Factset Research Systems Inc (FDS) 2007 Q2 法說會逐字稿

Welcome to the FactSet Research Systems second quarter fiscal 2007 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.

Thank you, Operator.

Good morning, everyone.

Welcome to FactSet's earnings conference call for the second quarter of fiscal 2007.

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

Investment Manager business; and Karen Kennedy, Director of our Services to Investment Banks.

This conference call is being transcribed in 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.

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.

Today, we'll divide our time among three areas.

First, I'll review second quarter results.

Second, I'll cover guidance for the upcoming third quarter.

Finally, we'll close with our management team addressing your questions.

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

One, included in this quarter's EPS was an income tax benefit of $1.1 million, which increased diluted earnings by $0.03 per share.

This income tax benefit resulted from reenactment of the U.S.

Federal R&D credit in December, 2006 retroactive to January 1, 2006.

Two, 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 in investors' ability to make more precise interpretations and forecasts of FactSet's revenues.

Moving on to the review of the second quarter, we're pleased with Q2 results.

It adds to our string of 11 consecutive years and 44 sequential quarters of revenue growth.

This would not be possible if our strength were a single product or if we were relying on a low-quality client base.

This record of consistency demonstrates the power of FactSet's business model and supports our recent decision to double our dividend.

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

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

As a reminder, we define free cash flow as cash generated from operations, which includes a cash cost for taxes and changes in working capital, less capital spending.

During the last 12 months, free cash flows were $94 million.

Free cash flows generated during the second quarter were $17.8 million, down from $25.7 million over the year-ago quarter.

Drivers of free cash flow during Q2 were record levels of net income and higher non-cash expenses, partially offset by a decline in working capital and higher capital expenditures.

The decrease in working capital was caused by an $8.6 million increase in accounts receivable and the timing of U.S.

federal estimated tax payments.

The increase in accounts receivable is not a concern for three reasons.

One, as we reported on last quarter's call, during the second quarter, we issued invoices for services to be provided over the next 12 months that aggregated to $10 million.

Accordingly, this increased both accounts receivable and deferred revenues.

Two, cash collections were limited by the number of business days in the quarter.

During Q2, there were 60 business days, three fewer than a normal quarter.

Three, over the last two years, DSOs have been reduced by 18% to a low of 51 days in Q1.

The DSO at February 28th was 55 days and the increase in Q2 represents a reversion to the mean.

Over the last 12 months, accounts receivable have increased 18% while subscriptions advanced 22%.

Regarding taxes, on our last call, I spoke about how FactSet remits estimated tax payments for the first half of the year during the second quarter.

This additional payment reduces free cash flow in the second quarter.

Estimated tax payments made during Q2 were $23.4 million, up from $11.8 in the year-ago quarter.

Our ending cash and marketable securities balance was $156 million, essentially the same balance reported on November 30.

During Q2, we invested $16.4 million to repurchase common stock and paid a quarterly dividend of $2.9 million.

Including the just announced $100 million increase to the share repurchase program, there's $115 million in remaining repurchase authorization.

The quarterly cash dividend will double to $5.8 million in future quarters, commencing with the June 2007 dividend payment.

Capital expenditures during the quarter were $7.3 million.

Major expenditures include building out new space in our New York and Norwalk locations and adding two HP mainframe systems to our data centers.

We also repaid $2.2 million of liabilities in connection with the acquisition of AlphaMetrics, which was completed in September, 2005.

Moving now to the P&L.

Revenue was $116.3 million, up 24% versus a year ago -- the year-ago quarter.

Operating income advanced 27% to $37.8 million.

Net income rose 38% to $26.5 million in the second quarter.

In addition to higher operating income, net income was favorably impacted by other income at a lower tax rate.

Other income more than tripled to $1.8 million.

Our effective tax rate declined 320 basis points to 33.1% from Q2 last year.

Let's take a look at the revenue drivers.

Subscriptions were $462.8 million at February 28.

Subscriptions increased $23.3 million during the quarter and were up $23.4 million, excluding currency.

