Factset Research Systems Inc (FDS) 2011 Q1 法說會逐字稿

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Now I would like to turn the call over to your host, Ms.

Rachel Stern.

Ma'am, you may begin.

Thank you, operator.

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

Welcome to FactSet's first quarter 2011 earnings conference call.

Joining me today are Phil Hadley, Chairman and CEO; Peter Walsh, Chief Operating Officer; and Mike Frankenfield, Global Director of Sales.

This conference is being transcribed in real time 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 can be found in FactSet's filings with the SEC.

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

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

Annual subscription value, or ASV, is a key metric for FactSet.

Please recall that ASV is a snapshot view of client subscription and represents the forward-looking revenues for the next 12 months.

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 Peter Walsh, Chief Operating Officer.

Thank you, Rachel, and good morning, everyone.

Today we'll divide our time among three areas.

First, I'll review Q1 results.

Second, I'll give guidance for the upcoming second quarter of 2011.

Finally, we'll close by addressing your questions.

Before I cover Q1 results, please allow me to highlight one item.

During the quarter, a $1.4 million tax benefit was recorded from closure of prior year tax returns.

This benefit increased EPS by $0.03 per share.

Q1 2011 was a good first quarter for FactSet.

I'm pleased to say that our combination of high value applications, breadth of global content, and stellar client service drove ASV and EPS growth to double-digit levels for the first time since the financial crisis two years ago.

ASV grew this quarter by $10.9 million, and totaled $695 million at quarter end.

This performance is encouraging, since ASV decreased in the first quarter last year.

ASV is up $59 million over the last 12 months, an organic growth rate of 10%.

EPS was $0.85 this quarter, an increase of 15% year-over-year after excluding the $0.03 tax benefit I mentioned a moment ago.

Let's turn to free cash flow which is an important metric that we believe captures all the balance sheet and P&L movements.

We define free cash flow as cash generated from operations less capital spending.

During this past quarter, free cash flow generation was $14 million, and $186 million over the last 12 months.

Q1 free cash flow is typically the lowest quarterly output due to the payment of annual employee bonuses.

This outflow was $37 million during the quarter.

Free cash flow over the past 12 months exceeded net income during the same period by 19%.

We believe this relationship continues to demonstrate the high quality of our earnings.

Accounts receivable ticked up slightly this quarter.

DSO at quarter end was an industry low 33 days, down from 35 days a year ago.

It's the seventh consecutive quarter we achieved a year-over-year decline in DSO.

We continue to improve our collection processes and as a result maintain a very low DSO, demonstrating the efficiency of our collection team.

Please note that our receivables typically increase in Q2 due to a large number of annual invoices transmitted in January and February.

If this is consistent with prior years, you should expect an increase in total client receivables at the end of our second fiscal quarter.

We expect to issue annualized invoices totaling $15 million during Q2.

This quarter, CapEx was $8 million, up from $7 million a year ago.

During the quarter, we spent about $5 million on computer equipment including deploying 12 HP servers.

The rest funded office expansion globally in a variety of locations.

In particular, please note that we moved one of our fully redundant data centers from New Hampshire to New Jersey.

We opened that new state-of-the-art facility smoothly over the Thanksgiving Day holiday while our data center in Reston handled our entire client capacity.

At quarter end, our ending cash and marketable security balance was $202 million.

At the end of the first quarter, we had repurchased $26 million worth of FactSet stock.

At the end of Q1, $133 million remained in authorized under the repurchase program.

Through dividends and share repurchases we have returned $207 million to shareholders over the past 12 months.

Now moving to the P&L.

Revenues rose 12% to $173 million compared to the year-ago quarter.

Operating income was $59 million, up 10% compared to the same period in fiscal 2010.

Net income rose to $42 million in the first quarter, a 15% increase compared to the same period last year.

Now let's look at some of the drivers behind our ASV and revenue growth in more detail.

ASV grew organically by $10.9 million during the first quarter to a high of $695 million.

