Factset Research Systems Inc (FDS) 2017 Q2 法說會逐字稿

Good morning.

My name is Mike, and I will be your conference operator today.

At this time, I would like to welcome everyone to the FactSet Second Quarter Earnings Call.

(Operator Instructions)

I will now turn the call over to Rima Hyder, Vice President, Investor Relations.

You may begin your conference.

Thank you, Mike, and good morning, everyone.

Welcome to FactSet's Second Quarter 2017 Earnings Conference Call.

Before we begin, I would like to point out that the slides we will reference during the course of this presentation can be accessed via the website on the Investor Relations section of our website at factset.com.

The slides will be posted on our website at the conclusion of this call.

A replay of today's call will be available via phone and on our website.

This conference call is being transcribed in real-time by FactSet's CallStreet service and is being broadcast live at factset.com.

After our prepared remarks, we will open the call to questions from investors.

(Operator Instructions)

Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risks of forward-looking statements and the use of non-GAAP financial measures.

Additionally, please refer to our Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures.

For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued this morning.

This non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.

In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

Joining me today are Phil Snow, Chief Executive Officer; and Maurizio Nicolelli, Chief Financial Officer.

I'd now like to turn the discussion over to Phil.

Thanks, Rima.

Good morning, everyone, and thank you for joining us on our call today.

You've just heard from Rima Hyder, who is our new Head of Investor Relations, and Rima is going to serve as the primary liaison with FactSet shareholders and the investment community, and we're really happy to have her join the FactSet team.

I know you're all going to really enjoy working with her.

At FactSet, we partner with our clients to solve their greatest challenges.

And over the last year, we've added significant building blocks through both innovation and acquisition to serve even more critical workflows for the investment community.

The market is continually looking for ways to better manage risk and be more efficient, and FactSet is perfectly suited to help.

In parallel to enhancing our core workstation, we've rapidly evolved our product suite to provide new solutions for our clients and to do it in new ways.

We're really excited that across the enterprise, our clients are now able to move on FactSet through the investment life cycle from research to portfolio management, to trading, to analytics and to client reporting.

Let me now give you a quick overview of our quarterly results.

Our organic revenues grew 7% year-over-year.

ASV during the second quarter grew organically at 6.5%.

Adjusted diluted EPS increased 14% to $1.81, higher than the midpoint of where we guided to last quarter.

Our adjusted operating margin at 33% was at the midpoint of our guidance range.

While we did see positive results, the organic ASV and revenue growth was below what we saw last year.

Our results were impacted by the cost pressures across the financial industry, driven in part by the shift from active to passive investing.

This quarter, we saw an increase in sales, offset by a higher number of cancellations from the same quarter a year ago.

We had a broad portfolio of wins across market segments and geographies.

And including our price increase in the Americas, our organic ASV grew $16 million over the last 3 months.

We saw great traction from our Vermilion acquisition and exciting new wins in the wealth management business.

It is difficult to predict if headwinds will lessen over time, but what we do know is that FactSet has a resilient business model and one that has previously executed well in a tough market.

As you can see in our slide presentation, our business can be cyclical, and organic ASV growth rates have fluctuated over the years, but there's been a constant theme of growth.

This growth, combined with our commitment to return value to shareholders, has greatly benefited our investors over the years.

We continue to see strong growth in the Asia Pac and EMEA regions, which now represent a high of 35% of our overall ASV.

The international markets have been a growth driver and, for us at times, a good hedge to the market conditions in the U.S. Our recent acquisitions provide us with a greater footprint in Europe and opens up more market share for us in the Asia Pac region.

We're definitely not satisfied with our current growth levels.

You've heard me say before that there's a growing opportunity with our existing clients as we broaden our suite of offerings across different workflows and asset classes.

Our recent acquisitions play a key role in unlocking more of that opportunity.

Last quarter, I spoke about seeing a healthy deployment across our wealth business and how it's an area of growth at FactSet.

In January, we announced our intent to acquire Interactive Data Managed Solutions or IDMS.

IDMS is a leading managed solutions and portal provider for the wealth management industry.

This acquisition, when completed, will add significant scale and scope to our wealth business in the Americas and EMEA.

And with FactSet's current footprint in Asia Pac, it also gives us an exciting opportunity to expand our wealth business in that region.

Just last week, we acquired BISAM Technologies, a leading provider of portfolio performance and attribution, multi-asset risk, GIPS composites management and reporting.

B-One, BISAM's award-winning platform, is an outstanding complement to both FactSet's portfolio analytics suite and client reporting solutions.

The acquisition of BISAM is aligned with our strategy to better serve the critical workflows in the entire portfolio life cycle.

At FactSet, we're at the perfect intersection of technology and finance, which fuels our thinking on product innovation.

The world is more open than it's ever been, and both volume and access to information are now at unprecedented levels.

