Factset Research Systems Inc (FDS) 2012 Q1 法說會逐字稿

Welcome and thank you for standing by.

All participants will be in a listen-only mode until the question-and-answer session of today's conference call.

(Operator Instructions).

I would like to introduce your host for today's call, Rachel Stern, Senior Vice President, Strategic Resources and General Counsel.

You may begin.

Thank you, operator.

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

Welcome to FactSet's first-quarter 2012 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 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, we'll talk about two housekeeping items.

Second, we will review our first-quarter results.

Third, I will provide guidance for the second quarter.

Finally, we will end with Q&A.

For housekeeping, please note we expect the US Federal R&D tax credit to expire on December 31, 2011.

While the R&D tax credit has been in place for 30 years, accounting rules mandate that it can't be factored into your effective tax rate unless it is part of currently enacted tax laws.

Accordingly, EPS and non-GAAP EPS include a $0.02 reduction for both Q1 and future quarters.

In addition, to be more consistent with information provided by other public companies, we added to our regular quarterly process by defining and breaking out non-GAAP EPS.

While investors could manually assemble the same information, we wanted to make it easier and more straightforward because we believe the information is relevant when valuing companies.

Before we dive into details of the first quarter, it is valuable to cover current market conditions and why FactSet can be very successful in the near term.

Volatility in the financial markets did interrupt short-term buying patterns from our clients, dampening our ASV growth this quarter.

Sell-side clients were quick to react, as they always do, tightening up user deployment.

Our share in buy-side clients did expand and was in line with previous quarters.

Our Q2 guidance implies more ASV growth is ahead.

Our clients are well-organized and efficient at managing their vendor spend, much better than a few years ago.

This is a positive for three reasons.

One, clients' unexamined spending is at an all-time low.

Clients who worked at inefficiencies in '08 and '09 have not overspent since then.

Two, improved management and more careful spending means clients can be quicker to react in both directions, adding services more quickly when the market conditions are less volatile.

Three, we often benefit in periods of consolidation.

FactSet is tiny to the market leaders in our industry.

We offer clients cost savings relative to these leaders and the best productline among them to manage portfolios and risks.

Simply put, we do not have to rely on a growing market to prosper.

Now let's turn to our first-quarter results.

ASV was $782 million at November 30, 2011, up 12.5% year-over-year.

ASV advanced $3.5 million during the first quarter.

We exceeded quarterly EPS guidance after factoring out the expiration of the R&D tax credit.

Free cash flow, which is defined as cash generated from operations, less capital spending, was $49 million during the first quarter, more than triple the same period last year.

Higher levels of net income and client payments contributed to free cash flow.

Over the last 12 months, our free cash flow grew 14%.

Free cash flow was also 21% higher than net income, which we believe illustrates the high quality of our earnings.

Accounts receivable declined by $10 million compared to the end of the fourth quarter.

Our DSOs were an industry-leading and record low 30 days at quarter-end compared to 33 days a year ago.

As of November 30, our cash and investment balance was $208 million, up $26 million from Q4 2011.

During the first quarter, CapEx expenditures were $6 million and $15 million was spent on share repurchases.

At quarter-end, $128 million remains authorized for future share repurchases.

During the first quarter, we paid a regular quarterly dividend of $0.27 per share for a total of $12 million.

Aggregating dividends with share repurchases, we returned $251 million to shareholders over the past 12 months.

Let's now turn to the P&L.

FactSet's revenues rose 13% compared to the year-ago quarter to $196 million.

Operating income for the first quarter rose to $67 million.

Net income grew to $46 million compared to $42 million in the same quarter last year.

Non-GAAP net income rose to $51 million, up 15% compared to the year-ago period and non-GAAP EPS rose 18% to $1.10.

Our US operations accounted for $533 million of ASV.

International operations were responsible for $249 million in ASV or 32% of the total.

US revenues grew in Q1 to $134 million, up 14% from the same quarter a year ago.

