Factset Research Systems Inc (FDS) 2013 Q3 法說會逐字稿

Welcome, and thank you for standing by.

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

(Operator Instructions)

Now I would like to turn the call over to your host, Ms. Rachel Stern, Senior Vice President of Strategic Resources and General Counsel.

Thank you.

You may begin.

Thank you, operator.

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

Welcome to FactSet's third-quarter 2013 earnings conference call.

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

Consistent with previous quarters, we have included a table at the end of the press release that reconciles non-GAAP measures to GAAP.

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 will review quarterly results.

Second, I will provide guidance for our next quarter.

Third and finally, we will end with your questions.

Before moving to the quarter, please allow me to cover one housekeeping item.

In Q3, a tax benefit of $2.3 million or $0.05 per share was recorded due to finalizing previous year's tax returns.

Amounts I disclose as adjusted exclude this benefit in order to present comparable figures with the prior year.

A full reconciliation from GAAP to non-GAAP figures can be found in the table at the end of our earnings release.

Let's take a look at our quarter.

Organic ASV grew by $2 million, representing a 5% organic increase year-over-year.

Total ASV was $864 million at quarter-end.

ASV from US operations grew to $590 million, and ASV from international operations was $274 million or 32% of the total.

Buy-side clients accounted for 83% of ASV, and the remaining 17% is derived from our sell-side clients, M&A advisory and equity research businesses.

Adjusted EPS increased to $1.15 this quarter, up 10% from a year ago.

We are proud that we have been able to deliver double-digit EPS growth again, our 12th consecutive quarter.

We continue to focus on providing value to our shareholders over the long term too.

FactSet's return on equity has averaged 32% over the past five years.

Free cash flow, which is defined as cash generated from operations less capital spending increased this quarter by $92 million, the largest quarterly free cash flow in FactSet's history, up 32% over the same period last year.

Free cash flow grew because of higher net income, and a meaningful decrease in accounts receivable of $17 million during the quarter.

DSO at May 31 was 29 days, a new record low for FactSet.

In addition to industry low DSOs, free cash flow over the last year was 18% higher than net income, which we believe demonstrates the high quality of our earnings.

At the end of the quarter, FactSet's cash and investment balance was $257 million, up $91 million as compared to Q2.

During the quarter, we reinvested $49 million by repurchasing 536,000 shares.

In May our repurchase program was increased by $200 million, and had $206 million remaining and authorized for future share repurchases at quarter-end.

At May 31, our weighted average number of shares outstanding was 44.5 million.

Also during the quarter, our Board of Directors approved an increase in our quarterly dividend by 13%, from $0.31 to $0.35 per share.

If you combined our regular quarterly dividends paid and share repurchased, over the past 12 months we have returned $309 million to shareholders.

Let's turn now to the P&L.

This quarter FactSet's revenues grew to $215 million, up 6% over last year.

That 6% growth rate can be broken down into 5% organic and 1% from our StreetAccount acquisition almost a year ago.

Our operating income rose to $72 million, up 5% compared to the same period last year.

Adjusted net income increased 6% to $51 million during the quarter.

In the US, revenues rose to $147 million in the third-quarter, up 4% over the same period last year excluding acquired revenue.

Non-US revenues increased 6% to $68 million.

Excluding foreign currency, almost all related to the Japanese yen, the growth rate of our international segment was 7% this quarter.

Third-quarter revenues from Europe and the Asia-Pacific regions were $52 million and $15 million, respectively, with year-over-year growth rates excluding currency effects in each region of 6% and 9%, respectively.

Let's look at some of the drivers for this quarter.

We added 4 net new clients, reaching a total of 2,440 clients.

At FactSet, we do not count every single company that uses our service as a client.

Companies on trial are not included, nor are our clients that pay less than $24,000 a year.

Our annual client retention this year was greater than 95% of ASV, and our retention rate in terms of number of actual clients was 92%.

These statistics show the power of our business model, as the large majority of clients maintain their subscriptions to FactSet throughout each year.

Our user count increased this quarter by 61 users to reach a total of 49,500 at quarter-end.