As in prior quarters, 82% of ASV was derived from buy-side clients and the remainder from sell-side firms, primarily M&A advisory and equity research firms.

In considering the geographic distribution, ASV from US operations was $474 million, and international operations accounted for $221 million.

As in prior quarters, international operations accounted for 32% of our total ASV.

Revenues in the US in the first quarter were $118 million.

Excluding an acquisition, the organic growth rate was 9% over the same period last year.

Non-US revenues rose by 10% to $55 million.

Q1 revenues from Europe and the Pacific Rim regions were $43 million and $12 million respectively with growth rates in each region of 10% year-over-year.

There are five primary factors propelling our revenue growth.

First, the cancellation rate of services by existing clients has moderated as the financial markets and the size of client workforces continue to stabilize.

Second, our portfolio analytic suite of products continues to be successful.

We have increased the number of PA Workstations sold, the number of clients using fixed income MPA, as well as the number of quantitative users taking advantage of our PA offering.

Axioma's Optimizer is now available in our Risk suite and our new application for Single Name Security Exposure analysis was recently released.

Third, we have been successful in the deployment of FactSet's proprietary content through our Workstation for our clients.

In particular, our FactSet Fundamentals and FactSet Estimates have been strong performers.

We have continued to invest in those and in other proprietary databases over the past few years and expect to see increases of client usage of FactSet Economics, CallStreet transcripts and ownership data, among others.

FactSet Fundamentals now delivers high quality standardized data typically within hours of a US company's public filing.

We continue to provide the best-of-breed data from our vendor partners including Dow Jones, Thomson Reuters, Standard & Poor's and Morningstar to name a few.

We provide the data that best suits our clients' particular needs, whether it's our own data or whether it comes from another source.

Fourth, we consistently grow the number of our clients and the workstations they use.

We gained 13 net new clients this quarter for a total of 2,123 clients.

Our client retention rate in terms of ASV is greater than 95% and we retain 90% of our clients, up from 87% a year ago.

User count also rose this quarter by 800 to 43,600 users in total.

Users increased at both investment management and global banking and brokerage clients.

User count has risen 17% over the last year.

Finally, we continue to expand our Company by adding to our ranks.

While people often show up as an expense rather than a driver of revenues, or ASV, we cannot ignore the contribution of our staff.

We have been investing in people, both off-shore and on-shore to collect content and to develop our applications to deliver it.

Our headcount stood at 4,400 at quarter end, up 36% over the same period last year.

Most of our new employees are involved in the deployment of our content but we also have seen expansion in our sales and consulting and product development staff, both in the US and overseas.

Let's look at the expense side now.

Operating expenses for the quarter were $114 million, up 10% organically year-over-year.

Operating margins were 34.3%, up 20 basis points from Q4.

Costs of services as a percentage of sales increased 30 basis points over last year.

The main driver was higher compensation expense from headcount growth in our own proprietary content operations.

The increased compensation expense was partially offset by lower variable data cost.

SG&A expense rose 20 basis points compared to last year.

The cause of the increase was more employee compensation from the Market Metrics acquisition and higher T&E.

Our T&E expense also grew from additional client visits and traveling to manage our employees around the world.

The first quarter's effective tax rate was 30.1%, consisting of 32.5% for the full year, partially offset by 2.4% of income tax benefits.

Income tax benefits of $1.4 million were recorded from closure of prior year tax returns.

Now let's turn to our guidance for the second quarter of fiscal 2011.

Revenues are expected to range between $174 million and $179 million.

EPS is expected to range between $0.85 and $0.87 per share.

If Congress reconciles the legislation to reinstate the R&D tax credit, it would add $0.02 per share to each end of the EPS range.

Capital expenditures for the full fiscal year 2011 net of landlord contributions are expected to range between $22 million and $28 million, the same as we expected last quarter.

Overall, the first quarter was a solid start to our fiscal year.

ASV and earnings per share grew 10% and 15% respectively, and our operations generated $186 million of free cash flow during the past four quarters.

