Factset Research Systems Inc (FDS) 2010 Q1 法說會逐字稿

Good morning and good afternoon.

Thank you all for holding.

I would like to inform all participants they are on a listen only mode until the question and answer segment of today's conference.

I would also like to inform all participants this conference is being recorded.

I'd now like to turn the call over to Senior Vice President, General Counsel, Rachel Stern, you may begin.

Thank you, Operator.

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

Welcome to FactSet's first quarter earnings conference call.

Joining me today are Phil Hadley, Chairman and CEO; Peter Walsh, Chief Operating Officer; Mike Frankenfield, Global Director of Sales; and Maurizio Nicolelli, Senior Vice President for Finance and Test.

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 differ materially.

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

In an effort to provide additional information our comments may include non-GAAP measures such as free cash flow.

Any non-GAAP measures discussed today have been reconciled to the related GAAP measures in our earnings press release and in our SEC filings.

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

I'd like to turn the discussion over now to Maurizio Nicolelli, Senior Vice President for Finance and Test.

Thank you, Rachel and good morning everyone.

From here, our call today will cover three areas.

First I'll review results for the quarter.

Then I'll outline guidance for the upcoming second quarter.

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

Before we begin, I would like to take a moment for one housekeeping item.

In the first quarter last year there was a tax benefit that increased earnings by $0.03 a share.

Excluding this prior year benefit EPS grew 6% to $0.74 from $0.70 in the prior year period.

Now turning to the quarters results.

From a top and bottom line perspective, first quarter results followed guidance we gave back in September.

We indicated last quarter that we believed our business was stabilizing and that we expect this period will last at least until our industry and Wall Street realizes a healthy paper profit with a turn of the calendar year.

Our performance was solid in the first quarter.

While organic ASV declined by $2 million, operating margins were 35% and EPS grew 6% excluding the prior year tax benefit just mentioned.

While the market improves, FactSet continues to invest aggressively in our future.

We successfully released a new platform this quarter and are very pleased with the client adoption rate.

We believe that the new FactSet is deepening the engagement level of thousands of users.

The best metric to support this is the accelerated [60%] increase in users of news and quotes just during this quarter alone.

New FactSet is broadening the use of available functionality by existing users.

Over the last 12 months, employee growth was 44%.

We've been growing our proprietary content operations to take advantage of significant opportunities within our client base.

Overall, we believe that our heightened investment levels have strengthened our market position and will also improve our participation rate in what we believe will be a more constructive selling environment next calendar year.

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

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

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

For the first quarter, free cash flow was $19 million compared to $30 million in the year ago period.

Free cash flow this quarter was adversely impacted by a non-cash adjustment of [$15] million in tax benefits from stock option exercises.

Excluding this tax benefit in both periods, free cash flow would have been up 9% to 34 million from $31 million in the prior year quarter.

While this amount is a detriment to the first quarter's free cash flow, it is temporary as this tax benefit will increase free cash flow in subsequent quarters through lower income tax payments.

During the last year, free cash flows were $172 million, an increase of 33%.

Free cash flows also exceeded net income by 18% illustrating the high quality of our earnings.

Other drivers of free cash flow during the first quarter were increased levels of depreciation and amortization expenses, lower CapEx and accounts receivable.

Over the last 12 months, accounts receivables had decreased 15% while revenues were flat.

DSO at quarter end is now a record low 35 days, down from 42 days a year ago.

As in previous years we expect receivables to increase by more than 10% during the second quarter, identical to prior years.

FactSet invoices a small portion of its clients annually in advance.

When our annual invoices are circulated we expect that accounts receivable and deferred revenues will increase approximately $11 million.

Please recall that FactSet also remits estimated income tax payments for the first half of the year during the second quarter.

Although lower due to our tax benefits from first quarter employee stock option exercises, we paid $9 million in December representing our estimated tax payment for the just completed first quarter.

The timing of estimated tax payments is consistent with prior years.

Capital expenditures were $6.7 million during the quarter.

Approximately 80% of capital expenditures were for computer equipment while the remainder covered office space expansion.

