Factset Research Systems Inc (FDS) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by, and welcome to the FactSet Q2 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kendra Brown, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to FactSet's Second Fiscal Quarter 2023 Earnings Call. Before we begin, I would like to point out that the slides we will reference during this presentation can be accessed via the webcast and are currently available on the Investor Relations section of our website at factset.com. A replay of today's call will be available via phone and on our website. After our prepared remarks, we will open the call to questions from investors. To be fair to everyone, please limit yourself to one question plus one follow-up.

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 of the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, Chief Executive Officer; and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q&A portion of today's call. I will now turn the discussion over to Phil Snow.

Thank you, Kendra, and good morning, everyone. Thanks for joining us today. I'm pleased to share our second quarter and first half results. Our organic ASV plus professional services growth year-over-year accelerated to 9.1%, driven by healthy expansion among existing clients and the successful execution by our sales team of our price increase in the Americas. We saw several large wins this quarter outpacing last year and allowing us to capture more of the addressable market.

Our second fiscal quarter performance resulted in adjusted diluted EPS of $3.80 and an adjusted operating margin of 37%, exceeding our guidance and situating us well for the remainder of the fiscal year. Growth this quarter was the strongest amongst banking, asset owners and wealth management clients, aided by larger wins across each of these client types. Acceleration was broad-based with double-digit ASV growth from our banking, corporate and private equity and venture capital clients, and our investments in content and technology supported retention and expansion.

We saw our core workstation drive follow-on opportunities for feeds and digital platforms and wealth and increased transactional revenue and demand for content from asset owners. In the first half, our end markets remained largely supportive. However, we are not immune to market volatility. As interest rates rise and macroeconomic conditions remain uncertain, we're beginning to see a more challenging environment for our clients. This includes reductions in AUM, constrained budgets and headcount rightsizing after increased pandemic hiring.

We're also monitoring the recent instability across the banking sector, which accounts for 17% of our ASV. In this regard, there are several key factors to keep in mind: first, FactSet is not materially exposed to commercial banking; second, no one single client represents more than 3% of our ASV; and finally, our multiyear enterprise contracts offer protections that includes seat minimums and longer cancellation notification windows.

Given the evolving market dynamics, particularly in banking, we feel it is prudent to take a conservative view on the second half of the fiscal year. As such, we expect continued ASV growth, but with modest deceleration in the second half.

We are, therefore, updating our guidance for fiscal 2023 to reflect organic ASV growth of $145 million to $175 million, inclusive of CUSIP Global Services, which becomes an organic part of our business in the third quarter. At the midpoint, this is a $15 million reduction in core business ASV growth. We expect 2/3 of this reduction to come from the challenging conditions facing the banking sector and the remaining 1/3 is expected to come from lengthening sales cycles and constrained budgets for other firm types. This reduction in ASV will be offset by the addition of $10 million of ASV growth from CGS. Together, these changes represent 8% growth at the midpoint, in line with our medium-term outlook.

To preserve EPS, we will continue to drive disciplined expense management. As a result, we expect adjusted operating margin of 34% to 35%, as previously communicated. We maintain a long-term view of our business and are steadfast in our commitment to investing for growth, and we will speak more about CGS and guidance later in the call.

The demand for data and technology is increasing, and we are a proven trusted partner for our clients for their digital transformations. In the second fiscal quarter, we remained focused on building the leading open content and analytics platform and several large deals reinforced our conviction regarding this strategy.

First, within Research & Advisory, we were selected as the primary market data provider for BMO's Wealth Management division. This was a key contributor to almost 9% of workstation growth year-over-year. Our ongoing investments in our digital platform and content refinery also resulted in wins across banking. The most notable was a 7-figure deal for a global bank sell-side research department, which included workstations and data feeds. Across the sell side, we are meeting the need for flexible integrated solutions, including feeds, APIs, CRM integrations and banker productivity tools.

In Content & Technology Solutions, we won a major real-time deal to provide our market data as a service offering to a premier asset management client. This solution will replace its legacy on-premise infrastructure. Our ability to augment enterprise platform deployments with consistent data is accelerating growth and expanding our share of wallet for Content & Technology Solutions.

Finally, within Analytics & Trading, investment in our portfolio life cycle suite has increased cross-sell opportunities with active asset managers and asset owners. Within the middle office, growth accelerated in our core analytics offering, which includes portfolio analytics, quantitative solutions, fixed income and reporting. We also see increased buy-side demand for outsourced performance and risk solutions consistent with the trend toward investment firms outsourcing middle office functions. Our open platform and enterprise solutions have positioned us well to capitalize on this with several other opportunities in our pipeline.

As we celebrate the first anniversary of the acquisition of CUSIP Global Services, I'd like to congratulate the team on a job well done. CGS has exceeded expectations with ASV growth of 8% since the acquisition. CGS' core securities identification capabilities align well with FactSet's data management strategy. And with the integration now complete, we're focused on growth across asset classes, geographies and capabilities. We are working on expanding into loan data and private companies.

For more than 50 years, CGS has provided mission-critical solutions to the front, middle and back office. This work continues and in close partnership with the American Bankers Association, we will continue to innovate.

Turning to performance across our regions, organic ASV growth in the Americas accelerated year over year to 9.3% driven by strength in Analytics & Trading and Content & Technology Solutions, and the execution of our price increase. Our Americas price increase delivered $30.7 million in ASV, up $10.6 million from last year. In addition, the region benefited from improved expansion with banking, wealth management and asset management clients. We also had strong sales of middle office solutions. While new business decelerated overall for the quarter, we saw strength in new logos from asset owners.

In Asia Pacific, we delivered organic ASV growth of 10.8%. Performance was driven by research with improved expansion and retention in banking. Expansion also improved among asset managers and asset owners, although this was partially offset by client cancellations. Given the recent changes in COVID policy across Asia, we are starting to see improvement in the pipeline. However, we expect a lagged effect as the market normalizes.

Finally, in EMEA, organic ASV growth accelerated to 8.1%. Acceleration was driven by Analytics & Trading, where we saw an improvement in expansion and retention among asset owners. Improved retention among private equity and venture capital funds and hedge funds also contributed to growth. However, we also experienced headwinds as the major markets in the region remain under cost pressure and the United Kingdom begins to see an adverse impact from Brexit.

