Factset Research Systems Inc (FDS) 2006 Q2 法說會逐字稿

Welcome to the FactSet Research Systems second-quarter fiscal 2006 quarterly earnings conference call.

At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded; if you have any objections you may disconnect at this time.

Now I will turn the call over to Mr. Peter Walsh, Chief Financial Officer.

Sir, you may begin.

Good morning and thanks to everyone for joining us.

Welcome to FactSet's second-quarter earnings conference call.

Joining us today are Phil Hadley, Chairman and CEO;

Mike DiChristina, President and Chief Operating Officer; and Mike Frankenfield, director of our U.S. investment management business.

This conference call is being transcribed real time 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 forecast 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 10-K and 10-Q.

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

Today's discussion will focus on three areas.

We'll start with FactSet's performance for the second quarter.

Second, I'll cover recent events in our business outlook.

Finally, our management team will take your questions.

Before we begin there are three housekeeping items to cover.

First, as previously announced we acquired Europrospectus.com on February 17th for $7.5 million in cash.

The impact from this acquisition on our financial results for the second quarter was immaterial in all respects.

Second, as we reported in January, FactSet is consolidating four London-based offices into one new location.

Incremental expenses from a redundancy of leased office space was 350,000 during the second quarter.

Third, consistent with the previous quarter, we have reported GAAP and non-GAAP financial measures.

These measures, including operating income, net income, EPS and free cash flow, have been adjusted to exclude stock-based compensation and incremental expenses related to the consolidation of London-based office space.

Reconciliations between GAAP and non-GAAP financial measures are also included in the earnings press release which can be found at our website under Investor Relations.

We hope that utilizing these reconciliations will help you to understand our results and our performance versus the year ago period.

Now moving on to the details about the quarter.

Overall Q2 results reflect another quarter of solid performance.

FactSet reported double-digit percentage increases in subscriptions, revenues and earnings per share.

We again posted record quarterly revenues, a feat we've achieved in every quarter for the past ten years.

Top-line growth is contributing to higher margins and earnings per share.

Excluding stock-based compensation and incremental costs from redundant London office space, our operating margin improved 60 basis points from Q1 to 34% and our EPS is up 21% over the last 12 months.

Underlying and driving this performance is broad-based growth.

Over time FactSet has deployed its capital to develop a diverse and valuable product suite.

Our results demonstrate this and our ability to attract and engage a valuable audience.

Our applications focus on many needs.

We solve problems for those involved in portfolio analytics, quantitative analysis, risk management and performance measurement.

Our products easily handle company analysis, real-time news and quotes, complex idea screening and industry research.

We have special applications for bankers, equity research and fixed income professionals and can customize workflows for any of these disciplines.

Clients of all shapes and sizes are attracted to FactSet services.

They're located around the globe and so are we.

Over time we've established offices in eight non-U.S. cities and now 32% of our employees operate from an overseas location.

Behind our suite of applications is a dataset that's unmatched.

It's only at FactSet that users can access an integrated database with premium content from companies such as S&P, Thomson, Reuters, MSCI, IDC, Russell, (indiscernible) and Dow Jones.

It's important not to exclude FactSet's own content including FactSet estimates, institutional ownership, M&A data, anti-takeover defense data points and now equity and debt prospectus information.

Finally, client owned data -- the amount of proprietary client data moving through the FactSet data centers is enormous.

Currently it stands at 5000 GB of stored data.

In summary, our talented employee base and their ability to develop multiple revenue streams is a competitive advantage our shareholders continue to enjoy.

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 second quarter was $25.7 million.

Over the last six month's FactSet's free cash flow generation has increased by $32 million compared to the year ago period in fiscal 2005.

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

For the fourth consecutive quarter cash collections were strong.

Accounts Receivable moved up slightly to $58.9 million.

We alerted you on the last call that during the second quarter 35% of [JCS] clients were scheduled to be invoiced for the forward 12 months.

This has occurred and accounts for a $1.9 million increase in Accounts Receivable and deferred revenues during the quarter.

Over the last 15 months subscriptions have grown 27%, more than double the 11% increase in Accounts Receivable over the comparable period.

One very interesting relationship is the comparison of our earnings to our free cash flow.

Second-quarter free cash flow exceeded net income by 34%; whereas, at the majority of public companies free cash flow is less than net income.

This illustrates the quality of our earnings.

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 $90.2 million, an increase of $21.9 million during the quarter.

The increase in cash was attributable to five primary factors.

Our cash provided by operations of $31.4 million and cash inflows of $5.8 million from the exercise of employee stock options -- offset by $6.7 million related to the acquisition of Europrospectus, capital expenditures of $5.7 million and dividends paid of $2.4 million.

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

Our financial statements from prior periods have not been restated for the effect of FAS 123R.

