This summary is based on the first quarter fiscal 2009 earnings call conducted by FactSet Research Systems, Inc. (FDS) on December 16, 2008.
Management:
Chief Financial Officer, Executive Vice President, Treasurer: Peter G. Walsh
Chairman of the Board, Chief Executive Officer: Philip A. Hadley
Executive Vice President, Director, US Investment Management Services: Michael D. Frankenfield
President, Chief Operating Officer, Director: Michael F. DiChristina
Senior Vice President, Director - Investment Banking and Brokerage Services: Kieran M. Kennedy
Key Investors Issues
- EPS were 73 cents a share compared to 58 cents a share last year.
- Net income increased 21% to $35.6 million from $29.4 million in the year-ago period.
- Revenue increased 16% to $155.6 million.
First Quarter Highlights
Free cash flow was $30 million.
- The increase was caused by higher levels of net income and noncash expenses and an improvement in working capital.
- FactSet pays variable employee compensation related to the previous fiscal year in the first quarter. This cash outflow reduced working capital by $32 million.
- FactSet remits estimated tax payments for the first half of the year during the second quarter. In December the company paid $14 million representing estimated tax payment for the just-completed first quarter.
- Accounts receivable decreased 5% which was full of economic turmoil. Over the last 12 months receivables have increased 13% while revenues have been 16% over the comparable period. At November 30 DSO stands at 42 days.
Ending cash and investment balance was $124 million, a decrease of $19 million since August 31.
- The source of the decrease was the variable compensation payments and share repurchases. Cash is invested in US Treasuries and government agent securities.
- The company invested $42 million to repurchase 1 million shares of common stock and paid a quarterly dividend of $9 million. Currently there is $63 million in remaining stock repurchase authorization and shares outstanding at quarter end were $47 million.
- Capital expenditures were $9 million net of landlord contributions for construction. Expenditures for computer equipment were $5 million and the remainder covered office space expansion.
- The company has $124 million of cash on hand and no long-term debt. During the last 12 months the company generated $138 million of free cash flow.
Revenue was $156 million, up 16% versus a year ago.
- ASV increased $7 million when excluding currency. Including foreign exchange ASV increased $5.2 million. Excluding acquisitions and currency ASV grew 15% organically or $78 million over the last year.
- ASV was $620 million at November 30. At quarter end 79% of the ASV is derived from buy-side firms and the remainder is from sell-side firms who perform M&A advisory work and equity research.
- The company exited the quarter with 40,200 users. Client count was 2,079 at quarter end down six from August 31. The number of client cancels was consistent with recent quarters. However, client adds were 43% lower than the average over the last four quarters.
- The contribution from hedge funds to ASV is 6%. In terms of clients the company services fewer than 10% of the number of hedge funds in the industry. Users of real time news and quotes increased 50% over the last year.
- US business produced revenues of $106 million up 13%.
- On the international front revenues increased 22% to $49 million. On a constant currency basis the increase remained at 22%.
- Revenues from Europe were $39 million up 21%. Revenues from Pacific Rim operations advanced 29% to $10 million. ASV from non-USA based clients was $199 million or 32% of the company-wide total.
- Client retention continued to remain above 95%.
- Operating expenses were $104 million.
- Operating margins were 33%. The US dollar strengthened reducing FactSet’s overall expense base. Since 96% of the company’s revenues are billed in US dollars this improved operating income by $2.1 million and the operating margin by 1.3%. Offsetting currency was FactSet Fundamentals.
- Operating income declined $2.7 million from FactSet Fundamentals which depressed margins by 2%.
- Cost of sales as a percentage of revenues was up 80 basis points over prior year. Higher data costs and amortization of intangibles were partially negated by a decrease in compensation. The increase in data costs and amortization was driven by the first full quarter of operations for FactSet Fundamentals. Lower compensation was driven by favorable currency rates when expressed in US dollars.
- SG&A expenses expressed as a percentage of revenues declined 210 basis points year-over-year. This decrease was driven by lower compensation costs in C&E. Lower compensation costs were caused by the stronger US dollar especially against the Euro and British pound. C&E was lower due to a decrease in the cost per trip and a judicious approach to FactSet interoffice travel. FactSet’s headcount was 2,054, up 120 employees. Excluding FactSet Fundamentals the increase in employees was 40 or 2%.
- Effective tax rate was 31.5%. This rate can be broken down into 34.2% from underlying operations and a 2.7% benefit from re-enactment of the R&D tax credit retroactive to January 2008.
- Net income was $36 million up 21%.
- Return on capital increased to 30%. This measure has shown continuous improvement rising 2% over the last year and 5% since November 2006.
- EPS advanced 26% year-over-year to 73 cents per share. Included in EPS was a 3 cents benefit from both the R&D tax credit and from foreign currency and a 2 cents per share benefit from lower weighted average shares outstanding. Partially offsetting these benefits was a 3 cents reduction in EPS from FactSet Fundamentals.
Second Quarter 2009 Outlook
- The projected revenue range for Q2 is $156 million to $159 million.
- Operating margins are expected to range between 31.5% and 33%. This guidance includes FactSet Fundamentals and represents an increase of 1.5% compared to guidance three months ago.
- The effective tax rate is expected to range between 33.6% and 34.2%. The midpoint of this range represents a reduction in tax rate guidance of 30 basis points.
- EPS dilution from FactSet Fundamentals should be 4 cents per share.
- The primary expense drivers are the costs of the transition services agreement with Thomson Reuters and new employee growth to support the Fundamentals collection operation. The guidance for capital expenditures net of landlord contributions remains unchanged between $32 million and $38 million.
- The company does expect receivables to increase. FactSet invoices a small portion of its clients annually in advance. When the annual invoices are circulated the company expects that accounts receivable and deferred revenues will increase by $13 million.
Key questions from the first quarter earnings call conducted by FactSet Research Systems, Inc. on December 16, 2008.
