Factset Research Systems Inc (FDS) 2005 Q1 法說會逐字稿

Good morning, and welcome to FactSet Research Systems first-quarter fiscal 2005 quarterly earnings conference call.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

I would like to turn the call over to Mr. Ernest Wong, Chief Financial Officer at FactSet Research Systems.

You may begin.

Thank you.

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

With me are Phil Hadley and Mike DiChristina, FactSet CEO and President, respectively.

Also sitting in on this call are Mike Frankenfield, Senior Vice President in charge of our sales and consulting group and Scott Beyer, Senior Vice President and Director of our international operations.

You will have an opportunity to ask questions following my review of our operating financial performance of the first quarter of our fiscal 2005 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 forecast 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 on FactSet's annual report on form 10-K for the year ended August 31, 2004 and quality (ph) reports on form 10-Q for each of the quarters ended November 30, 2003, February 28, 2004 and May 31, 2004, as well as other required filings.

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 happy to report that FactSet recorded solid revenue and profitability growth for the first quarter of our 2005 fiscal year which ended this past November 30th.

Our financials and operating metrics for this quarter also included the operations of the JCF Group of companies, which we acquired on September 1st.

Revenues net of clearing fees rose to $74.1 million, up 25 percent from $59.3 million recorded in the first quarter of fiscal 2004.

Operating income increased 23 percent to $25.8 million from $21 million, and net income advanced 18 percent to $16.4 million.

EPS on a fully diluted basis for the quarter was 49 cents, up from 39 cents for the first quarter of fiscal 2004.

Client subscriptions net of clearing recoveries totaled $299 million as of November 30, up from $238.8 million a year ago and $272.9 million at the end of August.

In addition to the approximately $17.7 million of subscriptions that we gained from the acquisition of JCF, growth in our subscriptions came primarily from incremental subscriptions to our databases and applications.

As a reminder, we define subscriptions as the forward-looking revenues for the next 12 months from all services currently being supplied to our clients.

In terms of client count, there were 1,410 firms who were clients of FactSet as of November 30th.

Factoring in the 329 net new clients that we added from the acquisition of JCF, this figure represents a net increase of 22 clients for the quarter.

The addition of JCF's 2,000 workstations increased our total users to 23,100 at quarter end.

Demand for our portfolio analytics applications continued to increase this past quarter.

As of November 30th there were over 390 clients representing approximately 3,000 users who subscribe to these services.

This compares to a total of 355 clients and 2,600 users a year ago.

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 16 percent to $54.7 million for the quarter compared to the first quarter of fiscal 2004, with the growth coming predominately from penetration of the investment management market.

With the acquisition of JCF whose business operations are predominately in Europe, revenues from our international operations rose to $19.4 million this past quarter, up by 62 percent from the first quarter fiscal 2004.

By region revenues from our European and Pacific Rim operations rose 71 percent and 32 percent to $15.8 million and $3.6 million, respectively.

International subscriptions now total $78.8 million, representing 26 percent of our total subscriptions.

Moving to the expense side of our P&L, cost of sales as a percentage of revenues decreased by 50 basis points compared to the first-quarter of fiscal 2004 primarily the result of lower depreciation on computer-related equipment, communications costs and computer maintenance expenses as a percentage of revenues.

Partially offsetting these declines was an increase in data costs and in the amortization of intangible assets.

The rise in data expenses was largely due to the incremental content costs associated with additional clients, as well as from our CallStreet acquisition in the third quarter of fiscal 2004.

The increased amortization expense was the result of our recent acquisitions predominately of JCF.

Selling, general and administrative expenses as a percentage of revenues increased by 110 basis points, relative to the same period a year ago.

This rise is largely the result of higher expenses in compensation, TME (ph) and the amortization of leasehold improvements.

These increased expenses were partially offset by a decline in miscellaneous expenses, which included the reduction of certain nonincome tax accruals after discussions with various state tax authorities this past quarter.

With respect to capital spending, FactSet's capital expenditures for the quarter totaled $4 million, approximately one-third of the total was used to purchase technology assets, while the remainder was spent on furniture and leaseholds.

Current guidance for capital spending for the entire 2005 fiscal year is $22 million.

Thank you for listening in on this call.

We will be happy now to entertain any questions you may have.

(OPERATOR INSTRUCTIONS) Douglas Arthur from Morgan Stanley.

It is Lisa Monaco for Doug.

If you could just elaborate on what you are seeing in investment management versus the sell side and also if you could just give some of your thoughts on the recent MESD mutual fund task force report that recently came out.

Thanks.

With respect to our investment manager clients and our investment banking clients, I will start with the investment managers.

The general market conditions appear to be stable, which is favorable for that group of clients.

Our large investment management clients seem to be on strong footing and continue to make progress in their respective businesses which bodes well for us and there appears to be good demand for our product and services.

As you are aware, there is a lot of small client creation, a lot of hedge fund creations and that creates a lot of opportunity for us as well to penetrate that growing segment of the marketplace.

