Factset Research Systems Inc (FDS) 2011 Q3 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

(Operator Instructions)

I would like to introduce your host for today, Ms.

Rachel Stern, Senior Vice President, General Counsel of FactSet Research Systems.

Ma'am, you may begin.

Thank you, operator.

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

Welcome to FactSet's third-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 review Q3 results.

Second, I will give guidance for the upcoming fourth quarter of 2011.

Finally, we will end with Q&A.

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

Q3 was another strong quarter for FactSet.

The organic growth rate of ASV accelerated to 12%, up 5% from a year ago.

We believe that our continued growth at healthy levels highlights the stability of our subscription business model and the improving health of a global client base.

We continue to combine our analytic applications, best-of-breed global content, and industry-leading client service to foster growth and the expansion of our business.

This quarter ASV grew by $17 million organically to reach $741 million at May 31.

Our 12% organic growth rate was derived from success across our product suite and in all geographic locations.

Non-GAAP EPS rose to $0.92 this quarter, up 18% from a year ago.

Last year's third quarter included a $0.03 per share income tax benefit from expiration of the statutory limitations over previously filed tax years.

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

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

In Q3, free cash flow generation was $57 million, and $177 million over the last 12 months.

Q3 free cash flows exceeded net income by 32%, which we believe illustrates the high quality of our earnings.

Free cash flow drivers included growth in net income, partially offset by midyear compensation payments, the timing of tax payments, and higher CapEx.

During Q3 accounts receivable declined by $3 million sequentially compared to the second quarter.

Our DSOs were 33 days at quarter end, flat from a year ago but down from 36 days in Q2.

CapEx was $7.4 million during Q3, up from $4.6 million a year ago.

During Q3 we spent $5 million on computer equipment and the remainder on office expansion.

At the end of Q3 our cash and marketable securities balance was $209 million.

During the quarter, we repurchased approximately 550,000 shares of FactSet stock worth $58 million.

Yesterday, FactSet's Board of Directors approved adding $200 million to our existing share repurchase program.

Including the expansion, $226 million remains authorized for future share repurchases.

During Q3 our regular quarterly dividend was increased by 17% to $0.27 per share, and dividends paid were $11 million.

Aggregating dividends with share repurchases, we returned $215 million to shareholders over the past 12 months.

Let's now turn to the P&L.

FactSet's revenues rose to $183.6 million, up 15% compared to the year-ago quarter.

Operating income rose to $62 million, up 11% compared to last year.

Non-GAAP net income rose by 17% compared to the year-ago period to $43 million.

ASV grew organically by $17 million during the quarter to $741 million.

As is typical for us, buy-side clients accounted for 82% of that ASV, and the remainder came from sell-side affirms, primarily M&A advisory and equity research firms.

ASV from US operations was $507 million, and international operations accounted for $234 million.

International operations accounted for 32% of our total ASV.

Q3 US revenues expanded to $126 million, up 16% year over year.

The organic growth rate for the US was 12%.

Over the last year, non-US revenues also rose by 12% to $58 million.

Q3 revenues from Europe and the Asia-Pacific region were $45 million and $13 million, respectively, with growth rates in each region of 10% and 16%, respectively, year over year.

Let's look at some of the reasons driving our ASV growth.

Consistent with previous quarters, we experienced growth in all our geographies and across many products.

Next, we have seen an uptick in client retention.

Our annual retention rate improved to 92% of clients at May 31, as compared to 89% a year ago.

This improvement suggests that despite concerns about the global economy our clients are using and purchasing FactSet services as they continue to derive value from them.

Last quarter we were concerned, along with our clients, about the impact of the natural disasters and their aftermath in Japan, coupled with unrest in the Middle East.

While those regions continue to work through the events of the last three months, our clients have been conducting business as usual and using FactSet services to do it.

Our PA suite of products registered its best quarterly performance of the fiscal year.

Subscriptions to PA2, SPAR, Portfolio Publisher, and Fixed Income in PA were all contributors.

We continue to focus our efforts on increasing the number of FactSet workstations.

This quarter we saw an increase of 800 users for a total workstation count of 45,600, a 13% increase year-over-year.

We added 26 net new clients this quarter for a total client count of 2,187 by the end of the quarter.

Adding clients and workstations begins the cycle of getting clients to use our products so that we can continue to show them value-added applications and content in future periods.

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

Operating expenses for the quarter were $122 million, up 16% from the same quarter a year ago.

Operating margins were 33.7%.

