Factset Research Systems Inc (FDS) 2005 Q4 法說會逐字稿

Hello and welcome to the FactSet Research Systems' fourth quarter fiscal 2005 quarterly earnings conference call. [OPERATOR INSTRUCTIONS] I'd now like to introduce today's conference host, Mr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

Thank you and good morning to everyone. Welcome to FactSet Research Systems' fourth quarter earnings conference call. Joining me on the call are Phil Hadley, Chairman and CEO, Mike DiChristina, our President, Scott Beyer, Director of non-U.S. Operations and Mike Frankenfield, Director of our U.S. Investment Management Business.

FactSet lost a brilliant leader and visionary in early September with the passing of Howard Wille, our Co-Founder and former Chairman and CEO. It was his vision of FactSet as a premium service for financial professionals that set the table for what FactSet has become today. Howard embodied the spirit of our Company. We know the best way to pay him tribute is to continue to build this business, using the service-oriented culture he created. It's a culture that still strives at our Company today, across all departments and remains one of the keys to our success.

I'd like to remind you this conference call is being transcribed in real-time by FactSet's Call Street service and being broadcast live via the Internet at factset.com. The replay will also be available on our Website. Our call this morning may contain forward-looking statements, reflecting management's current expectations, based on currently available information. Actual results may differ materially from what is expressed or forecasted in such forward-looking statements. More information about factors that could affect FactSet's business and financial results are in FactSet's filings with the SEC, including its most recent 10K and 10Q. During the call, we may also refer to various non-GAAP financial measures. In such cases, the legally required comparable GAAP measures and reconciliations are included in our earnings release. Lastly, FactSet undertakes no obligations to update any forward-looking statements as a result of new information, future events or otherwise.

We'll organize today's call around three topics: First, we'll cover our performance during the fourth quarter. Second, I'll provide guidance for fiscal 2006, including financial details from recent acquisitions and the impact we expect from the adoption of FAS 123R to account for stock-based compensation. Third, after our comments, our management team will be happy to address your questions.

Now, turning to our results. FactSet continued to outperform in the fourth quarter. It marked our 36th consecutive quarter of revenue and operating income growth. FactSet continues to deliver superior returns to its shareholders. During the past three years, our average return on invested capital was more than two times higher than the weighted average return on invested capital of companies included in both the S&P 500 and the Russell 2000. Our fourth quarter results are indicative of a very strong sequential quarterly growth in new subscriptions, users and clients. We were able to deliver while investing in and pursuing new opportunities, showing the power of our business model.

This is a very exciting and busy time for our Company, filled with significant opportunities. We have a lot of work ahead but feel good about our progress and the value created for shareholders. Let's talk about the highlights of the quarter, starting with free cash flow. Free cash flow captures all the balance sheet and P&L movements and we believe it is an important metric to measure financial success. As a reminder, we define free cash flow as cash generated from operations. Which includes the cash costs for taxes and changes in working capital, less capital spending.

Free cash flow generated during the fourth quarter was 26.6 million, up 47% on a year-over-year basis. This percentage increase excludes CapEx related to FactSet's new headquarters, incurred in the year ago quarter. Record levels of net income and strong cash collections propelled our free cash flow forward. One very interesting relationship is the comparison of our earnings to our free cash flow.

Fourth quarter free cash flow was 42% larger than net income. Whereas for the majority of public companies, free cash flow is less than net income. When considering free cash flow for the upcoming first quarter, please factor in that FactSet historically pays variable employee compensation related to the previous fiscal year in the first quarter. This cash outflow will approximate 16.6 million in the first quarter of fiscal 2006. It is included in a crude compensation and represented as a liability on our balance sheet at August 31.

Now, let's turn to what we did with the cash and what happened to our balance sheet. Our ending cash and marketable securities balance was 76 million, a decline of 14.6 million since May 31. We invested 42.5 million of cash through the acquisition of Derivative Solutions. A transaction we believe will yield substantial long-term returns. The remaining increase in cash was attributable to five primary factors. Our cash generated from operations of 31.5 million. Cash inflows of 3.9 million from the exercise of employee stock options. Offset by capital expenditures of 5 million, dividends paid of 2.3 million and 2.5 million of cash used for stock repurchases.

Please note the stock repurchases was primarily the result of terminating the Company's U.S. employee stock option ownership plan in favor of employer contributions to our 401K plan. Under the terms of the ESOP plan, participants can elect settlements of their ESOP share balance in cash, FactSet shares or a combination of the two. For the second consecutive quarter, our cash collections were strong and accounts receivable declined. Our accounts receivable balance at quarter-end was $54 million. Our accounts receivable at August 31 was just 2% higher than the accounts receivable balance at November 30, 2004. While subscriptions grew by 16% over the nine-month period.