Return on capital was 31% over the last year, slightly higher than our five-year average of 29%.

More importantly, our team has expanded enormously over the past two years as we've grown our headcount to help us capture what we believe is a significant forward-looking opportunity.

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

Thank you for your participation in today's call.

We are now ready for your questions.

Thank you.

(Operator Instructions) One moment for the first question, please.

And our first question today will come from Dave Lewis.

Your line is open, sir.

Thank you.

Good morning.

The first question is, international fund flows as well as hiring has exceeded the US fund flows and hiring here as well.

Does that impact how you're managing your business globally in terms of how you reposition your assets?

I think when we look at our market share in the United States versus the US and our revenue share, we see 32% of our revenue coming from outside of the United States and we believe that the market opportunity is 50/50.

So at this point, I think we're still over-allocating our resources outside of the United States and certainly adjusting it by market conditions worldwide.

There are certainly parts of the world that are stronger than others and we continue to allocate accordingly.

Okay.

Thanks, Phil.

And then can you guys provide an update on new FactSet and what the uptake has been there and I believe it's been tracking above expectations.

Has that continued?

If you could give us a sense for usage trends there?

This is Phil.

I think that at this point, more than the majority of our clients have upgraded to the new Workstation and I think the positive effect you're really seeing is translating into both ASV user count and new clients and we're very pleased with how it's doing and the response we're getting and the improvements we continue to make to the product.

That's great.

Thanks, Phil.

Last one from me and I'll hop off is the proprietary content, Peter cited that as a growth driver.

Could you just give us a sense for, I guess, question number one would be are you able to push through a price increase for that content at this point?

I believe it was discounted initially in the rollout.

And then question two would be is new FactSet accelerating the growth there, helping the accelerate the growth as a bundling strategy?

Thank you.

Dave, it's Mike Frankenfield.

At this point, we're not using price when it comes to content.

The content opportunity is very large.

Right now we're in the process of perfecting our offering.

The great thing about having our own content is that it allows us to engage at a deeper level with clients and to create new client relationships that we didn't previously have.

That's great.

Thanks, Mike.

And our next question comes from Shlomo Rosenbaum, your line is open.

Peter, just in terms of the headcount, as I look at the income statement and I look at it sequentially, looks like your cost of goods sold is up and that makes sense for adding people in terms of data gathering but the SG&A is relatively flat.

You talked a little bit about hiring for sales and marketing.

Is there something else that was kind of an offset to that in the quarter?

Hi, Shlomo, thanks for the question.

The way we really run FactSet is really looking at total operating expenses.

And our operating expenses went up 2.8% sequentially quarter-to-quarter.

The biggest driver of that is headcount and there's headcount growth in both cost of sales and SG&A.

Also during the quarter, we completed our annual compensation process, so compensation for FactSet represents 65% of our operating expenses.

So looking ahead, we have good visibility of what our largest expense is going to be in the very near term.

Certainly, as we look and calculated what our EPS guidance was for Q2, we have appropriately calibrated all the compensation changes that we've experienced over the recent quarter.

So when we think of it going forward, I believe you guys have talked about 33% to 35% operating margin on a regular basis.

I would have thought that as things start to heat up that your organic growth rate starts to accelerate, like what we're seeing now, that there would be more sales and marketing expenses going after that and I'm not really seeing that in your numbers.

Am I thinking about that the wrong way?

Shlomo, this is Phil.

I think the headcount for cost of goods and SG&A, I think our consulting costs, in other words, our new hires basically on the sales side of the organization actually shows up in compensation expense on the cost of service side.

So headcount growth there would drive that line.

As Peter said, it gets very gray as to whether that's really a cost of goods sold or whether that's really an SG&A expense.

I think we think of it both ways.

For GAAP accounting purposes, we break it out the way we've always broken it out.

But I think that's why you're seeing the growth in the cost of goods line, but thinking about it as really an SG&A expense.

Okay.

Thanks.

That's good color.

And then a week ago you guys rolled out the Single Name Security Exposure Analysis.

