Factset Research Systems Inc (FDS) 2006 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] This call is being recorded.

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

I would now like to turn the call over to one of today's speakers, Mr. Peter Walsh.

Sir, you may begin.

Thank you, operator and good morning everyone.

Welcome to FactSet Research Systems conference call for the first quarter of fiscal 2006.

With me today are Phil Hadley, Chairman and CEO;

Mike DiChristina, President and Chief Operating Officer;

Scott Beyer, Director of non-U.S.

Operations; and Mike Frankenfield, Director of our U.S.

Investment Management Business.

Please know this conference call is being transcribed in realtime by FactSet's Call Street service and is being broadcast live via the Internet at Factset.com.

A replay of this call will also be available on our website.

Our call will 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 filing with the SEC including its most recent 10-K and 10-Q.

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

Today's call is organized around three topics.

We'll start by covering FactSet's performance during the first quarter.

Second, I'll relay our business outlook and guidance.

Third, our management team will address your questions, provide even more depth into our business operations.

Before we begin, there are three important housekeeping items to cover.

One, as we reported last quarter, FactSet completed the sale of its only piece of company-owned real estate.

This transaction resulted in a pre-tax gain of 1.3 million, or $0.02 per share in the first quarter.

This gain is included in other income and had no impact on operating income.

Two, during the quarter, a tax benefit of 800,000 was recorded related to the closure of previously filed tax returns.

This benefit reduced our effective tax rate by 2.6%.

Three, beginning this quarter to enhance transparency into our results we will report GAAP and non-GAAP financial measures.

These measures including operating income, net income, EPS, and cash flows provided by operations have been adjusted to exclude the impact of accounting for stock based compensation, the sale of Company owned real estate, and income tax benefit from the closure of previously filed tax returns.

Reconciliations between GAAP and non-GAAP financial measures are also included in the earnings press release which may be obtained by visiting the investor relations section of our website.

Utilizing these reconciliations will help you clearly understand our results and our performance versus the year ago period.

Now moving on to the details about the quarter.

We are very pleased with Q1 results.

It adds to our string of ten consecutive years and 40 sequential quarters of revenue growth.

We've been careful and deliberate about reinvesting capital in our operations and external acquisitions.

Over time, these decisions have translated to an impressive record of product development.

And armed FactSet with a diverse set of services aimed at a global, blue chip client base.

Including Q1 our average return on invested capital over the past three years is 27%.

Adding to our historical record of superior returns to shareholders.

There's a lot of work and opportunity ahead, but we feel good about our progress and forward potential to create value for shareholders.

Let's cover 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 cost for taxes and changes in working capital less capital spending.

Free cash flow generated during the first quarter was 10.6 million, more than double the year ago figure.

Record levels of net income and strong cash collections drove free cash flow.

As mentioned previously, when evaluating free cash flow for the first quarter, please factor in that FactSet historically pays variable employee compensation related to the previous fiscal year in the first quarter.

Excluding these payments in the just completed quarter, free cash flow would have been 21.6 million.

Now let's turn to what we did with the cash and what happened to our balance sheet.

Our ending cash and marketable security balance was 68.3 million, a decline of 7.7 million during the quarter.

We invested 21.2 million of cash through the acquisition of StreamVPN.

The remaining increase in cash was attributable to five primary factors.

Our cash provided by operations of 12.7 million, 2.9 million generated from the sale of company-owned real estate, and cash inflows of 2.2 million from the exercise of employee stock options.

Offsetting dividends paid of -- offset by dividends paid of 2.4 million and capital expenditures of 1.4 million.

For the third consecutive quarter, cash collections were strong.

Accounts receivable ticked up to 57 million primarily due to recent acquisitions.

Accounts receivable over the last 12 months have increased just 7% while subscriptions advanced 21% over the comparable period.

Please be reminded that FactSet invoices clients acquired via JCF annually in advance.

During the upcoming second quarter, 35% of JCF clients are scheduled to be invoiced for the forward 12 months.

Accordingly it's reasonable to expect a temporary increase in accounts receivable and deferred revenues in the second quarter.

Before switching gears and moving to the P&L, please note all growth comparisons I mention relate to the year ago quarter unless otherwise specified.