Buy-side clients added users, while some sell-side clients continued to reduce theirs.

We continue to make gains on the buy-side which accounts for 83% of our total revenues.

The sell-side, particularly equity research, has been under significant pressure for some time.

Also as we have noted before, the average ASV for buy-side users is significantly higher than for sell-side users, though a shift towards more research being conducted internally at buy-side firms is a long-term positive ASV trend for FactSet.

As been historically the case for us, our portfolio analytics suite of products continues to be a strong seller.

As you know by now, that PA suite includes 10 separate products that cover a range of workflows around portfolios.

Our equity PA product continues to perform well, and we have also been growing our fixed income portfolio analytics business, also known as FIPA.

The number of clients subscribing to PA, FIPA, SPAR, Risk, Portfolio Publishing all grew in mid single-digits or higher over the last year.

This quarter, we have also experienced an increase in our off platform sales.

Although small in comparison to FactSet as a whole, this bump in sales was noticeable to us during the quarter.

In addition to standard sales of the FactSet workstation, FactSet also licenses certain types of data through non-traditional means such as feeds and web sales.

These businesses are a new area for us, and one that we expect to continue to pursue in the coming periods.

Our proprietary content continues to perform well.

StreetAccount has developed new features that offered nuanced information to our users, in a particular timely and easy format to consume.

Benchmarks and proprietary FactSet data, especially FactSet fundamentals and FactSet estimates are in demand at a number of different clients in feed form.

Finally, I would also like to note that we are continually improving and enhancing our workstation and making it more valuable to our end-users.

Most recently, we announced we have released an instant messenger platform that is available for free to all FactSet workstation users and employees at a FactSet client site.

We already have users who are taking advantage of its many features.

Moreover, FactSet instant messenger as a product is consistent with our philosophy of offering choice to our clients.

This platform allows connectivity to any contact regardless of the messaging network they belong to.

Now let's look at the expense side.

Operating expenses were $142 million, up 5% organically over the last 12 months.

Our operating margins were a healthy 33.4%.

Cost of services as a percentage of revenues increased 170 basis points over the same period last year.

This increase resulted from higher compensation due to more employees with our engineering, consulting and content disciplines, including StreetAccount.

Higher computer depreciation from reinvesting in our state-of-the-art computer infrastructure also contributed to this increase.

During the quarter, our SG&A expenses as a percentage of revenues decreased by 120 basis points compared to the same period last year due to lower variable compensation expense and a reduction in marketing costs was partially offset by higher T&E from increased client visits.

Our headcount was 5,900, down 148 employees in the last 90 days, but up 8% over the last year.

As covered in last quarter's call, Q3 is not a hiring quarter for us.

Headcount decreased in Q3 last year, and declined as expected this year.

We expect Q4 to be a normal hiring quarter.

We are also very proud that last week for the 5th consecutive year, we have received special recognition as one of UK's best workplaces.

These types of accolades are important to us, and reflect the dedication of our employee base.

This quarter, the effective tax rate was 25.9%, down from 30.4% a year ago.

Please remember that the decline in the effective tax rate was primarily the result of the reinstatement of the US federal R&D tax credit.

If you exclude the $2.3 million tax benefit from finalizing prior year tax returns, the annual effective tax rate was 29%, compared to 29.9% as of the end of last quarter.

Now let's turn to our guidance for the fourth-quarter of fiscal 2013.

Revenues are expected to range between $218 million and $221 million.

Operating margins are expected to range between 33% and 34%.

GAAP diluted EPS should range between $1.18 and $1.21.

The mid point of this range represents 11% growth over last year's fourth quarter.

Our annual effective tax rate should range between 28.5% and 29.5%, which is lower than the prior quarter's guidance.

We continue to expect that capital expenditures for the full 2013 fiscal year should range between $20 million and $28 million, net of landlord contributions.

Before we open the call up for questions, I would like to take a moment to focus on some important factors in our world over the past quarter.

Many market watchers have expected the mix of invested assets to shift towards equity from fixed income, when record low interest rates rise again.