Is that something that's part of an existing suite or is this a separate product that you'll be able to charge for?

Hi, Shlomo, it's Peter.

Single Name Security Exposure Analysis is a separate application that we will charge for at the client level.

The charge will be based on the size of the client and what typically would range between $50,000 and $75,000 per year, per client.

We're really targeting the large clients who are existing users of the portfolio analytic suite of products.

Okay.

And you talked for a while about portfolio analysis -- analytics and fixed income, just keep talking about that it's growing well.

Can you give us any more, even qualitative commentary, is it exceeded expectations?

Every once in a while we talk about whether you guys will break it out.

It doesn't seem to be large enough for you guys to do that right now.

Can you give any more commentary on that?

I think if you think about the metrics we were giving before, and it's the reason we really stepped away from it, and Peter just highlighted it, is that we used to give away PA clients and PA seats which was really just one dimension into that product line, and what happened is there are so many products in that product line and the cross-selling opportunities that those two metrics no longer were the appropriate guidance.

If I think of the quarter and how we did, I would break it down this way.

Traditional PA was very strong in the way that somebody historically think of PA.

Our quantitative products were very strong.

Fixed income and PA was strong.

The product that Peter just mentioned is brand new and is yet to influence the product or the PA suite revenue line at this point.

Okay.

Thanks a lot, guys.

And our next question comes from Robert Riggs.

Your line is open.

Hi, thanks for taking my question.

As you look at the competitive landscape, is there any changes going on that is making you or forcing you to consider either speeding up or changing where you're making your investments or is it pretty much just kind of steady as it goes, investing in proprietary content, things like that?

Hi, Robert.

It's Mike Frankenfield.

We operate in a very competitive industry, clients with very rigorous demands and we feel it's important that we constantly invest in our product and continue to release new features to meet our client needs and to stay ahead of our competitors.

I think that there have been no major changes in the landscape.

I think that's the environment that we recognize, that we operate in, and we continue to work hard to stay ahead of our competitors.

Great.

Thanks.

And then just one quick housekeeping question for Peter.

In terms of the tax rate going forward, 32.5% sound about right?

Yes, I think that that's the best rate to use going forward is the rate that we quoted for the full fiscal year in the first quarter, which was 32.5%.

Great.

Thank you.

And our next question comes from John Neff.

Your line is open.

Hi, guys.

Thanks for taking the question.

A couple things here.

This is a small point, but the sequential increase in other income, any change in what you're doing with your cash in terms of where it's invested?

I think cash balance went up 3% sequentially, but your other income, up about 75%.

Yes, hi, John, it's Peter.

That increase is just a factor of low numbers.

Our cash is still invested in the most conservative asset class possible which is yielding on average about 20 basis points per year currently.

Okay.

And then last one, this is one I can always look for the Q but if you have it handy, curious what the FX impact on the operating margin was in the quarter, net of hedging?

Thank you.

Yes, FX impact was flat in the quarter.

As we reported in previous quarters, we've hedged out our year euro and our pound exposure several quarters ago and that's really the cause for it being flat.

Thank you.

And our next question comes from Peter Appert.

Your line is open.

Peter, do you have the quarter ending headcount number and any color on how that number might progress over the next several quarters?

Yes, the quarter ending headcount number was 4,400.

If I was looking ahead, it's probably pretty consistent with how we've done it in the past 12 months, meaning that we've been growing our sales and support headcount and our product development headcount a little faster than our ASV growth rate and our proprietary content collection has accelerated beyond that.

And we can see that -- we think that trend will continue during at least this fiscal year.

At some point does the -- for the proprietary content side at least, will the headcount stabilize?

I think so, yes.

But not this year, obviously.

Correct.

Okay.

The pricing, can you remind me when in the year you do your annual review of the pricing dynamic?

I think you did 3% last year.

Can you give us any guidance on how you're thinking about this year?

Peter, we'll do a price increase that will affect the US market and it should yield between $7 million and $8 million in the second quarter.