While our ending cash and marketable securities balance was $218 million at November 30, 2009, during the first quarter we invested $52 million to repurchase common stock and paid a quarterly dividend of $9 million.

With the approval of an additional $100 million for the share repurchase program, there is $150 million remaining in repurchased authorization.

Moving now to the P&L.

Revenues were $155 million, flat versus a year ago.

Operating income advanced 5% to $54 million.

Net income rose 2% to $36 million, EPS was $0.74 per share, up 1% compared to the prior year.

Excluding a $0.03 benefit to EPS relating to a tax benefit in the prior year, EPS was up 6%.

Let's review the revenue drivers during the first quarter.

ASV grew $2 million in absolute terms.

Excluding non-subscription revenues totaling $4 million, organic ASV declined $2 million during the quarter.

Continued stabilization throughout our client base was offset by the judicious approach of large clients toward their overall market data spend.

Large clients continued to be very cautious in both their incremental data spend and additional hiring.

During the first quarter, we saw a healthy reduction in the number of client cancels but for obvious reasons there was not a meaningful increase in new firm creation.

Once the industry returns to healthy profits, we expect to benefit from additional data spending and increased hiring levels.

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

Let's look at some trends that we see in our client base.

Both our user and client count was steady for the second consecutive quarter.

Users increased slightly to 37,400 users and clients declined by 1 to 2,044 clients at November 30th.

The annual client retention rate was greater than 95% of ASV and 87% of clients.

Although we are not excited about the absolute ASV change during the quarter compared to our historical levels, we know from experience that multiple quarters of strong market performance is necessary to change our clients' annual spend.

We are optimistic that many of our clients will likely benefit from the approximate 20% increase in the broader market Indices this year.

In fact our user count has appeared to have stabilized in two quarters since September 2008.

By comparison it took over two years for our user count to stabilize after the downturn of 2001.

During the first quarter we saw several positive trends that reflect our aggressive investment levels.

We are delighted with the reception the new FactSet platform has received by our client base.

Anecdotal feedback we've gotten has been enthusiastic.

Our investment in the new FactSet consolidates data in analytics across multiple applications onto one comprehensive intuitive interface improving both functionality and ease-of-use.

Since its release in September, thousands of users have been upgraded.

This success has accelerated usage of our global realtime news and quotes.

Users are up 16% just during the first quarter and up 30% over the last year.

Realtime users have increased during every quarter since our realtime news and quotes product was released in 2002.

Since our clients rely heavily on our realtime product on a daily basis, this statistic is significant.

We interpreted it to mean that the overall engagement level from existing users is increasing.

We also continue to be pleased with the growing returns from our investment and proprietary content.

The acceptance rate of FactSet fundamentals by new and existing clients continues to grow.

During the past 12 months we have reduced our third party vendor payments related to fundamental data by over $7 million due to client switching from two FactSet fundamentals from third party vendor databases.

In addition, demand for FactSet Estimates continues to expand.

Estimates are a data set desired by a high percentage of our current and prospective clients.

Our expanded coverage and textural research has made our product more competitive in the marketplace.

Our portfolio analysis suite continues to be a source of growth.

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

During the quarter we saw incremental purchases of our quant and risk products and the addition of 32 PA users while our client count remained the same.

At quarter end, our Investment Management business accounted for 82% of total ASV with the remainder relating to services provided to M & A, Investment Bankers and sell-side equity research professionals.

Turning to geographic performance.

The US business produced revenues of $105 million, down 1% versus the year ago quarter.

Revenues from overseas increased 1% to $50 million.

By region, quarterly revenues from our European and Asian Pacific operations were $39 million and $11 million, respectively.

ASV by non-US based clients grew to $201 million representing 32% of the Companywide total.

Moving to expenses for the quarter.

Operating expenses were $101 million, down 3% from the year ago quarter.

The reasons for this decline were favorable currency movements, lower third party data vendor payments and reduced stock based compensation.

As we discussed on last quarter's call, we hedged a majority of currency exposure for the first quarter early in the 2009 calendar year.

Our benefit from hedging FactSet's euro and pound exposure amounted to 1.3 million during the first quarter.