Cost of services as a percentage of revenues increased 190 basis points over last year.

The increased percentage is mostly due to higher compensation expense.

We have continued with our standard of new classes of consultants and engineers around the world as we grow.

We also continue to build out our content operations in Hyderabad and Manila and keep compensation there competitive year-round.

Lower fixed and variable data costs slightly offset the increased compensation expense this quarter.

SG&A expense as a percentage of revenues declined 70 basis points compared to the same period last year due to favorable currency movements, partially offset by higher T&E.

As we have previously discussed, we hedged the majority of euro and pound sterling currency exposure for Q3 in calendar 2010, which resulted in lower SG&A expense in the current quarter.

T&E expense grew in Q3 as we visited more clients and prospects and phased higher air fares and hotel fees.

In addition, we held an internal sales conference as well as large-scale client conferences in both the US and Europe.

We continue to hire more employees both in our content operations as well as in other groups, including engineering and sales and consulting around the world.

Our total headcount rose to 4,805 at the end of the quarter, up 32% compared to the same period a year ago.

We added 37 net new employees during the quarter.

Similar to last quarter when we were named Fortune's 100 Best Companies to Work For, this quarter we are recognized in the United Kingdom as a Great Place to Work.

This accolade is a repeat performance for us, as we make our third consecutive appearance on this list.

We believe that FactSet offers our employees a great place to work and to progress in their careers as we grow the Company.

The effective tax rate for Q3 was 30.1% compared to 30.7% last year.

This slight decline in the tax rate was a result of updating our estimates based on fiscal 2010's tax return which was filed in Q3.

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

Revenues are expected to range between $187 million and $191 million.

EPS is expected to be between $0.93 and $0.95 per share.

We expect capital expenditures for the full 2011 fiscal year, net of landlord contributions, to range between $24 million and $30 million.

Our projected annual effective tax rate is 31%.

In conclusion, we delivered a strong third quarter.

As with our last quarter and compared to the period a year ago, all our metrics were positive for ASV, revenues, EPS, client and workstation count, and employee growth.

Q3 adds to a string of successful quarters.

Our organic growth rate increase to 12%, and EPS is tracking slightly better than revenues.

Over the years, regardless of the market cycle, FactSet's relative financial performance has been strong.

In terms of clients, we service just a third of the potential buy- and sell-side firms around the world, and our installed user base represents less than 10% of the global investment professionals.

We have enormous opportunity ahead, and we believe we have the right people, resources, and strategy to build deeper client relationships with the best financial firms all over the globe.

Thank you for your participation in today's call.

We are now ready for your questions.

(Operator Instructions) Peter Appert.

Thanks.

Peter, I was hoping you could help me better understand the dynamic around compensation expense growth.

You have obviously staffed up pretty aggressively over last bunch of years.

I guess the real question is -- when do you see some operating leverage out of the staff changes, or the staff additions, rather; and in particular, I guess the shift in mix to more overseas folks?

Thanks, Peter.

As you know, we are running FactSet for the long term, and that is really to have flat margins.

So we are not anticipating operating leverage in the foreseeable future from our aggressive hiring and headcount.

Over the last three years our headcount has grown by more than 30% on average.

A large majority of that has been in our collection operations.

We have been accelerating our headcount in terms of client-facing employees and our product development groups, more in line with our revenue growth.

And net-net, I think we are proud of the investment for three reasons.

One is our ASV growth has accelerated over the last year by 7%.

Our EPS growth continues to improve, rising by 17% this quarter.

And more importantly, our investment headcount we think is unique in our industry and enhances our competitive position, looking ahead in the marketplace.

Okay.

So we shouldn't necessarily assume that the rate of headcount growth slows going forward in the context of having built out the staff to drive the data business?

I think our rate of headcount growth in terms of our content operations will likely moderate, looking ahead, because we have reached critical mass there.

We will continue to follow our historical trend of hiring client-facing and product development employees consistent with our top-line growth.

Got it.

Okay.

So no leverage associated with the maturation of the data collection part of the business?

That's correct.

Okay, and one other thing, Peter.

You have addressed in past quarters competitive dynamic.

I was just hoping you could bring us up to date again on what you are seeing in terms of client response to the new FactSet offerings and just more broadly what you are seeing from a competitive standpoint in the marketplace.

Hi, Peter.

It's Mike Frankenfield.

I think our competitive position has improved steadily over this past year.

It is really driven by many of the enhancements we have put into our product.

You alluded to the new FactSet interface, the new FactSet; it is extremely well received by clients.

