Factset Research Systems Inc (FDS) 2011 Q2 法說會逐字稿

Welcome, and thank you for standing by.

All participants will be in listen-only until the formal question-and-answer session.

(Operator Instructions).

I would now like to introduce your host, Ms.

Rachel Stern, Senior Vice President, Strategic Resources and General Counsel.

Please begin.

Thank you operator.

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

Welcome to FactSet's second-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 call 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 financial measures.

The non-GAAP measures we will discuss 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 subscriptions and represents our 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 would like to turn the discussion over now to Peter Walsh, Chief Operating Officer.

Thank you, Rachel, and good morning, everyone.

Here is how I plan to spend our time today.

First, I will discuss a few unique items.

Second, I will review Q2 results.

Third, I will give guidance for the upcoming third quarter of 2011.

Finally, we will close by addressing your questions.

As the events of the weekend following the earthquakes and tsunamis on Friday have unfolded, we send our thoughts to our FactSet colleagues, our business partners and clients in Japan.

FactSet has a strong office in Japan with sales and engineering staff.

We know that we will be working hard to get back to business as usual as soon as possible, but in the interim, we are interested in their well-being and safety and that of their families.

To answer any questions in advance, even though our Japanese operations are important to us, we believe that the natural disasters there will not have a material impact on FactSet's performance in the coming quarter.

ASV from Japan represents approximately 2% of our total ASV.

We have considered the impact of any reduction in business in Japan in crafting our guidance, which we have given in our press release issued earlier this morning and which I will repeat later in this call.

To proceed, as you know, in December, Congress renewed and retroactively reinstated the federal R&D tax credit to January 1, 2010.

The effect of this reinstatement increased Q2 EPS by $0.10 per share.

In addition, during the quarter, a charge of $0.04 per share was recorded related to performance-based stock options when it became probable that more of them would vest due to our accelerating ASV and EPS growth rates.

Together, these items produce a net benefit of $0.06 per share in the quarter.

Now let's turn to the quarter's results.

FactSet had another solid quarter.

We again experienced double-digit growth rates in both EPS and ASV.

Our standard formula of broad global content through powerful applications accompanied by excellent customer service to win new client and maintain existing ones drove our results.

ASV grew this quarter by $27.9 million and was $723 million at quarter-end.

The 11% organic growth rate underscores that Q2 is typically a strong quarter due to an annual price increase and because many clients have budget flexibility to purchase new services after the new year begins.

Diluted EPS rose this quarter to $0.95 per share, up 27% year-over-year.

If you exclude the $0.06 net benefit I mentioned at the beginning of the call, non-GAAP EPS would have been $0.89, up 19%.

The last page of our earnings release issued earlier this morning provides additional useful detail on this area.

Now I would like to turn to free cash flow, which we believe is an important metric to capture balance sheet and P&L movements.

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

In Q2, free cash flow generation was $43 million, up 1% over the prior-year period, and $186 million over the last 12 months.

Our 25% growth in net income was partially offset by a reduction in working capital and higher CapEx during the quarter.

Working capital decreased by $9 million compared to a year ago, primarily due to the timing of tax payments.

CapEx was $7 million in the quarter, up from $2 million a year ago.

In Q2, we spent 80% of our CapEx on computer equipment and the remainder on office expansions.

As a side note, we are pleased to announce that we opened an office in Dubai to service our clients in the Middle East and African regions.

Our ending cash and marketable security balance at the end of Q2 was $203 million.

We repurchased $49 million worth of FactSet stock during the quarter.

At the end of Q2, $84 million remained authorized under our share repurchase program.

We also paid dividends of $10.6 million, and combined with share repurchases, we returned $60 million to shareholders in the second quarter and $202 million over the past 12 months.

In addition, Accounts Receivable only increased $2 million over the last 12 months, while ASV is up $72 million over the same period.

DSO was 36 days at quarter-end, down from 39 days a year ago.

Let's take a look now at the P&L.

Global revenues rose to $178 million, an increase of 13% compared to the year-ago quarter.

Our operating income at $58 million was up 7% compared to last year in the same period.