Now moving to the P&L. We continue to operate at full speed ahead in the fourth quarter. Operating income was FactSet's highest ever at 28.8 million, up 24% year-over-year. The overall summary reflects two fundamental strengths of our business model, excellent growth and great balance. And it's not an accident. We've been careful and deliberate about committing the appropriate capital investments into new products, international opportunities and external acquisitions.

Now, let's turn to the specifics of the fourth quarter. Please note that unless otherwise noted, subscriptions, users and client count statistics, all referenced, exclude the acquisitions of Derivative Solutions and StreamVPN. Our revenue growth story is good news. Excluding acquisitions, subscriptions increased 18.6 million during the quarter and totaled 336.5 million at August 31. Subscription growth reflects our position and strength of marketing a diverse set of valued services to a high quality client base all over the world. As a reminder, we define subscriptions as the forward-looking revenues for the next 12 months from all subscription services currently being supplied to our clients.

We exited the quarter with approximately 26,400 users, up 2,400 users since May 31. Excluding acquisitions, this represents the highest quarterly increase for FactSet in the last five years. Client count was 1,503 at quarter end, a net increase of 39 clients during the past three months. Revenues were 82.8 million, up 22% year-over-year. Excluding the acquisition of Derivative Solutions, quarterly revenues were 81.9 million. On a trailing 12 month basis, organic basis, revenues excluding acquisitions rose 12%. Organically, subscriptions grew 15% for the 12 months ended September 1.

Let me provide color on the recent client trends. We're especially pleased about the deepening engagement of existing FactSet users. New applications, added features, incremental content and gold standard client service have been and continue to be our formula for success. The ability to consolidate multiple services into one through the FactSet platform is proving to be a compelling opportunity for our clients to recognize efficiencies. We're delighted with the progress in Marquee, the utility of our portfolio analytic suite of products and expansion of our footprint across the U.S. - - outside the U.S.

Demand for our portfolio analytics continues to increase. This suite is comprehensive and includes the applications for portfolio attribution, risk and quantitative analysis. The portfolio analysis workstation is is the largest revenue contributing member of this product suite. At August 31, there were 425 clients representing approximately 3,300 users who subscribe to this service. This compares favorably to a total of 385 clients and 2,900 users a year ago. Client retention continued to remain above 95%. Once again, confirming breath and depth of a product suite that is deployed by a blue chip client base.

In terms of geographic performance, our U.S. business produced revenues of $60.3 million in the fourth quarter. U.S. revenues, excluding the Derivative Solutions acquisitions, was 59.4 million. Revenues from non-U.S. sources increased 64% to 22.5 million. Excluding the JCF acquisition, the year-over-year organic revenue growth from non-U.S. operations increased to 23%. By region, quarterly revenues from our European and Pacific Rim operations rose 75% and 27% to 18.3 million and 4.2 million respectively. Subscriptions by non-U.S.-based clients were 92.1 million, representing 26% of total subscriptions.

Moving to expenses for the fourth quarter, operating expenses increased 21.5% to 54 million. Excluding the acquisition of Derivative Solutions, our operating margin increased to a strong 35%. Cost of sales as a percentage of revenues increased 70 basis points from the year ago quarter. This rise was driven by increases in data costs and amortization of intangible assets. Partially offset by lower communication costs, depreciation on computer related equipment and a shift in employees performing activities considered SG&A. The rise of data expense was largely due to new costs from acquisitions, included for the first time in the fourth quarter P&L. And incremental content costs associated with royalty payments to data content suppliers. The increase in amortization expense was a result of our recent acquisitions, principally JCF.

Lower levels of depreciation on computer equipment, computer maintenance and communication costs, were primarily the result of favorable trends in pricing from industry suppliers. SG&A expenses, expressed as a percentage of revenues, decreased 120 basis points year-over-year. This drop was largely the result of lower occupancy costs and miscellaneous expenses. Partially offset by higher levels of employee compensation, professional fees and noncash charges from furnitures and fixtures and leasehold improvements. Lower occupancy costs were driven by FactSet's move to new headquarters in August 2004. Rent as a percentage of revenues have declined and 837,000 of relocation costs were incurred in the prior year's fourth quarter.

The decrease in miscellaneous expense included the reduction of certain nonincome tax accruals for - - after formal discussions with local tax authorities and favorable currency movements. Higher compensation is primarily the result of more employees classified as SG&A. Professional fees rose primarily due to tax planning in non-U.S. jurisdictions. Increases in noncash charges relate to the build-out of the Company's new headquarters. Our effective tax rate for the quarter was 36.2%. Capital spending during the quarter was $5 million. Approximately 90% of the total was used to purchase computer-related equipment, while the remainder was spent on furniture and leasehold improvements.