In summary, I'm pleased with our first half performance. We're confident in our ability to meet our medium-term outlook despite market conditions. And as we head into the second half, we have a solid pipeline, driven by our open platform, connected content and market-leading workflow solutions. And with more than 40 years of growth, FactSet has a proven history of successfully navigating market volatility.

Our greatest asset is our people, and I'd like to wrap up by recognizing their diligence and commitment to our strategic priorities. We were honored to be named one of Glassdoor's Best Places to Work in 2023, and I want to thank all FactSetters for helping create the culture that made this award possible.

At FactSet, we're committed to growth for our clients, employees, investors and communities. We recently published our Fiscal Year 2022 Sustainability Report themed Commitment to Action. The report highlights the progress we have made in turning our commitments into action, and I encourage you all to take a look.

I'll now turn it over to Linda to discuss our second fiscal quarter performance in more detail.

Thank you, Phil, and hello to everyone on the call. As you've seen from our press release this morning, we're pleased to report continued high single-digit organic ASV growth and double-digit growth of revenue and adjusted EPS year-over-year. I will now share additional details on our second quarter performance. Consistent with our definition of organic revenues and ASV, we will exclude any revenue and ASV associated with CUSIP Global Services when reporting organic metrics. Given the first anniversary of the CGS acquisition on March 1, 2023, CGS will be included in the organic results of FactSet as a component of our CTS business starting in the third fiscal quarter of 2023.

As Kendra noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. We grew organic ASV plus professional services by 9.1% year-over-year, an acceleration over the last quarter and a solid finish for our first half. Our performance reflects the strength of our recurring sales model and disciplined execution by our sales team. As our clients look to technology and data to drive alpha, we saw improved retention and expansion among existing clients. Price realization also continues to improve as we executed a higher price increase over a larger client base.

GAAP revenue increased by 19.5% to $515 million for the second quarter. Organic revenue, which excludes any impact from acquisitions and dispositions over the last 12 months and foreign exchange, increased 8.9% to $470 million. Growth was driven primarily by CGS and our Analytics & Trading and Content & Technology Solutions.

For our geographic segments, on an organic basis, revenue growth for the Americas was 8.2%, benefiting from increases in Content & Technology Solutions and Analytics & Trading. EMEA revenue also grew at 8.2%, primarily due to growth in Analytics & Trading. And finally, Asia Pacific revenue growth increased 15.3% due to increases in Research & Advisory and Content & Technology Solutions. GAAP operating expenses grew 12.4% in the second quarter to $346 million.

And I'll now detail the drivers based on our primary cost buckets. First, people. Our expenses grew by 10% year-over-year in the second quarter, primarily due to increased salary and bonus expenses for existing employees. As a percentage of revenue, this was 350 basis points lower year-over-year, driven by slower salary growth as a percentage of revenue, higher labor capitalization and FX benefit. We saw headcount increase by 10.3% year-over-year, with 2/3 of these new positions located in our centers of excellence. And as a reminder, more than 66% of our employees are located in our centers of excellence.

Next, facilities expense decreased by 7% year-over-year due to our reduced real estate footprint, lapping of the previous year's impairment charge of $10 million and FX benefit. As a percentage of revenue, this was 360 basis points lower year-over-year. As we continue our intense focus on cost management, we expect to take another real estate charge of approximately $15 million to $20 million later this fiscal year.

Moving on, technology expenses increased by 27%, driven by increased cloud spend, third-party software costs and higher amortization of internal use software. As a percentage of revenue, growth was 50 basis points higher year-over-year due to higher capitalization of internal use software. As we explained during last year's Investor Day, we anticipate technology costs being 8.5% to 9% of revenue over the medium term. Technology expenses will likely continue to increase as we invest for growth.

And finally, third-party content costs increased by 5% year-over-year. Our team is doing an excellent job of controlling third-party data costs despite inflationary pressure. As a percentage of revenue, growth in third-party content costs was 70 basis points lower year-over-year.

And now turning to the margin front. Our GAAP operating margin increased by 430 basis points to 32.9% compared to the previous year. Our adjusted operating margin improved by 330 basis points to 37%. Margin expansion resulted from higher revenue, lower personnel costs as a percentage of revenue, the lapping of the prior year's impairment charge and lower content and facilities costs. These savings were slightly offset by higher technology costs and expenses related to CGS. As a percentage of revenue, our impairment expense was 230 basis points lower than last year's on a GAAP basis. You'll find an expense walk from revenue to adjusted operating income in the appendix of today's earnings presentation.

As a percentage of revenue, our cost of sales was 50 basis points higher than last year's on a GAAP basis, largely as a result of increased amortization of intangible assets, expenses related to CGS and technology costs. This was partially offset by lower personnel costs as a percentage of revenue. On an adjusted basis, it was 180 basis points lower due to lower personnel costs as a percentage of revenue, partially offset by expenses related to CGS and higher technology costs.

And finally, on a GAAP basis, SG&A was 245 basis points lower year-over-year as a percentage of revenue and 150 basis points lower on an adjusted basis. This was primarily due to decreases in facilities expense and professional services. This was partially offset by an increase in T&E as our teams resumed essential travel.

Turning now to tax. Our tax rate for the quarter was 16.1%, a 6.2% increase compared to last year's rate of 9.9%. The higher Q2 tax rate is due to higher pretax income and lower stock option exercise. Going forward, it's important to note that we expect more volatility in our tax rate. One driver will be foreign tax. In April, the U.K. statutory rate will increase from 19% to 25%, increasing FactSet's foreign effective tax rate and reducing the tax benefit of foreign income. Stock option exercise will also fluctuate with our stock price, generally resulting in a lower tax rate when the stock price is higher and higher tax rate when the price is lower. Also, as we finalize our tax returns for prior years, we have the potential for onetime charges which could also be helpful. Even with this variability and a higher tax rate for the second quarter, we expect to end fiscal 2023 with an effective tax rate of 13.5% to 14.5%.