For the first time in five years, flows to equity have been positive year-to-date, even though flows to bonds still outpace flows -- funds flowing to equities as investors reduce their cash holdings.

We think this is a notable trend.

Our clients continue to be cautious in a market that is still far from settled.

On the sell-side, which constitutes about 17% of our business, they continue to contract both in terms of headcount and purchasing, to focus significantly on cost savings.

On the buy-side, they are still hesitant to make large purchases, because given market volatility they cannot be certain where they will wind up for this year in terms of performance.

These factors continue to make selling in the current environment challenging.

In light of these conditions, we are proud to deliver double-digit EPS growth again.

The mid point of our guidance for next quarter suggests this trend will continue.

We continue to invest aggressively in our product and people, as we believe we are closer to brighter days in the markets we serve.

Thank you, and we are now ready for your questions.

Thank you.

(Operator Instructions)

Our first question is from Shlomo Rosenbaum of Stifel.

Your line is open.

Hi, and thank you for taking my questions this morning.

Peter, can -- just doing the math and kind of backing into buy-side ASV versus sell-side ASV, it looks to me that the buy-side ASV growth improved sequentially.

First, I just wanted to confirm with you, is that correct or not correct?

That is -- I think that math is correct, Shlomo.

Okay.

And since that is correct, are -- would you take that as an indication that we are starting to see the beginnings of a turn on the buy-side in terms of hiring?

What would you attribute that to?

Or is it more of a willingness for people to buy product than we had seen beforehand?

And acknowledging it is a challenging environment, but are we seeing a little bit of a change there?

Shlomo, it's Phil.

I just want to make two points.

One, I saw some research written this morning where people are using our buy-side percentage and our sell-side percentage, and we are obviously, putting out a pretty round number there.

And I think the round numbers definitely distort things slightly.

But to answer your question more specifically, I think we are definitely seeing tiny signs of hiring.

But it is not one of those things where -- it feels like a market of several years ago.

Okay, I understand that.

But just to make sure what Peter said is accurate, that you have seen a step up --

Yes.

In ASV growth from buy-side?

Okay.

Yes, and I would -- and let me make one more point.

I think that the numbers right now, would at least from what I saw some in some of the calculations would make the sell-side seem slightly worse than it really is.

And therefore, making the buy-side slightly better than it is.

And I would also just clarify for the purposes of the metric that we produce, that the sell-side is purely sell-side for us, and that the buy-side is really buy-side plus other.

So you are saying, including like any corporate members who is through NASDAQ or anything like that?

Yes, including Peter messaged some feed revenue.

So it is really buy-side.

Sell-side is clean, as in the sell-side number, and then the buy-side is everything else.

Okay, got it.

And then, just in terms of the net adds, the net adds were -- in the customers and users just seemed kind of weak.

Is this really a continuation sort of the cadence you have had on the buy-side, but really being offset more on the sell-side more recently?

Yes, we had two odd quarters for us, just not the time where our clients are hiring.

Certainly our fall quarter, the first quarter for us, and our third fiscal quarter are just tend to be choppy in nature, and always have been historically.

But I think per Peter's comments, certainly there is still [trimming] happening on the sell-side, and slight hiring happening on the buy-side.

So they tend to be kind of balancing each other out at this point.

Okay, great.

On the -- (Multiple Speakers).

Go ahead, I am sorry to interrupt.

As we said, on the net client adds, we definitely saw quite a few firm shutdowns this quarter.

Bight switch out, firm gone, which I don't know whether that is a sign of cyclicality of -- this is a good time of year to do that, but definitely one of the factors.

Okay, great.

Thank you for the color.

Thank you.

Our next question is from Peter Appert of Piper Jaffrey.

Your line is open.

Thanks.

So Peter you mentioned the issue in terms of gross margin in the current quarter.

But I am noticing gross margin has actually drifted a little bit lower over the last year or couple of years.

Anything structural going on that would explain that, and then might that have any implications, in terms of how we should think about trend in margins looking forward?

Thank you, Peter.