Currently we are covered for that exposure through mid January 2010 due to hedging 90% of our euro and pound exposure last spring.

Using today's rates, compared to the second quarter last year, currency would increase operating income by $600,000 in the upcoming quarter and this impact is factored into our second quarter guidance.

Our operating margin was 34.8%, down 20 basis points from the fourth quarter.

As a reminder, fourth quarter revenue was higher by $800,000 from the use of FactSet by summer interns which was not repeated in the first quarter.

Turning to further specifics of the quarter.

Cost of sales as a percentage of revenues decreased by 180 basis points over the last year.

Lower levels of external data collection and a decline in data vendor royalty payments were partially offset by higher compensation expenses.

The reduction in external collection costs was a result of ending a BPO relationship during the third quarter of fiscal 2009.

Lower royalty payments are the result of increased client usage of FactSet's proprietary content.

Higher compensation is due to expanding the number of employees, particularly in our offshore facilities.

SG&A expenses expressed as a percentage of revenues declined 10 basis points year-over-year.

This decrease was driven by foreign currency hedging gains, lower T&E offset by higher occupancy costs.

Foreign currency gains included in SG&A were the result of favorable hedging contracts entered earlier this year.

T&E declined due to a continued prudent approach to inter office travel.

Occupancy costs increased because of office expansion at our Boston, New York, and offshore locations compared to the year ago quarter.

Our employee count was 3,300 at November 30th, an increase of 300 employees during the quarter.

The rise in headcount was driven by the offshore expansion of FactSet's proprietary content operations.

Lower interest rates caused other income to decline by 61%.

The average annualized return on cash and cash equivalents was just 25 basis points during the quarter.

Our effective tax rate for the quarter was 33.4%.

This rate is consistent with the fourth quarter and down 80 basis points versus the prior year excluding a $0.03 tax benefit in the first quarter of last year.

The US federal R&D credit is currently set to expire on December 31, 2009.

Our effective tax rate is based on current and active tax laws and appropriately reflects the credit only for the first four months of fiscal 2010.

Assuming the R&D credit does not get extended, FactSet's expected tax rate should range between 33.5% and 34% in the second quarter.

To provide context the R&D credit was originally enacted in 1981.

Over the last 28 years the credit lapsed once for almost a full year between 1995 and 1996.

Congress has extended the credit 14 times with extensions ranging from five years to six months.

Discussions in Washington are ongoing to extend the credit for calendar year 2010.

EPS was $0.74 in the first quarter, a growth rate of 1% year-over-year.

When excluding a $0.03 income tax benefit in the prior year period, EPS grew 6% compared to the prior year period.

Let's move to our outlook for the second quarter of fiscal 2010.

The projected revenue range for the second quarter is $154 million to $158 million.

This guidance factors in a 3% price increase for most US investment management clients in January 2010.

EPS should range between $0.73 and $0.75.

Both ends of the range were reduced by $0.01 to reflect the last of the US federal R&D tax credits effective December 31, 2009.

The range for capital expenditures net of landlord contribution is $20 million to $26 million for fiscal 2010.

In summary, we believe we've made great strides over the last 12 months generating strong EPS and free cash flow while investing aggressively for the future.

We are excited about the rewards from our aggressive investment in content and energized about the release of the new FactSet.

The new FactSet was released this quarter and is improving the workflows of thousands of users with great feedback.

Our ability and willingness to reinvest capital into our operations at levels we think many companies would envy, we believe will position us to take advantage of a global economic recovery.

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 Kevin Doherty of Banc of America.

You may ask your question.

Great, thank you.

First of all, if you can just comment about the incremental revenue opportunity you see from the new FactSet platform and maybe how you're pricing this product for customers who were already using that bundle of Marquee directions and IB Central?

Hi, Kevin, it's Mike Frankenfield.

There's no direct incremental costs for the new FactSet.

Rather, we view the new FactSet as an opportunity to partner and engage with our clients at a much greater level.

We view it as an opportunity to drive usage of the application, usage of all assets affected, and to enable clients to have a complete solution with FactSet.

Okay.