On the investment banking side of things it appears there has been a pickup in general M&A activity, which again bodes well for us.

And that segment went through a strong hiring process this summer.

And as a result, continues to be a good performing segment for us as well.

On the MESD mutual fund task force I think basically that announcement came out where we thought the whole industry should come out on the full disclosure.

At this point from a business perspective I would consider the soft dollar issue behind us.

Chris Fuller (ph) from Arbor Capital Management.

I wondered if you could comment on your progress at the plant sponsor market, some successes you might have had and any issues you guys have come across with the pricing of your product.

The plan sponsor market is, we're primarily attacking that market with our portfolio analytics product; we have had several new client signups in that area.

It is a very exciting area for us because our portfolio analytics product allows us to, allows the plan sponsor to look at it from a manager of managers perspective and take attribution up to that next level.

It’s not significant at the total corporate contribution yet.

But the trickle down effect, the effect that a plan sponsor has on our clients or the traditional buy side clients has a very positive effect.

How about pricing?

Any problems with that with that type of client?

There is a special package that is set up for that particular group, assuming they are not managing money actively for themselves.

So it seems to be well received at this point.

Brett Manderfeld from Piper Jaffray.

I have a couple of questions.

First one, just housekeeping.

Share count was up 700,000 shares in the quarter.

Is that the share count that we should be using going forward?

I think it is a reasonable base to use.

And the increased there, is that mainly options or restricted stock at the turn of the year?

Part of that was as you may recall we acquired JCF and as part of the consideration of JCF there were approximately 257,000 shares issued there.

And then some of the additional shares that you see are the result of option exercises and quite frankly with the stock price where it is that also increases the fully diluted share count.

Okay, and related to JCF can you give us an update on the buildout of the U.S. earnings estimate database?

The acquisition of JCF had lots of different facets of which that is one that we are currently focused on.

It is a very strong product in Europe and is an up-and-coming product in the United States.

But it is an active process for us to bring that product up to the level our clients are currently interested in.

So right now you are not offering a U.S.-based product, Phil?

We are.

But it has got lots of areas for us to expand it to really truly increase its opportunity.

Okay.

And just hoping you could comment -- yesterday Thompson put out a press release regarding Bear Stearns and their investment banking relationship, they were talking about moving from 250 desktops to 600.

I was curious whether some of those desktops were yours and whether you are growing your business with Bear Stearns.

Thanks.

Timing of that is kind of curious, isn't it?

We don't at this point we have always had competition in the marketplace.

We don't comment on individual clients, both when we have wins or losses.

It is not our current practice.

So all I can say is you need to continue to look at the macro business and how we're doing and base your judgment based on that.

And I am assuming that Bear Stearns is -- I mean just looking at your client list in terms of some of the larger clients, on the investment banking side being that Bear Stearns is one of the larger investment banks, can we assume that they are one of your larger clients as well?

In a general term, not specifically talking about Bear Stearns, the largest clients on the street both buy and sell side are our largest clients.

Okay, and one final question.

There have been some rumblings that you all are starting to look at developing some of your content products out of India.

Is that true?

And if not, you plan on doing so?

Are there areas of opportunity to lower the cost of content development given that you're now moving in that direction?

Thanks.

Well the landscape of the business has certainly changed as far as who the suppliers are in the marketplace and the (indiscernible) of the suppliers.

Our goal as a business is to support all the suppliers we have in the system to the best of our ability, and to the best of the data they supply to us.

With that said, there are opportunities for us in the market to expand niches and enhance our product.

We are exploring those always.

Some of that might involve collecting data in India, but we also have a pretty strong data collection here in the United States in a variety of different areas.

Do you see that as an opportunity to lower costs in India?

For us we don't have that much data collection occurring here, and it is really not the current focus.

Its really new opportunity that would be looking at.

Okay, great.

Thank you.

(indiscernible) of Landmark Capital.

Great quarter.

I missed the first part of the call, so you probably already mentioned this but could you give me the sequential increase in passwords and clients for the quarter?

The sequential increase in passwords was 21.1 to 23.1, I believe.

And did you ask also for client count?

Yes.

At the end of August 31st we had 1,059 and we are now reporting 1,410.

Keep in mind that the acquisition of JCF added a net of 329 clients at the beginning of September.

So our -- one can look at it as a net increase of 22 clients for the quarter.

Great.

One other quick question here.

It looks like you have over the last several quarters been reporting some nice solid trends in non U.S. business.

Could you just perhaps maybe outline the opportunities you see and the size of the market relative to the U.S. and also the competitive landscape in particular, I guess in Europe and the Far East?

The opportunity is quite large.

We view in the longer run our opportunity outside the U.S. to be equal to that we presently enjoy in the U.S. though half of our business and aggregates should be represented outside the U.S.

If you look at other organizations that service this client base the more mature ones tend to see that kind of a mix.