Historical periods have also not been adjusted for stock based compensation.

Growth comparisons of certain financial measures including operating income, net income, and EPS are lower when utilizing GAAP measures from both periods.

GAAP operating income for the quarter was 27.4 million.

This compares to GAAP operating income of 25.8 million last year.

Non-GAAP operating income was 29.9 million advancing 16% over year ago figures.

GAAP net income was 19.2 million as compared to 16.4 million a year ago.

Non-GAAP net income rose 18% to 19.3 million.

Non-GAAP operating and net income excludes stock based compensation charges, the after-tax gain from the sale of company owned real estate, and the tax benefit from the closure of previously filed tax returns.

The GAAP tax impact related to stock based compensations also excluded from non-GAAP net income.

Let's dive into the details regarding our successful first quarter.

Subscriptions increased 9 million during the quarter and totaled 361.9 million at quarter end.

On a constant currency basis, the subscription increase was 10.5 million.

FactSet continued its forward momentum from the second half of fiscal 2005.

Subscriptions in the first quarter can be seasonally impacted from staff reductions representing bankers graduating from two-year analyst programs.

Despite the seasonal impact subscription growth was strong representing the power of FactSet's products and client service model.

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.

Clients total 1614 including those acquired from StreamVPN.

Excluding the impact of Stream, client count was 1609 at November 30.

A healthy net increase of 33 clients during the past three months.

Taking acquisitions out of the equation, FactSet added more clients in Q1, 2006 than the aggregate total of first quarter client additions over the prior three fiscal years.

We exited the quarter with approximately 27,100 users.

This count excludes professionals who subscribe exclusively to StreamVPNs web based product.

While there are many users the price per user is materially lower than FactSet directions platform.

As a result, we believe including these user figures would cloud versus clarify performance during any quarter.

Quarterly revenues were 89.7 million, up 21% year-over-year.

The 21% growth breaks down into 15% growth in underlying organic revenue and 6% growth related to the acquired companies owned less than a year.

Let me provide color on trends we see happening at our client base.

We're especially pleased about our ability to establish new client relationships.

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 firms to recognize efficiencies.

Demand for our portfolio analytics continues to increase.

This suite is comprehensive and includes applications for portfolio attribution, risk, and quantitative analysis.

The portfolio analysis workstation is the largest revenue contributing member to this product suite.

November 30, there were 430 clients representing 3400 users who subscribe to this service.

Client retention continued to remain above 95%.

Once again, confirming the breadth and depth of a product suite that is deployed by a high quality institutional client base.

In terms of geographic performance, our U.S. business produced revenues of 65.6 million in the first quarter.

U.S. revenues excluding the Derivative Solutions acquisition grew 14%.

Revenues from non-U.S. sources increased 24% to 24 million.

Excluding the StreamVPN acquisition and holding currencies constant, revenue growth from non-U.S. operations advanced 22%.

By region, quarterly revenues from our European and Pacific Rim operations were 19.7 and 4.4 million respectively.

Subscriptions by non-U.S. based clients were 100.9 million representing 28% of our total subscriptions.

Moving to expenses for the quarter.

GAAP operating expenses were 62.2 million and our operating margin was 30.6%.

Excluding 2.5 million of stock based compensation, non-GAAP operating expenses were 59.7 million and the corresponding operating margin was 33.4%.

This quarter pretax stock based compensation charge was 2.5 million compared to 0 in the year ago quarter.

Stock based compensation is included in both cost of services SG&A.

Please refer the face of the consolidated statement of income in the press release for the split of stock based compensation between these cost categories.

Cost of sales as a percentage of revenues increased 160 basis points from the year ago quarter.

This rise was driven by increases in data costs, amortization of intangible assets, and the first time inclusion of stock based compensation.

Partially offset by lower communication costs, depreciation on computer related equipment, and shift in employees performing activities considered SG&A.

The rise in data expenses was largely due to incremental content costs associated with royalty payments to data content suppliers.

The increased amortization expense was a result of our recent acquisitions Derivative Solutions and StreamVPN.

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 increased 270 basis points year-over-year.

This increase was driven by the first time inclusion of stock based compensation and more employees classified as SG&A.

