Factset Research Systems Inc (FDS) 2007 Q1 法說會逐字稿

Good morning and welcome to FactSet Research Systems first quarter fiscal 2007 quarterly conference call. [OPERATOR INSTRUCTIONS]

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

Thank you, operator. I'd like to welcome all of you to our earnings call for the first quarter of fiscal 2007. 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, and Scott Beyer, Director of our non-U.S. business. This conference call is being transcribed in real-time by FactSeat -- FactSet's CallStreet 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 managements current expectations based on currently available information. Actual results may differ materially. More information about factors that could effect 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. Our agenda today will include a review of first quarter results. Then I'll cover guidance for the upcoming second quarter. We'll close with our management team addressing your questions.

Before I talk about results I'd like to take a moment to highlight one item. Unlike previous quarters we will not be providing non-GAAP metrics. As we told you on the last call, it's no longer meaningful to do so, since stock-based compensatious -- compensation is included in all quarterly periods presented. If you are interested in tracking our stock-based compensation we have included it as a separate line in our cash flow statement.

Moving on to first quarter results. Overall the quarter was solid. Our organic revenue growth rate advanced to 20% and operating and net margins improved while increasing investment for the future, including recruiting world-class talent. The catalyst behind our performance was broad-based growth across many product lines and geographies. Key drivers included our appeal to larger institutions to scale FactSet across many user groups and our capability to deliver intensive computing power and analytics to end users.

Let's begin the highlights with free cash flow. Free cash flow captures all the balance sheet and P&L movements. As a reminder we define cash flow as cash generated from operations, which includes the cash cost for taxes and changes in working capital, less capital spending. During the last 12 months free cash flows were $101 million, up 36%. Free cash flows generated during the first quarter were $15 million, up 41% over the year-ago quarter. Drivers of free cash flow during Q1 were record levels of net income and higher non-cash expenses, completely offset by a decline in working capital and higher capital expenditures. The decline in working capital was caused by variable compensation expenditures, partially offset by the timing of U.S. federal estimated tax payments.

As I mentioned in our last call, when evaluating free cash flow for the first quarter please factor in that FactSet historically paid variable employee compensation related to the previous fiscal year in the first quarter. This cash outflow was $20.3 million. In addition, please recall that FactSet also remits estimated tax payments for the first half of the year during the second fiscal quarter. On December 15, we paid $11.2 million, representing our estimated tax payment for the just completed first quarter. The timing of the estimated tax payments is consistent with prior years. Nevertheless, it distorts free cash flow in both the first and second quarters.

Accounts receivable over the last 12 months have increased just 7%, while subscriptions advanced 21% over the comparable period. Pleases be reminded that FactSet invoices a small portions of its clients annually in advance. During the upcoming second quarter $10 million is 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 upcoming second quarter. Our ending cash and marketable security balance what was $156 million, an increase of $13 million since August 31. During Q1 we invested $5 million to repurchase common stock and paid a quarterly dividends of $2.9 million. Currently there is $31 million in remaining stock repurchase authorization.

Capital expenditures during the quarter were $8 million. Major expenditures included adding two HP mainframe systems and increasing our data storage capacity by 65%. Both expenditures were driven by increased system usage by clients. On the real estate side the Company also consolidated two Chicago-based office locations into one.