On a constant currency basis, subscriptions advanced $79.5 million over the last 12 months, an organic growth rate of 21%.

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.

Professionals using FactSet increased to 32,000, up 1,000 users since November 30th.

Client count was 1,872 at quarter-end, a net increase of 42 clients during the past three months.

Quarterly revenues were $116.3 million.

Included in revenue was non-subscription revenue of $2.6 million.

Including non-subscription revenue and currency, the organic revenue growth rate was 20%.

Let me highlight trends we see happening in our client base.

We continue to demonstrate our ability to deploy solutions to service the global needs of large institutions.

We're also pleased with the performance of Portfolio Analytics and our ability to sell our proprietary content.

Subscriptions increased by 0.5 million or more for seven clients, all deploying a different combination of FactSet services.

Portfolio Analytics remained a source of growth.

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

Our newest version of Alpha Testing continues to advance our quant offerings within existing clients.

The Portfolio Analysis Workstation is the largest revenue contributing member of the Portfolio Analytics product suite.

At quarter end, there were 500 clients representing 4,200 users who subscribe to this service.

Higher demand for the Portfolio Analysis Workstation and our quant services also had the affect of increasing subscriptions to benchmark content, such as MSCI, Russell, S&P and FTSE.

We were also successful in selling proprietary content, including our deal in LionShares ownership data.

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

Taking a look at geographic performance, our U.S.

business produced revenues $81.9 million in the second quarter.

Excluding non-subscription revenues, the growth rate was 20%.

On the international front, revenues increased 30% to $34.4 million.

Excluding non-subscription revenues and holding currencies constant, revenue growth rate from overseas operations advanced 21%.

By region, quarterly revenues from our European and Pacific Rim operations were $28 million and $6.4 million, respectively.

Subscriptions by non-U.S.

based clients were $138.4 million, representing 30% of the Company-wide total.

Moving to expenses for the quarter, operating expenses were $78.5 million and our operating margin was flat from Q1, remaining at 32.5%.

Cost of sales as a percentage of revenue was up 50 basis points over prior year.

Higher compensation and computer-related expenses were partially negated by lower amortization of intangibles.

The increase in compensation was driven by new employees.

Computer-related expenses rose from utilizing a shorter useful life for mainframe depreciation to account for our plans to transition to HP's new Integrity mainframe machines.

The decrease in amortization expense was caused by a decline in acquisition activity compared to previous years.

SG&A expenses expressed as a percentage of revenues declined 140 basis points year-over-year.

This decrease was driven by lower occupancy costs and miscellaneous expenses, offset by higher T&E and marketing expenses.

Lower occupancy costs as a percentage of revenue is temporary.

The decrease was caused by redundant office space in the prior year and the timing of adding new space to support a growing employee base.

In the prior year, there was a redundant -- there was a redundant office space during the time our European headquarters was under construction.

In addition, during the just-completed second quarter, lease agreements were executed to support operations in New York and London.

The new space will accommodate approximately 315 professionals.

In New York, five office locations will be consolidated into one.

The reduction of miscellaneous expenses was the result of a payment in prior years related to acquisition activity.

Higher T&E is being driven by more employees conducting sales and consulting activities.

Marketing expenses increased due to a shift in the timing of expenditures during the fiscal year.

Employee count at February 28, 2007, was 1,486, up 17% from a year ago and up 10% since the beginning of the fiscal year.

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

Head count growth in the quarter reflects our success on the recruiting front.

Our effective tax rate for the quarter was 33.1%.

This rate can be broken down into 36% from recurring operations offset by a benefit of 2.9% from reenactment of the R&D tax credit retroactive to January, 2006.

Let's move to our outlook for the third quarter of fiscal 2007.

Revenues are expected to range between $118 million and $120 million.

Included in this amount is a $1 million reduction in non-subscription revenues compared to the just completed second quarter.

Operating margins are expected to range between 31.5% and 33.5%.

The effective tax rate is expected to be between 35% and 36%.

We're lifting the CapEx range for fiscal 2007 by $4 million to $35 to $39 million.

