Factset Research Systems Inc (FDS) 2006 Q4 法說會逐字稿

Good morning and thank you for standing by.

Welcome to the FactSet Research Systems fourth quarter fiscal 2006 quarterly earnings conference call. [OPERATOR INSTRUCTIONS]

Now I'd like to turn the call over to Mr. Peter Walsh, Chief Financial Officer.

Sir you may begin.

Thank you, operator.

Good morning and thanks to all of you for participating today.

Joining me are Phil Hadley, Chairman and CEO, Mike DiChristina, President and Chief Operating Officer, Mike Frankenfield, Director of the U.S.

Investment Management business, Karen Kennedy, Director of investment banking, and Scott Beyer, Director of our non-U.S. business.

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 diffrel -- differ materially.

More information about factors that could affect FactSet's business and financial results are in FactSet's filings with the SEC.

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

Consistent with previous quarters, we have reported GAAP and non-GAAP financial measures.

These measures, including operating income, net income, EPS, and free cash flow, have been adjusted where appropriate to exclude stock-based compensation, incremental expenses related to London office space, and an income tax benefit from conclusion of an audit of previously filed tax returns.

Reconciliations between GAAP and non-GAAP financial measures are also included in the earnings press release, which can be found on our website under the investor relations section.

We'll define -- divide our time today in three ways.

First, I'll review the fourth quarter, then we'll move to guidance for the upcoming first quarter of fiscal 2007.

Finally, our management team will take your questions.

Before I talk about results, I'd like to take a moment to highlight three items.

One, as you know, FactSet consolidated four London-based office locations into one.

Our new European headquarters opened in June.

Incremental expenses during the fourth quarter were $1.3 million and will not carry over into the next fiscal quarter.

Two, included in this quarter's EPS was an income tax benefit amounting to $1.4 million or $0.03 per share.

This income tax benefit resulted from conclusion of an audit in Q4 of the Company's U.S. federal income tax returns for fiscal years 2003 and 2004.

Three, we added a supplementary schedule in today's press release that summarized quarterly revenues related to FactSet services that are not included in our calculation of annual subscription value.

These revenues are not material, but were disclosed to aid investors ability to make more precise interpretations and forecasts of FactSet's revenues.

Now, let's discuss our financial results for the fourth quarter.

Overall we had a good quarter.

We delivered solid revenue growth, healthy margins, strong earnings, and another quarter of impressive free cash flow.

Performance was driven by many product lines in all geographies.

Our IB team was a catalyst behind adding 1,900 users this quarter.

The pace of signing on new clients kept the growth rate of our international business above 20%.

The growth rate of our U.S. business accelerated to19%.

Let's begin the highlights of the quarter with free cash flow.

Free cash flow captures all of the balance sheet and P&L movements.

As a reminder, we define free cash flows 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 fourth quarter were $29.6 million.

Record levels of net income and a reduction in accounts receivable during Q4 drove free cash flow.

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

Fourth quarter free cash flow exceeded net income by 26%.

This illustrates the quality of our earnings since, at the majority of public companies, free cash flow is less than net income.

During the last 12 months, free cash flows were $97.1 million, up 48% over 2005.

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 outlay will approximate $20 million in the first quarter of fiscal 2007.

It is included in accrued compensation and is represented as a liability on our balance sheet at August 31.

Our ending cash and marketable securities balance was $143.2 million, an increase of $24.6 million since May 31.

During Q4, we invested $8.8 million to repurchase our own common stock and paid a quarterly dividend of $2.9 million.

We repurchased 206,000 shares and the number of common shares outstanding at August 31 was 48.9 million.

Currently there is $36.1 million in remaining purchase authorization.

Moving now to the P&L.

GAAP operating income for the fourth quarter was $33.3 million.

This compares to GAAP operating income of $28.8 million last year.

Non-GAAP operating income was $36.7 million, advancing 27% versus the same period last year.

GAAP net income rose to $23.4 million compared to $18.6 million a year ago.

Non-GAAP net income rose 31% to $24.5 million.