I guess I would like to point out two things in that.

We are really managing FactSet at the operating margin level, as opposed to dissecting it between cost of services and SG&A.

But if I was going to look at the gross margin level, one thing that investors should factor out is the StreetAccount acquisition that we completed a year ago.

So if you are comparing Q3 this year to Q3 last year, that reduced gross margins by about 130 basis points.

And beyond that though, looking over the last couple of years, even it looks like the gross margin has shifted a little bit lower.

Anything you could say about that?

That would just be scaling up our content operations, where the number of content employees that FactSet has deployed has greatly changed over that time frame.

Got it, understood.

The - -can you talk a little, Peter or Phil about what you are seeing from the competitive perspective?

And the noise in the market suggests that the pressure from a discounting perspective continues to be pretty intense.

Can you just give us some thoughts on that?

Hi, Peter, it's Mike.

Hi, Mike.

Our competitive situation continues to evolve slowly over time.

FactSet continues to round out its product, which in many ways allows us to enter new segments, and create new types of competition for us.

The pricing environment is relatively stable overall.

There is definitely a lot of focus on cost.

And firms -- one of the long term trends amongst all of our clients has been the increase in focus on costs and scale with which these firms have brought professionals to help manage their expenses.

So that is an environment where it is just more important than ever for FactSet to demonstrate the value that we bring to the table, and continue to sell at the price points we are selling at today.

And I guess, how -- I am not sure how to interpret that, Mike.

In terms of, does that mean level of discounting higher today than it was 12 months ago, or the same as12 months ago?

I think it is relatively consistent in the industry.

Okay.

How about the -- any thoughts on the Eikon rollout and the competitive implications associated with that?

We haven't seen a significant amount of Eikon in the marketplace.

The indications are that most of the rollouts are happening in segments of the market where FactSet doesn't have a strong presence, between the trading and execution space.

We do know that firms are being contacted, and there is a initiative across all of the Thomson platforms to transition them away from their legacy platform to the new Eikon platform.

And FactSet is out there, reminding clients that if clients are in a transition period, we can offer them a seamless transition and offer them a very attractive alternative.

And you are seeing good response to that pitch?

We are.

We continue to round out our product, and it is something we focus on for a long period now, and we will continue to focus on it.

And last thing the -- you have talked for awhile about the fixed income offering as a new product suite for you.

And I know it's a relatively small piece of the pie, but can you quantify what portion of the business is specifically associated with fixed income market?

It continues to be a material driver for us.

I think if you wound the clock back a year, maybe two years, it wasn't material.

But it us now at a level where it is contributing, and is an important part of our growth story going forward.

It is a real driver, so what does that mean?

(Laughter).

We have to leave room for you, Peter, to make those estimates, and add value to your clients.

Okay.

Material driver, I will work on that.

Okay, thank you.

(Laughter).

Thank you.

Our next question is from Toni Kaplan of Morgan Stanley.

Your line is open.

Hi, thanks for taking my question.

You mentioned the employee count declining, and I was wondering if you could give any additional color on that?

Was it -- how it was split between maybe sales content or back office?

Sure.

Thanks, Toni, it's Peter.

Q3 hasn't been a strong hiring quarter for us, when you exclude the content operations.

And in fact, we haven't had a positive net headcount growth excluding content since 2008 in Q3.

So I think what you were seeing here, is why we have scaled up our content operations and continue to invest in it.

It is not at the same rate back several years ago.

And so, I would typify Q3 as a very normal pattern for us.

It has just been offset in previous years by content.

Okay.

And we shouldn't really take it to mean that the sales force is shrinking either?

No, not at all.

And we certainly already know that Q4, which is traditionally our strongest headcount quarter will -- we expect that likely to be true again.

Okay, great.

And then, if you could just give us a little bit of color on your pipeline of new clients, how is that relative to history?

Toni, it's Mike.

As we have grown in size, we have been able to do more and more interesting things with the sales force to segment it to focus on particular market opportunities, to focus on new business acquisition versus, for example, managing large accounts.

Our new business acquisition team has a very, very solid pipeline.