Turning to the outlook for the first quarter of fiscal 2006. Please allow me to remind you that the following comments are intended to fall under the Safe Harbor provisions, outlined at the beginning of this call. They are based on preliminary assumptions and subject to change. As previously announced, FactSet recently closed the acquisitions of both Derivative Solutions and StreamVPN. In aggregate, FactSet paid consideration of 77.4 million, including 306,000 shares of FactSet common stock. These acquisitions added 16.4 million of new subscriptions. FactSet's combined subscriptions were 352.9 million at September 1, 2005. We have modeled these acquisitions to be break-even in the first quarter of fiscal 2006 and modestly accretive to EPS for the entire fiscal year.

Revenue range for the first quarter of fiscal 2006 is 88 million to 90 million. Excluding acquisitions, we expect the organic revenue growth rate between 15 - - 14% and 15%. As scheduled, FactSet adopted FAS 123R to expense stock-based compensation effective September 1, 2005. Incremental noncash expense on a pretax basis should total between 2.5 and 3.0 million in the first quarter. The mid point of this range would have reduced EPS in the just completed fourth quarter by $0.04 per share or 11%. The adoption of FAS 123, of course, will have no impact on the Company's free cash flow generation.

Operating margins for the first quarter should range from 29.5% to 31.5%. Including the impact of FAS 123, operating margins would be 32.5% to 34.5%. The effective tax rate is expected to range between 35.9% and 36.5%. Our fiscal 2006 outlook contemplates CapEx spending of 18 to 20 million. Expenditures should be split approximately 50/50 between technology equipment and office expansions.

Finally, in September 2005, please note that FactSet completed the sale of its only piece of Company owned real estate. This transaction will result in a pretax gain of approximately 1.3 million or $0.02 per share in the first quarter.

In conclusion, we have a consistent and balanced business model. We're building deeper client relationships with the best financial firms all over the globe. We continue to deliver great value to our shareholders. The key metrics that underpin our business success grew at a rapid rate in the fourth quarter and we're excited about our future. Thank you for participation in today's call. We're now ready for your questions.

Thank you. At this time, we'll take questions. [ OPERATOR INSTRUCTIONS ] And our first question comes from Lisa Monaco of Morgan Stanley.

Hi, yes, Phil, could you just elaborate on the huge surge in both passwords and clients, where the growth came from? And then I have a couple of follow-ups.

Thanks, Lisa. I guess the answer was it was very broad-based. The passwords, if you have watched our Company over the years, certainly has some cyclicality in the summer because both the investment management and the sell-side fortunes of our business do significant hiring in the summer. I think certainly a major portion of those came from the sell-side, that being their hiring pattern. As far as the client growth, it was broad-based. Both investment management, some from the sell-side as well as international.

Okay. And can you - - I may have missed this, but if you could just give the organic revenue growth in the quarter, excluding JCF, as well?

I think Peter quoted that on a trailing basis, not counting JCF at all for the year, or any acquisition at all for the year, the answer was 12% on a trailing basis.

And do you have that just for the quarter? The fourth quarter?

That is the quarter. Quarter-over-quarter, year ago.

Quarter-over-quarter, okay. Okay. And then, Phil, if you could just elaborate on Derivative Solutions and kind of your thinking there, the opportunity there and how it will integrate with the FactSet base product?

Well, there's really two parts to the Derivative Solutions product and in fact the product line. We're excited to have their team join our family. They have a very strong product that does fixed income analytics. And takes a broad range of fixed income securities and allows somebody to do some outstanding analysis on it. The other piece of it is integrate it into what people think of traditional FactSet portfolio analytics. To allow us to complete our product suite across all security types.

Okay. Thanks.

Thank you. And our next question comes from Brett Manderfeld of Piper Jaffray.

Good morning, guys. Can you elaborate a little bit just on the growth rate of Derivative Solutions and StreamVPN? And then there's also just looking at the guidance, for operating margins, it looks like you're guiding lower by 150 or a couple hundred basis points, relative to last year's more traditional guidance has been. Can you talk about what's kind of driving that, as well? Thanks.

I will answer the first part of that and pass the second part to Peter. We haven't given guidance on how the organic growth rates of Stream or Derivative Solutions. Both of those relative to the size of FactSet's core probably aren't going to be, I guess that much - - that material in the next 12 months. But I don't think they will affect us much either way. And then the margin question, Peter?

Brett, Peter. How are you? As I reported, our operating margins for the first quarter - - for the fourth quarter were very strong at 35%. Excluding the acquisition of DS. And our margin guidance includes two items, obviously the impact of 123 and also the impact of acquisitions. We did report that the acquisitions, we expect to be break-even during the first quarter and accretive during the year.

And so if you exclude the acquisition, then I think you gave out the numbers, "X" the options, would your core operating margin be fairly similar to what you reported in '05?