Following up on that, could you talk a little more specifically about what some of your revenue drivers will be going forward, in particular some of the investments you've been making, how that ultimately translates into incremental revenue growth here?

As you know, Kevin, FactSet really isn't a one trick pony.

There are many many components to our business.

The traditional drivers remain in place.

Our value-added applications in the portfolio, analytics and quant space, continue to have great prospects.

We have a large initiative to build and deploy our own proprietary content and that represents a big opportunity in the future.

And the new FactSet itself I think will do a lot to drive revenue from an incremental user perspective.

Of course as the industry stabilizes and we begin to see new firm creation, we obviously have the opportunity to expand well beyond the couple thousand firms that we have today.

Okay.

And then you made some comments about the next calendar year probably being a better selling environment and I know last quarter in your conference call you talked about some of the investments you're making eventually helping you to get back to that double digit revenue growth range.

I'm just curious if you think you can hit that double digit range later in this year or this fiscal year or maybe next in calendar year, or at what point do you think we get back to some of those historical levels?

It's difficult to predict when we'll get back to double digit growth but that's certainly an objective of the firm.

What's going on in the marketplace right now is that even though, as Maurizio mentioned, markets are up over 20% in the US year-to-date.

not all of our clients have participated in that growth and there's still a number of firms that are struggling and still rationalizing their cost structure.

So things are a little bit choppy, we need some new hiring and stabilization before we can see an acceleration of growth rate.

Okay, and then just last question and then I'll turn it over.

I appreciate the comments you made about the pricing outlook but any reason why the international customers or the sell-side customers wouldn't see that same sort of price increase?

We've historically done our price increases at different times for different markets.

The US investment management market is traditionally the market that goes first at the beginning of the year and as we formalize our plans for the rest of calendar 2010, we'll let you know.

Okay.

Thanks, guys.

Thank you.

Our next question comes from Glenn Greene of Oppenheimer.

You may ask your question.

Thanks, a few questions and I apologize if some of these have been mentioned before but there's a lot of data points out there.

First is on fundamentals.

Could you just give us the revenue and profitability impact from Fundamentals in the quarter?

Hi, Glenn, it's Peter Walsh.

How are you?

Good, how are you, Peter?

Good.

As we covered last quarter, consistent with all our other products, the granular detail behind FactSet Fundamentals is something that we're no longer disclosing in our earnings press release and that's primarily because Fundamentals is now accretive to our P&L.

Okay, and similarly, Peter, while I've got you, the FX impact, I know there was a data point out there but could you clarify what the impact to revenue and profitability was on the quarter and how we should think about it for fiscal '10, not necessarily just next quarter as you roll off the hedges?

Hi, Glenn, it's Maurizio, I'll take that question.

During the quarter, the FX benefit was $1.3 million.

If you use today's rate for the next quarter, the benefit next quarter will be $600,000.

We continue to see benefits from currency.

FX, we don't see as a material item to our margin.

Even with the US dollar weakening against the pound and the euro over the last 12 months, the US dollar is still 16% stronger than the pound and 4% stronger against the euro since the financial crisis began.

We continue to see benefits in our P&L from FX and we don't see it as a material item affecting our margin.

And then just the clarification on the ASV organic decline sequentially, in contrast to the users and clients being relatively flat.

I guess some of your larger clients rationalize some of their use of data providers such as you?

If you could help me understand that a little bit better.

Yes, this is Mike Frankenfield.

I think what we saw was a little bit scaling back in the bigger clients and the change is really not material overall.

And is that something you suspect you're going to see a continued theme for the next few quarters?

No, I think it's difficult to predict exactly what will happen.

Again, I'd go back to my comments about seeing markets stabilize, getting through the rest of this calendar year so that clients begin to have more visibility into their revenue models themselves and therefore feel comfortable spending more on services like FactSet.

So are you talking about calendar year '10 or calendar year '09?

As we get moving into calendar year 2010.

Okay.

Thank you.

Thank you.

Our next question comes from Shomo Rosenbloom from Stifel Nicolaus.

Hi, it's Shlomo Rosenbaum from Stifel.

I just wanted to ask you straight out, what's the sales environment like this quarter versus last quarter?