Net income rose to $45 million in Q2, a 25% increase compared to a year ago.

ASV grew organically by $27.9 million during the second quarter to $723 million.

Buy-side clients accounted for 82% of that ASV, and the remainder from sell side firms, primarily M&A advisory and equity research firms.

ASV from US operations was $496 million and ASV from international operations was $227 million.

Non-US operations account for 31% of our total ASV.

US revenues in the second quarter were $122 million, up 14% from the year-ago period.

Organic revenues in the US grew 10%.

Non-US revenues rose by 11% to $56 million.

Q2 revenues from Europe and the Asia-Pacific regions were $44 million and $12 million, respectively, with growth rates in each region of 11% and 13%, respectively, year-over-year.

I would like to take a moment to review some of the forces behind our ASV and revenue growth.

There are five major contributors to our revenue growth this quarter, and many of them will not seem new to you at all.

First, we experienced broad-based growth across our geographies and products.

Our US IM business posted strong results, and the ASV change from our global banking clients was the highest since 2007.

Second, client cancellations have again trended downward, signaling to us that our client base is becoming more stable after the downturn.

Even so, like many other companies linked to the financial markets, we feel the hiccups when there is unrest in the Middle East, doubt about the stability of certain European economies and uncertainty following natural disasters, like the earthquakes and tsunamis in Japan in the Asia-Pacific region at the end of last week.

Third, we continue to focus on the basics of our business to grow revenues.

Equity portfolio analysis, SPAR, fixed-income [NPA] and quantitative tools have been among the many value-added applications that our clients desire and that have expanded ASV this quarter.

We've also seen the number of PA workstations expand as clients take advantage of these offerings.

Fourth, we've been focused on increasing our client and workstation count.

This quarter, we had 38 net new clients, bringing our client count to 2161.

This is our fifth consecutive quarter of net new client gains following the financial downturn.

Our net user count also rose this quarter by 1200 users to 44,800 in total, up 16% year-over-year.

Finally, FactSet issued its annual price increase during the second quarter for the past few years.

This price increase impacts the majority of our US investment management business and a small portion of our US global banking and brokerage business.

This year, the price increase accounted for $9 million of Q2's ASV growth compared to $7.7 million last year.

Let's take a look on the expense side now.

Operating expenses for the quarter were $119.5 million, up 16% from the same quarter a year ago.

Excluding the $2.5 million charge for performance-based stock options, non-GAAP operating margins were a healthy 34.1%.

Cost of services as a percentage of revenues increased 150 basis points over last year.

This increase was partly due to higher compensation expense as we continue to expand our proprietary content operations offshore and hire new classes of consultants onshore as well.

In addition, stock-based compensation expense rose as it became probable that a larger number of performance-based stock options would vest.

The increased compensation expense was partially offset by lower fixed and variable data costs.

SG&A expense as a percentage of revenues rose 40 basis points compared to the same period last year.

Higher option expense this year and compensation expense related to Market Metrics employees was not included last year prior to the acquisition in June.

Fee (inaudible) expense grew in Q2 as well from more client visits, compounded by higher airfare and hotel fees.

Our employer ranks continued to expand.

Total employee count rose by 309 heads in Q2, raising our total number to over 4700, up 39% from a year ago.

We added employees in all areas throughout the world, including our content operations, product development and consulting groups.

We believe that we offer excellent opportunities to our employees, and we are delighted to be named again this year to Fortune's 100 Best Companies to Work For.

We recognize that it is our employees who make us a great company and we thank them for their ongoing efforts.

The effective tax rate for Q2 was 22.3% compared to 33.9% last year.

Please recall that during the quarter we benefited from the reinstatement of the federal R&D tax credit to the amount of $4.9 million.

Without this reenactment, our effective tax rate for the second quarter would have been 30.7%.

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

Revenues are expected to range between $181 million and $184 million.

EPS is expected to range between $0.90 and $0.92 per share.

Our guidance for capital expenditures for the full fiscal year of 2011, net of landlord contributions, remains at $22 million to $28 million.

Our projected recurring annual effective tax rate is 31%.