The increase in CapEx is a result of accelerating New York office expansion from the first quarter of fiscal 2008 to the fourth quarter of fiscal 2007.

In summary, we've made great strides over the past two years, consistently maintaining record levels of revenue and net income growth.

Results halfway through fiscal 2007 illustrate this progress.

During the last six months, subscription rose $40 million, approximately the same increase during the entire 12 months of fiscal 2005.

Our goal is not just to deliver a string of successful quarters or years, but to add to shareholder value over the long-term.

Our ability to reach our long-term goal is correlated with our ability to solve client problems.

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

Over time, these decisions have translated into an impressive array of products and services for our global client base.

We're fortunate to operate in an industry where our clients are very profitable and where our opportunity is enormous relative to our current size.

We have a lot of work ahead, but we're excited and focused on this future opportunity to create great incremental value for our shareholders.

Thank you for your participation in today's call.

We're now ready for your questions.

Thank you.

We will now begin the question and answer session.

[OPERATOR INSTRUCTIONS] Our first question comes from Peter Salkowski.

Your line is open.

Yes, good morning, everybody.

A couple quick questions.

First of all, on the 10% increase in FTEs, just wondering what the plan is for the rest of the year with regard to that, and then I have a follow-up.

Hi, Peter, Peter Walsh.

Regarding our 10% increase in employees, we've been planning to grow our employee base at approximately at the rate of our revenue growth.

That's our plan for the year.

For the rest of '07 as well?

Yes.

And then what about going into '08?

Similar kind of process of just continuing to grow the employee base?

Yes, I think you should -- we think about it in the same terms for '08 as well.

Okay, and then on the capital spending, the movement from fourth quarter into first quarter -- or sorry, from first quarter of next year into fourth quarter of this year of the New York City office thing, what should we expect then for '08 on a capital spending side?

Should it step back down?

I think we had it going up a little bit.

From a CapEx perspective, I think the best way to look at CapEx is to look at it historically.

And as a percentage of revenues, CapEx has really been, over the last five years, 7.4% as a percentage of annual revenues.

Over the last 12 months, it's 7.5%, and we have no reason to believe that's going to change materially in the future fiscal years.

Just this little step up here in '07 due to the relocation?

It's traditionally been over that five-year period, when I look at it averaged.

It's very lumpy from year to year.

Got you.

Great.

Thank you very much.

Our next question comes from Lisa Monaco.

Your line is open.

Good morning.

Phil, I was wondering if you could just give us a little bit more color on how you guys thought about the cash flow allocation and how you derived your -- the numbers that you came to in terms of the dividend and the share repurchase program, and then I have a couple of follow-ups.

Thanks.

Well, obviously as a steward of the Company, we have to look at the opportunities for us to invest the cash in the business and what the cash is -- the business is actually deriving.

In our particular case, we've got the healthy problem of lots of free cash flow coming off.

And as we look at opportunities of the business, I think it's one where we felt very comfortable that raising the dividend and expanding it to share repurchase were consistent with prior history and that it was the best use of cash as we move forward.

And in terms of what you're seeing in the acquisition pipeline, has anything changed there?

Is the pipeline smaller than what it was a year ago or -- ?

I think we've always been opportunistic about acquisitions meaning if they were available and they fit into our long-term plan, certainly when we look at the landscape of what we have in our portfolio at this point, it solves many of the blank spots that we had.

With that said, certainly opportunities come by and we always evaluate them.

But as a focus, we're always focused on the organic part of the business and acquisitions are really just an add-on to help our future strategy.

And then just on PA, is there any way to give us some color in terms of what percentage of revenues come directly from the PA suite of products?

We certainly don't publicly disclose it, and even internally, it would be difficult to actually derive the revenues because so many different products have product pull beyond just the stated revenue of that particular product.

It's certainly one of our significant products, but there are many others that drove the revenue this quarter and continue to drive it as well.

As Peter said, it's not just a one-product business.

I would say IBCentral, Marquee, and then if you lumped all the rest together into dozens and dozens of products, they were all strong contributors this quarter.