GAAP EPS increased 19% to $3.38 this quarter versus $2.84 in the prior year. Adjusted diluted EPS grew 16.2% to $3.80. Both EPS figures were driven by higher revenue and margin expansion, partially offset by increased interest expense and the higher tax rate. Also of note, Q2 EBITDA increased to $200 million, up 45.4% year-over-year due to higher operating income. And finally, free cash flow, which we define as cash generated from operations less capital spending, was $147 million for the quarter, an increase of 34% over the same period last year. This was due to higher net income, partially offset by increased capitalization costs from internal use software. We would note that strong free cash flow continues to be an attractive feature of FactSet's business model.

Our ASV retention for the second quarter remained greater than 95%. We grew our total number of clients by 558 compared to the prior year, driven by corporate and wealth clients and channel partners. Our client retention remains at 92% year-over-year, demonstrating excellent execution by our sales and client support teams.

Moving on to our balance sheet. During the second quarter, we completed another $125 million prepayment of the 3-year term loan for the CGS acquisition. This was our fourth prepayment since the start of the loan. This brought our gross leverage ratio down to 2.4x from 3.9x level when we initially financed the CGS acquisition. This is well within our 2.5 to 2x gross leverage target and appropriate for our investment-grade rating. Given that we are within our target range, we will slow the pace of repayment of the remaining $500 million outstanding balance of the term loan, which matures in 2025. Also, given our reduced leverage levels, we intend to resume share repurchases for the remainder of fiscal 2023.

We currently have $181.3 million available for share repurchase under the company's existing authorization. We plan to allocate this amount equally in the third and fourth fiscal quarters. While bringing our repurchases back to previous levels will take time, we're focused on returning capital to shareholders. We will provide updates on our share repurchase program in the coming months.

As Phil stated earlier, given our reduced core ASV outlook and the inclusion of CUSIP Global Services as part of our organic results, we are updating our guidance for fiscal 2023. We expect organic ASV growth of $145 million to $175 million, which is a $15 million reduction in core ASV growth at the midpoint. The decline is offset by the $10 million addition of CUSIP and remains within our medium-term outlook of 8% to 9% organic ASV growth. Given the headwinds to ASV and lagged timing of ASV in the first fiscal quarter, we expect revenue for fiscal 2023 to be in the range of $2.08 billion to $2.1 billion. At the midpoint, revenue growth is expected to be about 13%, a deceleration of 95 basis points from our previously issued guidance.

Despite a slightly softer top line, we are confident that our disciplined expense management will allow us to protect margins and preserve EPS. Consistent with our downturn playbook, areas of focus include ongoing real estate rightsizing, rationalization of third-party content costs and limiting hiring to essential positions. Based on forecasted performance, we also expect our year-end bonus pool to be in the range of $100 million to $105 million, roughly $10 million less than last year, which will provide an additional margin benefit.

As a result of these measures, we are maintaining adjusted margin guidance of 34% to 35%, consistent with our Investor Day commitment of 50 to 75 basis points of adjusted margin expansion on average per year. And finally, given the strength of our adjusted operating margin and revenue growth, we expect adjusted EPS of $14.50 to $14.90 for fiscal 2023 as previously communicated. Despite the uncertain environment, we remain confident regarding long-term growth. We have a diverse pipeline and are seeing higher retention, better expansion, improved price realization and increased demand for our products.

In addition, our enterprise contracts and diverse end markets provide us with some downside protection in a turbulent market. As a result, we remain committed to our medium-term outlook and are positioned well for the future. And with that, we're now ready for your questions. Operator?

(Operator Instructions) And our first question comes from Manav Patnaik from Barclays.

This is Brendan on for Manav. Just wanted to ask on the ASV cut. Obviously not entirely unexpected with everything going on and appreciate the disclosures there on where it's coming from. I want to ask you, you talked about 2/3 of being from banking, would expect maybe some of it's coming from venture capital, too. If you could just walk through where exactly you expect that impact to be, and maybe it's just venture capital is just a small part of ASV, it doesn't matter. But if you could quantify that for us, too, that would be great.

Sure. This is Helen Shan. I'll take that question. So the end markets did begin to soften a bit at the beginning of the calendar year and obviously more volatile in the last few weeks. And as we said, 2/3 come, we think, from banking and 1/3 from the other types. And so we did plan for lower growth in banking after such strong years of growth post the pandemic. And actually, first quarter would continue to be strong, but we did see some greater erosion in Q2 in part due to layoffs. And so that kind of got us to our number there of that 2/3.

PE/VC, we've not seen that. In fact, we've continued to see double-digit growth there, and so we don't feel that, that's going to be as big a factor. And it is, as you noted, somewhat relatively small. But for us, we'll have a lot to say more when we can see what happens in the hiring classes in the fourth quarter. So that's really the driver of the banking piece. The rest comes from really just changes in client behavior that we're seeing as Linda and Phil talked about earlier.

Okay. And then just one follow-up, pivoting over to margin. Obviously, a really strong performance in the first half, and I know that second half is typically seasonally worse, but it's still -- the number you guys have there still feels a little conservative, even if ASV comes in a little lower. Is there something else to call out? I mean, it sounds like maybe more real estate charges are coming in. I mean, it seems like -- it feels like the -- even [35%] seems pretty beatable, but just -- if I'm missing something, just let me know.

Brendan, it's Linda, and we appreciate your optimism on the margin front. A couple of things going on. We see ASV growth slowing primarily because we're now lapping the CUSIP acquisition. So growth, which had been as strong as 19.5% will now come down towards 8%. And we see expense growth continuing at about 11% in the back half of the year. So those 2 things will combine to give us some margin compression.

In the first half, we've had adjusted operating margin of about 37.6%, and we do like our guidance of 34% to 35%. So if you do the math, you can see that adjusted operating margin will be closer to the zip code of 32% as we get to the back half of the year, we think. But we do hope that continued expense management will help us. The biggest piece that we're looking at here, as we said in the script, is potentially reducing our real estate footprint by another $15 million to $20 million as we get closer to the end of the year.