Now moving to the P&L. Operating income was $35.4 million advancing 29% versus the same period last year. Other income declined 13% to $1.5 million. Included in other income, in 2005's first quarter was a $1.3 million pretax gain from the sale of Company-owned real estate. Net income rose 24% to $23.8 million in the first quarter. Let's take a look at the revenue drivers. Subscriptions increased $16.9 million during the quarter and totaled $439.5 million at November 30. On a constant currency basis the subscription increase was $16.4 million. As a reminder, we define subscription as the forward-looking revenues for the next 12 months from all subscription services currently being supplied to our clients. The client count was 1,830 at quarter end, a healthy net increase of 45 clients during the past three months. We welcome 1,200 new users on a net basis during Q1 and exited the quarter with 31,000 users. Quarterly revenues were $108.9 million, up 21% year over year. The 21% growth breaks down into 20% growth in underlying organic revenue and 1% growth related to acquired companies owned for 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 expand our user base at existing clients. The number of net new users were the highest ever for a first quarter in the past seven years. Portfolio analytics continues to be a source of growth. This suite is comprehensive and includes the applications for a portfolio attribution, risk and quantitative analysis. Demand for our quantitative services were strong. Clients have been receptive to a new version of our alpha testing application and new content to analyze as-reported data back in time. The portfolio analysis workstation is the largest revenue contributing member of the portfolio analytics product suite. At November 30 there were 485 clients, representing approximately 4,000 users who subscribe to this service. Client retention continued to remain above 95%, once again confirming the breath and depth of a product suite that is deployed by a high-quality client base.

Taking a look at geographic performance, our U.S. business produced revenues of $76.5 million in the first quarter, up 19%. On the international front revenues increased 28% to $32.4 million. Excluding the europrospectus acquisition and holding currencies constant, revenue growth from overseas operations advanced 22%. By region, quarterly revenues from our European and Pacific Rim operations were $26.5 million and $5.9 million, respectively. Subscriptions by non-U.S. based clients were at $131.3 million representing 30% of the Company-wide total.

Moving to expenses for the quarter, operating expenses were $73.5 million and our operating margin was 32.5%. Our operating margin increased 90 basis-points from Q4. The increase was caused by Q4 events that did not repeat in Q1. In the prior quarter margins were depressed from redundant London real estate costs, partially offset by the temporary favorable impact from selling work stations for use by summer interns. Costs of sales as a percentage of revenues was up 80 basis-points over prior year. Higher data costs and computer-related expenses were partially negated by lower amortization of intangibles. The increase in data cost was driven by variable payments to data vendors based on deployment of their content to client. Computer-related expenses rose from commencing implementations of our plans to transition to HP's new Integrity mainframe machine; the decrease in amortization expenses caused by a decline in acquisition activity compared to previous years.

SG&A expenses expressed as a percentage of revenues declined 2.8 percentage points year over year. This decrease was driven by lower occupancy costs, professional fees and miscellaneous expenses. Lower occupancy costs is temporary and is being driven by the timing of acquiring new space to support a growing employee base. Professional fees dropped from the expiration of a consulting agreement dating back to an acquisition. And miscellaneous expenses include the reduction of an accrual after conclusion of an audit by a state tax authority. FactSet's total headcount reached 1,432, up 5% over the last three months and up 17% from a year ago. Our total sales force grew approximately at the rate of revenues. The headcount growth in the quarter reflects our success on the recruiting front. Our effective tax rate for the quarter was 35.5%. Our rate was below our guidance, primarily from the favorable effect of a first-time credit in France. The effective tax rate increased 150 basis-points from a year ago. Included in last year's rate was $0.02 per share of tax benefit from the completion of an audit and the favorable effect of the U.S. Federal R&D tax credit, which was enacted at that time. EPS advanced 24% to $0.47 per share.

Let's move to our outlook for the second quarter of fiscal 2007. The projected revenue range for the second quarter is $112 million to $115 million. Operating margins for Q2 should range from 31.5% to 33.5%. The effective tax rate is expected to be between 35.3% and 36.3%. This guidance assumes the U.S. Federal R&D tax credit is re-enacted for all periods in fiscal 2007. If the U.S. Federal R&D tax credit is re-enacted retroactive to January 1, 2006, please also note the second quarter would include the favorable impact of reducing our estimated taxes from January to November, 2006. We believe this true-up would approximate $0.02 per share. We're narrowing the CapEx range for fiscal 2007 to $31million to $35 million. This guidance represents lifting the bottom of the range from $29 million last quarter. For the full fiscal year CapEx will be allocated approximately 50% to computer equipment and the remainder to office expansions. Our CapEx spend this year will vary according to size and timing of acquiring new office space to accommodate employee growth.