Non-GAAP operating and net income exclude, where appropriate, stock-based compensation charges, incremental cost from consolidating office space in London and the tax impact from the settlement of prior-year tax returns.

Let's take a look at the fourth quarter in detail.

Subscriptions increased $23.2 million and totaled $422.6 million at quarter end.

FX had virtually no impact on subscriptions during the quarter.

Keeping currencies constant and excluding the acquisition of Euro prospectus, subscriptions grew $66 million during the last 12 months.

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

Q4 revenues were $105.2 million, up 27% versus this same period a year ago.

The growth breaks down into 19% growth in organic revenue and 8% growth related to acquisitions completed within a year.

The fourth quarter is illustrative of the breadth and value of FactSet services.

We welcomed 63 net new clients and 1,900 users during the quarter.

During fiscal 2006, we added 50% more new clients compared to 2005.

Client count at quarter end was 1,785, representing 29,800 users.

We're especially pleased with deeper penetration within in cell-site firms and the appeal of our IBCentral application.

Demand for the portfolio analytic suite of applications continues unabated.

This suite is comprehensive and includes the application for portfolio attribution, risk management, and quantitative analysis.

At quarter end, users total 3,900, spread out among 475 clients.

Client retention remained above 95%, once again confirming the breadth and depth of a product suite that is deployed by a high-quality institutional client base.

Taking a look at geographic performance, our U.S. business produced revenues of $74.2 million in the fourth quarter, up 19% organically.

On the international front, revenues increased 38% to $31 million.

Excluding 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 was $25.4 million and $5.6 million respectively.

Subscriptions by non-U.S. based clients were $125.6 million, representing 30% of the Company-wide total.

Moving to expenses for the quarter.

GAAP operating expenses were $71.9 million and our operating margin was 31.6%.

The GAAP operating margin increased 30 basis-points from Q3, Excluding stock-based compensation and additional real estate charges in London, the corresponding operating margin rose to 34.8%.

Pretax stock-based compensation charge was $2 million for the fourth quarter compared to zero in the year-ago period.

Cost of sales as a percentage of revenue was up 110 basis-points over prior year.

Higher compensation and amortization of intangibles was partially negated by lower communication costs.

Higher compensation was driven by stock-based compensation, and higher amortization was from acquisitions made during the last 12 months.

The decline in communication expense was due to lower industry pricing, partially offset by higher [inaudible] requirements.

SG&A, expressed as a percentage of revenues, increased 200 basis-points year over year.

This increase was driven by the first-time inclusion of stock-based compensation and higher occupancy costs in London, offset by lower professional fees.

Employee count at September 1, 2006 was 1,368, up 17% from a year ago.

The percentage increase in employee hea -- head count breaks down into 15% from organic growth and 2% from acquisitions over the last 12 months.

Our total sales [force grew] approximately at the rate of revenues.

Other income for the quarter tripled from a year ago.

Drivers behind the improvement were higher cash balances and after-tax interest rates.

Our GAAP-effective tax rate for the quarter was 32.5%.

Included in this rate is a net benefit of 4% from conclusion of an audit of the Company's U.S. federal income tax returns for fiscal years 2003 and 2004.

GAAP EPS for the fourth quarter was $0.46 per share, and included $0.03 -- a $0.03 tax benefit from completion of an audit from our U.S. tax returns.

Non-GAAP EPS advanced 30% to $0.48 per share.

Capital expenditures during the quarter were $3.2 million and totaled $23.7 million for the year.

Let's turn to our outlook for the first quarter of fiscal 2007.

The projected revenue range for the fourth -- for the first quarter is $106 to $109 million.

It's no longer meaningful to provide guidance on stock-based compensation.

Next quarter will be the first for the effect of FAS 123 as presented in both periods.

Our operating margin guidance will include FAS 123.

Operating margins for Q1 should range from 31.5% to 33.5%.

The increase in the range reflects the incremental expenses related to London office space.

The effective tax rate is esse -- expected to be between 36% and 36.8%.

The CapEx range for fiscal 2007 is $29 million to $35 million.