However, we've provided a table on our press release for your reference to appropriately compare operating, net income and earnings per share with the prior year.

GAAP operating income for the quarter was $29.6 million.

This compares to cap operating income of $27 million last year.

Non-GAAP operating income was $31.9 million advancing 18% over year ago figures.

GAAP net income was $19.2 million as compared to $17.2 million a year ago.

Non-GAAP net income rose 21% to $20.9 million.

Non-GAAP operating and net income exclude stock-based compensation charges and incremental occupancy costs from a temporary increase in London real estate.

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

Let's turn to the details regarding our second quarter.

Subscriptions increased $18.4 million during the quarter and totaled $380.3 million at quarter end.

On a constant currency basis and excluding the acquisition of Europrospectus, the subscription increase was $15 million in the second quarter.

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

Excluding acquisitions owned for less than a year and currency movement, subscriptions have increased by $50 million or 16% over the last 12 months.

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 totaled 1,666 including those acquired from Europrospectus.

Excluding Europrospectus the client count was 1,646 at February 28th, a net increase of 32 clients for the quarter.

We exited the quarter with approximately 27,700 users.

As a reminder, this count excludes professionals who subscribe exclusively to StreamVPN's Web-based product which has been renamed AlphaMetrics after the acquisition.

While there are many users of AlphaMetrics, the price per user is materially lower than FactSet's DIRECTIONS platform.

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

Quarterly revenues were $93.7 million, up 22% year-over-year.

The 22% growth breaks down into 16% growth in underlying organic revenue and 6% growth relating to acquired companies owned less than a year.

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

First, continue to realize efficiencies consolidating services through FactSet.

We're especially pleased about performance from the Portfolio Analytics suite of applications.

This suite is comprehensive and includes the applications for portfolio attribution, risk management and client data analysis.

Demand for the portfolio analysis workstation continues unabated.

During the quarter users of PA Workstation increased by 200 on a net basis.

This represents the highest quarterly increase in users since we began tracking and publishing this metric in 2001.

Users now total 3,600 and are spread out among 446 clients.

Client retention continues 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 $67 million in the second quarter.

U.S. revenues excluding the Derivative Solutions acquisition grew 15%.

Revenues from non-U.S. sources increased 29% to 27 million.

Excluding the StreamVPN and Europrospectus acquisitions 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 at $21.6 and $4.9 million respectively.

Subscriptions by non-U.S. based clients were 110 million representing 29% of the companywide total.

Moving to expenses for the quarter, GAAP operating expenses were $64 million and our operating margin was 32%.

Excluding stock-based compensation and additional real estate charges in London the corresponding operating margin was 34%.

This quarter the pretax stock-based compensation charge was $1.9 million compared to zero in the year ago period.

Stock-based compensation is including in both cost of services and SG&A.

Please refer to the face of the consolidated statements 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 325 basis points from the year ago quarter.

This rise was driven by increases in data cost and amortization of intangible assets and the first-time inclusion of stock-based compensation -- partially offset by lower depreciation on computer-related equipment.

The rise in data expenses was largely due to incremental content costs associated with royalty payments at data content suppliers; an increase in amortization expense as a result of our recent acquisitions, primarily Derivative Solutions and StreamVPN.

Depreciation on computer equipment as a percentage or revenues declined due to lower industry pricing and a constant focus by our engineers on software optimizations to improve computational capacity.

This decline was partially offset by higher levels of system usage by our clients.

SG&A expenses expressed as a percentage of revenues increased 50 basis points year-over-year.

This increase was driven by the first-time inclusion of stock-based compensation and higher occupancy costs in London and Tokyo.

The increase was partially off by lower G&A.

G&A declined as a percentage of revenues as FactSet conducted a global sales conference in the year ago period.

As you know, a driver of operating leverage is compensation cost -- it's our largest expense and it's yielded productivity improvements.

Headcount at quarter end was 1,266, up 19% from a year ago.

The percentage increase in employees breaks down to 11% of organic growth and 8% from acquisitions.

Interest income improved during the past three months.

Drivers behind the improvement were higher cash balance and interest rates and shifted available cash away from tax exempt investments.

The effective tax rate for the quarter was 36.3%.

The 30 basis points decline from the first quarter was a result of tax planning involving non-U.S. operations partially offset by the decline of investment levels and tax exempt investments.

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

Non-GAAP EPS advanced 21% to $0.41 per share.

Capital expenditures over the first six months were $7.1 million, 60% of CapEx went towards the purchase of computer equipment and the remainder are related to office expenses.

Now turning to comments regarding recent events and our business outlook for the upcoming third 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.

As you know, FactSet recently acquired Europrospectus.com.

Europrospectus collects equity and fixed income prospectuses on a global basis.