In summary, we had a solid second quarter, aided by our standard price increase.

More importantly, all our metrics were again positive for ASV, revenues, EPS, client and workstation count and employee growth.

We are pleased to have finished a solid quarter, but we have our sights fixed on work that remains ahead of us.

We continue to pursue our long-term goals of providing the best data, applications and service to a blue-chip client base.

Thank you for your participation in today's call.

We are now ready for your questions.

(Operator Instructions) Dave Lewis, JPMC.

Good morning, guys.

It's JPMorgan.

Quick question on the new FactSet.

I believe last time you guys described it, it was -- the majority of new FactSet had been rolled out to new clients.

I was curious if a price increase for that workstation is a possibility in the coming year or two, given that there hasn't been a price increase for that workstation in I think 10 years, and there has been a number of enhancements to it.

Yes, as we mentioned last quarter, it is actually something we are not even tracking internally at this point.

We are down to the point where we have a few clients who have rollout policies that prevent it from happening, except on a semiannual or even sometimes on a biannual basis.

As far as the value of our workstation and what we think of as pricing in the marketplace, we are constantly looking at the product mix between pricing incrementally for features and content on the base product versus putting that value in the workstation and moving it out.

At this point in time, we haven't made any decisions in that area, but it is certainly something we consider.

Thanks, Phil.

And then I was wondering if you could comment on the -- when headcount in supporting fundamentals will slow down.

Is that a fiscal 2012 event, where we could see headcount tail off?

And is the headcount there -- is it supporting content other than fundamentals?

Thanks for the question.

Just to reiterate, our headcount is up 39% over the past 12 months.

And we are on pace to make 2011 the third consecutive year of our headcount growth being at least 25%, and most of it relates to our operations to collect content offshore.

And it is not just fundamental content.

It is a variety of different content that is consumed through our product.

Maybe comparing 2011 to the previous two years, there is a slight change in the source of growth, in that our onshore employee growth rate is approaching double digits, and it really represents a renewed investment in sales and consulting and all product development areas for us.

Thanks, Peter.

Do you think it will slow somewhat in fiscal 2012, the offshore, or is it too early to tell?

Our rate of investment is always correlated in headcount to our rate of growth.

So we will keep calibrating what our best investment levels are based on what ASV brings in the coming quarters.

Thanks, Peter.

Peter Heckmann, Avondale Partners.

Good morning, everyone.

A couple questions here.

On the acquisition of Market Metrics, can you give an update on that and how you feel the integration is going there?

By my estimates, it contributed maybe about $4 million, $4.5 million in the quarter.

Just give us an idea of how that is being integrated and how you feel about the acquisition going forward.

[I think] if you were going to characterize it in very general terms, we are very pleased with the acquisition.

We picked up a very strong team of people, with a very strong focus in the marketplace on the products they serve.

As far as the integration goes, it is very tightly integrated with FactSet and the team, both on the technology side as well as in sales and marketing.

Breaking out revenue, we gave you the revenue in the beginning as to its impact.

But as [typical affects it], we really start to talk about things in total terms of revenue, and we will discuss it when we feel it is a driver in the business.

But based on its size, that may not happen that often.

But we definitely are very pleased with the acquisition.

Okay, that's helpful.

And then as regards -- when we look at proprietary content, does the Company have an interest currently in expanding what some would call a news platform or more interpretive content, rather than just collection and an averaging of content -- of estimates?

Our content collection operations are pretty extensive at this point, collecting all types of content.

We've been in the content collection business now for more than 10 years, and as you can see from our headcount, we continue to invest heavily in it.

How much we invest in the future really is based on what we feel the opportunity is.

Certainly in the news category right now, we have a very strong partnership with Dow Jones and they do a great job for us on the news front.

So we allocate our investment to other areas where we feel we can have a higher return.

So we take things on a quarter-by-quarter, year-by-year bases and allocate our resources accordingly.

Okay, I appreciate it.

[Chris Kennedy], Oppenheimer.

Thanks for taking the question.

Any update on the competitive landscape?