The increase was partially offset by lower occupancy costs.

Rent as a percentage of revenues has declined as FactSet space additions have been limited since August 2004.

Our GAAP effective tax rate for the quarter was 34%.

This rate can be broken down into 36.6% from core operations, offset by a benefit of 2.6% from the closure of previously filed tax returns during the quarter.

GAAP earnings per share on a fully diluted basis for the quarter was $0.38.

Non-GAAP EPS advanced 16% to $0.38 per share.

This translates to achieving EPS growth of at least 14% in 35 of the last 36 fiscal quarters.

Capital spending during the quarter was 1.4 million.

Now for some comments regarding the business outlook for the second quarter.

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 are subject to change.

Revenue range for Q2 is 91 to 93 million excluding acquisitions we expect organic revenue growth to approximate 15%.

Stock based compensation expenses should range between 2.0 and 2.4 million.

We anticipate stock based compensation for the remainder of fiscal 2006 will be allocated to cost of services in SG&A and similar proportions as the first quarter.

Operating margins for the quarter should range between 30% and 32%.

Excluding stock based compensation, operating margins would be 32.5 to 34%.

Effective tax rate is expected to be between 36.2 and 36.8%.

We are lifting the ceiling on our fiscal 2006 CapEx range by 2 million, the range is now 18 to 22 million to consider revisions and build out costs for office expansions.

In summary, FactSet has continued its run of exceptional growth.

Our financial vital signs in terms of revenues and net income are the highest ever.

These results clearly highlight the power of our products, our predictable business model, and very talented employee base.

While we're proud of our achievements, at the same time, we're very aware our mission is not to simply deliver strong results for a few quarters but deliver shareholder value over the long term.

Thank you for your participation in today's call.

We are now ready for your questions.

[OPERATOR INSTRUCTIONS] John Neff, you may ask your question and please state your company name.

John Neff, William Blair.

Couple of questions, guys, on the operating margin excluding the stock comp, down about 150 basis points from the level you achieved over the course of the last fiscal year.

Can you explain why and if amortization expense primarily from the recent acquisitions what the expected amortization running through the P&L that we can expect every quarter?

Thank you.

John, good morning.

I think we told everyone in last quarter's call that we expected our operating margin to climb from the recent acquisitions.

And we told everyone that we expected the acquisitions to break even.

That's exactly the way they've turned out.

Last quarter we told everyone without the acquisitions the operating margin we expected was 35% for the first quarter.

That's what they would have been.

As far as the intangible -- the amortization on intangibles that number will still be disclosed separately in the cash flow statement.

Okay.

But the reason for the decline is essentially the acquisition?

Yes.

Is that fair to say?

Yes.

We had an equal amount of expenses and revenues in the quarter.

Okay.

Great.

I was wondering if you could just comment on the current state of the share buyback.

The addition of the appearance of the notes payable, I know it's a s a small amount.

But just wanted to understand what that was.

And if you could just talk quickly about the long-term product strategy for derivative solution.

Thank you.

We have a $50 million share buyback program that's authorized.

We haven't bought any shares under that program as of today.

The note payable arose from the acquisition of StreamVPN, that was primarily tax driven by the seller.

I'll let Phil cover the question on that.

Hey, John, how are you doing?

It's Phil Hadley.

The Derivative Solutions acquisition really has two separate strategies to it.

One as a stand alone project, it's an outstanding product in the marketplace.

Primarily specializing in structured products, but really being able to analyze all fixed income instruments from a portfolio or security level perspective.

The second really is to enhance our portfolio analytics product line to move from the asset class of just an equity focus all the way through the whole fixed income asset class.

So that part of the integration will certainly take us time, but we're certainly excited at the opportunity it presents us.

Great.

Thank you.

Good quarter.

Our next question comes from Chuck Thomas.

You may ask your question and state your company name.

Chuck Thomas from Bassimer.

Just a couple little questions.

First can you talk about, you had in the press release a statement about your relationship with Thomson and that the contracts were 4.5 to 6 years.

Now can you talk about any other activities you've been doing with sources of data and anything we might want to look out for there?

I can comment on the Thomson contract.

We've had a long relationship with Thomson.