Now that, given the length of the leases that we have, provides another, call it, $3 million to $4 million back into the P&L for next year. And in total, last year, we did $62 million of real estate rightsizing, so with this, we'll be approaching $80 million in real estate rightsizing. So we think we've handled that quite well. Otherwise, we just keep our eyes on our downturn playbook, and we're managing all of this pretty closely. So I hope that helps.

And our next question comes from Alex Kramm from UBS.

Just quickly on the pricing, $30.7 million, clearly a nice increase from last year. But if I look at this correctly and I just look at your U.S. ASV, I think that works out to roughly 2.5%. I think you've been talking about the req rate 6%. So just wondering, I know you don't get it on all of your book of business, but just talk about maybe if you saw a little bit more incremental pushback than you expected or how pricing discussions had gone relative to expectations. And how we should be thinking about the European increase, which should be coming in the next quarter?

Alex, it's Helen. I'll take that one. We've made really good progress in capturing value, both because of our fit-for-purpose packages and our higher price realization. And as Phil mentioned, we did get to raise $31 million from ASV just in the Americas alone, which is $10 million higher than the previous year and really 1/5 of our total ASV growth rate. So to your point, this increase is in part due to higher rate but also the fact that we are able to capture more clients. 60% of our book here in Americas was captured, which is actually higher by 6.4%.

But the remaining part, a lot of that is in our long-term contracts that we have negotiated step-ups, and so we don't include that in the annual price increase or for those that we were able to recently renew or new clients in Q1. And then also keep in mind, because of our calendar year-end, Alex, that first quarter that focused still on last year's rate increase, and then so you're really getting 3/4 of it for this year. So that is part of the reason you're trying to get to a math piece there. But our sales force has been terrific in being able to help clients understand with our -- the value of our increased investments and being able to get the higher price increase. We did not see more pushback this year than in previous years. So that is not at all the behavior that we dealt with.

Okay, great. And then second question, I'm not sure if I'm the right person to ask it but I will anyways. I mean, obviously, UBS is buying Crédit Suisse. And I think this is the first, I guess, bulge bracket marriage or fourth marriage that we've seen since the financial crisis. So when I go back to 2008, 2009 performance, you certainly saw that impact. Phil, I heard you in terms of highlighting how big some of -- or how big the biggest customers are. But could you talk about how something like that may impact you? I would assume this is more a fiscal year '24 event. And then if I think about the relative size relative to what you said earlier, I mean, it's like $15 million, plus/minus, the right ballpark for a client of that size or can you help us a little bit about a potential impact here?

Yes. So Alex, it's Phil. I'm not going to talk about the specific size of any particular client. But I think you can assume, right, that FactSet has a good footprint within these large global banks. But it's not just the investment banking teams. Very often, it's on the asset management side and also there'll be wealth users as well. So we've got a very nice distributed portfolio across these firms.

I think part of why we're being a bit more prudent here in the second half is we do get a lot of banking ASV in Q4 based on the hiring of these banks. So we're not quite sure how this is going to play out, whether or not there's going to be more consolidation or not. But typically, we do okay, right, during these periods. FactSet's very sticky. We're there to help our clients. We're very trusted. We have a much more diverse portfolio than we had 10 years ago, that's for sure. And usually, if people leave these firms, they end up somewhere else. And if they like FactSet, they'll ask for it, which is always great. So it is hard to predict. But we've handled this well in the past, and we think we're very well equipped to handle it if there's even more uncertainty moving forward.

And our next question comes from George Tong from Goldman Sachs.

Your ASV guidance plans for slower growth from the banking category. Can you describe what you're seeing with the sales cycles there in the broader pipeline? How much of the guidance reduction reflects what you've already seen versus conservatism around what you expect to see?

George, I'll take that. It's a little bit of a combination of both. I mean, obviously, this quarter has been a terrific one, given our 9-plus percent growth rate. But we are seeing some higher erosion, and so that's something we're taking into effect. Banking is a pretty large piece of our Q4 so there's probably a bit of conservatism there, but that's because we don't have that visibility at this time. But knowing where we think hiring will go, that's where that drives that 2/3 piece.

In terms of the rest of the book, we are seeing that more deals -- it's taking longer to get some of the deals over the line. And quite frankly, what's the benefit is the fact that we see quite a few that are still in the commercial negotiation stage, meaning they're in the right place, but it's taking a little longer. So that really speaks to the quality of the book, which is still solid. But given timing, it may take a little bit longer to monetize.

Got it. That's helpful context. And as a follow-up on the turn to margins. You had mentioned before that you expect margins to move lower heading through the year, and understand the seasonality of margins. If you look at year-over-year comparisons with margins, which essentially would wash out seasonality, how do you expect margins to progress year-over-year? And what are the key puts and takes as you think about margin expansion or contraction year-over-year?

Sure. George, the seasonality and the pattern is very similar to what it was last year in FY '22. And as we move forward, we would probably give you a little bit of outlook here on our 4 main cost buckets. People, we expect that cost will continue to increase as we go through the back half of this year. We have additional headcount, 2/3 of it in offshore locations, but we do have additional headcount. And we're offsetting that by higher capitalization. We've done very well across the firm to increase the rate of capitalization, which is appropriate.

And in the first half of the year, I would note our capitalization was $35 million. With the back half, you're going to want to pick that up even a little bit more as the tech spend is heavier and thus, the capitalization will be higher as well. On the technology costs more specifically, we still see that we'll be within the 8% to 9% of revenue for tech costs, but this is a growing business, and we are increasing our tech spend to support it.

We talked about real estate, another charge of $15 million to $20 million that we have planned. This has been an area where I think we've done a great job of rationalizing our costs, and it's been very helpful to us with absolutely no impact on anything else that we're doing. Third-party data similarly has had a slight growth, 3%. But given the rate of inflation, that looks pretty good, so we're pretty happy about that.

So what we're going to do is we're going to continue our focus on our downturn playbook. Right now, we are looking at essential hires only. Travel is prioritized for essential trips, primarily around Helen's sales team. And we've talked about real estate, and we are negotiating hard on third-party content. So all of that together, we think, is manageable.