We've seen some of the mixed metrics but what are you hearing from your sales guys?

What's the sense that you're getting?

I think the sales environment remains very much the same.

Certain clients, there's a robust sales pipeline.

There are lots of bright spots, some of the product lines that I mentioned, there's increased demand for portfolio analytics quant.

Certainly the fixed income product suite is doing very well on our clients.

And clients are very excited to upgrade to the new FactSet and that whole initiative is moving ahead of schedule and well ahead of our internal plans.

So that's balanced with some remaining uncertainty in the market but I think as we get through this calendar year, we should be in an improved selling environment.

And can you walk me through the puts and takes of the margins again?

You talked about but it was 140 basis point sequential increase.

Is that sustainable?

How should we think of that?

If you look at the margin over the past year, yes it has increased and it's really been driven by two items.

One is the reduction in our data royalty payments that we pay to third party vendors that had over 100 basis point affect to our operating margin.

That was the biggest item.

The next biggest item is really the reduction in what we pay for data question to third party vendors.

Those are probably the two biggest ones towards the effect of the increase in our operating margin.

So the royalty payments, is that because people are using more of your proprietary data?

Is that the way to understand it?

That's correct.

Clients are switching to our proprietary data from third party vendors.

Specifically that's FactSet Fundamentals.

And then I'll ask one more and jump back in the queue.

The US revenue declined sequentially and international grew.

Is that the maturity of the locations or is there anything else going on over there?

Any color you can provide?

I don't think there's anything of significance in those numbers, it's reflective of the overall tough environment.

All right, thanks a lot.

Thank you.

Our next question comes from Gregg Markowitz of Auriga.

You may ask your question.

Thank you, good morning, guys.

Either for Maurizio or for Peter.

Previously I believe you were targeting double digit employee growth in fiscal 2010 with most of the headcount add coming offshore which is what we saw this quarter.

But you're actually nearly at that number already following about 300 hires in Q1, so was just wondering if you had an updated headcount plan for fiscal 2010, could it grow 20% or possibly even a little bit more than that as you look to bulk up your proprietary content?

This is Philip Hadley.

I think, as you can see, as a business we're making a transition from getting a lot of our content via third parties to creating it more internally.

I think our plan is one where you can see that we've managed to grow our headcount substantially over the last year and a half but continue to keep margins and grow our business.

So I think as we look forward, we'll continue to invest very heavily in headcount both on and offshore to produce a more competitive product in the market.

Okay, great, that's helpful.

And I apologize in advance for perhaps having to ask a somewhat difficult question but in late September, we saw, I believe, the largest amount of insider selling in years so I was a bit surprised to see FactSet buyback about $20 million more stock than in the prior quarter.

So I was just wondering if you could perhaps help reconcile those two items.

Thanks.

This is Phil again.

I'll take that question.

I think there's several factors involved.

One, a big portion of those options were granted in[2000, 2001, so they're reaching the end of their life where we're at that point.

Second I think is just one where if you look over a long period of time, the average stock price is higher in that period for our employees and they hadn't seen a window of opportunity and took advantage of it.

But I think if you look at what the Company is doing at the corporate level, we certainly believe that investing in our stock is something that's valuable to our shareholders and you can see by the increase in our share buyback plan that we believe that's a good allocation of capital as well.

Great and then just finally, last quarter you had talked about the plans for flat operating margins over fiscal 2010.

Is that still what more or less you're targeting for the next year?

Flat operating margins has been the way we've always run the business.

If you practice through time it's gone up, it's gone down.

It's not something that's a mandate for us but a benchmark we use to guide ourselves is through our investment levels in our opportunity.

Fortunately as a business we've been able to find cost savings in areas and continue to invest.

As you can see with the growth in headcount, to be able to grow headcount that substantially would keep margins where they are and keep earnings expectations.

It's really just the beauty of the fact.

Great.

Thanks very much.

Thank you.

Our next question comes from David Lewis of JPMorgan.

You may ask your question.

Thank you, hi, guys, good morning.

I was wondering if you could just elaborate on how you're approaching selling proprietary content to non FactSet clients.

