FactSet Research Systems Inc.
Q2 2008 Earnings Call Transcript

Published: 18 Mar 2008

[Operator:]

Welcome to the FactSet Research System’s Second Quarter Fiscal 2008 Quarterly Earnings Conference Call. (Operator Instructions) Now I will turn the call over to Mr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

[Peter Walsh:]

Thank you, Operator. And good morning everyone. Welcome to FactSet’s Earnings Conference Call for the Second Quarter of Fiscal 2008. Joining me are

[Operator:]

Thank you. (Operator Instructions) Peter Alford, you may ask your question. Goldman Sachs.

[Peter Alford:]

Thank you. Peter, something you could maybe give us a little more color on, the drivers of password’s growth, where you are seeing the growth is related to new versus existing clients, for example.

[Philip A. Hadley:]

Peter, it’s Phil. Good morning. The majority of our password growth comes from existing clients, and as Peter mentioned in the first half, and even in this quarter, it was both buy and sell side growth. But it’s traditionally large clients expanding our footprint. Marquee happens to be a driver of that in many of our clients.

[Peter Alford:]

Okay. And then I notice that the revenue per password is down a little bit on a year-to-year basis in the current quarter risks. How do I interpret that?

[Philip A. Hadley:]

I think it just goes back to the most important metric being looking at total ASV—any time we have growth in passwords in large clients, like we did this quarter, it’s going to be lower than the average total password. A new client that comes on with two passwords, those two passwords are more expensive on a [inaudible] basis than a marginal password. So, it’s just a mixed--on a quarter to quarter, but not anything I would go on beyond that.

[Peter Alford:]

I guess that the reason I note it, it’s just in the context of the discussion of your great success in migrating customers to some of the more advanced products, which presumably carry higher fees per user—right? I would think that maybe more of the growth would then be coming from effectively pricing than units.

[Philip A. Hadley:]

I think we get--the majority of the application growth would probably be on an existing user that we would be upgrading and then new passwords would tend to be—might be on Marquee seat, which on the margin would be not loaded all of the applications. They would essentially then progress to being fully loaded at the end.

[Peter Alford:]

Got it.

[Philip A. Hadley:]

Okay.

[Peter Alford:]

What should we anticipate in terms of cost growth of say the next four to six quarters and specifically the thing about as you implemented the change in the computer systems, normally there’s higher depreciation expenses. Should we look for percentage growth rates and expenses to accelerate a little bit over the next several quarters?

[Philip A. Hadley:]

I’ll let Peter take it.

[Peter Walsh:]

The beauty of our ASV model is that it provides visibility in time to adjust our investment rates to correlate to future revenue growth. If you look historically, it’s not unusual for ASV to closely track revenues on an LTN basis six months into the future. That’s important and valuable. The FactSet compensation represents 65% of our total cost. If our ASV growth rate changes substantially up or down our focus on ASV will allow us to be thoughtful and calibrate our plans to adjust our expense level, which is most likely to be in the area taken.

[Peter Alford:]

Fair enough. And then just one more and I’ll let someone else ask a question. Any incremental thoughts in terms of the Thomson Werner transaction and specifically given that they’ve identified the products and areas that they might have to exit—opportunities for you from an acquisition or a product expansion standpoint?

[Philip A. Hadley:]

Well, certainly from an acquisition perspective it hasn’t taken place yet so it hasn’t affected the marketplace in any material way, yet. I think that’s yet to come. We certainly are monitoring with the regulatory buyers, the values they’ve put out in the market place but at this point can’t comment on any thing that FactSet is doing.

[Peter Alford:]

Can’t comment in the context of whether there would be interesting products coming out of that that might be available for you for an acquisition standpoint?

[Philip A. Hadley:]

Yes.

[Peter Alford:]

Okay. Thanks.

[Operator:]

Kevin Doherty of Banc of America Securities, your line is open.

[Kevin Doherty:]

Thanks guys. I just want to see if you could kind of give us a little more color about what impact, if any, you might be seeing from some of the self-evaluating methods. It seems like you’ve been doing a good job, continuing to add new users and generate some Marquee penetration, so I’m just kind of curious, have you seen much of an impact yet, and when might that start to become a little more material in your business?