In conclusion, we've completed a solid quarter to begin our fiscal year. Our business model has proven consistent over time. Over the last ten years revenue has risen every quarter. We generated over $100 million in free cash flow in the last 12 months. While we accelerated the growth of our business we recognize our opportunity is in front of us. Our current user base represents just 5% of the professional investment user community. Our priorities are clear, to invest aggressively in the business in the form of more people and new products to win business from a blue-chip institutional client base. 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.

OPERATOR INSTRUCTIONS]. Our first question comes from Peter Appert with Goldman Sachs. You may ask your question.

Hi, good morning. Two questions, please. Phil or Peter, number one could you just prioritize for us where you're putting the most emphasis in terms of development dollars on product development? And if it's possible to talk about where you see the greatest revenue opportunities in terms of specific product offerings that may come out over the course of the next year or two? And then secondly, the headcount is very -- you're seeing some aggressive growth in your headcount. Should we anticipate that this rate of headcount growth continues, and give us some sense of where these incremental employees are going? Thanks/

Peter, how are you? It's Phil Hadley. Good morning. As far as product development dollars we allocate, actually, pretty evenly across our product line between invest banking and investment management. It's, obviously, really the same answer to the question as the headcount question, which rate of business where investing in employees is critical. We're a service business and we continue to invest in headcount, roughly similar to the revenue growth. So at this point our plan looks very similar to what you saw as an organic growth for the quarter. As far as products that develop revenue, most of the products in the marketplace have a very long life cycle. Marquee, for example has been in the marketplace for several years now but is contributing very nicely to continued adoption of FactSet and work flow in both our [inaudible] clients. PA's been around for a long time but we continue to extend those product lines. And then on investment banking side we've done a nice job with IBCentral and it continues to gain share on the seat count.

I was thinking specifically about some of the things you talked about on the fixed income side. So I guess what would be helpful to know is roughly what portion of the revenues currently is associated with fixed-income offerings -- if it's possible to talk about that -- and what more is to come on that side?

Well, certainly with the acquisition of derivative solutions we stepped in a little bit deeper into that market. It's still not a material driver for revenue growth, but its certainly a material area of investment for us. Like I said before, everything kind of starts out small. It really has two strategies, both the extension of the portfolio analytics product line to the fixed income space, which is started off very nicely. But in addition, just core fixed income analytics, primarily in the structured product area. And then our traditional systemic [inaudible] explorer product will get a significant amount of divestment over the next few years and I'm sure will contribute nicely in the future.

Okay. And then last thing, if headcount grows roughly with revenues, would the implication of that be then that -- recognizing there are other, obviously, expenses besides labor cost -- but if headcount gross with revenue, would the implication be basically that operating margins would target to be roughly flat on a go-forward basis?

Yes, that's typically the way we guide. And our business model and growing headcount with revenues has been very consistent over last ten years, so I would say the answer to that would be yes.

Okay, thank you.

Next question comes from Lisa Monaco with Morgan Stanley. You may ask your question.

Yes, could you just remind us again what the organic growth in the August quarter was for U.S.? I think there was some acquisitions in there and then I believe the U.S. number that you said, Peter, of 19% is all organic? And then I have a follow up.

Thanks, Lisa. The organic growth rate in the U.S. in the fourth quarter was 19%. The methodology which I deployed to calculate that is once we've owned a company for a year, we include it in both periods. And the DS acquisition became -- we've owned it for more than a year, effective August 1, and 19% growth rate that I disclosed in the first quarter was also -- didn't have any acquisitions related to it. It was completely organic.

Okay, thanks. And then just, Phil, if you could elaborate on alpha testing, why that was such a material contributor, it sounded, like in the quarter? And then I guess just in general, if you could just discuss how you go about -- it sounds like what was a -- and based on some of the numbers, what was a material driver in the quarter was selling -- increased dollar sellers -- sales to existing clients. So how is the sales process -- how does that take place to drive existing users and new products to existing clients?