We see clients willing to outsource and move more workflows to cloud-based solutions.

With a significant investment and upgrade to our technology stack, combined with our content and analytics, we're now able to offer new ways for clients to leverage the power of FactSet.

In summary, FactSet has a resilient business model and best-in-class products with very strong client service.

This powerful combination sets us apart from our competitors.

We know how to innovate and engineer the most efficient tools for the financial industry.

And at the same time, we continue to maintain financial discipline through cost controls, a lower effective tax rate and an accretive share repurchase program, allowing us to return value for our shareholders.

Over the last 6 years to date, the average cash returned to our shareholders is 94% of free cash flow.

Looking ahead to the second half of 2017, we're focused on the integration of our recent acquisitions and are excited about the opportunity to cross-sell a broad suite of solutions into our blue-chip client base.

Let me now turn the call over to Maurizio to talk about the second quarter financial results and third quarter outlook.

Maurizio?

Thank you, Phil, and good morning to everyone on the call.

In the second quarter, we continued to grow ASV and EPS and delivered solid results within our guidance range.

As Phil stated, we are investing in our future growth with the goal of offering our clients complete enterprise solutions for their investment portfolio life cycle.

Let's now go through the second quarter results.

GAAP revenues in the second quarter increased 4.5% to $294 million and 7% to $282 million on an organic basis versus the second quarter of 2016.

GAAP revenues from the second quarter of 2016 included the Market Metrics business, which was sold in the fourth quarter of 2016.

Organic ASV increased 6.5% year-over-year and $16 million from our first quarter of fiscal '17.

This increase was primarily driven by price increases of $9.5 million and new sales opportunities, offset by cancellations.

U.S. revenues grew $192 million.

Organic revenues in the U.S. were up 6% compared to the year-ago second quarter.

International revenues increased to $103 million.

On an organic basis, the international growth rate was 9%.

The international business continues to perform well.

And as Phil already stated, it continues to be a growing part of our overall ASV.

Moving down the income statement, let's take a look at our operating expenses.

Operating expenses for the second quarter totaled $203 million, an increase of 3% year-over-year.

Second quarter cost of services, expressed as a percentage of revenues, increased slightly by 70 basis points compared to the year-ago period.

The increase was driven by higher compensation due to base salary changes after the annual review cycle, incremental hires in our centers of excellence in India and the Philippines and acquisitions from CYMBA and Vermilion, offset by lower data costs related to the sale of Market Metrics.

SG&A expenses, expressed as a percentage of revenues, were down 160 basis points compared to the second quarter of fiscal 2016.

The decrease was primarily as a result of lower employee compensation due to the sale of the Market Metrics business in the fourth quarter of fiscal 2016 and higher rent expense from new office locations.

Our adjusted operating margin, excluding $1 million in acquisition costs for professional fees from the recently announced BISAM and IDMS transactions and $4 million of intangible asset amortization, was flat at 33% this quarter versus the second quarter of 2016.

Adjusted operating income grew 4.5% to $97 million, excluding $4 million of intangible asset amortization and the $1.4 million of non-reoccurring acquisition costs.

Adjusted net income, which excludes non-reoccurring acquisition-related costs, intangible asset amortization and the working capital adjustment to the Market Metrics disposition, increased 9% to $72 million while adjusted diluted EPS grew 14% to $1.81.

Free cash flow for our second quarter was $71 million, a decrease of approximately $10 million from the same period last year.

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

The $10 million decrease was the result of higher client receivables.

Our DSOs were 40 days at the end of the second quarter compared to 34 days in the prior year period.

The increase in days is driven by our recent acquisitions, the timing of client payments and lower number of business days in February 2017.

It's important to note that 2/3 of the accounts receivable balance increase was from billings outstanding 60 days or less.

You may have noticed in the press release we issued this morning that we changed our definition for client and user count.

Our client count definition now captures clients with ASV greater than $10,000 versus the previous threshold of $24,000.

This lower threshold allows us to capture smaller clients such as family offices and smaller hedge funds as well as small data feed clients.

As our business evolves and we look to align our metrics internally and externally and enhance our disclosures, we felt we needed to update how we account for our clients.

Our net client count increased by 143 clients this quarter to over 4,400.

Our net user count increased approximately 1,500 users to over 85,000.

The new user account definition accounts for users from workstations previously not captured due to certain product bundling and also users of the StreetAccount web product.

The increase was driven by workstation deployments across wealth management as well as displacement of key competitors at large institutional clients.

We have provided you with schedules of historical client and user counts under the old and new definition in the back of our press release.

We repurchased approximately 48 -- 480,000 shares for $181 million during the second quarter under our existing share repurchase program.

As Phil stated, we have continued to return value to our shareholders.