The company is headquartered in East Sussex, England and supported by approximately 25 employees.

This acquisition resulted in a 3.2 million increase to subscriptions at quarter end.

We modeled the acquisition to reduce EPS by 1 penny over the next 12 months.

Also, FactSet is consolidating four London-based offices into one new location.

As a result we have and will continue to incur incremental expenses.

Incremental expenses primarily represent a significant short-term redundancy of leased office base.

FactSet continues to occupy its existing leased office spaces until the new facility is ready for occupancy in the summer of 2006.

Incremental expense from this action were $350,000 during the second quarter and should range between $1.7 and $1.9 million over the remaining six months of the fiscal year.

We expect that approximately $600,000 will be incurred during the third fiscal quarter with the remaining $1.2 million a Q4 event.

The projected revenue range for the upcoming third fiscal quarter is $95 to $97 million.

Operating margins for Q3 should range from 31% to 33%.

Excluding stock-based compensation and redundant London occupancy costs, operating margins should range between 33 and 35%.

Stock-based compensation expenses should range from $1.8 to $2.1 million.

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

The effective tax rate is expected to be between 36.3% and 36.8%.

Our fiscal 2006 CapEx range remains at $18 to $22 million and includes buildout for our New London headquarters.

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

Our financial results and strong balance sheets speak to the fundamental strength of our business model -- consistency, predictability and broad based growth.

Our aspiration is to generate superior returns over the long-term, not just a few quarters or years.

Continued high levels of investment in our suite of products and our high-quality client base makes this goal possible.

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

Thank you for your participation in today's call, we are now ready for your questions.

(OPERATOR INSTRUCTIONS).

Lisa Monaco.

Phil, could you just review with us the pricing of the three recent acquisitions -- Derivative Solutions, StreamVPN and Europrospectus and how that will impact revenue per client and revenue per user?

My second question -- is there any way to give us some color in terms of your exposure to fixed income clients?

I think at one point you said roughly 100 clients were fixed income.

And then if you could quantify the dilution from the recent acquisition -- I know Europrospectus was immaterial this quarter?

Thanks.

(inaudible).

On the revenue per client -- on each of the acquisitions we would give you the net client change and the revenue contribution.

I would say that Derivative Solutions 00 I don't think it probably materially changes the revenue per client at all.

And the others are small enough so that I don't think it's going to move the number much one way or the other.

The one thing that does happen though is that if there are overlaps in clients we're not double counting the client.

So it would definitely cause the revenue per client to move up slightly because of that, but I don't think it's really material.

On the fixed income -- obviously with the acquisition of Derivative Solutions you have -- you called it exposure;

I would call it opportunity in the fixed income area.

I think you were referring more to the historical FactSet fixed income product, but obviously with that acquisition we've picked up quite a few more relationships.

And the last one was dilution.

Hi, Lisa, it's Peter.

Thanks for your question.

Regarding dilution from our recent acquisitions, we obviously covered Europrospectus in the call.

But specifically to Stream and Derivative Solutions, on our last call we said that we expected these acquisitions to be breakeven during the quarter and modestly accretive for fiscal 2006.

That's exactly where we see these things still coming out three months later.

And then, Phil, just back to the pricing of Derivative Solutions, Stream and Europrospectus, how exactly is that different from the FactSet base, is it bundled?

Can you just review that with us?

Those all at this point are stand-alone products and they have their own pricing model.

So we haven't changed the pricing of those products in the marketplace.

Is that the answer to your question or are you after something else?

Yes.

And can you give us a little bit more specifics on the pricing for them?

All very different in what they do.

Derivative Solutions is typically a pretty expensive product, probably a six-figure number and higher in most cases.

Stream, it depends very much on the client relationship as to the revenue derived per client, so it could be a pretty small relationship or a pretty significant one.

And then Europrospectus is a content product, so it depends very much on the quantity of use and the type of the client, but not as significant as the other two at this point.

Okay, thank you.

John Neff.

Good quarter.

A few questions.

Can you just give us a little bit more color behind the growth in Asia and Europe?

What are the dynamics at play there as far as explaining the increased traction you're getting?

This is Phil Hadley.

I would say the biggest difference is just that our product start up years and years ago was very much a U.S. centric product and it's continued to become more of a global product.

Obviously with something like Europrospectus we continue to invest both in local content as well as making our product more appealing to markets around the world.

The content set that we have now is very complete and gives the client multiple options in each category and I think that's enhanced our competitive position in the marketplace and given us fair opportunity.

Great.

You addressed the stock comp expense -- I guess how can we think about stock comp expense for '07?

I realize that's down the road.

We haven't provided any guidance regarding '07 stock-based compensation.

We'll do that as we enter into some -- probably likely in the fourth quarter.

