Factset Research Systems Inc (FDS) 2007 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen only mode. Welcome to the FactSet Research Systems fourth- 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 meeting over Mr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

Thank you, Operator. Good morning and thanks to all of you for participating today. Welcome to FactSet's fourth-quarter earnings conference call. 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, Head of Investment Banking. This conference call is being transcribed in realtime by 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 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. We'll divide our time today in three ways. First, we'll review fourth-quarter results. Then I'll cover guidance for the upcoming first quarter of fiscal 2008. Finally, we'll close with our management team addressing your questions.

Before covering results, I'd like to take a moment to highlight two items. 1) Included in a just completed fourth quarter were income tax benefits related to prior periods of $1.1 million or $0.02 per diluted share. This was a result of FactSet beginning to include in its estimated tax liability a benefit related to repatriation of foreign earnings to the U.S. 2) Like last year, 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 an investor's ability to make more precise interpretations and forecasts of FactSet's revenues.

Overall, we had a very good quarter. We delivered solid revenue growth, healthy margins, strong earnings and another quarter of impressive free cash flow. Performance was driven by adding more users and selling existing clients additional applications and content. Deployment of Marquee, the PA Workstation, IB Central and our risk and quantitative services continue to expand across all geographies. Broad-based growth has been the catalyst to accelerating our growth rate by more than 200 basis points to 22% over the last 12 months. This has translated to a record level of free cash flows for the fourth quarter and for the just completed fiscal year.

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 include the cash costs for taxes and changes in working capital, less capital spending. Free cash flows generated during the fourth quarter were $43 million, up 45% over a year ago. During fiscal 2007, free cash flows increased 20% to $117 million. One very interesting relationship is the comparison of earnings to our free cash flow. Fourth quarter free cash flow exceeded net income by 40%. Free cash flow for fiscal 2007 was 7% higher than net income. This illustrates the quality of our earnings since at many public companies free cash flow is less than net income.

Drivers of free cash flow during Q4 were record levels of net income and an $18.3 million improvement in working capital, partially offset by higher capital expenditures. Working capital was aided by increases in accounts payable and accrued expenses. When considering free cash flow for the upcoming first quarter, please factor in that FactSet pays variable employee compensation related to the previous fiscal year in the first quarter. This cash outlay will approximate $28 million in the first quarter of fiscal 2008. It's included in accrued compensation and represented as a liability on our balance sheet at August 31.

Capital expenditures in the fourth quarter were $30.8 million and $11.4 million net of landlord contributions for construction. Expenditures for computer equipment were $6.4 million and the remainder was for office space expansion. Major expenditures included adding four HP integrity mainframes to our data centers and building out new space to complete the consolidation of five New York City office locations to one. Our ending cash and marketable security balance was $186 million, down $3 million over the past three months due to returning excess capital to shareholders. During Q4, we invested $46 million to repurchase common stock, and at quarter end there was $57 million in remaining share repurchase authorization. Shares outstanding at August 31 were 48.3 million. We also paid a dividend of $5.9 million, up from $3 million in Q3.

Now moving to the P&L. Revenue was $129.5 million, up 23.1% versus a year ago. Excluding currency, the revenue growth rate was 22%. Operating income advanced 28% to $42.7 million. Net income rose 31% to $30.7 million in the fourth quarter. The growth rate of operating income was aided by redundant real estate costs incurred only in the year-ago quarter. In addition to higher operating income, net income was favorably impacted by other income and a lower tax rate. Other income rose 66% to $2.4 million. Our effective tax rate declined 68 basis points to 31.8% from Q4 last year.

Let's take a look at the revenue drivers. Subscriptions increased 27.7 million during the quarter, and were up 27 million excluding currency. On a constant currency basis, subscriptions advanced 92.5 million over the last 12 months, up 22%. 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 35,000, up from 33,300 at the beginning of the quarter. Client count was 1,953 as of August 31, a net increase of 39 clients during the quarter.