Over the last 12 months, we have returned over $485 million to stockholders in the form of share repurchases and dividends.

Recently, our Board of Directors approved a $300 million expansion to the existing share repurchase program.

Including this expansion, approximately $337 million is currently available for future share repurchases.

In our third quarter, we entered into a new credit agreement and borrowed $575 million at favorable rates to pay for the BISAM acquisition and our existing -- and repay our existing debt of $365 million.

We remain committed to returning capital to shareholders and maintain a balanced capital allocation framework.

Now let's turn to guidance for the third quarter of fiscal 2017.

For the fiscal third quarter, we expect our GAAP revenues to be in the range of $301 million and $307 million.

BISAM is expected to add approximately $6 million to third quarter revenues.

The midpoint of our organic revenue guidance is 6%.

The proposed IDMS acquisition is not included in these numbers as it is expected to close later in our fiscal third quarter.

We plan to update our third quarter guidance once IDMS is closed.

Our GAAP operating margin is expected to be in the range of 30% and 31%, which includes a 90 basis point reduction from BISAM.

Adjusted operating margin is expected to be in the range of 32% and 33%, which includes a 30 basis point reduction from BISAM.

The annual effective tax rate is expected to be in the range of 25% and 26%.

GAAP diluted EPS is expected to be in the range of $1.68 and $1.74, and adjusted diluted EPS is expected to be in the range of $1.80 and $1.86.

The midpoint of the adjusted diluted EPS range represents 12% growth over the prior year.

In summary, we're pleased to see our solid performance in the current market conditions.

Our continuing growth this quarter highlights the strength of our business model, and we remain confident in our ability to return value to our shareholders.

Thank you for your participation in today's call.

We're now ready for your questions.

(Operator Instructions) Your first question is from Bill Warmington from Wells Fargo.

So first of all, hello and welcome to Rima Hyder.

Thank you, Bill.

Okay.

So Phil, you mentioned in your comments the impact that you're seeing from the shift from active to passive.

And I mean, as we all know in the industry, this is something that's been going on for a number of years.

And so my question is, are you seeing something in terms of a tipping point in terms of cost or headcount or something else that is starting to impact the industry?

And I'm asking also in terms of how we should model out the rest of 2017 in terms of ASV growth.

That's a great question, Bill.

Thank you.

So it is an ongoing trend.

I would say that what we're observing is that trend is more pronounced in the Americas than we're seeing it in the EMEA and Asia Pac region, and you see that reflected in our growth rates.

So we're -- we anticipate that it will continue to head in this direction for a little while.

But what I would say is that we have a broader suite of solutions than we had historically to help mitigate some of that.

First of all, we have a multi-asset class system now so we have a lot of clients using us for fixed-income capabilities.

And a lot of our product suite throughout analytics and research and RMS is very well suited to passive investors as well as active investors.

So it's a trend that we're aware of.

It's definitely putting cost pressure particularly on the Americas investment management side of the business.

But it's one that, with our recent acquisitions and innovation, we feel like we're in a good position to address.

And for my follow-up question, on the BISAM acquisition, how does that fit into FactSet strategically?

Because FactSet has historically been a distributor of third-party models, MSCI Barra, Northfield, Axioma, and it would seem that BISAM would, in some ways, compete with these firms.

So that's the question.

Yes.

So actually, it doesn't really compete with them.

BISAM is really a performance system.

So it gives clients locked-down returns for the official performance that they are reporting to their clients and the market.

BISAM did a very small acquisition of a firm called Cognity.

So it does have some risk capabilities in it, but it's primarily a performance system.

It's something that FactSet has looked to build for a long time.

We were making some progress.

But when the opportunity to go out and get the market leader to add it to the power of our portfolio analysis product, we were very excited by that.

And I can tell you that the reaction from our clients has been exceptionally positive.

I'm out here in San Francisco this week with the team.

And a lot of the salespeople out here have been telling me that their clients have actually been sending them congratulations e-mails and can't wait to have a meeting.

The next question is from Anj Singh from Credit Suisse.

First off, I was wondering if you could speak to the portfolio wins you referenced earlier, Phil.

Any sense of the geography, client profile, buy side versus sell side versus what we've been seeing recently from you guys?

And as you look to improve your growth profile, what is it that we need to see for that to happen?

Is it the market environment needing to improve or stabilize a little bit?

Or is it some of your acquisitions and solutions needing to gray -- gain greater scale?

That's a great question.

Thank you.

So yes, I'll go over a few things here.

So on a regional basis, we've reported we did very well in Asia Pac.

That continues to be a strong region for us.

We're very focused on it.

EMEA came in strong, and we were a little bit weaker in the Americas.

In terms of client types, we did exceptionally well again this quarter with wealth and client sponsors.

From our product suite standpoint, the analytics suite had a very good quarter.