This is a minor housekeeping point, but why did interest income decline sequentially despite the strong growth in cash investments and cash flow?

You might have heard wrong.

It increased sequentially.

Oh, it did?

Yes, we had higher interest rates, higher average cash balance and less investments and tax exempt and -- tax-exempt instruments.

Okay.

A quick comment on the state of the stock buyback at this point?

We have not repurchased any shares during the quarter.

I'd like to remind everyone, over the recent few years we've repurchased 150 million of our own shares or 12% of the stock.

We continue to evaluate the proper ways to allocate capital to maximize return for shareholders and during the past three months we chose to build up our cash balances to have financial flexibility in the future.

What's the current authorization?

$50 million in cash.

And that stands at $50 million?

Yes.

And just any kind of commentary on the competitive landscape at this stage both domestically and abroad -- any major changes?

Hi, John, it's Mike Frankenfield.

Really the competitive landscape hasn't changed much at all.

There are competitors of all sizes and as we continue to expand our capabilities we seem to find new competition.

While we always wish it was easy the competition ultimately is good for us and it provides better value or our clients because it makes us work harder.

Thanks, guys.

Brett Manderfeld.

Good morning.

A couple questions.

First, on the top line, the subscription number accelerated a bit it looks like sequentially $15 million versus $9 million in the last quarter.

My sense is it's pretty evenly split between international and North America.

But can you talk a little bit about what the key drivers are -- the couple areas there?

And then I have a follow-up related to margins.

Thanks.

I think the revenues will probably be more typical of our growth rates and proportion of revenue -- I don't think it's heavily weighted to non-U.S.

The second part of the question was --?

Just the key drivers behind that, Phil?

As Pete kind of illustrated, it's really very much across the board.

All of our products are doing well in the marketplace in all of the markets.

So obviously we highlighted PA, but we have many other products that contribute very significantly; when you go down the list everybody was a positive contributor and everybody was a positive contributor on a relative basis to prior periods in year ago.

If you look at the core mutual fund client base versus the hedge fund area, is there one that's kind of leading the growth or is it a combination of the two?

For us our growth traditionally is in the more traditional manager, obviously PA plays much stronger into that space because of the attribution against a particular benchmark as opposed to an absolute return focus.

That's definitely an area of growth for us.

I think the other thing I'd like to illustrate just on a competitive landscape -- as long as we continue to grow the client base, the number of clients, the number of users, that is a measure of how we're doing in the marketplace.

And then obviously total subscriptions mean you didn't give the product away.

So it's really the combination of all three of those that drives revenue growth.

Okay, very good.

And switching over to margins, it looks like your operating margin was on the higher end of guidance going into the quarter and the guidance looking into the next quarter actually you've raised it by about 100 basis points.

Can you talk about what the driver of that is?

And then I think I know the answer to this, but if you look at -- Peter, I think you had mentioned that if you strip out the stock-based comp in London the operating margin was around -- or you expect 33 to 35% operating margins in the February quarter, that's down a little bit versus last year.

Is that due to acquisitions?

Thanks.

Yes, Brett, you hit the nail on the head.

As we added at the beginning of the year an equal amount of revenue and expenses from the Stream and DS acquisition that's really related to that comparable -- year comparable margin comparison excluding stock-based comp.

Okay.

And in terms of just if you look at the sequential -- the margins I guess you were on the higher end in the quarter and you're guiding up a little bit on the operating margin side in February.

Can you talk about what's driving that?

Or excuse me -- into the May quarter?

Typically, Brett, and we've done this since we've been public.

The margin assumption that is probably the most valid is take what we're doing and pretend that's marching forward.

Obviously when we have an improvement in margins there's certainly leverage in this business and that's a good thing.

But as look forward we always plan really pretty much for a straight line margin.

Okay, thank you.

Neil Godsey.

Good morning.

A question on a couple of the acquisitions you made last summer -- Derivative Solutions and Stream.

I think you mentioned earlier that from an earnings perspective they're performing about how you expected.

I was just curious if you could maybe provide a little bit more color on the traction that those products might be getting when the sales force is taking them to new accounts.

And particularly I think Stream has historically been mostly a UK-based product, what sort of traction that might be getting in the U.S. at this point?

Thanks.

I think both acquisitions are tracking at or above expectations and we're very excited about how they're integrating into our business.

If you take the Derivative Solutions, there's really a two-part strategy there to continue to sell the stand-alone product which is doing well in the marketplace as well as integrating that capability into the Portfolio Analytics productline.

As you mentioned, the Stream product was primarily a UK or European-based product to begin with and it's doing very well here in the states.

So we're very excited about its prospects.

Great, thank you.

(OPERATOR INSTRUCTIONS).

I'm showing no other audio questions at this time, sir.

Thanks, everybody.