Let's turn to the trends we see happening in our client base. We're especially pleased at the broad appeal of FactSet to users across the world as evidenced by our high rates of growth of both our U.S. and non-U.S. businesses. The U.S. business produced revenues of $91 million in the fourth quarter. Excluding non-subscription revenues, its growth rate improved 300 basis points to 22% over the year-ago quarter. Applications such as Marquee 3.0 and IB Central were the catalyst to increasing the number of FactSet users. Demand for advanced services and computing power related to risks, quantitative and portfolio analysis continued throughout the client base. At quarter end, clients using the portfolio analysis work station increased to 540, representing approximately 4700 users.

Revenues from overseas increased to $38 million. New clients and incremental sales of the Portfolio Analytics suite of products were key revenue drivers. Excluding currency and non-subscription revenue, the growth rate from the non-U.S. Operations was 21.6%. By region, quarterly revenues from our European and Pacific Rim operations were $31 million and $7 million respectively. Subscriptions by non-U.S. based clients were $157 million representing 30% of the companywide total. Client retention remained above 95%, once again confirming the high quality of our product suite and our client base.

Moving to expenses for the quarter, operating expenses were $86.9 million and our operating margin was 32.9%, up 50 basis points from Q3. The margin increase from Q3 is temporary and primarily the result of work stations sold to summer interns only in the fourth quarter. Cost of sales as a percentage of revenues was up 120 basis points over the prior year. Higher compensation and data costs were partially negated by lower amortization of intangibles.

The increase in compensation was driven by new employees. Data costs rose from incremental royalty payments to data suppliers and expanding our coverage of proprietary content. The decrease in amortization expense was caused by a decline in acquisition activity compared to previous years.

SG&A expense expressed as a percentage of revenues declined 250 basis points year-over-year. This decrease was driven by lower occupancy expense, compensation costs, marketing and professional fees as a percentage of revenues. Lower occupancy cost was caused by redundant office space in the prior year during the time our European headquarters was under construction. Excluding this item, occupancy costs were consistent with the year-ago period as a percentage of revenues.

The reduction of compensation cost relates to the timing of accruing variable compensation. Lower marketing and professional fees was driven by keeping our investment levels consistent with last year while growing our revenue base. Please note that in August 2007, the Company granted 1.5 million employee stock options. Like last year, up to 63% of the options granted vest only if certain Company performance metrics are achieved over the next two fiscal years. The Company's progress towards obtaining these performance metrics could change our stock option expense in future quarters. For additional information, please review our recurring disclosure on performance-based options in FactSet's 10-Q and 10-K filings with the SEC.

Employee count as of August 31, 2007, was 1,653, up 23% from a year ago. Our total salesforce grew approximately at the rate of revenues. Other income grew to $2.4 million, up 66% versus the fourth quarter last year. Higher cash balances and interest rates drove this increase. Our effective tax rate for the quarter was 31.8%. This rate can be broken down into 34.2% from recurring operations offset by a benefit of 2.4% from recognizing a tax benefit for prior periods related to repatriation of foreign earnings to the U.S.

Let's now turn to our outlook for fiscal 2008's first quarter. First off, please note that the earnings release date for Q4 was a week later than our normal schedule to account for the first business day of the month falling on September 4. We expect to revert to our normal schedule with a call on Tuesday, December 18, for the first quarter.

Now, turning to the specifics. Q1 revenues are expected to range between $131 million and $135 million. This includes a $1.2 million reduction primarily from work stations sold to summer interns for use only during the fourth fiscal quarter. Operating margins are expected to range between 31.5% and 33%. The return to our normal guidance range versus Q4 reflects the seasonal revenue benefit from work stations used by summer interns. The effective tax rate is expected to be between 34% and 35%. Our CapEx range net of landlord contributions for fiscal 2008 is $38 million to $44 million. This includes enhancements to FactSet's data centers by upgrading to HP's integrity mainframes.

To sum it all up, our business has continued to thrive during the latest year. In fiscal 2007 we crossed over the 500 million mark in annual subscriptions and added more than 200 basis points to our annual revenue growth rate. The good news to our shareholders and employees is that we believe our opportunity is ahead, not behind us. The current 35,000 FactSet user base represents just 7% of the professional investment user community. While we like our competitive position in the marketplace and we're pleased with our progress, we have a business agenda and there's a lot of work ahead. Thank you for your participation in today's call. We're now ready for your questions.