[Philip A. Hadley:]

Well, I think that the impact for us, as far as just being able to notice something different in the marketplace, probably started last summer. As Peter said, it’s 22% of our business, it’s been softer in the first half than it probably had been in the year before, but at the same time, as he mentioned, we grew seats in client count in that area. I do think that we’re much better positioned in this cycle than we were in prior cycles to provide a better solution for our clients. This cycle we have got IBCentral, which is a specific product [inaudible] Marquee allows us a greater opportunity to [inaudible] clients. And our content in the sell side, in what we’re able to sell there, is significantly expanded from the last cycle. Now whether that’s private company information, private equities, venture capital, enhanced M&A, shareholder activism data, [inaudible] the list can go on. And lastly I would say that we have a wireless product that extends out from our key products that has been very popular. So I think all of those things provides greater opportunity in this cycle than we had in the last cycle.

[Kevin Doherty:]

And if we were to see a little more sensitivity in terms of the user growth or the ASV, how would that kind of balance out, one versus the other?

[Philip A. Hadley:]

[inaudible]

[Kevin Doherty:]

Yeah, again, I mean, I guess historically in the last cycle we saw a lot more sensitivity on the user count and ultimately the ASVs were impacted so I’m just kind of curious if you would see any of that playing out and obviously it seems to be a lot more isolated this time versus the last cycle, but presumably if there was some slow down, what would maybe be the driver, at this point?

[Philip A. Hadley:]

Maybe do some characterizations that would differentiate where we sit today versus where we sat six years ago. First of all, I think that buying patterns of our sell side clients are far more prudent than they were in the last cycle. There was a period of time in 2000 where anybody got anything they wanted, which we certainly benefited from, but as they contracted their businesses they became very efficient at allocating services, ours included, and you saw user count drop dramatically. I think in this cycle they were very prudent, even in the up part of the market, so I don’t feel the users in places where our product was on a desk but not being used. I also think that because of the strength of our product that we’re looked at as a potential consolidation source for them and are invited into opportunities to provide a broader solution and actually reduce their costs.

[Kevin Doherty:]

Okay, that’s fair. And could you say a bit more about some of the growth opportunities you see now with your investment management customers, as well as with the IB folks? I guess what areas you’re most excited about here that might have changed over the trends you’ve seen over the last year or so?

[Philip A. Hadley:]

Well, certainly the fact that the trends tend to be very long-term trends. Our product cycle from creation to the point where it makes impact on our product—it seems to be it’s really five years before we create a product and it actually starts to become what we think of as a material product driver. Now, whether that be PA or Marquee, they all tend to have a very long cycle to them. And I think that’s just because it takes a long time to create a product that is valuable to many as opposed to valuable to a few. So, for us I think that they key product drivers are very consistent. Obviously the PA suite is very material to us. And it continues to broaden, so it’s not just attribution and it has many other features, as Peter mentioned. Marquee certainly allows us to expand our footprint inside a client and provide a greater value for our client. It’s becoming far more material to us. And just content in general and I split content into two parties [inaudible] our business model is willing to support third party contact very heavily so whether it derives from [inaudible] any of the benchmark providers, we’re very successful at distributing anybody’s third party content that’s needed by a financial professional. But in addition to that—obviously our product strategy changed over the last seven years—the market has changed. And that we also have fact and content that we have become very successful with. But I think all three of those really couple to our future opportunity.

[Kevin Doherty:]

Okay. And then just one follow-up. You mentioned some of the proprietary content. Are there any new areas you’re continuing to explore, where might you be concentrating more of your resources these days?

[Philip A. Hadley:]

No, I would say making what we have better is always the focus. It’s one where the goal posts continue to move when it comes to content and what was accessible as a level of content a year ago, and a year from now, the content is a moving target. So, all of our content areas require continued focus [inaudible].

[Operator:]

Randy Hugen of Piper Jaffray, your line is open.