Okay.

And then just on the -- what you're seeing in the current environment.

Has there anything changed materially in the last three months, what you're hearing from your client base?

Certainly I think we feel very comfortable we have a strong product for the current marketplace.

I would certainly characterize the client environment as a strong environment, certainly relative to three or four years ago.

On the competitive landscape, I don't think really much has changed.

We're a great solution for most of the opportunities we come across, but certainly not all.

Okay, great.

Thank you.

Our next question comes from Brett Manderfeld.

Your line is open.

Good morning, guys.

Peter, question for you quick.

The impact on the P&L from the New York office consolidation, what kind of time line are we talking about there?

We've arranged for 33,000 square feet.

We've signed the lease.

That lease will commence in the second half of the year.

We're hoping to occupy the space in approximately August of this year.

We'll be consolidating five locations down to one.

And I think the timing of that, obviously, was favorable in this quarter's P&L and was a contributor to our lower SG&A as a percentage of revenues and that timing is, I think will turn around in future quarters.

Okay, great.

Second question.

Thinking about '06, that clearly was a very strong year for investment banking.

Are your clients seeing kind of similar types of staffing increases looking into '07 as compared to '06?

Do you have a sense for the staffing on the I-banking side?

Brett, it's Phil.

I think -- we really don't know what the staffing is going to be for the summer until it actually happens.

You probably being in the sell side have as good a feel as any.

I certainly would characterize the environment as healthy, but I couldn't translate that into workstation count.

Okay, very good, and maybe one final question, Phil.

Hoping you can give us an update on the fixed income product.

Maybe talk about the long-term opportunity for fixed income attribution.

Thanks.

So like many of our products, it's certainly a young product for us and on a quarter-to-quarter basis, really not material contributors to what goes on but certainly we're excited about the future opportunity, and that's consistent with every product that we've ever created.

We've had Marquee now for five years and now it's a very interesting product and is helping drive growth, but took many, many years for it to get to the point where it was material in the marketplace.

We categorize fixed income kind of in that same category as an early for us.

The fixed income PA product is out in the marketplace and is doing very well.

And we're certainly adjusting to client demands as we discover what we have and what we don't have.

I would certainly say that the clients are very excited about what they see from a product perspective.

Was that a meaningful, kind of incremental driver of revenue in the quarter, or are we still too early?

It's still too early to be a material driver.

Okay, very good.

Thank you.

And our next question comes from John Neff.

Your line is open.

Hi, guys.

Good morning.

Peter, I was wondering -- I think you gave the international revenue breakdown.

I was looking for it but just wanted to make sure I had it right.

Europe was $28.0 million and Asia Pacific 6.4?

That's correct, John.

Okay.

And then I was just wondering if you could give us a little more color on the non-subscription revenues in the second quarter.

Obviously, very significant growth year-over-year and a fairly significant number compared to prior quarters.

But it can't be summer intern workstations, given the timing, so what was it?

Thanks, John.

So non-subscription revenues, just let me repeat what that really is first, first of all.

So that's revenue that we earn every quarter, but it's not included in our calculation of subscription value.

So the two primary components are summer interns, which occur in our fourth quarter, and then revenues that we receive from a product that we call Partners, which is a service used by sell-side equity research professionals to automate their work flow, to publish their research.

So during the quarter, we had -- the Partners product is sold in a traditional software model, where there -- about 80% of the revenue is a one-time license fee, and then 20% of its revenue is in a recurring maintenance fee.

So we had several Partner installations where they came to conclusion during our second quarter, resulting in an unusual increase in non-subscription revenue, which obviously was a good thing, and we've incorporated that -- those -- their recurring events or what we view as their recurring event quarter-by-quarter in our revenue guidance going forward, so we expect that non-subscription revenue will decline by $1 million in Q3, reflecting a reduction in the number of implementation of Partner products for our sell-side firms.

Okay.

Great.

And then last question, employee growth.

Any specific area focused within the Company departmentally, or is there a geographic focus to that growth?