There is not only a lot of new firm creation happening.

But we have opportunities in new segments, like fixed income to go after clients in pure fixed income managers that we never had before.

So that pipeline is very robust, and continue to see significant numbers of new adds.

Okay, great.

And then lastly, when you look at the number of users for the sell-side summer interns, can you talk about how that compares versus last summer?

And do you have a sense for the numbers for the full-time class yet?

Or do you typically find those out when they actually start -- in probably next quarter?

Thanks.

The firms are still communicating with us what the exact counts are going to be.

At this point, we don't see a material change from last year.

Certainly, no material growth versus last year.

Okay, great.

Thank you.

Thank you.

(Operator Instructions)

Next question is from Keith Housum of Northcoast Research.

Your line is open.

Good morning, gentlemen.

A question for you on the ASV.

If we looked at the past few quarters, actually the past few years, and we look at the ASV, there is strong correlation to what GAAP revenue in the following quarter being a little bit higher than 25% of the prior year quarter's ASV.

This quarter, it was down just a little bit.

What do we attribute that to?

Hi, Keith.

It's Peter.

I think you would just attribute it to timing.

ASV doesn't come on equally every month, every quarter.

So any change on that, is just going to be timing.

Okay.

In terms of when the changes occurred during the quarter.

You had mentioned that, I think in one of your previous responses, that it seems like there was some more terminations, or just some firms going under during the quarter.

I would assume those would be unanticipated, and that would be part of the reason as well, correct?

I think it would be more related to timing.

So if the ASV dollar comes on the first day of the quarter, then we get three months of revenue.

And if it comes on the last month of the quarter, we only get one-twelfth.

So as Peter pointed out, if in a particular quarter the first month had more positives, then that would change GAAP revenue to the positive.

If the first month had more negatives relative to history, then that would be the reverse.

Okay.

(Multiple Speakers).

Which month in the quarter, you are only seeing the snapshot at one period in the quarter.

Okay, thanks.

Changing gears on you for a second question, if I may.

A lot of the inflows that we see coming into the equities are being attributed to the passive ETFs.

I guess, can you just provide a bit of color or what your thoughts are in terms of how ETFs have been climbing over the years, and they are expected to climb significantly more in the next few years, how that impacts the business?

Does that hurt the business at all, the growth rates, or is it really neutral?

I think we certainly have ETF creators as clients, and also put ETFs in the same category as passives.

Passives have been around for a long time, and there are many players in the space that are -- and several huge players in the space.

And the shift in mix over time to passives has been kind of a long-term trend.

I would say certainly, a negative to the passives as an asset class.

But I always question where the assets are actually coming from, and what it is displacing.

And one of the thoughts that would not be a negative for the actives, would be that the old fashioned stock picking that used to take place at the retail level is being replaced by [passive] ETFs, at certain key (inaudible) in several key cases.

But I think it is definitely one of those factors that is out there in the marketplace.

Okay.

So is that a challenge to the overall growth rate?

I mean, do you see people -- I guess your buy-side customers, are they needing less terminals because there are less people even, because there is more passive ETFs out there?

I think if you take the whole global market -- so FactSet participates in -- anybody who is managing institutional assets anywhere in the world, and takes the opportunity of how many equity analysts, fixed income analysts, portfolio managers exist out there in the world, is ETF and passive a slight negative to that?

Certainly.

But I just don't think it affects the macro opportunity that exists out there.

Certainly, there is huge growth in hedge funds, and I certainly see strong growth happening in our large traditional asset managers as well.

Okay, thanks.

Thank you.

Next question is from Pete Heckmann of Avondale.

Your line is open.

Hi, good morning.

Forgive me if I missed it, but could you comment on any pricing increase that took place in international markets?

And if there was one, can you quantify it for us?

Well, there was a small price increase in international.

It is not material, and we don't break it out.

Okay.

And then, can you comment -- you talked -- on two quarters ago about the potential for offering a high net worth broker platform, maybe a FactSet light.

Can you comment on that initiative, and if you have had any early success?