So to specifically talk about quantitative it's really just an example of one product line. And I think probably the most important thing from an investors perspective is the fact it's not a one-trip pony. We have revenue that comes across both in IM and IB space through multiple product lines. It just happened to be slightly above our expectations last quarter. If you were to look at it in aggregate of the whole ASP for the quarter, not really that significant in that it's really all of the things. It just happened to have done well in the last quarter, primarily driven by some product improvements in that area. We've invested in that area and it's competing nicely in the marketplace. The second part of your question was sales?

How do you up-sell your existing client base?

That's really what in fact its all about in that when we went public ten years ago we had 85 of the top 100 investment managers, now we have 87. Obviously, if you continue to glow you have to create more and more product as it impacts more and more work flow inside of those clients. So a product that started out as just security prices in estimate database and the fundamental database has broadened way across the clients' work flow and those larger clients probably subscribe to 20, maybe 30 products from us across a much larger user base. The sales force is really structured in two different groups. You've got pure sales people who are really generalists and account managers. And then in parallel to them you also have sales specialists, who focus on a particular product line, where a depth of knowledge is important to complete that sale. And then behind that we've got a very large consulting force, whose sole job is to make sure the clients understand the product they purchased. But, obviously, indirectly in that process they create a lot of demand for our product.

Then just one last question. I believe in the past you guys have referred to a market opportunity of about 5,000 firms or clients. Is that still the case and is that a -- is there a target market now larger with fixed income and derivative solutions? Thanks.

Well, certainly as you start to get off to the 5,000, 6,000, it gets kind of fuzzy as what you define your target market. Every time we change our product the target market moves in some dimension. But I think we still feel very comfortable that there are that many firms worldwide that participated in an institutional level that we subscribed to a product that we currently have. We kind of keep that definition tight because we really try and focus on the institutional marketplace. If you take all the sell-side firms, the combination of buy-side firms and plan sponsors, I think we still feel very comfortable that 5,000, 6,000, somewhere in that neighborhood, is a potentially [inaudible].

Thank you.

Our next question comes from John Neff with William Blair. You may ask your question.

Hi, thanks. Quick housekeeping question. Peter, you had said you spent $5 million in stock buybacks. I didn't know if that included the $2.9 million I think you said in dividends, or was that a separate number?

Thanks, John. No, that purchase excluded dividends, so that was [inaudible] we purchased 100,000 shares during the quarter, dividends.

A couple of questions. Just, number one, can you describe how we should interpret the decline in the number of -- average number of passwords or work stations per client? So I'm looking at the 2001 period, that number was in the 30s; currently it's in the 16, 17 range. Does that reflect sort of the fragmentation of the customer base, more and more boutiques springing up, hedge funds, whatever the case may be?

I wouldn't interpret anything negative in that. It's really just the simple math of how the users are coming on. And if you talk about that core large group of people -- large client base, there aren't that many $1 trillion managers that continue to bring up the averages. We add 45 clients, they're not in that category. Still very positive on the client share basis, but on a users per client, the potential's not the same. The revenue per user actually ends up being higher on a smaller client than it does on a bigger client, though.

Right. So another thing, I wasn't interpreting it negatively. I just was wondering what it said about any sort of marketplace shift in terms of the customer?

No, I think it just means that, as you continue to chase that 5,000, you end up with firms that don't have 100 seats of potential and they might only have five seats of potential. But our average is selling per seat in that client is higher than it's going to be in a 100-seat client in many cases.

Because of the base fee?

Yes, the core pro -- as you add all the product to get up to full functionality, it costs more for a smaller client. They don't have the same scale, both on the content side as well as on the application side.

A question I have on applications and databases, are those typic -- I realize those are two things, but broadly speaking, are those charged per work stations, but is there a firm-wide -- for example, I guess, content licenses, is there a firm-wide subscription arrangement or is that done on a per seat basis? The gist of the question is if -- in the event -- in a downturn where people were cutting work stations, is there a spill-over into the revenue from applications in the database as a result of that, or are those things barely distinct?