What would that compare with what you did last year?

Fairly comparable.

Okay.

And then, Mike, in your discussion with the competitive dynamics, I was hoping you might just expand a little bit on what's going on with [Capi2] in particular, since they seem to be emulating some of the moves you guys are making in terms of greater ownership of proprietary content.

Do you hear more of them in the marketplace?

You come up against them more frequently now?

Really don't see a big change there.

They made great progress early in their existence in the IV space.

We recognize the challenge that they pose to us and made some aggressive moves in our product enhancements and we feel like we compete very, very effectively with them at this point.

Okay.

And how often does pricing get to be the deciding factor in terms of [bake] costs?

Peter, it's Phil.

I think that certainly when you look at where we were last year, it's amazing to me, it's been a year already.

Last year's quarter was 2.4 negative, and that we're 10.9 positive.

Just shows you how the world has changed.

When you're in the environment where we're under that much pressure from our clients, pricing is almost everything.

I think everybody comes to you with, I need my bill to come down, and the value component of anybody's product in the marketplace is almost completely dismissed.

I would say the pendulum has really swung back to what I would classify as a normal marketplace where if you can demonstrate value and the ability to change or enhance somebody's work flow, you're able to monetize that.

We're very fortunate in that we have a very diverse product line and our ability to monetize it, you always hear us talking about the PA in that particular product line but we're also very strong in company analysis, the news in quotes, and continue to expand our opportunities in all of those work flows with the new interface.

You couple that with the fact that we also have the ability to monetize a great deal of the content we produced, though we're still very young in that space.

And of all that headcount we put on in the last two years, I really feel like probably half of that headcount really hasn't reached full productivity as to what we can do in the product in the marketplace.

So I'm really excited about what our future opportunities are and when I really look at how the competitive landscape lines up, really the way I keep score is do I think I'm growing faster than the marketplace?

And when I look at us growing at 10% at this point relative to what I think and know of my peers in the marketplace, I feel very comfortable that we're gaining share in the marketplace inside of our clients.

For us it's really just stick to our knitting, sell more clients, sell more users, and create product and sell more product to each one of those users.

Yes, that's very helpful.

Thanks, Phil.

One follow-up.

In terms of your comment on sort of, I guess, seeing less pressure on pricing this year versus a year ago, would you say that's true on both the buy- and sell-side or would you distinguish?

No, I would say on both buy- and sell-side.

Great.

Thank you.

(Operator Instructions) And there's another question from Shlomo Rosenbaum.

Your line is open.

Hi, thanks for taking some follow-ups from me.

Just two other questions.

Are you getting a sense that the clients in general are hiring more now or do you feel like you're just primarily gaining share within the client base?

Hey, Shlomo, it's Mike.

On the investment management side of the business, I would say there's some modest hiring and there's definitely been hiring amongst the large investment banks.

They have returned to good-sized [classes].

So modest hiring is definitely going on in the industry.

Okay.

And then can you talk a little bit about the improvements in FactSet Fundamentals since you guys began supporting it totally on your own this year?

Hi, Shlomo, it's Peter.

Fundamentals is a terrific area for us because we have so much experience with fundamental data.

We've been working on it literally since FactSet's been around, for the last 20 years, the last 25 years in terms of fundamental data.

Specifically to FactSet Fundamentals, we've done a number of improvements including expanding the universe of companies that we cover and that's been on a global basis.

We have improved the timeliness in which our data is rendered and we continue to work on automating more of the collection process to FactSet Fundamentals.

So overall, when we look at where we stand with Fundamentals, almost two and-a-half years later since the acquisition, we're extremely pleased and excited as to where it stands.

But there is still a tremendous opportunity to sell Fundamentals not only among our existing client base, but also to all new clients and users who Mike's team is actively pursuing in the normal course of business.

Thanks a lot, guys.

And at this time there are no further questions in queue.

Thank you very much, everyone.

Thank you very much.

And thank you for participating in today's conference call.

You may all disconnect at this time.