The midpoint of the range is 7.6% of subscriptions at August 31, and is consistent with our average over the past five years.

We expect approximately one-third of the annual CapEx to be incurred during Q1.

For the year, CapEx will be allocated approximately 55% to computer equipment and the remainder to office expansion.

Now, allow me to take a minute to summarize and to put our growth history, including fiscal 2006, into perspective.

During the fourth quarter, we celebrated ten years as a public company.

Over that ten-year period, our revenues have increased every quarter and our earnings have grown tenfold.

We've executed over the past ten years, never losing sight of our growth strategy and long-term vision.

Our business has continued to thrive during the latest year.

In fiscal 2006, we added 300 basis-points to our annual revenue growth rate.

The good news for our shareholders and employees is that our opportunity ahead is enormous.

The current FactSet user base represents just 5% of the professional investment user community.

We're a Company with $387 million in trailing annual revenues, with a market opportunity that is well more than 15 times our current size.

While we like our competitive position in the marketplace and we're pleased with our progress, we have an ambitious agenda and there's a lot of work ahead.

Thank you for your participation in today's call.

We are now ready for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Lisa Monaco from Morgan Stanley.

Your line is open.

Yes, Phil, could you just give a us a little bit of color on -- I'm sorry, can you hear me now?

Yes, we can hear you better now.

Thank you.

Phil, could you just give me a little bit of color on what you were hearing from client, buy side and sell side, throughout the quarter?

Did the tone from your account base differ at the end of the quarter versus early on in the quarter? and Peter, if you could just tell us -- or kind of give us -- shed some light on what factors would cause you to come in on the low end of your margin guidance versus the higher end of the range?

Thanks.

So to answer your question on tone, I think our tone for the whole year has been pretty consistent in almost every area of our business.

We've just continued to execute against our strategy and it's come through nicely.

Lisa, as far as the margin guidance, I mean, obviously, there's a lot of factors that play into what the ultimate margin is, including how we accelerate in revenues and also expenses.

Our margin increased 30 basis-points over Q3 and we expect them to expand in Q1, as our forward-looking guidance suggests.

Okay.

I guess I'm just a little -- little bit surprised to see that the lower end of the range, you know, isn't much higher than -- it's not higher than the fiscal fourth quarter, which included some of the relocation costs.

Just, you know, how should we think about the ongoing leverage in the business, I guess, is the ultimate question?

So we certainly picked our guidance range by 50 basis-points, and you'll see that from Q1 guidance versus Q4 guidance.

As far as the overall leverage in the business, you know, I think we're obviously operating our business for margins to be flat, and our margin improvement really relates for our opportunity to grow revenues at a rate that's higher than we estimate.

Okay, great.

Thanks.

Your next question comes from John Neff from William Blair .

Your line is open.

Hi, thank you.

You cited in the press release increased growth on the sell side during the quarter.

I was wondering if you could be a little more specific, and is part of that seasonally driven?

John, it's Phil.

Yes, the investment banking business, or the sell side for us, does have a bit of cyclicality.

Their hiring pattern is typically to bring on the majority of their employees during the summertime, so there's an element of that to it.

And -- but as mix from a year-to-year basis, it remains pretty similar.

You did a great job with DSOs over the course of the year, down seven from the fourth quarter last year by my estimate.

Just wondering what's going on?

What is that a reflection of?

I think it's -- hi John, it's Peter.

It's a reflection of two things.

One, obviously, it's -- you know, it speaks volumes about the value of the service.

The second thing is there's effort.

I mean, we spend time making sure that we go out and talk to clients if someone's behind and that's been reflected in the DSO drop.

Great.

I just want to be clear, the guidance that you gave for the first quarter, that includes stock-based compensation?

And you're talking about margin guidance?

Yes.

Yes, the margin guidance.

Yes.

It does.

And last question.

Just in the spirit of Capital IQ's press release today, how client count has doubled over the two years since acquired by S&T, any additional comments on the competitive landscape?

Thanks very much.

John, this is Phil Hadley.