Non-US revenues rose 13% to $60 million (sic - see Press Release).

Revenues from Europe and the Asia-Pacific regions in Q1 were $48 million and $40 million respectively with growth rates in each region of 11% and 17% respectively year-over-year.

Let's look at some of the factors behind our performance this quarter.

We continued to experience strong growth in ASV from our portfolio analytics suite of products.

ASV from this product suite during the last three months was higher than Q1 last year.

We have seen a nice increase in the number of PA workstations and strong demand for SPAR in our portfolio publishing productline.

FactSet's proprietary content has been a solid contributor to our total ASV.

Our content technical solutions team continues to work hard and has been successful in licensing our own databases and in particular FactSet Fundamentals and FactSet Estimates.

We have invested aggressively in FactSet Fundamentals and Estimates and now have leading databases that are relevant to a large user community.

The improved market position is also important because they, like all FactSet content, is available in feed form to large clients and third parties for redistribution.

Our user count declined to 46,900 at the end of Q1, a decrease of 1200 users.

This reduction was related to large sell-side firms.

A few other key performance metrics are relevant.

Our client count increased to a total of 2271, up 34 net new clients in Q1.

This increase is more than the 13 clients we added in the first quarter of last year and is illustrative of the opportunity to sell into more buy-side firms.

Consistent with last year, annual client retention was greater than 95% of ASV.

In terms of the number of clients, our retention rate rose to 92% versus 90% a year ago.

These statistics tell us that our recent and substantial product investments are paying off and increasing engagement levels among clients.

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

Operating expenses for the quarter were $130 million, up 14% from the same quarter a year ago.

Operating margins were 34% compared to 33.6% in Q4 of fiscal 2011 and 34.3% in Q1 last year.

Cost of services as a percentage of revenues increased 155 basis points over last year.

This increase was the result of higher compensation expense associated with new hires and an uptick in variable data costs from growing the client base, partially offset by the full deprecation of older generation of VMS mainframe machines.

SG&A expense as a percentage of revenues decreased 65 basis points compared to the same period last year due to lower interoffice travel and a reduction in our advertising costs in the current quarter, partially offset by higher office costs from a growing employee base.

This quarter, our headcount rose modestly by 199 employees to 5450 at quarter-end with the large majority of new employees allocated to our content operations.

The effective tax rate for Q1 was 32.1% as compared to 30.1% a year ago.

The expiration of the R&D tax credit increased the annual and first-quarter effective tax rate by 1.3%.

Now let's turn to our guidance for the second quarter of fiscal 2012.

Revenues are expected to range between $197 million and $200 million, which represents year-over-year growth of 11% and 13% at each end of the range.

Operating margins are expected to range between 33.7% and 34.2%.

GAAP diluted EPS should range between $0.99 and $1.01.

Non-GAAP diluted EPS should range between $1.10 and $1.12, which represents year-over-year growth of 12% and 14% at each end of the range.

Both GAAP diluted EPS and non-GAAP diluted EPS include a $0.02 reduction to reflect the expiration of the US Federal R&D credit on December 31.

To sum it up, we are not completely immune to volatility in the global financial markets.

Few are these days.

Nevertheless, our business model is built to operate successfully in all market conditions.

We have been investing aggressively in our product.

Our ASV metrics provide us the necessary visibility to manage our expense base.

We generate far more cash than we need and our balance sheet is very healthy.

Most importantly, we believe that our forward opportunity is more than 10 times our current size.

FactSet doesn't require a growing market to be successful and our employees remain focused on increasing our marketshare.

Thank you for your participation in today's call.

We are now ready for your questions.

(Operator Instructions).

Peter Appert, Piper Jaffray.

Thanks.

Good morning.

So, Peter, I was hoping you could give me some added color on the impact of the growth in the proprietary data business on the overall operations.

So the growth in FactSet Fundamentals and Estimates, does that create added visibility around revenues because perhaps there is less seatcount reliance and how does that impact the profitability of the business?