The last piece that we would note on people costs, our bonus pool, we're thinking is going to be sort of $100 million to $105 million. Last year, we had a bonus pool which was more like $115 million. So we're looking for about, call it, $10-ish million savings on that if we perform at 100% of our targets. So again, last year was a very strong bonus year. This year will probably be a bit more moderate, and we'll continue to update you on this as we move through the year. So I hope that's helpful to you, George, and I hope I covered everything you wanted.

Very helpful.

And our next question comes from Andrew Nicholas from William Blair.

I think Phil, you mentioned CGS ASV growth of 8% here since acquiring it. And I think that's on the higher end of what that business has historically grown, at least in terms of revenue. So I'm just wondering if you could speak to the sustainability of being kind of in that high single-digit range and maybe a little bit more on the progress of some of the new opportunities there on private company data in particular.

Yes. Thanks for the question. Yes, we feel confident. We've had this asset for a year now, so we're still getting to know it. It's a very steady, consistent business. We are executing exceptionally well. We've got a great sales team. Almost all of the employees that came over during the acquisition is still with us and very happy. And I think some of the growth can just be attributed to good execution, frankly, in terms of the contracts and as new issuance comes out.

It is -- getting into issuing CUSIP's for new asset classes isn't a very quick process, right? There's a lot of parties you have to bring to the table and get on board to do that. So we're making good progress there on the 2 areas that I mentioned, particularly the loan entity IDs. So it's a consistent business. I think you should see steady performance from it. But again, we're just getting to know this asset really well now that we've had it for a year.

Perfect. And then switching gears a bit for my follow-up. I wanted to ask a question on wealth. Obviously, another nice win there with the BMO add in the quarter. I'm just hoping you could spend maybe a bit more time walking through the major reasons you're winning in that space. And maybe more importantly, from my perspective, when you're not winning deals, are there major gaps in your offering that consistently come up? And as you think about those gaps, are those generally opportunities to address those organically? Or would we eventually expect to see you acquire into those gaps?

Yes, so thanks for the follow-up question. There are no gaps related to the product that we intended to take to market, so we're doing very well with the Advisor Workstation. And some of the reasons we're winning really are just the ease of use of the interface, the speed of it, the flexibility of FactSet's superior analytics capabilities, integrating portfolios. The Advisor Dashboard that we've layered on top of this for some clients really suggests the next best action for the advisers. That's been a big hit.

And just, I think, our open and flexible technology in addition to the interface itself allows the firm to bring in feeds and other components that they may want into other parts of their business. So it continues to grow in double digits. It was a double-digit growth for, I think, 7 or 8 quarters in a row now, so a very consistent performer. And we still see a lot of room here to grow the tailwinds in the space. And as you pointed out, there are some obvious adjacencies that FactSet could get into. So we're looking at those. And if there's an opportunity to do something, either buy or build, we'll take advantage of that. Helen, do you want to add on?

Yes. No, I was going to say that a lot of our wealth clients are really investing into their own technology platforms. So exactly what Phil said is once we land with our workstation, quite frankly, there's a lot of room for growth with the Advisor Dashboard and other digital solutions. And since they're investing in their platform and because we have an open strategy, we are actually seeing tons of opportunities. So I think there's a lot there for us to continue to grow on.

And our next question comes from Faiza Alwy from Deutsche Bank.

So I wanted to ask about investments because it looks like the pace of investments is going to accelerate, which is typically the case seasonally. But I'm curious if -- given the recent volatility, if you're thinking around the types of areas that you're investing in has evolved at all?

Sure. Thanks, Faiza. I mean, it's a little bit early to comment on exactly what we'll be doing. This is the time of year that we look at our strategy and consider what we might want to think about for next year in terms of any changes. Many of the initiatives that we set out to execute on a few years ago, these are long initiatives, so we continue to execute well on our deep sector and private markets offerings. We're doing well in real time.

I mentioned a very nice deal that we captured in Q2 as a result of that investment, and we've actually tilted more investment towards that this year. We just see so much opportunity in that space. One thing I can sort of highlight or I'd like to highlight is FactSet has great content analytics, and we're also a technology company. And we've done so much work to invest in our platform with our hybrid cloud strategy, partnerships we've developed, our API program. All of that is really beginning to bear fruit. And we do believe that the technology piece of what we do is going to help us more in the future.

And you actually see that in CTS. So CTS had a very good quarter, growing double digits, accelerated. And if you look at what CTS is providing to the market, it's content and technology solutions. But this quarter, it really tilted towards the technology part, which is exciting. It's sitting down with our clients, helping them manage data, helping them in other ways. So that's a bit of the evolution there, if that's helpful to you and maybe gives you a bit of a hint of sort of where we're headed into next year.

Great. That's very helpful. Just as a follow-up, wanted to ask about capital allocation. So Linda, you mentioned that you expect to slow the pace of repayments on the debt side. Maybe talk about how you're looking to balance debt paydown versus share buybacks. Like should we expect all buybacks to happen immediately this year? Or just give us a bit more color in terms of how you're thinking about those things.

Sure, Faiza. The first order for FactSet for capital allocation is to reinvest in our strong and fast-growing businesses, as Phil just explained. Our investment pool is pretty much the same this year as it was last year. We've tracked our investments. They've done very well. We'll continue with the things that are going very nicely for us and maybe pick up a thing or 2 that's new. But investment comes first.

And then we have our dividend, which as you can see, has been quite steady and has grown nicely over the years. We're about coming up to the time where we think about what will happen next with the dividend. And then on share repurchase, we have $181.3 million in our authorization. The plan is to spread that evenly over the remaining 5-ish months of the year, and we'll use a 10b5-1 and grid repurchase program. So we'll put that into place here sometime in the coming weeks. And we're pretty excited about resuming share repurchase.

So I think that probably pretty much covers what we'll be looking to do in terms of capital allocation. I think we see this more sort of getting back to what we've done before. On the paydown of the loan for CUSIP, we had been paying down $125 million a quarter. We may slow that down to even sort of half-ish of that pace. And all these things together, I think, should help us get some capital back to shareholders in a way that's more typical of what FactSet has done in previous years.