One of your larger peers has been talking about challenges within the investment management business, and just curious if you are seeing incremental opportunities or just help us think about that.

It's Mike Frankenfield.

As Peter explained in his introduction and as you saw in the press release, all of our operating metrics were very positive this quarter.

They continue to accelerate.

And I think we still mentioned last quarter, one of the things that we are seeing is that the marketplace is returning to more of a normal state, where clients are really interested in the value that FactSet delivers; they are not making purchase decisions based solely on price.

In that environment, we continue to execute well.

We see great growth in our analytics products, in user count, client count.

And so really across all metrics, we feel we are doing well and probably gaining share.

Okay, great.

And then just a quick one on the cancellations coming down.

Can you give us some perspective on where they are relative to history or relative to normal?

Again, relative to history, I would say they are trending towards more of a normal rate.

I think during the economic crisis, we saw an increase in the number of client cancellations.

The most price-sensitive clients evaluated their need for the service.

At this point, as I said, we feel the market is returning to more of a normal state and that cancellations have returned accordingly.

Okay, great.

Thanks a lot.

(Operator Instructions) Shlomo Rosenbaum, Stifel Nicolaus.

A couple questions.

Just longer-term, are you seeing new firm creation within your clients?

And in general, are you seeing your clients hire more?

Just trying to see where the trajectory is going right now.

In terms of firm creation and user growth, on the margin, there is definitely an increase in the number of firms that are being created on both the banking and the money management side.

Yet, it is a business that is hard to enter.

There is a lot of competition in the business, and we also continue to see a certain amount of business failure.

One area where we definitely think there is growth in terms of headcount would be in the global banking and brokerage sector.

There are healthy levels of M&A and IPO activity.

This obviously leads to a need to have more analysts, more headcount, which is good for demand generation for our product.

Okay.

And when you think about the growth and what you've experienced over the last few quarters, is it primarily existing growth on targeted accounts, or, let's say, the user -- is it from existing clients primarily, or out of the 1200, are you getting a decent bulk out of new clients?

Most new clients, when they sign up for the service, come on at a rate that is lower than the average price of the existing clients.

So typically, new clients are not the largest drivers of ASV generation.

But having said that, we are seeing healthy growth in all metrics, whether it is coming from users, from new clients or more products within existing clients.

Maybe I can add a little color to that, Shlomo.

I think it's been true for a long time that since we have such a broad workflow solution with our clients, you typically find an opportunity or a pocket of opportunity in the new clients and you sell the product to that solution.

After we have made that beachhead inside of the client, then you get the opportunity to move the workflow to other parts of the firm and other product lines within FactSet.

So the lifecycle of a client starts out as the new client revenue that adds to FactSet, which really isn't that material as to our total.

But after a year -- I guess in most terms, you would call it same-store sales -- but I would say our clients have a healthy growth pattern, easily for the first five years.

And as we continue to innovate and grow our product, we have clients that -- our goal is to grow all our clients all the time on a same-store sales basis.

So I feel like if you are looking at our opportunity, it is really about creating that new relationship that gives us the future opportunity inside of a client.

So of the 1200 users you added, is it fair to say that the bulk of them were from existing clients that you further penetrated?

Or have you had any material, hey, we had a bunch of wins and we brought in a bunch of -- primarily from the new clients?

The quick answer is most clients sign up with a few workstations to start with, so you can take our net new clients and kind of do some simple math.

Certainly there are times where we find a bigger client with an opportunity day one.

But even a large potential relationship typically still starts out small on the first day of subscription.

And honestly, that's a better relationship for us, because they feel good about the value they create.

We are able to demonstrate that what they've paid for and what they've purchased is of greater value than they are paying for it.

And then it will allow us to continue to build the relationship and grow through the firm.

It would be a really difficult situation for both sides to buy all of FactSet, everything we have to sell on all the workstations for the entire firm and change all their work flows at the same time.

So it is really the ideal situation for both sides.

Okay.

And then, Peter, gross margin was down from a lot of hiring.

How should we think about this just in terms of trends of the business?