No I don't think I've felt the competitive landscape change much.

Certainly our industry just doesn't change that much year to year.

But I think our results show that we're performing quite nicely in the marketplace and providing solutions that our clients need.

It's a very broad product line and covers, obviously, different markets around the world.

Thank you.

Congrats on a great year.

Thanks.

Our next question comes from Brett Manderfeld from Piper Jaffray.

Your line is open.

Hi, guys.

Hoping to get a little color around the growth coming out of the buy side.

Maybe, Phil, you could comment on growth in the core I Management area versus what you're seeing among new hedge-fund clients?

Thanks.

I've got Mike Frankenfield here with me.

I'll let him take that one.

Hey, Brett, it's Mike.

The growth on the buy side continues to come from all sources.

We have healthy client acquisition in the form of new hedge funds and brand new clients, and we also see a lot of growth from our existing clients who are interested in purchasing combinations in more users, more applications and more content from us.

Okay very good.

And in terms of some of the newer products, I guess, I don't even know if you could call Marquee new anymore, but could you give us an update on what's happening there, in terms of the growth in that product?

Thanks.

I think the functionality -- Brett, this is Phil again.

The functionality of revising news and quotes to our client base takes the form of Marquee and actually several other interfaces.

IBCentral has its own quotes and news applications, as well as DIRECTIONS even has a quote-news application.

I think we've definitely matured in the area of providing value to our clients in that space and continue to, you know, solve that problem for clients who have that need.

Okay, very good.

And related to that, are you picking up any, kind of, stand-alone clients that are just using the Marquee as opposed the core -- the core FactSet service, or is that still not really been a focus of yours?

No, no, 100% of the Marquee acquisitions would be additional users or additional product to current client.

Okay, very good.

Thank you.

It may be a driver in a client acquisition, but it's not a stand-alone application.

The next question comes from John Neff from William Blair, your line is open.

I didn't expect to circle back that fast.

Just wondering if you could provide us any color on the use or, you know, how prevalent the use of term contracts are in the subscriber base at this point?

I know you have the small management -- small asset manager product.

Just trying to get a sense for whether the needle has moved in terms of the materiality of term contracts?

Thank you.

It's been our -- it's been our policy for a while to have the smallest package that we sell have a year initial term, but then the client goes month to month after that.

It's just a reflection of the amount of effort we put into signing up a client like that.

And then, any other client that's for term is typically the largest clients we have, and that is driven by their side of the relationship and wanting comfort on service levels and pricing control.

But not -- no activity on our part.

Doesn't have anything to do with term.

Thank you.

Our next question comes from Michael Lipper from Lipper Advisory Services.

Your line is open.

Good morning.

I -- could you in future reports provide the past quarterly on a subscran -- on a substantial basis --

Michael, could you clarify that for me?

Yes, I would like to see, you know, quarter by quarter, you know, over the two years, something like that, in your releases.

So, you know, in addition to -- I mean, right now you're comparing fourth quarter to fourth quarter.

It would be useful to see -- to some degree fourth to third, et cetera.

That way you can pick up some more information, which hopefully isn't too misleading in terms of trends.

Okay.

Thank you for the suggestion.

Our next question comes from Lisa Monaco from Morgan Stanley.

Your line is open.

Hi.

Phil, could you just maybe give us a little bit more color on your traction with Derivative Solutions and the Fixed Income suite of products [inaudible] offering?

Thanks.

So, the product line [in fact, is a] very broad product line and we've had a Fixed Income product for a long time, of which Derivative Solutions was a nice addition of that product.

In addition, the other major Fixed Income release we had this year was Fixed Income and [Portfolio] Analytics.

The combination of all three of those products has performed nicely for us, but still not a significant portion of our revenue at this point.

And so you -- I would imagine you would characterize still that your current stage of expansion there as very much early stages?

Very much.

Okay, great.

Thank you.

[OPERATOR INSTRUCTIONS] I have no further questions at this time.

Thank you very much.

Thank you, everybody.

This concludes today's conference.

Thank you for joining.

All parties may disconnect at this time.