So we're excited about getting back to share repurchase. It is the back half of the year. It's not going to move the average share count all that much for 2023, but it will be quite helpful to us as we move into 2024. So I hope that detail was helpful to you, Faiza.

Yes, very helpful.

And our next question comes from Craig Huber from Huber Research Partners.

My first question, just go a little bit deeper, if you would, please, on the sales cycle that you're seeing on your buy-side clients, both the asset managers, hedge funds. I'd also love to hear a little bit on the venture capital and private equity firms out there, how that sales cycle is tracking for you?

Craig, I'll take that one. Yes, I think when we -- interestingly, as opposed to specifically on the firm types, but as we're taking a look at sort of the size of firms, that's where we're seeing a little bit of a difference with regard to sales cycle. So what I mean by that is many of our larger clients are really going through their digital transformation. And because they've already spent probably 12 to 24 months investing, planning, our ability to continue with them, when we think about deals that are taking longer, it's not in necessarily the largest of deals, it's actually more in the midsize.

So as a result, we are -- we feel some downside protection on that. But things will take a little bit longer. We can tell from the deals and how long they're taking and moving from one quarter to the next, not very, very long, but as we said, the trend is coming that way and so we're just keeping an eye on it.

And then how would you characterize the revised ASV outlook here in terms of conservativeness? Given the environment, I don't blame you for being conservative there. And so just how did you put that together in terms of -- as the question came up earlier, just want to hear a little bit further about what you're hearing from clients versus what you layered on top of that, trying to anticipate about a tougher economic and stock market backdrop?

Craig, maybe I'll say a few things and then I'm sure Helen will have some stuff to add on. So for the second half, what I do want to highlight is the strength that we're seeing in Analytics and CTS. So they've had -- both had very good quarters and the pipeline for both of those lines of business look very good. So you think of these more as our enterprise solutions. So we see a very healthy appetite from our clients for these across a number of firm types.

The conservatism is coming around our research area, which really has to do with the seats and primarily in banking. So that's a bit of the thinking. And then as I mentioned in my opening comments, we see about 2/3 of the correction that we made to banking and the other 1/3 to firm types. So Helen, I don't know if you wanted to add on and sort of help with any...

Yes. And I think it's also important to keep in mind the shape and mix of our banking book. So first of all, we have seen acceleration in a lot of the cross-selling we're doing. So as banks are -- we've had growth in data feeds, API integration, digital solutions in there, so it's not only around the workstation itself. And then the other piece is to really think about both the large banks, sort of the majors as we call them, and then the middle market banking clients, where a number of the advisory boutiques actually are making opportunistic hiring decisions. And so that's helped keep the book in decent shape.

So we do expect the sector to be slower than last year, but I think the diversification and what we're offering them and the mix of the client portfolio and, of course, the multiyear contracts that have minimums, 2/3 of our book have minimums in there in banking, so that gives us some downside protection. So I feel pretty good about our ability to manage through that downturn.

And our next question comes from Ashish Sabadra from RBC Capital Markets.

Yes, I just wanted to drill down further on the 2 areas which have been really strong, Content and Analytics, and that's mostly focused on the buy-side, which is more than like 87% of your business. And in this environment, the buy-side has been relatively resilient, at least as far as we can see. So the question there was, and I get the -- sorry, the comments around elongation of sales cycle. But I was just wondering if you can talk about the pipeline itself. How is the pipeline comparing even compared to 3 months before? Are you seeing more deals come into the pipeline? And is it just a matter of maybe they get pushed out from fourth quarter to fiscal year '24 versus the ability to close the deal?

Ashish, it's Phil. I'll start. So yes, we're seeing very good pipelines for both Analytics and CTS. And this really, I think, is just in line with the mega-trends that we've seen on the buy-side for the last few years. So all these firms are going through their own transformations. They want to do more with less partners essentially. So they're looking for those anchor partners like FactSet that they can work with that have the majority of what they need from a technology and content standpoint. And then they want to shorten the tail.

There's also a shift to outsourcing, so we're seeing a lot of the asset services beginning to do more for asset management clients. We think -- we're in about 70% of the asset services at different stages of working with them, but we've got very good partnerships there. That's really built up over the last year or 2, where FactSet's superior middle office solutions, whether it's risk, performance reporting, all our multi-asset class capabilities, we can deploy those now to the buy-side, either directly ourselves or through partners like asset services. So that's a big trend.

We're also seeing very good strength in asset owners. That firm type accelerated this quarter for some of the same reasons, just the strength of the solutions that we offer. So that's a trend. I think also, Helen mentioned sort of the open technology that's working very well with wealth clients. That's true with asset managers as well. So there's lots of ways that we can help them.

On the CTS side, the real-time data had a very strong quarter, and we had that key deal. We see a lot of opportunity there, a very strong pipeline for what we're calling market data-as-a-service. So FactSet is delivering this through the cloud, which is new. So for clients that have had very heavy on-prem solutions for real time historically, we're offering a next-generation solution for them that we think is very exciting. So that's one of the things I would highlight in CTS.

That's very helpful color. Sorry, go ahead.

I was just going to add one quick thing. In these sorts of periods, the thing you want to focus on as well is retention, and our retention has continued to be incredibly strong. And as we think about the expansion with the buy-side, from a workflow perspective, we continue to see strength in the middle office with performance solutions. And as Phil said, back office with real time, where we're the only provider with our ticker plant in the cloud, and that's a differentiating factor that's very much resonating.

And then to your last point, when we see delays, we're not seeing those deals necessarily fall out, meaning they're not lost or canceled. And I think that plays a bit into the comment made around when they will come -- actually become monetized.

That's great color. And maybe if I can just ask on the wealth front. Despite the BMO win, the belt was not highlighted as a strength in the second quarter. So I was just wondering, does that come in, in the back half of the year or does that get classified as something else in terms of ASV?

Yes. No, wealth is a terrific growth area for us and the Bank of Montreal deal is in this quarter. But it will -- it's just part one. We believe as they continue on their complete digital transformation, in fact, it's in the statement that they gave in the press release, we'll follow them through that. But it is in this quarter.