So, when you add back the impact of 123 and our margin guidance is 32.5 to 34 and that's - - to 34.5. And that really is reflecting the impact of the two acquisitions.

So, excluding the acquisitions, would - -?

Margins would be stable.

Stable. Okay. Thank you.

And then Brett to further answer your question. Just on a magnitude basis, if you take the subscriptions of the two acquisitions we made, it's basically 4.5% of our current subscription rate. Hence, it would be very hard for them to be significant drivers in our growth rate in the short run.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And our next question comes from Eric Sliplip of Robert W. Baird.

Yes, thanks. I was wondering if you could talk a little on Derivative Solutions as it kind of looks like you're getting into the fixed income market? I was curious if you could talk about the competitive landscape and maybe the underlying demand you're seeing in that market?

Well, FactSet's has had a fixed income on our systems. It's actually been quite successful and is used by over 100 of our clients today. But it is an area that we've not done particularly well in and invested significantly in. We were really looking for the right partner. And as we met the team at Derivative Solutions, it became quite clear that they were going to be a nice fit for us. I think as one looks at the investment markets and the significance of fixed income securities in the portfolio, we were obviously leaving a huge portion of the market open. And we're excited about the opportunity to be able to carry our analysis from the equity side into the fixed income side. I think, as a mentioned before, both the security analysis and the portfolio reviews will deliver high value to our client base. As far as their product in particular, it does have some reasonably direct competitors. It would be BlackRock, CMS BondEdge and Solomon Brother's Yield Book would be the most likely direct competitors. All of those products in that space do a variety of different things, much like FactSet does. And you could name several competitors of FactSet but none of us all do - - solve client problems, the exact same way. But we're certainly excited about the opportunity in front of us.

Great. And one other question you don't mind. Would the international performance, in terms of when I look at the client and user base growth this quarter, did international have a big impact there? Or could you talk about the international growth in users and clients?

Sure Brett, it's Scott Beyer. I'm going to characterize that again. As Phil mentioned before, it's fairly broad-based, in terms of the geographic dispersion of our growth. It's very, very broadly-based internationally. Even on the product side. The product we - - clear PA was a key driver for us, again, as it usually is. But all the way across in terms of the product suites that we offer and the client segments that we market to, investment banking and investment management sides of the business, both performed very well for us this year. Even throughout the fiscal year, we had a very smooth - - we didn't have much seasonality in it this year. And even in terms of new client acquisition versus same-store sales on both sides of that, I was fairly pleased with our performance. Phil eluded to earlier that the investment banking deployments this year were rather healthy. And international did see a fair amount of back growth, as well.

I might just tack on a little bit to Scott. Excluding the JCF acquisition, the year-over-year organic growth rate for our non-U.S. acquisitions increased 23%. So, it's a great story for us.

Great, thanks, guys.

Thank you. And our next question comes from Ashley [Hapeal] with William Blair.

Hi, guys. I was wondering, what was the Derivative Solutions contribution, if any, to EPS in the quarter?

So, we acquired Derivative Solutions on August 1, we had one - - we had it for one month in the quarter. It had no impact on EPS.

Okay, great. Thanks.

Thank you. And our next question comes from Douglas Pratt of Mesa Capital Management.

Thanks very much. I apologize, I came on late to the call. I'm curious, you talked a little bit, I guess earlier, about the acquisitions. What was the revenue contribution? In other words, what was your pro forma, if you had anything in for last year in the third - - in the fourth quarter and this year?

So, are you specifically talking about Derivative Solutions for the fourth quarter?

All the acquisitions. If you had made all of those acquisitions at the beginning of '04, what would the revenue be for fourth quarter last year and then for this year?

Peter gave in his commentary that his organic growth rate on a revenue basis, not a subscription, - - the forward-looking subscription is obviously much stronger, was 12%. So, if you took our number and backed that out, that would be the nonacquisition trailing accounting revenue view of what happened last year.

Weren't there acquisitions, though, in the fourth quarter last year, also?

No.

Okay, so that was a clean base. That's all the acquisitions were after the end of August of last year?

Correct.

Okay, great. Thank you.

Thank you. [OPERATOR INSTRUCTIONS] And our next question comes from Lisa Monaco of Morgan Stanley.

Hi, Peter, could you just elaborate on CapEx, why the decline in '06 to - - I think you said 18 to 20 million, close to 22 million? Is there just a rolling off there? Thanks.

So, our CapEx in fiscal '05 certainly included some hangover from our new headquarters. While we consider you to have some growing real estate needs, which is good news, obviously, especially in our non-U.S. operations. That's really a - - we're not repeating our headquarter build-out. And that's really the primary reason for the decline.

Thanks. [OPERATOR INSTRUCTIONS] And at this time, I'm showing no further questions.

Thanks very much. We will see you next quarter.

And thank you for participating in today's teleconference and have a good day.