Thank you. At this time we will begin the question and answer session. (OPERATOR INSTRUCTIONS) The first question comes from Mr. Peter Appert, Goldman Sachs. You may ask your question.

Thank you, good morning. It looks like the momentum in terms of clients and users for the Portfolio Manager Workstation accelerated here in the most recent quarter. Any thoughts on what might be driving that?

Hi, Peter, this is Phil Hadley.

Hi, Phil.

I think if you were going to look at even a change in trajectory of total seats, we built out our salesforce on a specialty basis pretty substantially throughout the year to focus on a particular product line, and I think the fourth quarter probably illustrates success in that area in penetrating current clients and diverting them into that particular product line.

Can you give us any specifics, Phil or Peter, in terms of number of salespeople, specifically today versus a year ago?

We grew our salesforce, Peter, approximately at our rate of revenue growth versus a year ago.

How about number of salespeople?

We broke the Company into thirds. A third are sales and consulting, a third are engineering and product development, and a third are content collection and administrative personnel.

Okay. And then Phil, any thoughts on the development of the fixed income product? I understand it's a small component, obviously, of the business currently, but just the traction you're seeing there and whether there's any pushback from clients in the context of just the turmoil we're seeing in the debt markets currently?

I would just make two points. You're correct. It's still immaterial as far as FactSet goes. It's moving nicely in the PA product line for PA fixed income, and we're continuing to focus on the stand-alone product as well, but it's still single digits for us as far as total ASP. As far as the term loan in the credit markets, again I think our exposure is so low that it's hard for me to even make a comment.

And are you hearing anything, Phil, back from customers in terms of again, the turmoil in the capital markets that might suggest a greater resistance to adding terminals going into fiscal '08?

I haven't seen anything yet. 75% of our business is the buy side and if you look at the U.S. market, all of the markets, major indices, are still up for the year, which bodes well for us. If you get to the sell-side, you obviously have the equity research department which is more tied to the buy side, and then you hit to the investment banking area. And I think you've seen mixed results firm by firm as to what their year turned out to be. So I think we've still got such a huge upside and such a small spend inside of these firms, in addition to which I think the firms are continuing to consolidate onto our product line and simplifying their IT spend by choosing FactSet. So I really see a lot of opportunity ahead of us.

Okay, great. I'll just ask two more and then try to stop being a hog here. The pace of share repurchase activity, you stepped it up here obviously, Phil, this year. Is this year's pace a good indication, do you think, of what we should look for next year?

We're constantly evaluating how best to return our profits to the shareholders. Obviously we increased our dividend. Share repurchases is certainly a mechanism, in addition to M&A activity. I think since we're such a cash flow positive business, you'll continue to see us optimize those three as we best feel will be for the shareholders.

Okay, that was very political. The last question then, Phil, any particular new products or new product offerings or product line extensions we should be focused on over the next 12 months that could be drivers of revenues?

Our entire product line is really incrementally enhancing everything we already do. Marquee is a great example. We've been incrementally enhancing that since we released the product three or four or five years ago at this point. It will continue to get enhancements like any other product in our system. So for something to be a driver of our revenue has probably got a five year run before it gets to the point where it's really a contributor from what you think of as being a contributor. We invest heavily in our product. As Peter was describing, a third of our employees are really in the product creation side.

Right, so more of the same.

Yes.

Okay, thanks.

Our next question comes from Mr. Kevin Doherty, Banc of America Securities. You may ask your question.

Great. Thanks for taking my call. Just to follow-up on one of Peter's earlier questions about the seat growth, can you maybe just give us a sense of the mix of your new users; is that still coming in kind of the 75% investment management, 25% banking split? And then also how you think about new users coming from your existing clients versus new users, new clients?

I think if you were going to look at our seat and client growth, it's always going to be lumpy to some degree. Large clients can make broad decisions that affect our seat count quarter to quarter. I think as a whole, I'm certainly pleased with the year because our seat count accelerated. And the second question was, sir?