Thank you.

Hey, Peter.

It's Mike Frankenfield.

I'll speak to the revenue opportunity.

FactSet's proprietary content gives us a couple of unique opportunities.

It gives our clients more choice within the FactSet workstation.

As you know, we supply content from several third-party providers and now we are pleased to be able to offer our own offering in that space.

And I think clients appreciate that choice.

The second big opportunity content gives us is the ability to sell the content directly to clients in a feed form.

Many of our clients have back-office or middle-office applications that are hungry for data and we think there is a big opportunity out there to supply our data in feed form to those clients.

How big a business is that for you currently, Mike?

How big do you think it could be?

Peter, it's Phil.

It is hard to decompose our revenues because we have always been in the business of supplying software and content.

It's just historically the content was really not built directly by us or even produced directly by us, so it is hard to measure.

To answer the first part of the question you asked before on the profitability, it is definitely one of those where the bigger we get, the more scale we have.

I would definitely characterize our content operations as profitable, but, as you can tell by our headcount growth, we continue to invest heavily in it and when you invest in something new, obviously, it doesn't have a revenue stream or value associated with it, so it takes time for it to get scale.

But the mature products, like Fundamentals, Estimates and ownership, M&A, all the ones that have been (inaudible) for a while, deliver a substantial amount of the value of the FactSet service.

So, Phil, you've historically said that driving margin expansion is not one of the key goals.

I would think that, as the proprietary data business grows as a percent of revenues, that would potentially have significant implications for profitability and margin leverage.

Is that fair or not?

There is always opportunity for us to drive margins.

This is a spectacular business and we can certainly stop investing in our future.

I think the big challenge with that in a business like this is that most of the products that you produce or the value you are producing probably has a five-year cycle and you need to invest to make sure that you have growth opportunities five years from now.

So I think it would be a mistake for us to stop investing in content and stop investing in our applications.

So we use the flat margins really as a discipline to measure whether we should be investing more or less and it's kind of a line in the sand.

But as you can see through time, our margins go up and go down on a quarterly basis.

We are not perfect at it, but I think we feel very comfortable that the current level of profitability is the right level of profitability for the business and would rather see investments so that we could drive organic growth.

Okay, and one last thing then I will shut up.

The competitive dynamics, Phil, a lot of noise in the marketplace with Thomson and Cap IQ seemingly getting ever more aggressive from a pricing perspective.

Can you share with us your color on that?

Yes, well, there is always noise in the marketplace.

I can't really speak to what is taking place inside the other firms.

But certainly at the competitor level, inside the client, the competitive dynamics in the marketplace did not shift quarter-to-quarter.

It probably shifts ever so slightly year-to-year.

It is just because it takes time to convert people's workflows.

We feel very good about our current competitive position.

And I have spent a great deal of time monitoring anytime we gain revenue in a client and why, anytime we lose revenue in a client and why, and decomposing what the competitive dynamic is.

And I guess the quick summary is that it just doesn't change that quickly, but we feel good about our current position.

Thanks, Phil.

Peter Heckmann, Avondale Partners.

Good morning, everyone.

I had a question as regard accelerated stock compensation costs in the quarter.

You looked -- the difference between reported and now your new non-GAAP adds back all stock compensation, but was there some accelerated stock comp in the quarter that was based on the increased estimates of hitting a set of targets?

Hi, Peter.

Thank you for the questions.

It's Peter Walsh.

Just to remind everyone, in the fourth -- in the previous quarter, the fourth quarter of 2011, we had a one-time charge of $5.4 million related to increasing the performance of our performance-based stock options.

The total stock comp in that quarter was $10.4 million.

If you backed out that charge on a recurring basis, it was $5 million.

Comparing it to this quarter, it was -- our stock-based comp increased by $900,000 sequentially.

And that primarily relates to the increased performance levels achieved in the last fiscal year.

