard dollars adjusted for that?

Sure.

With the latter question, with respect to dollars coming from either through our broker-dealer or through third parties, that number still is around 40 percent of total revenues.

In terms of your first question regarding net commission revenue as a percentage of total revenues, I'm not sure whether we're working off of the same numbers.

I'm showing fairly consistent percentages across the last several quarters, unless you're going back a couple of years.

Yes, I was looking at -- unless I have this wrong here, my model -- my number is showing the percentage from cash fees, you indicated 53.7 million.

That was 79.3 percent of total revenue.

In the prior quarter it was 79.9 percent.

In the prior quarter I had cash revenues representing about 80 percent.

This year -- this quarter about 79 percent.

Yes, so my question was -- the fact that it's declined, are we seeing any kind of an easing off of fears related to soft-dollar payments, because by extension, I would assume the proportion of soft dollars as a proportion of revenue has gone up?

I think the percentage change is relatively insignificant for us to be able to make a comment or come to a conclusion on that.

I guess there are two elements there.

This particular quarter, we had four clients switch from paying commissions, either directly with our broker-dealer or through third party, to cash.

In all cases, those subscriptions actually rose in the quarter.

And then, quarter-to-quarter, we have clients who switch from third party, which would always show as cash to us, to commissions, and back and forth on a pretty regular basis.

So there's volatility within clients, and even in clients where they pay us in all three methods.

So those numbers can move, and it's not material as far as an indication of what you're trying to find.

Good.

And then the tax rate was a little bit higher than I had expected, not significantly.

But what can we expect going forward?

Still around 37 percent?

Our guidance was between 36 and 37 percent for the first quarter.

And then operating margins, if I actually exclude the nonrecurring charge associated with the office consolidation, I get operating margins of 35.6 percent.

The guidance for next quarter is 32 to 34.

Can you talk about what's happening there?

Sure.

That's largely due to the acquisition of JCF.

We haven't given any specific financial information about JCF itself other than subscription level.

It's our expectation that JCF in and of itself is not going to be dilutive.

It will be breakeven or possibly slightly accretive.

And that's why you're seeing the decline in margins.

Do you expect that -- would you expect that to be a relatively temporary dampening, or do you -- from that basis, kind of starting to move back up again, or is that kind of a plateau you're comfortable with for the next year?

I think for the next couple of quarters, we're not going to see too much of a change relative to that level.

We only give guidance for one quarter at a time.

Sure.

Last question.

Receivables year-over-year up $10 million; same as sales, essentially.

Any corollary there or anything we should know?

There's some corollary.

Truthfully, I took a look at who our largest obligors were, and if I named them on this telephone call, I might embarrass a number of people who are listening in.

Our largest obligors are all household names, so it's not a matter of credit quality.

It does raise an issue from an internal policy standpoint as to whether we need to be a bit more diligent in forcing these folks to pay on a closer schedule to their invoices.

But that's really what's causing it.

Thank you very much.

Great quarter.

Douglas Arthur.

Morgan Stanley.

Ernest, I'm wondering if you can expand on the environment you're seeing right now on both the sell side and the buy side.

Clearly, you mentioned the sell side demand or desktops as picking up.

And then, the continuing drop in D&A -- is that likely to continue, or is that going to stabilize going forward?

Let me take the D&A question first, and then I will let Mike Frankenfield talk about sell side versus buy side.

Clearly, with the increased capital spending that we've had in this past fiscal year, our D&A is going to be increasing on a go-forward basis.

As you probably have tracked our D&A over the last couple of years, we peaked at 2001 and then our last -- our CapEx for the last couple of years has been fairly low.

With this increase in CapEx this year, D&A will increase for fiscal '05.

Let me turn the question over to Mike on the buy side versus sell side.

On the sell side, we have seen a positive turnaround.

Things have stabilized.

And during the past year, there's been positive net hiring in that segment, which bodes well for us.

We have seen an increase in the workstation count in the sell-side firms.

And then, the buy side continues to remain a steady grower.

There are lots of new, small clients being created, and the large clients continue to grow in a relatively positive market environment.

So we have a reasonably positive outlook.

Eric Jacobson (ph).

Artemis Advisers.

When does your contract with COMPUSTAT end?

I think the answer would be years from now.

I couldn't tell you exactly what the date is.

Brett Manderfeld.

Piper Jaffray.

Just wanted to clarify one of the questions.

I think, Phil, you had mentioned that you thought 60 to 70 percent of the business would include Marquis or does include Marquis.

Is that just in the US?

And then do you think that -- I think you had mentioned that by the end of the year that you would be completed with the Marquis pretty much throughout the system.

Is that still something due out to look forward to?

I'll let Mike Frankenfield answer the follow-up.

We continue to chug along with Marquee.

It's hard to measure the exact percentages for a couple of reasons.

One, there's a gap between getting the client on the right-priced program so that they are eligible to get Marquee, and then the time that takes before the client actually deploys Marquee.

So we continue to address the U.S. investment managers first and foremost.

We are making great progress in that area.

By the end of the year, all U.S. investment managers will be eligible to get Marquee.

Whether they choose to deploy it or not is a function of technology and what we're able to deploy.

As Phil said, on the international front, it's a different situation.

We need to finish the product development on Marquee to make that product relevant for those markets.

And on the investment banking front, we face some of the same challenges that we face internationally.

These are typically very large-scale deployments.

We have pilot programs going in virtually all the major investment banks.

And we will continue to make progress in those areas.

Does that mean then, Mike, that the price increase will be complete by year-end in the US?

I know you love to think of it as a price increase, Brett.

It's really a price reconfiguration.

I have stated before, what we did was we eliminated lots of fees, and bundled some of the fees that were on invoice into the workstation price.

So it's really -- I view it more as a conversion.

And yes, the conversion will be complete by year-end.

Great.

And Ernest, just in terms of the margin guidance, maybe another way to ask the question -- without JCF, would you expect margins in the November quarter to be similar to August if you back out the relocation charges?

I think that margins for FDS for FactSet on a stand-alone basis without JCF would be probably more comparable to the guidance that we've given historically.

Okay.

And in terms of the D&A, just hoping to get a little more meat on the bone.

I guess two questions related to the new headquarters -- can you give us a sense for kind of the basis point impact to margins with the increased D&A, and then maybe longer-term, what kind of cost savings you might see from the new headquarters?

Relative to this quarter's D&A, I think that the headquarters is going to add less than 100 basis points in terms of additional D&A for next quarter.

Okay, great.

And final question -- just CallStreet;

I'm assuming that's a pretty small contributor to subscriptions and revenue.

Is that less than what you paid for that, or can you give us a sense?

Is it a couple million?

I think when we made the announcement that we acquired CallStreet, we indicated that the total subscriptions were close to $2 million at that point in time.

Brett, that was in last quarter's numbers (multiple speakers), not this quarter.

(OPERATOR INSTRUCTIONS) Craig Huber.

I am just wondering, Ernest, if you could tell us what dollar impact or change you would expect from the headquarters to your cash costs on a full-year basis.

On a full-year basis, on a cash basis, actually, the rent itself is going be neutral relative to the rent we were paying for the three different locations before we moved.

At this time, I show no further questions.

Thank you all for listening in.

Have a good day.

Thank you.

That does conclude today's teleconference call.

Everyone may disconnect at this time.