And then again just more of the mix between growth from new users and existing counts versus new users from new clients.

I would say the majority of our seat count is with existing clients. Most clients come on with a small seat count and then over the years, expand.

Okay. And then just a question on how we should think about your margins going forward. I know in the past you've talked about kind of reinvesting the upside, but I know this year is kind of the first year in a few years that your top-line growth is really outpaced by the bottom line. Is there anything unusual about '07 that you were able to generate so much leverage, and should we expect more of a top-line growth to track the bottom line, maybe as we look out over the next few years?

Thanks, Kevin. I think when you look at '07, I think two things certainly helped the relationship of bottom line versus top line, and that was our other income was up consistently in strong percentages, 66% in the most recent quarter year-over-year due to our higher cash balances and a little higher interest rates. And also our effective tax rate dropped. We ended last year at just a little north of 36% and our recurring rate for the year was 34.2% for '07. So I think we're really managing the Company for our revenue top-line growth and our bottom-line growth to be more consistent than what they were in 2007, and it's hard to predict or hard to think other income and improvements in the tax line will continue at the rate they did this year.

And then maybe just above the line your margins did expand at least this past year. How should we think about that going forward then and how does that balance out to your reinvestment strategies?

We've been really managing the Company for our margins to be flat, and we're managing that primarily through investing back into the product. And that investment comes in two forms. One is people, which you have seen that we really increased our headcount at 23% which was very significant relative to other years. And the other form is expanding some of the content that's available on FactSet, whether through third parties or through what we collect ourselves.

Okay, thanks for the color.

Thanks, Kevin.

Your next question comes from Mr. John Neff, William Blair Company. You may ask your question.

Thanks, guys. You guys described about 63% of the options that you granted are performance vesting based and not just time vesting. Can you describe what the key performance metrics are that you use to track that vesting?

Thanks, John. So last year, we introduced performance based options because we thought it was really important to balance the needs of our employees and also our shareholders, two important constituents. The performance based options vest over a two-year period. If we obtain metrics that relate either to our growth of ASD or net income, those metrics would be the lower of one of those two items over a two-year period.

Okay, that's good. I was just wondering if you could describe the growth in employees as they've been concentrated in one bucket or the other of the third, a third, a third you mentioned, was there a geographic concentration of that growth? An what might you expect for hiring growth in '08?

As far as looking back at '07, there wasn't a concentration in any one discipline when you compare it on content collection, sales and consulting and/or engineering, product development. From a geographic point of view, we added more employees non-U.S. than we did in the U.S. and that just really reflects what we think is the opportunity in those relative markets. Going forward, we will continue to invest heavily in headcount and our current plans are to keep our headcount investment and our revenue growth rate in very similar zip codes.

Great. And then your CapEx guidance of 38 to $44 million in '08, is there any duplicative real estate or consolidation expenses in there?

So the CapEx guidance doesn't -- has us moving in Boston from one location to another, and so when you're moving as opposed to expanding an office, you're going to spend more money in CapEx. And I also would add that the CapEx guidance also would include us upgrading from one version of HP's mainframes to another, and it would also follow that your CapEx is higher doing a year of upgrade versus a year of just adding to or expanding the number of mainframes that are necessary based on client demand.

Okay. One more question if I could. The DSOs looked like they just plunged in the quarter, and I know last quarter you started invoicing at month end -- at the beginning of the month, if I reversed that. Beginning of the month or month-end, it was a change. Can you just walk us through the impact that had this quarter if any on DSO's and what's sort of the sustainable level for DSO's we should think about? Is it the third-quarter number or the fourth-quarter number you just reported today?

I think as far as DSO's are, I think the number we reported today is more valuable than it was 90 days ago. Our receivable balance is flat over the last 12 months, while our revenue growth rate has increased 23%. And one of that reasons is because we're billing on the first day of the month versus the last. We continue to work very hard on our collection activities, and our goal is to keep our receivable growth to be lower than our revenue growth. So obviously fiscal '07's performance is superlative, and it will be difficult to replicate that going forward.