We had a robust offering for the wealth management segment.

The segment of that marketplace that we are focused on is wealth managers who are managing significant amount of assets, and really operate very much like a traditional institutional manager.

We have done some pricing and packaging of our product to make the offering more compelling to that segment, both from a product offering perspective as well as from a cost perspective, and we continue to see good progress in the wealth segment.

Okay.

That's helpful.

And then lastly, your guidance for the fiscal fourth -quarter seems to imply maybe just a very slight improvement in organic growth.

Can you talk about your expectations for user growth?

And for the full year fiscal '13, do you think you can match the net user adds that you had last year?

I think the variable on that, is going to be what happens on the sell-side.

The sell-side user count is volatile.

It represents a large percentage of total users, larger than the amount of ASV that we get from the sell-side.

So it is difficult to predict actual end-user counts.

I think long-term, we are -- still extremely optimistic about what our opportunities are.

I think I would also emphasize that, seats is only one of the dimensions of revenue that we get, and it is certainly a positive indicator.

And I have always described it as, growing clients and growing seats is really about growing share in the marketplace.

And then, it is obviously, you are a building relationship with the client, and you are there to sell the seats and other products that we have.

So internally, I don't think we actually spend much time trying to project how many seats we are going to get in a particular quarter, because it has a great deal to do with client hiring, decisions that are out of our control.

We spend more time focusing on what we think it is, the pipeline looks like, and how much of that we can convert in the 90 days.

Okay, fair enough.

Thank you.

Thank you.

Next question is from Tim McHugh of William Blair.

Your line is open.

Hi, thank you.

I just want to circle back to the fixed income.

Can you tell us how much of the growth is coming from traditional clients on the equity side, versus selling into the new client base, maybe fixed income only type of managers at this point?

Tim, it's Mike.

Whenever FactSet introduces or develops a product, the first place we take it is to our existing clients, and fixed income is no different.

We identified that opportunity because we had a lot of clients who were loyal users of our equity PA product.

And they expressed to us that they managed assets in addition to equity, maybe they were a balanced manager.

And so the fixed income product really came about as our desire to give them a more complete solution, to help them answer questions that relate to the equity side of their portfolio, as well as the fixed income side of their portfolio.

And for the first few years of that product's life, we really focused exclusively on those types of clients.

Now as that product begins to mature and really begins to get critical mass, we do have an opportunity to go after -- there are fixed income only managers.

And while that and the number of those are still small in number relative to the overall mix, it is a growing segment for us.

Okay.

On the international ASV growth it is, as I look relative to a year ago it slowed down a bit.

Is that the impact to the sell-side, are we seeing it more on the international side, the domestic side?

Or is there something else in terms of just the economic environment in Europe for things like that, that are impacting that ASV growth?

Well, I would say one thing you definitely have to factor out, is the change in the yen has impacted the comparison of that growth rate year over year.

I will let Mike or Phil comment on other items.

In terms of client activity and ASV adds, it seems relatively consistent over the time period.

Okay.

And then one last one, just I saw one of your bigger competitors, Bloomberg had some public issues with the other side of their business this quarter.

Has that created opportunities for discussions with clients, or competitive takeaways at all at this point in the marketplace?

Certainly, when I look at FactSet as our business, and the philosophy is that we operate our business, and one of the core philosophies we always had is to never compete with our clients.

We are not an investment business, a management business, we are not an investment banking business.

We don't write equity research.

We don't have trading platforms that compete with our clients or do wealth management.

And its always been very core for us to be partners and work side by side with our clients, and do as much as we possibly can.

I would say that, at least the feeling we get in the market is we definitely feel that our clients out there who feel overweighted with particular players in this space and have concerns.

Does that create a near-term opportunity that materially affects ASVs in the next 90 days?

I don't think so.

But I think there is definitely some sentiment there that there is some uncomfortable connections or situations that exist in certain clients.

Thank you.

Thank you.

At this time, there are no further questions on queue.

Thank you, everyone.

Have a terrific summer.

This concludes today's conference.

Thank you for participating.

You may now disconnect.