And what I do want to highlight, I mentioned it in my earlier comments, is we actually sold more product this Q2 than we did last Q2.

The pressure that we saw was in the existing clients, the cost pressure that they're facing.

So we're seeing consolidation of firms and on the desktop, it's becoming sort of a market share game, where somebody that had a couple of services historically is now being forced to choose between one or the other.

And we did see more users leaving the firm.

So we have a strong pipeline.

Our sales team is out there executing very well, but we are facing this headwind of cancellations within clients.

I would say, and I've said this before, that part of our largest opportunity really is in our blue-chip client base.

So when you look at FactSet's top 100 clients, that's a large percentage of our ASV.

These are long-standing clients that aren't going anywhere.

And with the recent acquisitions that we have, we have a real opportunity to cross-sell what we've bought and, as we integrate it, unlock even more opportunity for those clients moving forward.

So that's one of the things that we're very focused on.

And we don't necessarily need to see the markets turned around for us to grow faster.

We're -- our thesis is that we can do that by executing well on the strategy that we've laid out for the firm.

Okay.

That's helpful.

And one for Maurizio that's similar.

Maurizio, if you had to parse out the down year-over-year margins implied in your guidance adjusting for BISAM, what would you say are the biggest drivers here?

Perhaps how much is due to your product suite changes versus ASV deceleration?

And what do we need to see for the margin performance to sort of stabilize year-over-year and perhaps improve?

When we -- that's a very good question.

So when we look at the margins of FactSet pre the most recent acquisitions, it's very comparable to our margins historically.

And so what we need to see is we need to continue to grow these -- the ASV from these acquisitions and embed these into our product suite so that we can push up the margin overall from the cost -- or from the base that we acquired from each one of these acquisitions.

We've done that with Portware and that -- quarter-by-quarter that -- the margin of that business has gotten more and more towards the FactSet overall margin.

But we need to continue doing that as we've purchased a number of companies over the last 6 months.

And so in doing that, that gets our margin back to historical levels.

And then as we grow ASV in the coming years, that's when we'll see more leverage in our margin.

The next question is from Shlomo Rosenbaum from Stifel.

Phil, can you talk a little bit more about what BISAM does that you guys were not already doing?

It seems like you had a pretty decent -- or a very robust platform in a lot of the portfolio attribution stuff.

And can you also comment on, like, how fast the companies were growing?

A little bit more just specificity, maybe from Maurizio, on the margin profiles of the businesses.

Yes.

Thanks, Shlomo, for the question.

So yes, the main difference with the performance system is that the returns are locked down historically and that you get a degree of accuracy out to multiple basis points for official client reporting.

PA does that in some cases.

But the real power of PA for our clients really was the flexibility of the system, the ability to do ad hoc analysis within the middle office and some client reporting.

This really just takes it to another level.

So BISAM is a firm that we would run into all the time within our largest clients.

In fact, most of the BISAM clients are already FactSet clients.

And connecting the 2 systems together and adding the risk capabilities that we have and the publishing solutions, that really just creates a powerhouse suite for us, for our clients in the performance area.

And it was a missing piece.

It's one that we've known about for 5 years and have just not had the ability internally to build to the quality of something that BISAM had been doing for much longer.

And how fast were they growing?

Or...

So the growth rate of BISAM is higher than the rest of FactSet.

It's in double-digit growth rates historically, and that's the trend going forward for BISAM.

Okay.

Can I sneak one in, Maurizio?

Can you give the organic growth rate at both ends of the guidance range?

Is it 5% to 7% getting you to 6%?

Or is there a little bit more specificity I should be using?

No.

That's essentially the range, is right at -- between 5% and 7%.

And that's why I gave the middle of that range of 6%.

That's right in the middle of that range.

The next question is from Peter Appert from Piper Jaffray.

So Phil, you've done a handful of larger transactions here in the last couple of years in the M&A market.

So I'm wondering if maybe your attitude towards M&A has changed, has it become more important to the growth story.

And what's missing in the portfolio now that you'd like to have?

Great question.

So no, it's not important to the growth story.

We've been very intentional about going out and finding some pieces for the investment management workflow that we decided it would be easier to acquire and integrate than build ourselves.

So Portware, CYMBA, Vermilion and BISAM all represent what we consider to be good workflows for us to integrate with the already fantastic FactSet products.

So we're not out in the market looking for tons of acquisitions to grow, that's not it.

And with this latest acquisition of BISAM now, we feel very well positioned for that investment life cycle that we talked about on the call earlier.

So that's -- our focus now is going to be shifting to the integration and cross-selling of these acquisitions.

We're not going -- if the right asset comes up and there's something we're interested in, we'll be opportunistic, but we're not going to go out and continue at this pace.

Got it.

And then, Maurizio, maybe I'm reading too much into this.