Okay, so there was -- I guess if I am looking at it on an apples-to-apples basis, on an operating margin basis, because we have excluded kind of these step-ups in achievement of performance-based options, would I -- I am estimating -- and the reason why I am stuttering here a little bit is that FactSet is reporting actually your non-GAAP number is $1.02, but your press release says $1.10, and so I am wondering if there is -- like you have some amount that really is a nonrecurring number.

We backed out all stock option expense in the non-GAAP number, which includes option expense related to both regular options and performance options and the non-GAAP number is $1.10.

Okay, can you reconcile, though, the number that FactSet is reporting of actual of $1.02?

Did somebody add back the R&D?

I would use our press release is what we actually reported, Peter, and I would be happy to reconcile anything you are seeing afterwards.

Okay, okay.

Let me just move on to a second question.

You saw a sequential decline in users of 1200.

Do you feel that was all based on headcount reductions or in some cases were people moving let's say associates to a lower-cost solution and away from the FactSet platform?

Hey, Peter.

It's Mike.

Our sell-side firms, all the firms, buy-side and sell-side, are very cautious these days and they are all scrutinizing their user populations and rightsizing their populations based on how to proceed in the market.

There are significant cuts going on in the sell-side right now.

Most of those cuts do not affect our user base, but some of the cuts do affect our user base.

And I think the reduction you are seeing is primarily limited to the sell-side and mostly a reflection of the fact that headcount has come down a little bit during the quarter.

Okay.

Thanks for the feedback.

Shlomo Rosenbaum, Stifel Nicolaus.

Hi, thank you very much for taking my questions, everybody.

I just want to circle back to the competitive environment.

I appreciate the comments that you have given, Phil.

I just want to focus again on that, just with some of the dislocation with the competitors out there, there has been some talk about them trying to stem marketshare losses by potentially bundling more software together in terms of protecting their base.

And I was wondering if you are seeing any of that going on in terms of competitive situations.

Hey, Shlomo, it's Mike.

I think, as Phil stated, our competitive landscape really hasn't changed that much and it is slow to evolve.

We foresee that the landscape is very competitive, and what we really focus on is executing on our product, executing on our sales strategy.

Clients certainly are going to alter their price strategy and bundle if they think they have got a competitive situation where price may help them, but we believe that, for the market we serve, our clients are interested in buying the best product.

So that is really what we focus on is executing, delivering the best product possible and we believe the evidence is showing that, versus our largest competitors, we continue to take share.

So is that a yes, they are doing it, but it is not working, or we have seen no change in the behavior of our competitors over the last couple quarters?

We have seen lots of bundling, lots of price change -- lots of price configuration changes happening for as long as we have been in the business.

I think it is a pretty standard practice for competitors as they perceive they have an advantage or are losing an advantage to alter their pricing in response to their comparative [advantage].

So there is no change in that aspect of it as of the last few quarters?

Nothing material, no.

Okay.

That is what I wanted to get to.

Then, just, Peter, what tax rate should we assume for the next quarter?

I think the best assumption is to use first quarter's tax rate going forward, which was 32.1%.

Okay, and then how do you differentiate between short-term buying patterns of the customers versus longer-term patterns?

Do you differentiate that with sell-side versus buy-side?

Do you differentiate that with intra-quarter changes, maybe something picked up towards the end of the quarter?

How should we think of that?

Just as far as the way a quarter breaks out, if you are just taking this quarter, I think that you would take what happened in August where you had massive market volatility in two weeks.

We are certainly correlated to the market.

You have a buy-side mentality and you have a sell-side mentality.

They both react differently.

I would say the buy-side gets cautious.

They don't roll up the tent and go home.

The sell-side can change very quickly to we are in cost-cutting mode and the market data vendor procurement person gets a great deal of power and exerts it immediately.

That is just the mentality of the firms.

I would say just from a characterization, I think the buy-side just kind of waits to find out what happens with the year and our first quarter is kind of an odd buying period for our clients and it always has been from a cyclicality perspective.