Are you expecting that they will generate more revenue on kind of the existing kind of levels over there of headcount, and therefore we should see gross margins start to trend back up?

Or is it -- kind of the trend we should see is lower gross margins and then operating margin kind of staying the same as you leverage it on that area?

Shlomo, thanks for the question.

Obviously, the way we operate at FactSet is at the total operating margin line.

So we are constantly running the business to have -- to achieve flat operating margins.

And where -- it is benign to us as to whether a cost of service here actually may go or down; we will just offset it with the other one.

Okay, and then tax rate.

The 31% tax rate, is that for the full fiscal year or should we think about that for the next quarter?

You should think about it in terms of the future quarters going forward.

Each of the future quarters going forward?

Yes.

Okay.

So 31% for fiscal year 3Q, and then 31% again for fiscal year 4Q.

That's the right way?

Right.

Okay.

And last one.

The low end of your revenue guidance basically implies ASV divided by four.

Is there any reason why you guys shouldn't improve on that as the quarter goes on, as your renewal rates are going up and your sales are gaining more traction?

I think it is one where we certainly give a range that we feel kind of encompasses -- I mean, it is a really honest range, that we feel that all the scenarios, disaster and positive, that is the set of potential outcomes that could exist.

You do point out the fact that even if we have a great quarter on a subscription model, since you are only booking 1/12 of it each month, that the opportunity for us to have a blowout quarter that is substantially greater than the range or one that is even less than the range is pretty difficult for us to have happen.

So it is really our honest belief of these are the potential scenarios, from disaster to exceptional.

Okay, great.

Thank you very much.

Robert Riggs, William Blair.

Thanks for taking my question.

Just one final question on the proprietary content.

When you are going and selling that to your clients, how are you really differentiating yourself or what is really resonating with those clients?

And is there any difference by kind of the different product offering, called it fundamentals versus economics?

Thanks.

Hey, Robert.

It's Mike.

On the surface, many of the databases do seem very, very similar.

But there are small differences that we try to introduce into each database to improve their competitiveness.

Examples of that would be offering data on a more timely basis, or perhaps offering more coverage, more companies, or offering unique geographies.

In certain cases, we offer unique data items that are difficult or impossible to get.

And finally, we have our own unique methodologies to collect data.

So all of these things are subtle differences that to the average person are difficult to understand, but our clients find significant value in these differences, and because of that they view our products well.

Our focus is to always sell the best solution for our clients.

Our salespeople and consultants certainly know the product very, very well and what our clients' needs are.

Certainly -- obviously, the bias would be to sell FactSet content if you had the choice.

But in the end, you have to listen to what the client's needs are and make sure you sell to that solution, because that will deliver the highest value for FactSet and ultimately the client.

Great.

Thank you.

Peter Heckmann, Avondale Partners.

Just a couple follow-ups.

Remind me -- when you typically see a stabilization in the securities industry, do you see domestic consultant attrition rise?

And is that typically -- are you seeing that now?

Is that something that you are struggling with, or is that something that is just normal course of business?

I presume you're talking about consultants within FactSet.

Correct.

We are certainly subject to all of the economic activity that is happening out there.

It's a competitive market for labor, and certainly we've put our employees out into the marketplace.

They add a lot of value and they are in our clients every day, and it is not uncommon for our employees to sometimes leave FactSet and pursue career opportunities within our client.

Having said that, we work really hard on retention, and we find that to date, we are doing a good job staying ahead of our plan in terms of retaining our valuable consultants.

Okay, okay.

And then one of the things that I'm having a hard time -- and probably it is just a little bit of my worldview on the equities side -- but on fixed income, where is FactSet making progress?

What would be the areas, applications, that you would point to as specifically having real success in gaining share on the fixed income side amongst the buy side?

You can think about our fixed income offering a couple different ways.

First, we are taking more and more fixed income data and integrating it into our standard platform, the yield curves, terms and condition data.

And really what that does is it just makes our core offering that much broader in its appeal.

The second way to think about it is taking information and integrating it into our portfolio analytics suite.

The goal there is to help managers who are managing assets beyond just pure equities, be it balance manager, someone like that.