But I think in response to an earlier question about trends in margin, you suggested that once the completion of the integration of the acquired properties is completed, we could expect to see some leverage in margin.

Does that suggest that your view has changed a little bit?

Because I think historically, you've talked about keeping margins essentially flat on a go-forward basis.

Would the objective now be to try to move the margins up some over time?

So what I was alluding to was our margin has been affected by these acquisitions, and it's been -- it's trended slightly lower from each of the acquisitions.

The goal is to get that margin of these acquisitions back to the historical FactSet margin.

And then over the coming years, as we continue to grow the business, we would expect some greater leverage within our margin going forward as we scale the business.

So for the company in total, you would look for some improvement in margin over time apart from just...

Over time.

Yes.

Okay.

So not just return -- sorry to be so specific on this.

But not just to return to where you were historically but to get back to where you were and then perhaps to grow it from that level?

Correct.

In the coming years.

Correct.

Understood.

Okay.

And then just one last thing, sorry, the -- Phil, the -- is it possible to quantify the scale of the opportunity you see in some of the other asset classes that you're getting involved in?

I would just say, overall, we view the addressable market for us with the products we have today at 10x the revenues of FactSet.

And as we continue to integrate and build out more capabilities, that potential market share could -- or potential market could increase.

So we view just tons of stuff in front of us that we can go out and execute on, not just in terms of seats in the industry, but in terms of off-platform solutions and enterprise solutions.

And the next question is from Peter Heckmann from Avondale.

My question is on IDMS.

It seems one could infer from your commentary so far that the acquisition is relatively small.

But it appears, based on our research, that it could be double the -- more than double the revenue of BISAM.

Can you help us bracket that?

I know the deal has not closed yet, but certainly, we would expect it to close in the next 30 days.

I'd like to include it in my model.

So could you bracket some of the potential revenue addition, margin and then bracket the purchase price?

Peter, it's Maurizio.

Unfortunately, we can't give out that information just yet because it's not closed.

As soon as it closes, when we send out the press release on the closing of the acquisition, we will include guidance updates and include the information that you're looking for.

Okay.

Then maybe I'll try a different one then.

You changed the methodology on the metrics for clients and users.

Could you give us the numbers on the old methodology for 1 final quarter so we can kind of compare it to what we were forecasting?

Yes.

So the metrics on the old methodology under users and clients are very similar to the increases historically in both of those categories.

There's not a significant change in the quarter under the old methodology.

And again, we made this change so that externally we're portraying the business very closely to how we're measuring the business internally.

The next question is from Manav Patnaik from Barclays.

This is actually Greg calling on for Manav.

Just wondering, as you broaden the suite of products that you are offering to the clients, from a commercial perspective, does the conversation go more to an enterprise-type model versus per seat?

Or how you guys are thinking about that?

Yes.

That's a great question, Greg.

It's something we're looking very closely at, and you bring up a good point.

I think the way that we want to, and in some ways have been, charging our clients is really the value that they're receiving from our service.

So if that's an enterprise solution, whether it's a seat, that's the way that we're beginning to think about it.

And as we've broadened our suite of products, not just with CTS and analytics but with these acquisitions, we're beginning to take a much closer look at that, and we are becoming less levered to the workstation number that you've been used to seeing from us.

Fair enough.

And then maybe you can give an update on the FactSet web rollout.

I think you rolled it out last quarter, and traction there and what you're hearing from clients.

Sure.

It's early days.

We're hearing positive things.

The new technology that we have really provides a more intuitive user experience on the web product.

We're still converting some of our more advanced applications.

We expect our flagship screening product to be in there very shortly with some really nice default reports for clients that we didn't have in the older version.

But we'll be moving PA into the web version soon, so all the work we've done for PA3 and that a lot of investment managers are beginning to use will be over there.

So I think once we get the bulk of the applications in there, we'll begin to see a broader uptake for the web product.

The next question is from Hamzah Mazari from Macquarie.

Maybe if you could just frame for us how much less mature is your European business versus both Asia and the U.S. And any potential regulatory changes in that landscape that could impact you, either positive or negative?

Great question.

So we think we do see more upside in those regions just based on some of the trends I already mentioned as well as they are less mature markets for us.

Many of the acquisitions that we've done recently also have a good footprint in Europe that allows us to cross-sell the existing FactSet suite, and many of the acquisitions don't have any presence in Asia.

They did not have the scale, essentially, to go out there.

So we've got offices all over the Asia Pac region, and that's going to provide us a great opportunity to cross-sell those products with the existing FactSet footprint.

So on the regulatory side, that is definitely an opportunity for us.

So we're already capitalizing on that in some ways in Europe.

We have a lot of solutions outside of the workstation where we package our content and analytics in a way that solves various regulatory requirements like Solvency II.