We are an August year-end, so our clients hire a lot in the summer and our salesforce is driving for the fourth quarter.

You get into the first quarter, your September, October and November, it is not really year-end decisions.

In a normal healthy environment, people are kind of generally kind of buying stuff or stuff that just kind of slid, just falls in that quarter.

Otherwise, in an environment like this, you can see that people start to slide decisions to the year-end and, hey, wait and see where is this market going to end up.

Are we going to fix what is happening in Europe?

From a business perspective, our strategy really is the same in an up and a down market.

We feel really good about where we are headed in the marketplace.

I felt very good about our client adds this quarter.

It tells me that we are gaining share of the client add side of the business.

The sell-side, my ability to predict the next 12 months of sell-side revenue for us, I wouldn't want to bet a penny on it as far as what happens on a forward 12 months.

The buy-side of the business actually did pretty well this quarter, pretty darn similar to what it did last year.

So even in a tough environment, we did pretty well.

You can see by our headcount, we are investing a great deal in headcount and that is really just confidence in the fact that we have got great ideas and believe we can convert it into product.

And then if you look at everything else we did this quarter, the financial metrics, whether it is the DSOs, the free cash flow, it is just a great business that we are in.

I am not trying to take away anything from that.

I am just trying to understand the comments in the press release that volatility in the financial markets interrupted short-term buying patterns from clients.

Short term, is that defined by the sell-side versus long term defined by the buy-side?

Yes, I think the short term is they got cautious; the long term is that we have got a large salesforce worldwide that is very engaged with our client base and all of the products and things that we are -- solutions we are providing for our clients are all very active and our clients are excited about the product we are producing for them.

Okay.

And I will leave you with one last question.

You guys have said you are comfortable with the current state of profitability, which you think is a fair, long-term state of profitability.

What do you think is a fair, long-term state of growth for the Company?

I've said now for decades I have been in the business that my goal is to double this business.

Internally we talk about doubling this business and it is the way we look at everything we do, and that is making sure we put the pieces in place to make sure that happens.

And in Mike's world, it is make sure I have the salesforce in place to make sure I can sell that much product.

In Peter's world, it is about building the product and making sure that we are delivering that kind of value to the marketplace.

We are in a business that the biggest two players add up to $15 billion in opportunity.

So the market has got to be close to $20 billion out there and we are not even a $1 billion yet.

So I look at it and think if we just keep executing, the opportunity for us to deliver business is right in front of us if we just keep marching ahead.

Okay, well, thank you very much.

Dave Lewis, JPMorgan Chase.

Hi, guys.

Good morning.

Thanks.

I wanted to ask a quick question on the trading solution that was recently rolled out.

This question might be for Mike.

Mike, the last time you sized it as -- the opportunity is much larger than the current business, but I was just curious if you could provide an example of what the breakout between trading -- what the trading [personnel] at an average buy-side [loan-only] equity client would be versus your existing users that you sell into.

So is it 1.5 to 1 or is it 1 to 1 or how many buy-side traders do you have in your average loan-only equity client?

If you could frame it in that type of terms, please.

Well, the average number of traders at a buy-side firm is going to be anywhere from just a couple to maybe 20.

It's going to vary significantly based on the size of the firm.

We are in the very, very early stages.

We have a compelling product with some unique functionality out there in the marketplace, and it appears that we are gaining some good traction with -- amongst our buy-side clients.

And it is a great collaborative process of how so many of FactSet products get developed through collaborating with our clients to understand their workflow challenges and then design our solutions to enhance their workflow.

All right.

Thanks, Mike.

And then -- sorry to belabor the competitive questions, but I just want to ask you about -- Bloomberg rolled out a portfolio risk analytics solution and I know that -- I think the PA suite has been around since -- a long time, 1997 or in that range.

So if you could just comment on FactSet's strongest competitive advantages versus that product, whether it is primarily the consolidation capabilities, (inaudible) applications, etc., I think that would be helpful.