[Randy Hugen:]

Thanks and thanks also for the disclosure on Bear—have you been getting any pushback, specifically from the sell side—on the 3% price increases this year?

[Philip A. Hadley:]

No. I think it was just viewed as a normal—and it was also just a buy side increase.

[Randy Hugen:]

And is the 3% similar to the price increases that were implemented back in the 2001 to 2003 time frame?

[Philip A. Hadley:]

I would say that if you called what we were doing back then a price increase—which it was for some and not for others—that was more of a reconfiguration of the price of our workstation. That was taking the value and lowering the front-end cost for a new client, but increasing that tail-end cost, or the price of the workstation, and I think it really reflected just a change in product mix as we continued to add Marquee and include that in the work station and add other content that were included in that workstation. I would categorize that as more of a reconfiguration than an inflationary price increase.

[Randy Hugen:]

Okay. And then, would you scale back your level of investment if the market dips lower significantly, or would you kind of maintain the expected level of investment at the expense of margins?

[Philip A. Hadley:]

I think our guidance historically has always been to track expenses with ASV or keep margins at constant. Obviously, you would need to re-evaluate how you keep your resources in your business at any point in time in the cycle, but we’ve had the luxury of always having growth so we’ve managed to accelerate or decelerate along with what the marketplace is willing to [inaudible].

[Randy Hugen:]

Okay, thanks. And generally speaking and realizing that the sell side is becoming a less significant piece of your overall business, if a large sell side firm were to lay off, let’s say 10% of their equity research investment banking employees who are using FactSet, how would this impact your revenues and also how long would it take for that to show up?

[Philip A. Hadley:]

A couple of things. How quickly does it take to show up? One of FactSet’s unique positions in the marketplace is our clients are able to adjust their subscriptions on a real time basis, which I think makes the value of our ASV number much more relevant than it would be if it were contractually-based. But the answer is that they can adjust it in real time on a monthly basis. The answer goes back to the answer of Peter’s question and that is the workstations on the margin aren’t the average workstation product. So the impact isn’t nearly as material as if you took the total number of workstations into our ASV number to come up with the average per workstation. But, our clients are adjusting their workstation plans up and down in real time all the time. So in the last six months some of the large clients have shrunk their workstations, some of the large clients have increased their workstations, just depending on how they feel their business is doing in the market place. So it’s something that has happened already and will continue to happen as time goes forward.

[Randy Hugen:]

Okay. And then, finally, was Bear Stearns a top 10 client?

[Philip A. Hadley:]

No. Our largest client is less than 3% of our total ASV. And Bear Stearns was significantly less than 1%. If you were to add some history to it, as similar in size as what Roberson Stevens was to us in the last cycle. It seems like every cycle one soldier goes down and that just happens to be the one in this cycle. Hopefully only one.

[Randy Hugen:]

Let’s hope so. Thanks a lot.

[Operator:]

John [inaudible] of William Blair, you may ask your question.

[John [inaudible]:]

Hi. Good morning, guys. A little bit more color, if you could, on the incremental stock compensation expense. This is from the performance-based options, I believe. Can you give us an update? I believe it was previously 20%. What percentage do you now expect of that?

[Peter Walsh:]

Hi, John, it’s Peter. How are you? Early in the quarter we estimated that was probable that we would achieve ASV and diluted earnings per share growth of at least 20% on a compounded annual basis for the two years ending [inaudible]. But 20% is the new estimate. This 20% estimate reflects higher performance level than we previously estimated in Q1 and previous quarters. It’s important to know that there are times when proper accounting is predicated on an estimate and probable is a term in FAZ 123 that is utilized to describe this type of accounting judgment. So we think a probable is the likelihood of us [inaudible] ten times. I would encourage everyone to look closely at our 10-K and 10-Q. Ever since we issued performance options back in August 2006 we have been including a lot of transparency as to what is our estimate of performance-based options that work best. And what would be the change if that estimate changed up or down from a one time [inaudible] as well as the ongoing stock options expense. Obviously, if actual results meets or exceeds our estimate, coming this August 2008, we’ll certainly be very proud that we’ve delivered an increase—or an organic growth rate by 300 basis points over that two year period.