We're getting a lot of interest around MiFID and what we're doing there.

We have solutions within the Portware application and that allow clients to solve part of MiFID.

So we look at regulatory as a growing opportunity for us and one that we're placing more focus on.

Great.

And just a follow-up question.

You referenced acquisitions versus build yourself, sort of the trade-off in doing some of these deals.

Could you maybe frame for us, what does the competitive environment look like on the workflow side?

We're very familiar on the desktop side and what's going on there.

But are you competing with 1 or 2 big guys?

Is it mostly customers doing this in-house themselves?

Who do you view as sort of your biggest competitor on the workflow side?

And maybe there's just several.

But any color around that would be great.

I think -- so it's a very good question.

I think the way I would like to answer that is one of the themes that we're really hearing from our clients is that they want to see more consistent data across their enterprise, so the data that they're using in the middle office and the portfolio managers and traders would be using in the front office.

Really the great thirst within our user base to see consistent data.

So that's really what's been driving a lot of our activity here.

And as we integrate the data and get the content flowing between the systems, we're going to be able to satisfy that need for our clients.

The next question is from Warren Gardiner from Evercore.

On the MiFID II comments, it sounds like your client base is kind of moving to prep a bit more.

Can you kind of just give some more color on the opportunity that you kind of see arising there, either in terms of new products or market share gains?

Yes.

It's a great question.

So we're still looking at that.

We can solve different pieces of it.

It is a large opportunity.

And I think that's where a lot of the cost pressure is coming from in the client base.

It's that they are -- it's not just the shift from active to passive, but it's the need to spend more on regulatory solutions.

So it's really the opportunity is packaging a lot of the content we have in smart ways for the clients creating analytics.

We've got a lot of building blocks, but we're still in the process of putting all that together.

So it's too early for me to really give you a sense of what the true opportunity is there.

And is there anything we should maybe think about in terms of how the buy side kind of currently pays you right now?

Maybe this is more sort of on the Portware side if -- but is that we should kind of consider as that regulation comes into force?

And I guess, specifically with respect to maybe unbundling or things like that.

No.

We don't see any significant change there, to be quite honest.

The next question is from Glenn Greene from Oppenheimer.

I wanted to go back to the cancellation phenomenon.

Just wanted to get a sense is this sort of the same dynamic you've been talking about for a couple quarters?

And is it accelerating?

And also, you sort of alluded to the importance of your top 100 clients.

Could you contrast the cancellation trends you're seeing in the top 100 clients versus, I guess, non-top 100 clients?

We can't provide you that level of detail, but I would say this cost pressure is ongoing.

I wouldn't say that it's necessarily accelerating.

And it's just a combination of clients merging, layoffs, users no longer with firms in some of the areas that FactSet serves and a certain amount of cost pressure.

As clients consolidate, sometimes what we'll do is we'll have long-term contracts with the clients, but it's cost pressure on the existing business, essentially, as we move forward.

Okay.

And I assume this sort of explains the deceleration in the domestic ASV growth, Q-to-Q, it looks like it was down, order of magnitude, 150 basis points.

And it looks -- sounds like your pricing that you usually put in place in this quarter was pretty status quo versus a year ago.

Yes.

So I would say net new business, just in terms of the smaller clients that we added a lot and the price increase, was consistent with last year.

The difference that you saw was in the existing client base.

I mean, one thing I will point out is that, traditionally, we've included our SP&A, or strategic partnerships and alliances, revenue with our investment management revenue.

That's a very lumpy business, very often 7-figure deals.

There are a couple of things that happened in this quarter that were part of that.

So that's some of the drag that you're seeing on the IM business.

And it sounded like, from some of your commentary, the wealth management solution continues to trend at a pretty robust clip, so there's no drag there.

If anything, that's a benefit.

Yes.

It's doing really well.

Yes.

In the uptick that you saw in seats for us this quarter, there were a couple of really exciting wealth wins and a very large win on the sell side at a global bank in that research group.

The next question is from Joseph Foresi from Cantor Fitzgerald.

Is the Global FinTech Index an attempt to get into the indexing market?

And do you see opportunities there?

I think what you -- great question, Joe.

This is really just a continuation of us really partnering with firms out there to help them with build indices and ETFs with our Revere content.

So we've got a fantastically detailed taxonomy, industry classifications and a lot of firms are leveraging that, that way.

So we partnered, I think, with a firm over in Asia for this one.

Okay.

And any way to quantify the new opportunities in the portfolio versus the old?

Even a ballpark would be great.

Are the new opportunities 25% of the portfolio?

Are they 50%?

Just trying to get some idea there.

Can you -- I didn't quite understand the question.

Can you restate that?

So it sounds like you're kind of mixing your portfolio here.

You've got some stuff that's kind of not doing so well, the active management, the buy side, maybe even investment banking.