But there have been many other additions which have led to the improved retention that Peter alluded to.

The fact now that it has a robust set of its own data content enables us to offer alternatives to clients.

And our advanced analytics suites in the PA area, with portfolio analytics as well as fixed income, continue to solve unique problems for clients that really cannot easily be done by any of our competitors.

So we are continuing to extend the competitive mode wherever possible with those application products.

You guys definitely seem like you are kicking derriere from a competitive standpoint.

Do you see any competitive responses in terms of more aggressive pricing actions?

Peter, it's Phil.

Pricing in the marketplace relative to where we were in the cycle where the clients were making decisions solely based on price is really back to a value proposition.

As we continue with our investment in headcount, as you see in content as well as on the applications and sales and [closing] fronts, continue to deliver more value to the client.

We are certainly able to monetize that in many different ways.

Some of it is expanding our footprint set of clients; we are certainly making advances in fixed income areas inside of firms, certainly making advances in the trading space.

And all of those are really just product and focus of content and efforts in particular workflows for our clients, to continue to expand our footprint.

Great.

Thank you.

Peter Heckmann.

Good morning, everyone.

Comments on -- looking for a question on Market Metrics, the acquisition that was made about a year ago.

As it converts into the organic growth rate, do you anticipate that being additive or dilutive to the growth rate?

I guess my assumption is that business was close to breakeven when you acquired it.

Have you made strides on improving profitability there?

I mean it has been FactSet's history every time we have had an acquisition that we always talk about our organic growth rate.

So revenues of that business on the ASV basis were $16 million a year ago; so as the next quarter comes through, that $16 million will become our real growth rate because of the year-over-year comparisons.

As far as the progress and how it fits into our business, it won't be a product line that we break out and give specific metrics -- no pundit intended -- on, for.

But in our color each quarter, as it contributes or as any other product contributes, you will hear bits and pieces as to what it is doing.

It is a great business.

We are very pleased with it, and we are pleased with the team and that progress we are making in the marketplace.

Okay, and a follow-up to that.

How does the M&A pipeline look?

You continue to buy a fair amount of stock here.

I guess my impression, based on some of the other companies that I am following, is that there do appear to be acquisitions that are priced at a level that is at a discount to where your stock currently is.

Things in the 10 to 14 times EBITDA range.

Are you just not seeing anything that is strategically interesting for your business?

I think it really points to the position that we feel we are in.

And that is -- we are really not missing any big pieces to our business.

So for an acquisition, for us to fit into what we need in the marketplace it really has to be an attractive acquisition.

We are just not in the business of acquiring revenue for the business of acquiring revenue, even if mathematically it comes out accretive Day One.

It is a great deal of work and a huge distraction, and we really feel like our organic opportunities are very pure.

So it takes a pretty high hurdle for us to make an acquisition.

Okay.

I appreciate it.

Chris Kennedy.

Yes, thanks for taking my question.

Can you give any type of update on fundamentals?

You have historically targeted a $100 million revenue opportunity.

I know you don't disclose the number; but can you just talk about how that process is going?

Thank you.

I guess I can give you some metrics.

Certainly inside of FactSet it is not something that we are going to break out revenue -- and in fact probably we couldn't if we had to.

We would have to come up with some mathematical formula to basically attribute to revenues to it in many cases.

I think if I were going to describe it, it is certainly the most widely used fundamental database on the system.

But along with four other fundamental databases on the system, many of our large clients subscribe to multiple fundamental databases for different workflows.

The funds will use one workflow; the active managers will use a different database in their workflow.

I think from where we sit and what it is to FactSet, it is a very important database and it has been a -- fundamentally changed our competitive position in the marketplace.

So I think it ultimately translates into new client growth and new client opportunity for us as well.

Great.

Thank you.

Shlomo Rosenbaum.

Hi, thank you very much for taking my questions.

I want to ask, is there any material change you guys are seeing in the operating environment in the quarter?

Are you seeing any tick up in new firm creation or headcount at your base of buy-side clients?

Hi, Shlomo; it's Mike Frankenfield.

I would characterize the macro environment as solid and steady as she goes.

There is a steady flow of net firm creation at the low end, which means that there are constantly new firms being created.

But I would also say that the rate of firm failure has somewhat moderated; it's slower than it has been in previous quarters.

Then on the large end, I would say our large clients haven't had a lot of visibility in their operating models and are continuing to make investment decisions and work on improving their investment processes, which is great for us.

Okay.