So we would -- that creates an enormous opportunity for us outside the U.S.

In terms of the competitive landscape it varies greatly.

I would say we're very well positioned in each, in Europe and Asia if I could speak about those in general regions.

On the content side as well as the application side our greatest advantage today still is on software technology and the efficiencies that we can bring to those organizations.

Really in the key product suites that we first developed in the U.S. marketplace those advantages and those efficiencies are well sought after.

So you are seeing a broad based, strong support for the offerings we're bringing to the marketplace.

A lot of what we've done in the portfolio space in the last 12 months has been enhanced specifically for our international users.

So we are quite confident with that opportunity, and I think in the coming months and years Marquee will also represent an opportunity for us in our desktop expansion strategy going forward.

As far as pricing overseas, I would imagine even with the increase penetration with new clients you've maintained your premium pricing strategy.

Yes, we have.

I would say if I'm going to generalize again because it’s touchy to do that, the only market I would view as any softer than how we price is Asia ex Japan.

So Japan and Europe in general we are finding a broad acceptance for our pricing based on the value that we deliver.

With the acquisition of JCF, that has brought us a product platform that avails us that lower marketplace.

In fact with the acquisition we immediately had a captive audience of people of smaller tiered organizations that we could trade up on.

And we're already seeing the fruits of that.

Great job, guys.

Keep up the great work.

Thanks.

John Neff from William Blair.

Just one question which was could you give us the breakdown of commissions versus cash fees in the quarter?

In very rough numbers if you look at commissions and third party payers that continues to be approximately 40 percent of our total commitments for total subscriptions.

And is this historically you have provided that breakdown in your press release.

Is that no longer going to be the case, and if so, why?

Quite frankly we just sort of viewed it as somewhat an immaterial issue.

We certainly can put it in include it in the 10-Q if there is a strong desire.

We, as a follow-up in terms of the number of clients who have shifted from cash to either third party payers or commissions, actually was about 5.

And we had only two clients who went from third party payers or commissions to cash this quarter.

And these were all relatively small clients.

Okay, great.

Thank you.

Carla Cooper from Robert Baird.

In the cost of service line are the impacts on the quarter things that we should look to going forward, or are some of those going to reverse themselves in the coming quarters?

I suspect that there will be some timing issues, in this quarter we probably benefited from some expenses that did not -- that were not incurred, such as data costs.

And perhaps some compensation expenses.

Okay, thank you.

And then just looking to the pricing in the U.S., are you know at the point where the majority of your client base is on the Marquee type pricing or on the newer pricing or could you give us any color there?

We have largely accomplished our goal for the U.S. investment management segment and all of those clients are eligible to get Marquee are on that price point.

So if we had to think about the average revenue that you get per user at this point it would largely go up due to changes in services from those clients?

That's probably a fair statement.

Okay.

Thank you.

Jennifer Foster from Chilton.

I just wondered if you could comment on the operating cash flows this quarter.

I know with JCF things are a little bit confusing but it looks like there was a healthy decline year-over-year and I am just trying to understand that better.

Part of the difficulty in looking at the cash flow this quarter is that we've got some purchase price accounting going on.

So it will be difficult to sort of tie in all the numbers.

But with respect to the operating cash flow, I guess we had some additional cash uses related with working capital.

Were those cash uses associated with the acquisition or more part of the core business?

It's really more of the core business and it's really more of a timing issue than anything else.

(OPERATOR INSTRUCTIONS) William Drewry from CSFB.

So just going back to that last question, would the decline albeit relatively slight in operating margin year-over-year, would that be attributed to the expenses you were just talking about, or would it be attributable to a combination of JCF and CallStreet?

And if it was, if you could just -- not to get too deep into the minutia here, but if you could just give us a sense of which one was the greater impact.

Well, in terms of size certainly JCF is much larger than CallStreet, but I think we've indicated in the past that the operating margins for the old JCF operation is somewhat lower than the margins that FactSet has enjoyed historically.

Also included in our margins going forward is the amortization of intangibles, which we really do not have too much of in prior periods.

Now with the acquisition of JCF, that number has increased.

Just one more question if I could.

I don't know if you mentioned this before, but organic for the quarter, organic revenue growth from core operations or not core operations, but operations that you owned in the year ago quarter, and then growth rate from the acquired properties -- if you can speak to that.

We integrate things so deeply that it is not really possible for us to continue to break that out.

Literally day one the sales forces were all integrated; product teams and engineering were all integrated.

It's not something that is available going forward.

Okay, great.

Thanks very much.

Bill Lamonna (ph) from William Blair.

You might have just (indiscernible) this last question, but I was going to ask what the bottom line EPS impact was from the JCF acquisition in the quarter.

Was it slightly accretive or was it slightly dilutive?

I think the word is slightly.

You choose.

Okay, so pretty much immaterial?

Okay.

Thank you.

At this time we show no further questions.

Once again, everyone, thank you very much for participating on our conference call.

Have a happy holiday.