But then you've got a number of things that are doing well, including multi-asset class, wealth management, internationally.

So I'm just trying to get a feel for what percentage of your portfolio you think is doing very well, some of the new opportunities that you've highlighted versus some of the standard stuff that you've provided in the past that maybe isn't doing as well.

Is it 1/4 of the portfolio?

Is it half of the portfolio?

Just trying to get a sense there.

Yes.

So you mentioned a lot of different dimensions there.

There's geography.

There's client type.

There's workflow.

I mean, we see great opportunity throughout the whole portfolio.

It's a little bit different each quarter, but we're still growing.

We're doing well in investment management.

We're just not growing as fast as we did the last 3 quarters, but we see a way for us to kind of reaccelerate that with all of the great product that we have and the integration that we're going to do.

The next question is from Alex Kramm from UBS.

Sorry if this came up in the prepared remarks.

But I think it's for Maurizio.

If I look at my model, it seems like the employee count actually came down quarter-over-quarter.

Maybe just confirm if I have this right.

And if this is correct, I mean, what does this suggest in terms of what are you doing or what you're seeing out there if you're reacting with some cuts internally here?

So maybe just flesh that out, please.

Yes.

So when you look at headcount between Q1 -- yes, I'm assuming you're referring to Q1 to Q2?

Exactly.

Of this fiscal year.

So we were down about 121 employees in our headcount just quarter-to-quarter, and that was over 90% driven by attrition in Hyderabad and Manila.

If you look at our headcount here between the U.S. and Europe, it was very stable.

So we had attrition in these locations, but we also had some new employee classes that started.

So we were very stable in headcount when you look at the U.S. and Europe.

All right.

Fair point.

And then just secondly, sorry to come back to the whole pressure discussions you had.

You obviously gave a lot of color here.

Just to make sure I understand this right or maybe flesh it out little bit.

When you're talking about pressure, is this really a discussion mostly around the desktop side of the business?

Or are you seeing selling pressure and cost consciousness also on some of the other things that you're doing away from the desktop?

I guess, what I'm trying to say is, are you seeing the same kind of double-digit growth in the non-desktop business?

And is that really, as the business shifts more towards those enterprise workflow solutions, we should feel more comfortable about the growth rate than if you were just a desktop player?

Alex, it's Phil.

Thanks for the question.

So yes, I would say, if you aggregated our -- the acquisitions that we've done as well as our CTS and our analytics business, that certainly is growing faster than the desktop business, and it's pressure on kind of the users at firms.

And we're going to -- I think that's where the industry is heading.

We're going to see more clients try to do more with enterprise solutions and less people.

The next question is from Tim McHugh from William Blair.

It's Stephen Sheldon in for Tim.

You talked about some displacement in competitors within your larger client base, and some of that sounds like it was driven by consolidation.

So can you maybe talk about what you're seeing in terms of what's driving the decision between how they're consolidating kind of vendor spend?

Can you -- I didn't quite understand the question.

Can you...

Well, so if they're consolidating towards you guys, I guess, why would you win?

And if they're moving away, I guess, just in a broad sense, why would -- if someone is consolidating and moving away from you, what's the reasons that you might lose in those situations?

Or why would you win...

Yes.

So FactSet wins -- yes, FactSet wins for a lot of different reasons: It's technology, content, analytics and service.

Overall, clients really do want to partner with us.

They really trust FactSet.

We've built very good relationships with our clients.

The quality of our content is exceptionally high.

The flexibility of our workstation is good, so clients can really customize their workflow to the way they want to do it.

And our consultants and our client-facing staff are really the best in the market, essentially, out there helping the clients.

So for the long run, we know we have the best people.

We have a great product, and we're very bullish about the future.

In some cases, we may not have all the pieces today that a client needs when they're consolidating.

And either for contractual reasons or other reasons, we won't win this time, but we're really bullish that we'll win in the long run.

Okay.

And then one more.

I want to ask about leverage.

And specifically, what level of debt to EBITDA you'd be comfortable with kind of going to if you continue to see attractive M&A opportunities?

The level of debt that we have on our books is less than 1.5x our EBITDA.

And so there's significant amount of capacity if the right asset comes along that we need to go purchase.

So we've added -- we have $575 million of debt on our balance sheet right around a cost of capital of 200 basis points.

So it's very economical for us to have that debt on our books and to continue our buyback program going forward.

But it just highlights that we have the capacity going forward if the right acquisition comes along.

The next question is from Andre Benjamin from Goldman Sachs.

I guess my first question is the thoughts on the brand campaign, which you said in the press release was launched earlier this month.

Just wondering what drove you to launch the campaign, how it campaign -- compares to prior efforts and expected impacts on margins and revenues over the longer term.

Andre, it's Phil.

Thanks for the question.