Thanks very much.

The next question comes from Lisa Monaco, Morgan Stanley. You may ask your question.

Hi, good morning. A couple of questions. Just on the growth in the U.S. versus overseas, I'm surprised at how similar the growth rates are. I would have thought overseas would be growing at a higher rate than the U.S. Can you just talk a little bit about how those markets might be different or the products, the different product offerings in each of the markets? And then somewhat related, is there any way to give us some idea about the margin, if it's similar in the regions? And then I have a follow-up. Thanks.

Hi, Lisa, how are you? It's Phil Hadley.

Hi, Phil.

So part of the reason is because the U.S. business accelerated nicely. Part of the reason is because the product lines are different across the world. We have a tendency to produce the product first in the United States and then expand it throughout the world. That is true in two major product lines that we have. So Portfolio Analytics from the equity side is mature worldwide, and anybody could describe the product and get full functionality. Portfolio Analytics on the fixed income side is ready for the market in the U.S. and it still has progress to be made on the non-U.S. market, obviously lots more securities in local markets to deal with. It's just an example of it just takes us longer to get the product to maturity in a global marketplace than it does in the U.S. marketplace just because of the complexity.

The same would be true with the Marquee product line. It's much easier to load just the U.S. or North American exchanges than it is to load the rest of the world. So some of the drivers that accelerated the U.S. haven't yet hit full strength in the non-U.S. markets. Then as you take that outside of the U.S, they're just market by market. Some markets are hot. Some markets aren't. It depends on what's going on in the local market; depends on what our market share is already. Sometimes it's what kind of salesforce we have in the ground in our local market because it gets smaller as you get country by country, but I feel very comfortable that the opportunity outside the U.S. for us is still very strong.

Hi, Lisa. Thanks for your question on margins, U.S. versus non-U.S. The way we really manage FactSet is through one P&L, and while we do have segments and we break out those segments, you'll see in our SEC filings, we have a very big asterisk telling the world that we have one P&L and it's very difficult to allocate expenses from one location to another, primarily because most of our engineering activity is located here in the U.S. and they work on products that benefit both geographies, as well as a lot of our infrastructure related to the data centers. So there's nothing that leads us to believe that the margins are significantly different in either location. The products are priced very similarly. The clients and their activities and their profit margins we think are consistent from one geography to another, but I just don't have a hard fact that I can give you on your question.

Okay, great. And then just you mentioned an increase in data. I think you said data collection costs or -- I'm not sure if you said data collection or data creation. Can you just elaborate on what content sets you're adding to or enhancing, and it sounded like that's going to be a focus of some of your investment spending going forward where you need to beef up some of your content sets? Thanks.

So through several acquisitions, we have several content sets on FactSet that we create and maintain ourselves. Institutional holdings is one. CallStreet, this call being transcribed is another. Several other content sets we've created organically. It has been a revenue driver for us in the last year as well. We don't talk about it much because it kind of gets blended into the regions and the various product lines, and it's produced a high return for us and given us a competitive advantage. So we continue to invest heavily in each of the content sets to make sure they meet the needs of each of our clients.

Our primary position in the marketplace is at the very high end of the marketplace, which demands us to make sure the content sets are A plus in their space, and we continue to focus to make sure that happens, and it requires people and focus.

Is there any particular content set that you're focusing on adding to or enhancing?

No. I think each one of them has a set of priorities attached to them, whether it's the earnings estimate, the institutional holdings, the M&A, the private company, the private equity, the venture capital, and several more; each of them requires investments. And there's lots of players in the space to collect content, and you have to find a niche and make sure you're the best at it.

Okay, great. Thanks.

The next question comes from Mr. Jeff Cardon, Wasatch Advisors. You may ask your question.

Hi, thanks, guys. The only question I have is what was the FASB 123 cost for the quarter? Can you hear me?

Hi, Jeff. Thanks for your question. The stock-based compensation expense for the quarter was $2.3 million.

Great. Thanks, that was it, thank you.

(OPERATOR INSTRUCTIONS)

Thank you very much. We'll see you in December.