So you are seeing just a steady improvement in the potential numbers of clients that you guys can go after, you are seeing, on the low end.

And then on the high end more comfort, so they are willing to spend more.

Is that accurate?

I think that is a fair characterization, yes.

Okay.

Then just going back to some of the headcount growth, you guys have grown dramatically over the last few years; and then on a sequential basis the last quarter only added net 37 people.

Is there -- Peter, you talked a little bit about reaching critical mass in his India.

Is there anything else that we should be thinking about?

Is there anything seasonally we should be looking at?

Because I would have just expected a little bit more growth based on the revenue growth trajectory that you guys are on.

Thanks, Shlomo.

I think there is something seasonally if you look back.

Excluding our content operations, I think historically our third quarter has probably been the slowest overall quarter for headcount for the sales and product development groups.

Certainly looking ahead in Q4 we have our busiest training schedule organized for new college hires in both of those departments.

And as I mentioned, I think our goal is to consistently hire client-facing and product development employees, along with our top-line growth rate.

I would agree with Peter, Shlomo.

Seasonal would be the way to characterize it.

Okay.

If you are thinking about the fundamental team, they are busy doing their annual updates; they don't have time to ingest new people at that point, so that is a huge group of people who are in that workflow.

Then if you look at our traditional hire, our training rooms will explode in the next three months as we bring on new employees around the world.

Okay.

Has the switch -- have you guys switched over to more of -- historic for the last couple years it has been the data-gathering kind of people in India.

Have you really done a flip now to more of the client-facing hiring?

No, I think if you -- we have actually hired net head count into each of our major groups every single year even through this cycle.

So '09, '10, and '11 sales and consulting was positive; product and engineering was positive; and obviously content was positive.

So from a net headcount basis, we have continued to add headcount all the way through that.

As Peter said, our business model really is one of -- certainly there is some lag effect on occasion, but to try and match our ASV model.

Because of the product we deliver, there is definitely a relationship between having sales and consulting employees per dollar of revenue per client proceed, just making sure that we match those to be able to maintain our level of service with our clients.

Okay, great.

Well, thank you very much for taking my questions.

Dave Lewis.

Thank you.

Good morning, guys.

A quick question for Mike I think.

Mike, can you give us a sense for the headcount adds, asset managers say three years ago and where that stands today?

I mean clearly FactSet is taking market share and has been able to sell -- increase the value in what they sell into these companies.

But can you just give us a sense for where headcount was three years ago versus where it is today?

Thanks.

The way I think about that is the addressable headcount that FactSet can focus on now is much, much greater than it was three years ago, because of the improvements, new product development that we have released in our product.

Never before -- if you wind the clock back three years ago, I would never have imagined that FactSet could ever be on a trader's desktop, for example.

And now that is a market that we are regularly going after.

Fixed income has opened up whole new departments for us in all of these firms.

Our RealTime offering in new FactSet has allowed us to continue to expand.

So I don't have any hard metrics on how headcount has changed over the last three years, but I do know our addressable universe has increased substantially.

That's great.

Thanks, Mike.

Just one quick follow-up for me on fundamentals.

I think last time, Phil, you cited that you are selling fundamentals to half your clients now.

Could you just maybe provide a little more detail on the levers to boost revenue growth there?

If it is to half your clients, is it selling it to bigger clients or deeper penetration within the existing clients?

Or is it potentially a price lift to make it more or closer to some of the legacy products that are there?

Or I guess maybe selling it to non-existing clients?

Thank you.

I think from a business perspective the metric I look at -- and it is really just truly a metric of our client health -- is just the sheer usage of our product in various categories, whether applications or in the content space.

So we internally could spend a lot of time on transfer pricing, trying to figure out exactly how to monetize each piece and each user information.

We don't actually spend that much time on it.

In fact, very little time on it; and really use our instincts and know that positive trends in those metrics will point us toward more investment in those products.

So on specifically the fundamentals, the metric trends for the number of users in our system that use our fundamentals, it is the majority of the users in our system at this point.

In some of those cases they are directly monetized because it is a large client and they chose to add that on to their subscription.

In a smaller client it may just be part of the package we sold into that client and it is the only fundamental product in that system.

So it can come in a variety of different forms.

But the real metric for us is its broad usage in the system.

And certainly the goal is to continue the broad usage and make it used in many different areas in our system and more of our clients' workflows.

Thank you.

(Operator Instructions)

It doesn't look like there are any more questions.

There are no questions at this time.

This concludes today's conference call.

You may disconnect at this time.

Thank you.

Thank you.