Yes, it has been a while since we've refreshed our brand.

Every company goes through cycles.

We hired a fantastic Head of Marketing just over a year ago, and she went out and did a bunch of research for us in the marketplace.

And what we really discovered is that there was a big awareness gap in the market in terms of FactSet's capabilities.

Even some of our bigger clients were really not fully informed about what we've done from a multi-asset class or feed standpoint.

So we're at the beginning of it.

I wouldn't expect it to affect our margins in any way, but we got a really great response just in terms of media impressions from the kickoff that we had a couple of weeks ago.

Great.

And I guess, the other question I would ask is in terms of the financial deregulation, I know it's hard to say, but have you had any conversations with any clients if that were to go through about how they're thinking about that would impact their spending on FactSet solutions?

Or I guess, if asked differently, is there anything incremental we should expect to see from you if the administration does start to deregulate the financial industry?

Well, I think there's an opportunity in either direction.

So if clients are forced to do more regulatory solutions, we feel like we have great products to help them there.

And if there's less of a burden on regulatory, that means that there'll be more money for our clients to spend on things like FactSet.

Yes.

I was just saying if there was any specific products, but understood.

Well, I can give you one.

So if the Fiduciary Rule goes through, which is, I think, one we got last quarter, we've got fantastic tools for people to evaluate ETFs versus mutual funds.

And for the compliance and documentation part of that, we have fantastic research management solutions.

Our Code Red solution and our internal research nodes are very well suited for any regulatory solution that requires a good audit trail.

The next question is from Patrick O'Shaughnessy from Raymond James.

Yes.

So first question.

In terms of the debt that you've been taking out to finance some of these acquisitions, and presumably, you'll take out a little bit more for IDMS, is there any appetite there to term it out?

Or are you comfortable maintaining the credit facility?

So we're comfortable right now maintaining the credit facility going forward given where the cost of capital is today.

Okay, great.

And then a follow-up question.

I know this came up on the call a couple of quarters ago, but I'm not sure I totally understood the explanation.

Can you walk me through the apparent disconnect between your commentary on elevated cancellations and the fact that your client retention rate remains very stable at 95% of ASV?

Sure.

This is Maurizio.

So the calculation in our retention rate is really based on the last 12 months of clients that have canceled and that ASV that has canceled.

Keep in mind, when clients cancel, these are at the lower end of FactSet.

All of our top 100 clients don't cancel FactSet altogether.

So what the ASV from canceled clients in that calculation is from clients that cancel FactSet 100%.

So that number is small compared to the overall total.

It doesn't capture existing client cancellations.

And so that's where you see the difference between the 2.

The last question is from Toni Kaplan from Morgan Stanley.

This is Patrick in for Toni.

Phil, I believe you mentioned that you think FactSet's market opportunity could amount to as much as 10x your current share.

Can you give us a bit more color on the largest pieces of that opportunity, either by user, product, workflow or geography?

Sure.

So I would say, geographically, it's pretty evenly split.

When you look at some of our largest competitors, which I'm sure you're aware of, you just have to look through really the research workflow, who the competitors are there, portfolio management and trading, who those are, the analytics space, investment banking.

So it's a well-known set of competitors.

And we think about the solutions that we have today, how much market share they have.

That's one way that we think about it.

And the other thing that we're doing -- you've heard me talk about the CTS business before, our content and technology solutions, that's a rapidly evolving suite of products, which allows our clients to do very interesting things outside of the workstation and within their enterprise.

So with some of the technology advances that we've had with our next-gen project, we're now actually able to unbundle, if we wanted to, certain pieces of the product and allow clients to use it within specific workflows that they're building.

So we're very bullish on that.

There's a lot of other offerings within that suite, but that is an area of our business which will actually open up even more market share as we move forward.

And then just a quick follow-up.

Do you feel like cost-cutting pressures are less serious in wealth management?

And then given that, in many instances, asset managers and financial advisers are frequently under the same roof, I'm wondering if you've been able to bundle products in enterprise-wide contracts.

So we're seeing -- that's a relatively newer market for us.

We're seeing less cost pressure there from an existing client base.

So I think it's more of a greenfield opportunity.

And we -- it has been a lower-priced solution than our institutional asset management solution, which has allowed us to get market share.

And we're beginning now to do much larger deals with the technology advances that we've made.

And I think you'll see, with IDMS, it opens up even more opportunity for us across the entire wealth spectrum.

So what we'll have now are solutions that we can provide the wealth market all the way from the top end down to clients that need thousands of users.

We're very excited about that.

I think that's going to be a good opportunity for the company.

That was our last question at this time.

I will turn the call back over to the presenters for closing remarks.

Great.

Well, thank you, everyone.

We look forward to talking to you again next quarter.

This concludes today's conference call.

You may now disconnect.