Thank you very much.

John, this is Phil.

The employees are really scattered all over the firm.

Certainly, areas sometimes are playing catch-up relative to history.

But if you're looking at the allocation across the firm, it's in the major groups that we have would be sales and consulting, product development, software engineering, and systems engineering, pretty much all the way through the firm globally.

Great.

Congratulations again.

Our next question comes from Pete Heckmann.

Your line is open.

Good morning, gentlemen.

Wanted to follow up on Marquee.

It seems to me that when we are talking to the buy-side and hearing about the deployment of Marquee, it sounds like that is helping you displace some incumbents and kind of gain share of that data services desktop.

Can you give some additional detail around Marquee in terms of what percentage of the users are actively using Marquee as their primary realtime quote system, and if it is having that intended effect of kind of pushing out some competition?

So of the 31,000 seats we have, that's really the public disclosure we make at this type of seat level with the exception of PA.

Marquee is available to all of them, but obviously as you pointed out, it's not necessarily the primary provider.

And we're not even sure who the primary provider is in all cases.

But you are correct in that it's definitely been part of our integration strategy to deliver more value to our clients.

And news and quotes is certainly a potion of that value along with what people would think of as traditional or core FactSet.

So it's certainly helped us gain share inside of a client.

And it is a common denominator for most financial professionals who need news and quotes.

But as to where we stand in relation to our whole client base yet, it's not something we disclose, but certainly making good progress.

Okay, all right.

And then as regards the -- can you give us an update on the estimate service and AlphaMetrics, how those are coming along, and can you just give a little bit of thought process to us around the AlphaMetrics product and talk about if there's any incremental revenue streams generated there?

So, the first would be estimates primarily referring to the JCF acquisition and our investment in that particular product.

We continue to invest very heavily in it, and it's used broadly throughout our system, but we also continue to support and sell the other products in our systems from Reuters and Thomson will be the primary suppliers and they do very well in our system.

Not everybody collects the same items in the same way, so many of our clients subscribe to multiple estimate services, but it's certainly a value point that we're excited to be able to deliver value into the marketplace.

On AlphaMetrics, that's an exciting product for us, a little bit out of the normal FactSet work flow, but certainly ties into helping the sell-side monetize research and helping the buy-side understand where value is being created.

It's certainly done well for us and is quarter-by-quarter becoming more integrated into the FactSet product, making it a stronger product as we move forward.

Okay, I appreciate that.

And then just another question, I don't think this is anything significant, but just could you comment on the Vista rollout and any opportunities or challenges as regards to that new operating system?

I actually probably don't have a comment when it comes to the Vista rollout, which I guess means that internally that I'm sure we're on top of all of the features and things that we can do with Vista, but we've gone through so many software changes over the years at the PC level or at the mainframe level that for us, it's just normal course of business.

Okay, thanks.

[OPERATOR INSTRUCTIONS] Our next question comes from [Sam Jones.] Your line is open.

Yes, hi.

This is kind of a longer-term strategy question with regard to what impact, if any, you see from XBRL and the setting of those standards that will impact the -- or likely to impact the data consolidation business?

And do you see the Portfolio Analytics and AlphaMetrics and so on growth as being significant enough that it will more than offset any competitive incursions of XBRL?

I think XBRL will be helpful to people who collect data, but it doesn't change the value that's created by a CompuStat or Reuters or a World Scope in that they take it to the next step and apply an accounting standard to putting that data in a database, which the buy-side needs to screen and do quantitative work, which is an important part of their work flow.

I think it will certainly assist in the data collection, but I don't think it will commoditize it in any way, shape, or form.

Okay.

You don't see the XBRL as being the panacea for the analyst community or investor community in terms of just accessing the data without having to resort to using CompuStat or what have you?

No, no.

I think it will be beneficial and potentially help with the as-presented information, but there's a great deal of value created by those databases making decisions on where the exceptions go and how you deal with all the exceptions.

Okay, thank you.

And I'm showing no further questions at this time.

Thank you, everybody.