This was just further cementing the long relationship we have.

The reason there's a range there on the number of years is because I think we receive approximately five different major content sets from them and they're staggered over the 4 to 6 years.

But our business model really is to support all the third party content to the best of our ability.

We obviously look forward to having a long relationship with the Thomson folks.

Then also the relationship with Barra, you had mentioned that.

That one is also a very positive event for us in that it's primarily purpose is to integrate their risk models into our portfolio analytics products which will create great opportunity for both their products as well as ours.

And the pricing to you guys on these relationships, is that better, worse, the same as the last time you worked on contracts?

I think in both of those two cases the current model we have is that they bill their clients separately.

So it's not a data cost to our P&L.

So they're really separate to sub-client relationships.

We're just primarily the distributor in the software in that case.

One last question, if I may.

I'm trying to figure out if I'm understanding your penetration of your client base and then say with additional users and then products for users.

Can you give me color on how that's going?

Are you finding over -- at the end of one year you get a richer user base?

Over two years that it continues?

Can you give me any clarity on that?

Is the first part just the number of potential clients?

You have clients and then you have users.

So the first part would be penetration of the potential client base and the second is once you get a client in there, penetration of the potential user base within that client.

Then additional applications per user.

Just trying to get a sense of how much further you can grow at this pace?

Well, you pretty much identified the way we break down our opportunity.

We're always chasing new clients.

We have roughly 1,600 clients at this point.

That opportunity in front of us is at least 5,000.

We're strongly penetrated in the larger clients but we don't have them all.

This last quarter we closed several of the larger ones.

But that list always changes and new players join the large ones.

It's one where the job will never be done.

You'll never have 100% share.

I don't see coming even close for a long time at this point.

The second is selling more product to our current clients which is something we do all day long.

Our general scenario is that we sign up a client and [INAUDIBLE] of the revenue of the client is a feature of us selling product, for example Portfolio Analytics.

Or users, as you've mentioned as the other dimension.

We're always focused on those three dimensions of our growth.

I really view us as a tiny, tiny player in a huge industry at this point.

Depending how you measure maybe we have 1% share, 2% share.

But the opportunity is so large that I don't even see the wall yet

Thank you very much.

Lisa Monaco you may ask your question and state your company name.

Morgan Stanley.

Phil, can you just elaborate on the current market environment, what you're seeing in trends on the sell side versus the buy side?

And if possible if you can break down your new -- the new clients I think in the quarter ex-acquisitions with 33.

Can you give us potentially what the growth number was.

And then you just mentioned that you closed several new large clients.

I know you can't really talk to them by name, but can you give us a little color on, as to why -- they weren't a client before what got them over the hump?

Thanks.

There were a bunch of questions there.

I hope I get them all.

We'll go in reverse order.

The large clients -- the answer as to why, I don't know.

I'd like to think that it would be very difficult to manage money without FactSet these days.

Certainly in a large firm.

But that's just the way it is.

We don't have 100% share.

And there's still great opportunities with us there.

Those are large and assets under management.

They usually start out as small clients for us.

So it's not usually a significant revenue bump day one.

It's just a great opportunity once you finally get that first workstation installed.

As far as the color on the market place, I think when I looked at the revenue growth this quarter it was very diversified.

It was really over all of our product lines.

Both Investment banking, IB, certainly non-U.S. is doing well.

IM is very steady and shows promising signs.

Then the acquisitions that we've had, they're on track as well.

So it's just a very diversified quarter when it comes to the revenue contribution.

As far as to the color on the -- we've always historically released net client count.

I don't think at this point we're probably changing that.

Okay.

Did I get them all, Lisa?

Yes.

And Peter, if you could just perhaps give us the current head count where that stood excluding acquisitions versus a year ago and any color on what you're thinking going forward.

Thanks.

Our current head count currently excluding acquisitions is roughly 1200 employees.

We haven't given any guidance on where we're going head count.

Probably leave it for that right now, Lisa.

Do you have a comparable year ago number?

Just for--?

I don't have it handy.

I'll give you a call with it.

Thank you.

I am showing no further questions. [OPERATOR INSTRUCTIONS]

Thank you very much for participating with our call.

We'll see you next quarter.