And our next question comes from Russell Quelch from Redburn.

So I just want to get back to the point on margin. If we go back 10 years, your gross margin was somewhere around sort of 65%. Today, that number sits at just over 50%. Is it a function that you have to buy more third-party data and that cost is increasing? I sort of heard your answer to George's questions in terms of near-term margin drivers. So is there more you can do to improve efficiencies in operations to improve the gross margin over time again? Just noting like best-in-class here operate above 80% gross margin.

Russell, it's Linda. Yes, best-in-class in our competitor set is above where we are, but they are different businesses. Some of the companies have an index business, which has a 75%-plus margins, and some of them have ratings businesses, which have 55%-plus margins. We have neither of those businesses. We think we're doing really well on the margin increase front. We've said 50 to 75 basis points on adjusted operating margin, and that we will see that on average over the next few years. So we've been making really good progress on that.

Are there more things we could do on margin? The answer is definitely yes. I spoke about what we're looking to do in terms of further reduction in our real estate footprint. And we're very proud of the cost control efforts that we've put in place already. I think the main part of the effort here that Phil may want to pick up on is what we're doing to automate our content collection. And that's kind of the biggest opportunity that we have, and technology is changing very rapidly in that area.

We were able to move much more quickly with content collection and do much more much more quickly than we were able to do previously, even a year ago. And I'm not sure that it's relevant to comment on what happened really 10 years ago. This company was very, very much different 10 years ago. So we're working on the margin. We have done what we said we will do. Even with a $15 million decrease in the core ASV growth, we're still holding margin for the year with the increases that we had spoken about before. So maybe I'll turn it over to Phil here and let him talk a little bit more about some of the opportunities that we see particularly in the content area.

Sure. Thanks, Linda. Yes. So yes, Russell, we've been re-architecting our content collection efforts and really automating things more than we had in the past. So that's been an ongoing effort. It was necessary for us to do that because of the deep sector initiative and some other content sets that we're beginning to collect at scale. So we're way less than halfway through that, but we have a lot of content sets beginning to go through it. It looks very promising.

And the question just becomes, okay, does that flow through to margin or does FactSet continue to invest in even more content, right, to help drive the top line? But there's a lot of automation opportunity, not just within content but I think within different parts of our business moving forward.

Okay, yes. Okay, then just as a follow-up, in terms of client growth. The client growth has been under 100 for 2 consecutive quarters now, I think. To what degree do you think that's due to, just the backdrop? Or is there an element to which we're seeing the impact of increased competition, particularly in financial markets workstations from some of your peers?

I wouldn't attribute it to increased competition. New business is down, I think, because of the environment, but we still are showing very strong growth in new logos from corporates. There will be a big opportunity for private equity firms. This quarter, we actually grew our institutional asset management clients, I think, by 10. So we're seeing growth across different firm types. So we are -- we do exist in a lot of the large firms that are out there already, so the potential for FactSet really exists within a lot of the existing clients, but it is nice to get new names as firms get formed.

And our next question comes from Kevin McVeigh from Crédit Suisse AG.

Phil, you had a comment on the call where you talked about CTS tilting more towards technology as opposed to content. Can you maybe just segregate that a little bit? How much -- if you can, how much is CTS today's kind of content versus technology? And is there a meaningful difference in the growth there? And then is it kind of the Snowflake relationships in lend that's driving that technology adoption? Or is it, to Helen's point earlier, just the sophistication of the clients you're serving?

Yes, Kevin. The vast majority of it is content. And when I talk about technology, it's probably being able to deliver that content and that same content in new ways. So if you went back 10 years ago, we'd be shipping you a comma-delimited flat file that you'd be putting into your internal systems and having to do a lot of work with. But now we do have delivery through APIs, through Snowflake, through lots of other partners and beginning to layer on some services.

So one service that we have is something called Concordance as a Service. So if you have some data, you don't want to go through all of the mapping of it yourself. FactSet's very good at that. That's what we built our business on. We will provide that service. So we believe there's opportunities like that moving forward to lean in real time, where I think I'm characterizing that as technology. You could say it's content as well. But the fact that we're -- we've put this technology up in the cloud, we think, is really interesting from a technology standpoint and going to drive growth -- further growth for CTS moving forward.

Super helpful. And then this may be obvious, but Linda, if you could just humor me. The difference in the ASV relative to the revenue, it looks like you have $5 million tweak, and I know CUSIP comes in versus the revenue, looks like it's $15 million to $20 million. Is there any way to think about the delta between those 2?

Yes. Kevin, I think you make a good point. The conversion of ASV into revenue a little bit perhaps slowed as to where it was before because we had a little bit lighter first quarter in particular. But I don't think there's going to be anything there that's major. We feel pretty good about each of those estimates.

And it's probably worth saying, we're doing this, Kevin, as you know, it's been a pretty dramatic time. We have to revise guidance here 4 days after a very eventful weekend. So it is possible that maybe we're being overly conservative. We don't know yet. But as we watch going through the rest of the year, we'll be updating as to where we stand. But we did want to try to be very thoughtful about what we're seeing right now. And good point on the conversion to revenue. Thanks very much, Kevin.

And our next question comes from Shlomo Rosenbaum from Stifel.

Phil, can you elaborate a little bit on the cancellations you touched on? Is there something in particular? Is it people getting laid off? Is it some firm closures? Maybe you can just expand on that a little bit.

Can you help clarify the question? I'm not sure what cancellations I referred to.

I thought you were -- when you're discussing Americas, that you had some area that you said you were -- some of the positives and one of the negatives. I thought there were some cancellations that you had highlighted. It could be that I misunderstood it.

Yes, I think you might have misunderstood that.

Yes, there were -- Shlomo, it's Helen. Yes. No, I don't -- we've actually had very good retention. There is erosion that's happening in cases on -- a bit on the banking side, which is why we are taking our more deliberate approach on thinking about that. But there wasn't anything material this quarter.

Okay. And then Linda, you talked a little bit about real estate -- potential additional real estate that you plan to do some more actions on the rest of the year. If you look at your downturn playbook, is there a lot more levers that you can kind of push in that downturn playbook beyond what you've kind of laid out for us in the last several quarters? In other words, if we do see that this kind of spirals more after, as you noted, was a very eventful weekend last weekend.