[Philip A. Hadley:]

And again, the metrics—the performance triggers our organic AFC and net income growth.

[Peter Walsh:]

The minimum is as organic as the [inaudible]

[John [inaudible]:]

In terms of the stock comp expense of $4.3 million versus the $2.7 million prior, is this a one-time adjustment you make during the quarter? Is this sort of setting the bar at $4+ million in stock comp expense on a go-forward basis?

[Peter Walsh:]

The $2.4 million was a one-time incremental adjustment in this quarter.

[John [inaudible]:]

Okay.

[Peter Walsh:]

If you go back to that disclosure it will also tell you how our ongoing quarterly charge will increment now that we estimate a higher number of performance options [inaudible]

[John [inaudible]:]

Okay. And then, a little bit more on the 3% price increase. I think that you mentioned that you are going to start to do this on an annual basis. Does that represent a change from past practice? When was the last sort of similar price increase done? And can you specify where the price increase was assesses? Was it on the base fee, the incremental fee? And then what’s historically been the contribution to top-line growth from price increases?

[Philip A. Hadley:]

I think I’ll get all those questions.

[John [inaudible]:]

I can repeat them.

[Philip A. Hadley:]

The first one, it was on the base seat. It was in the U.S. IM segment. It was the first time that we’ve implemented in the U.S. IM segment, but we plan to continue it as an annual policy going forward. Did I miss one?

[John [inaudible]:]

Just historically, is there a way to quantify what price increases have contributed to revenue growth on an annualized basis in a normalized kind of period, but if this is the first time you are doing it . . .

[Philip A. Hadley:]

Yeah, I don’t think I could quantify that.

[John [inaudible]:]

Okay. And then last question. What were the DSOs in the quarter, excluding DealMaven? Thanks very much.

[Peter Walsh:]

John, you should look at those DSO in the corner—45 days—DealMaven AR that we picked up [inaudible]

[Operator:]

Dave Lewis of JPMorgan, you may ask your question.

[David Lewis:]

Good morning, guys. I was wondering if you could address two secular trends [inaudible]. One, is the impact of [inaudible] money moving into some of the buy side clients, and number two, the impact of U.S. Detention Protection Act. Is that increasing the money allocated in the buy side clients where they have a need to add more services on the buy side?

[Philip A. Hadley:]

I’m going to take a wild guess at trying to answer this but I’m not sure—other than just guessing, if I look at our large top 100 clients on the buy side, they are so large and some of them are the sovereign funds themselves, that money moving around isn’t probably that material. For them it’s just a big core healthy business that’s been very traditional and [inaudible].

[David Lewis:]

The U.S. Detention [inaudible]?

[Philip A. Hadley:]

Can you elaborate more on . . .?

[David Lewis:]

Yeah, I thought Fidelity was--they’re increasing money—the funds that they’re receiving, due to the U.S. Detention Protection Act is increasing and so I assume that that benefits you guys. I’m just curious if that’s material. It doesn’t sound like it is but that was the question.

[Philip A. Hadley:]

No, but I would say that anything that helps the pool of large investment management funds worldwide is good for FastSet.

[David Lewis:]

And just one follow-up. The pricing on the sell side—you guys touched on the buy side—what are you seeing on the sell side? Currently budgets are down across the investment banks. How strong is the present pressure on the sell side?

[Philip A. Hadley:]

I think that, as I said, their configuration of service has been much tighter in this cycle. I think one of the big variables is based on the way they deploy service and how large they are. It’s certainly seat counts, of which they’ll adjust their head count accordingly based on their thinkings [inaudible] but at the same time I think we’re looked at with the broadening products we defect as an opportunity for them to consolidate onto a [inaudible] platform. So, in a down cycle, typically where a user might have multiple services, they have to choose one service, and we believe that FastSet is the [inaudible] player in being that one service.

[David Lewis:]

Thank you.

[Operator:]

You have no further questions.

[Philip A. Hadley:]

Thank you very much.

[Operator:]

Thank you for your participation. Your call has concluded. You may disconnect at this time.