And then we have a standalone analytics product that continues to get used in the structured client space.

Okay.

And who would you consider to be your primary competitors in fixed income?

There is a long laundry list of competitors in the fixed income space.

Certainly, the largest suppliers in the industry are -- all have strong fixed income product offerings.

There as well.

Okay.

All right.

Thank you very much.

Peter Appert, Piper Jaffray.

Thanks.

I was hoping you could help me understand a little bit better the demand dynamics.

My understanding is in the last few years, client consolidation on fewer market data providers has been an important factor in helping drive unit demand for you guys.

Is that still a key part of the equation, or are customers actually just spending more now?

The answer probably is both, Peter.

If you think about FactSet and its workflow as it has evolved over the last 10 years, clearly, we are a much more integrated solution than we were before.

[Using quotes] are a big part of our platform.

That's a workflow that we didn't really address.

Having our own content certainly creates more value or more integration on FactSet.

And then just the breadth of the product and the solutions we provide [from] the client.

That said, lots of other players in the industry have been doing the same thing.

So when you really get out there and fight for your opportunity, it is really about whether you can deliver a higher value for a particular workflow than someone else.

In some cases, it is a zero-sum game, where we win and somebody else has to lose, because the budget doesn't allow us to coexist.

In many of the larger firms, it is really just to demonstrate your value on an incremental basis and you are in.

Some of our largest clients have all of the players in the industry's products to varying degrees.

And it is really about moving eyeballs to your product so that you are in a stronger position for the future.

On that, Phil, what is the feedback you hear from clients in terms of the functionality that they would like to see from FactSet that you are not currently providing?

We have an [RNPD] database, which is our internal database to track product enhancements.

And it is thousands, if not tens of thousands, of ideas to go in our product.

But (inaudible), it is one of the biggest challenges we have in the business, and that is making sure you prioritize the next best idea as your next investment.

For us, I think the theme really is focus on what we do, what we've already been doing.

There are lots of new things we could do; we certainly get lots of ideas to go into markets and adjacencies that we are not in.

But at this point, I think it is really about take the FactSet product as it exists today and continue to really enhance the functionality and the content that we have that our clients use every day.

Phil, could you or Mike speak specifically to the evolution -- you addressed this a bit earlier -- with the offering from the [ICON] product or CapIQ, in terms of some of the enhancements that they've made, and particularly CapIQ, which seems to emulate pretty much all the things you guys do, whether you are seeing more of them, hearing more from them from a competitive standpoint?

I think if you certainly look at our core metrics, clients, use and ASV, of which ASV is always the most important, I feel very comfortable that we are gaining share in the marketplace.

We certainly have a scoreboard internally that we keep against all the players in the space, just because it is the way to find out whether you are winning or losing and whether you need to change your resource allocation to adjust accordingly.

But I think at this point, I feel very comfortable that we are gaining share in the marketplace.

Okay.

I think the data would support that view for sure.

And then last thing.

Phil, can you give us a sense of how penetrated FactSet Fundamentals is at this point?

I ask this in the context of just trying to understand how big the revenue opportunity for that might still be.

I don't know if I have any particular color that is going to be useful.

I think we gave metrics up to the point where it became truly integrated in FactSet.

I think it is definitely a very broadly-used product within our system.

It's certainly the largest fundamental database used in our system.

But we still are very big suppliers of S&P's products and Thomson Reuters' products to our largest clients.

And it is in our mutual interest, because the incremental opportunity in those major clients, they basically have bought it all from all of us already, so it is really just about focusing on functionality and making sure that us as business partners and sometimes competitors are delivering the best solution we can for those clients.

Okay.

But more than half of the clients are using FactSet Fundamentals, I guess is the [message].

Yes, but I would also add, Peter -- this is Mike -- that over half of our clients are using another provider of fundamentals.

It's not uncommon, particularly in the largest firms, for clients to consume multiple versions of a fundamental database.

Thank you.

Currently at this time, there are no further questions.

That does conclude the conference call for today.

Thank you for joining.

Please disconnect all remaining lines at this time.