Yes, Shlomo, great question. We do have some additional thoughts on things we could do. For example, we've added back a bit to travel and entertainment, particularly for Helen's team for critical client usage and for critical pipeline activity. So we could pull back on that again a little bit. But frankly, I'd rather not because we're trying to get the -- make sure the top line is as healthy as absolutely possible.

Real estate is one that we're going to do. Technology costs may come in a bit lighter. We'll have to see how that goes and please keep an eye on the capitalization rate. And then with people, it's largely about keeping to this essential hiring and making sure that we're communicating clearly with you on where the bonus pool is going.

So those are the major things. And at this point, we feel pretty good about the way we're managing the company. I wanted to anticipate a question you always ask, Shlomo. You're always ahead of everyone on days sales outstanding. It has popped up a bit as we brought CUSIP in-house. Job #1 was to get the technology changeover completed successfully, not break anything, and we did that. So now our focus will turn to days sales outstanding, Shlomo. And we hope that we have some nice lower results on DSO to speak to you about in the third quarter. But glad you're paying attention to that detail.

Thanks for preempting that.

Happy to do so.

And our next question comes from Toni Kaplan from Morgan Stanley.

You've talked about the elongation of the sales cycle already. And wanted to understand, the impact on not just new customers but also cross-selling, like does cross-selling or upselling start to get more complicated in this kind of environment? I guess, what product sets would you anticipate being the most impacted?

Toni, I'll take a shot at that. I think for cross-selling, it becomes a little bit around client budgets. So we did talk about a longer sales cycle. It would be remiss of us to not also note that clearly, folks are tightening their belts. So there is some of that coming into play. That being said, as I mentioned earlier, for our larger clients, many of them had set budgets. They need to continue to invest. So we've not seen some of the major changes on that front. There may be if they need to take something major in terms of change, especially in certain areas right now because of changing from one provider to another. But in terms of add-on, especially on feeds, we've seen very good positive momentum there. So I think the pressure will be more along the lines of material new projects as opposed to expansion.

Great. And then I think you mentioned some strength on the risk side. I guess in terms of the offerings there, can you just refresh us on -- is this within the asset management client base that's purchasing it? And like, I guess, how much of an uptick do you typically see? Or is it just offsetting something they might have purchased otherwise?

Yes. Typically, our risk offering, Toni, is delivered through our Analytics Suite, and that will be -- multi-asset class risk is really where the momentum has been for us over the last number of years. So we have a number of risk models on our system from third-party providers that we integrate. And then we do a lot of our own work on the risk side as well. So all of FactSet are really giving that choice and then very good analytics that are integrated with the rest of your portfolios, your performance suite, all of that has come together so nicely with the acquisition of BISAM, Vermilion, and getting those integrated into the core FactSet platform.

So we just see -- when you go out and you're closing an asset owner or an asset manager, risk usually is at the heart of their middle office system. And we believe that we've done such a nice job there. We have good momentum. It wasn't a particularly strong quarter for risk. It's a consistent performer, but it's always in the mix there with the rest of that -- the rest thing is really at the heart of it.

This quarter in Analytics, we did very well with our Quants product, which is -- which we're investing in. And we also did very well in fixed income, so it was nice to see fixed income have a good quarter as well.

And our next question comes from Owen Lau from Oppenheimer.

Could you please give us an update on the momentum in Asia Pacific? And I think organic ASV grew at 10.8% off a low base. You talk about recent change in corporate policy there. What do you see the environment there right now? And do you think growth can accelerate from here going forward?

Thanks for that question. Yes, we did see accelerated growth in the quarter, which is terrific. And in particular, some good demand in the first half in both Australia as well as in Japan. If I think about Australia, they had greater and improved retention and increased demand from asset owners, in particular. As you know, there would be the super funds who are going through some consolidation and trying to gain efficiencies.

And so they've got a lot of complexity on the data side. And as Phil just mentioned, our ability to help them manage through that, to connect the different various data sets has really been a differentiator for us. So our Concordance offering has helped them, for example, in creating an entity master.

Now Japan has their own issues, but they've also expanded in terms of accelerated growth with asset managers. So we continue to see double-digit growth there in Analytics. Now we do see that Hong Kong is still recovering, so I think we mentioned that last quarter. But activity has picked up a lot, given post the relaxation of the zero-COVID rule. So we think the pipeline there is beginning to book. But that's -- at this point, it's coming from, as you note, a bit of a low base. But we're very pleased to see the improvement happening out in APAC.

Got it. And then -- and also another product which is like related to ESG offerings and also the traction there. And I think there are some noise about like some funds are moving away from ESG investing. Do you see this as a material trend, or you don't see that as like troubling as kind of some people have reported?

Owen, it's Phil. So ESG is a very small piece of FactSet's business. Our strategy here is just to provide the picks and shovels that anyone in the market that wants to can build a view of ESG. We'll provide choice of data that's out there, but we're not in the business of creating ESG ratings or anything like that. So we'll provide the tools that clients need, but it's not a huge focus for us.

And what I don't want to get lost today, right, with all of the volatility of the market is this was FactSet's strongest Q2 ever. We had a very good quarter. And we had 3 deals across different parts of our businesses in the 7 figures. We had a fantastic real-time deal, which is new. We captured a large sell-side research deployment, which is very exciting. And then we had the BMO Wealth deal that we've been able to be more public about.

So all of this really points to the strength of our business, the diversity of it, and I think a reason for us all to be optimistic moving forward.

So in closing -- yes, sure. Thank you, Owen. Thanks, everyone, for your questions today.

In closing, thank you, all, for joining us today. Please note that in conjunction with the first anniversary of our inaugural investment-grade senior notes offering, we will be hosting a conference call for our fixed income investors on April 13. Linda and I will give an update on performance and take questions from investors. Details can be found in our press release that we just issued on March 21. In the meantime, feel free to contact Kendra Brown with additional questions. And we look forward to speaking to you again soon. Operator, that ends today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.