It's a more sizeable market.

And just what capacity do you have there to reach clients that aren't FactSet clients right now to sell Fundamentals, Estimates, et cetera.

Thank you.

I think you bring up an interesting point and it's certainly a growing area of our business, one that we were not able to participate in before since we were 100% an integrator of content as opposed to a producer of content.

And it's one where we have a team of people whose sole purpose is to work on selling FactSet content through what we call an off platform environment, in other words not necessarily directed to our interface.

It's an area where we believe there's great opportunity and one where we have very little share and a great deal of regular upside.

Phil, would you reach a point where you're growing the salesforce to try to target that more aggressively in a better environment?

It's an area where that particular salesforce is better organized and a growing portion of our salesforce and is specialized away from our traditional platform in their area of expertise in how the content is both delivered and who they're selling to as an end-user.

Okay, thanks.

And the last one is somewhat related for me is just is there a trend of selling more bundled proprietary content from your competitors that changes the dynamic of selling proprietary content or that puts any pressure on it?

I don't think anything is particularly different in the marketplace.

I think the marketplace is aligned differently now than it would have been five or ten years ago in that most of the major players have a house brand of content.

We're still unique in the marketplace in that we sell all of our competitors' content, as well.

Many of the large institutions choose to buy two or three flavors of a particular content set, Fundamentals and Estimates being a great example of that, just because there are nuances product by-product that they find important in their workplace.

Okay.

Thanks, guys.

Thank you.

Our last question comes from Peter Appert of Piper Jaffrey.

You may ask your question.

Thanks.

Can you please tell us what portion of the clients currently take the FactSet Fundamentals offering?

Peter, that's not a number we currently disclose.

Phil, in the context of your earlier comments about targeting stable margins, I was thinking that with the greater portion of content proprietary and the clear margin benefit we've seen from more proprietary content sales over the last year, wouldn't it be reasonable to think there could be some secular upside in margins as you continue to see this evolution in your offerings?

That would be the natural thing to believe that there is operating margin opportunities in content.

At the same time, you notice, Peter, and we've always chosen to invest in the future of our product so any margin benefit we get we tend to invest in new content and new applications to broaden our opportunities.

Okay, so not inclined to let the margin flow through?

No.

Okay, and then to a point Mike made earlier about the new FactSet as a way to drive client relationships, is it possible to give us some specifics or maybe case study on how the new FactSet actually drives revenues?

I think when you think of the new FactSet and you put it in the context of our history, it's really what we think of as traditional FactSet plus Marquee merged into one interface.

So this is the objective we had with Marquee is to be able to go after a much broader audience that we believe in the financial community.

As a historical research product, the portfolio manager and the research analyst, both buy and sell-side was our core client base.

Many times they were very data centric and needed a very deep level of information.

The lowest common denominator in the industry were the financial professional who needed a quote.

I'm not sure exactly what the number is but it's way over half a million feet of news and quotes out there in the industry, so our goal with Marquee was to be able to engage that user base.

We're very excited with our new interface to be able to merge heavy analytics, historical FactSet whether it be on the PA side or the quantitative product, with news and quotes because there are many users where they have you go to separate products to get that portion of the work load.

So the primary business objective is to be able to attack the marketplace and create the multiple hundred thousand seat opportunity for FactSet in the market.

So it's really about growing seat count.

It's not about growing revenue per seat?

Correct.

Okay, and that speaks to an earlier question, because Phil, I recall that perhaps in the last call or maybe a couple calls ago, you indicated there was at least some thought process involved in potentially repricing the product in the context of new FactSet and what I hear now is that's not really part of the strategy.

I'm not following the context exactly Peter of where you're coming from on that.

I think as a business, we're constantly analyzing the opportunities we have in the marketplace to properly price our product to match the value that we create.

So to that end, certainly if we were able to create substantially greater value for the clients, we would certainly explore that as an opportunity, but the real core driver is to be able to drive seats, and to drive seats and revenues per seat that's a huge positive as well.

Okay, great.

Thank you.

Thank you very much and we'll see you next quarter.

Thank you.

That concludes today's conference.

You may disconnect at this time.