Our PA suite is, as you just mentioned, is a suite of products.

It doesn't focus on just attribution or just risk.

It's -- we consider it to be the premier product in the marketplace, and it has got incredibly deep functionality that is capable of meeting the needs of the most sophisticated user, yet it can also be set up in a way to meet the needs of very, very casual users.

So we feel like we address a broad spectrum of needs within our asset management client, and as I said earlier, our clients are interested in buying the best product.

When we are looking at markets that are volatile and uncertain, having the best measures of performance, having the best measures of risk I think are what are appealing to our clients.

Thanks a lot, Mike.

I would take it one step further in that it is definitely one of those products that has been in the press now for three years, but it is invisible in the marketplace at this point.

We have found one client that was promised a great deal and it didn't work for them and they moved to our product, but other than that, it is one that I carefully watch the marketplace to understand where our competitive risk is, and we feel very much -- we feel that we definitely have the complete solution for our clients at this point and that product is not there to meet the client workflow that we currently provide.

Thanks, Phil.

John Neff, Akre Capital Management.

Hi, thank you very much.

Two questions.

First, Peter, I think you mentioned unexamined spending is at an all-time low among your clients.

I was just wondering how you get your handle -- how you get a handle on that, how you gauge that?

And, two, I just wanted to ask you about Europe, about 24% of revenue, just trying to get any more color on some of the market dynamics you are seeing there.

Perhaps what the buy-side/ sell-side mix is in Europe.

Any other color you could provide.

Thanks very much.

Hi, John.

In terms of unexamined spending, that is just a judgment call on my part and just from anecdotes from the salesforce and how they described their experience with clients.

I do think generally all clients, including buy-side clients, have learned from '08 and '09 and have more tools and are more careful about their spending in general.

I think that is really what that point is about.

And, John, it's Mike Frankenfield.

Regarding the international environment, we see volatility and different performance in different regions not only in Europe, but across the globe.

Some of our Asian markets, our Middle Eastern markets are performing extremely well.

There is softness in certain areas of Europe, yet other areas of other countries in Europe are performing very well.

No doubt that on the continent, there is a certain degree of cautiousness.

But, again, we are small in that area relative to the potential addressable universe and we continue to chip away.

Thanks very much.

Robert Riggs, William Blair.

Good morning.

Thanks for taking my question.

Since you remain committed to adding headcount, primarily on the content side, but also some on the client-facing personnel as well, I was just hoping you could comment on the productivity trends you are seeing in terms of new hires and maybe how much room you have for improvement there going forward and what might those key drivers be.

It's kind of an interesting question.

I guess I would -- I would certainly decompose it this way.

When we hire somebody new into FactSet, and it really doesn't matter what area you are hiring them into, I think we probably at least have a period of six months of investment in every employee that we make before we get a reasonable return on our investment.

And that is probably true in content, engineering and the client-facing employees.

And then from that point on, it is certainly one of mutual benefit.

Their careers are off to the races and the value they produce for FactSet is growing every day.

Okay, and that ramp time, it sounds like it has been pretty consistent over the last several quarters?

Yes, yes.

I think it obviously really depends on the workflow and what group you are in.

In content, it might be quicker on some applications depending on how complex the content to collect is and slower in others.

Great, and then you guys haven't been too acquisitive of a company, but just given this lingering period of market volatility, could you just comment on the acquisition pipeline?

Are there some things that are emerging maybe a little more attractive these days?

I think we see a very active M&A opportunity pipeline.

I think we probably see three, four a quarter that come by as potential opportunities.

For us, at this point, we really can be very selective in what is interesting to us, both on a valuation and a workflow perspective.

I think we feel very good about our organic opportunity.

So, for the most part, we take a pass because it is not a good return on the time and integration and the dollars that are -- it would require.

Great.

Thank you.

(Operator Instructions).

Looks like we are at the end of the questions.

Have a great day.

Thank you.

Thank you for your participation.

Your call has concluded.

You may disconnect at this time.