To generalize -- which there are certainly exceptions -- the databases tend to be firm wide and the applications tend to be seat based. But that's not totally a true statement. So TA, for example, is the primary example and the [inaudible] would be a pure seat-based product, where a purchase decision made on a seat basis. In most cases content is a firm local decision, but not always.

Okay. Great. I was wondering -- another housekeeping question lastly, could you just repeat the revenue by -- from Europe and the Pacific Rim again?

I'd be happy to, John. So by region our Europe was $26.5 million our Pacific Rim was $5.9 million. And on an organic basis the revenue growth from non-U.S. was 22%.

Great. Thanks.

Our next question comes from Brett Manderfeld with Piper Jaffray. You may ask your question.

Good morning, guys. I was hoping you could provide a bit color regarding the drivers of the big increase in new users, sequentially November versus August? My sense is historically August has been the big increase for you and it looks like its accelerated. Is that coming from new clients or growth of existing and/or looking at that buy side and sell side? Thanks.

So you're correct in that the first quarter for us is traditionally is a slower quarter. Just based on our timing of our fiscal year, decisions tends to slip to December and January. The seat growth was actually pretty equal between buy and sell side. We had some nice client wins on both sides. Some private wealth management area was one contributor and on the sell side we made some share gains in some of the larger, [most reactive] firms. So they were both organic in nature and same-store sales to the current client relationships.

Okay. Very good. Thank you.

Our next question comes from Pete Heckmann with A.G. Edwards. You may ask your question, sir.

Morning, gentlemen. Peter, I had a follow up on your comments on gross margin. Gross margin looked like it came in a little bit sequentially as well as year over year. There's a lot of data coming out there and so I missed it. But I think you said that there was a little bit of pressure from higher data costs from the content providers. Could you kind of go through that and talk a little bit about some of your expectation for gross margin trends?

Sure. Thanks, Pete. As far as cost of sales there's really three things that were drivers behind the decline or the tightening of that margin. So first, we had higher variable data cost that's scale with this deployment from third-party content providers. Second, we've begun a transition from HPs Alpha mainframe systems to HPs Integrity mainframe system. That's two things. One, we hired a third-party firm to help us with project on that. And we've also tightened up our estimated useful life for Alpha mainframes that we purchased to a year and a half down from two years. And, finally, the amortization of intangibles have declined year over year from a decrease in our acquisition activity over the previous years. On the second part of your question we really manage and run the business on the operating margin line and, as Phil alluded to earlier, we're managing the business to be flat. We don't pay particular focus on how that's split between cost of services and SG&A.

Okay, all right. And then while I've got you, as regards acquisitions, can you talk a little bit about your appetite there, whether there'd likely be domestic providers, international providers? And given some of the relatively strong M&A activity we've seen over the past year whether the valuations on some of the deals that you've looked at have caused to you sit out or whether valuations still remain decently attractive?

It's Phil Hadley. If you look at our historical acquisition strategy, it's been really either to acquire content that we didn't have on our system before or to acquire a work flow that we found interesting and synergistic to our goal of serving an institutional client base. All of them have been opportunistic in nature in the sense that it was opportunities we saw in the marketplace and took advantage of. I don't feel at this point it's necessary for us to do any acquisitions nor did we do them historically for that reason, other than it just felt like it was something that would be accretive to the future. So, we evaluate them on a case-by-case basis but it's not a core part of our focus. As Peter alluded to, organic growth is really what we're all about. Acquisitions are there to supplement or accelerate the time to market of a particular opportunity we see in the marketplace. As far as valuations go, our space is pretty small and things are pretty unique, so I couldn't even characterize valuations now versus historically.

Okay. I appreciate it.

[OPERATOR INSTRUCTIONS] At this time we have no further questions.

Thank you, everybody. Happy holidays.

Thank you