This summary is based on the fourth quarter fiscal 2008 earnings call conducted by FactSet Research Systems Inc. (FDS) on September 23, 2008.
Management:
Senior Vice President, Chief Financial Officer: Peter Walsh
Chief Executive Officer: Philip A. Hadley
President, Chief Operating Officer: Michael F. DiChristina
Senior Vice President, Director of US Investment Management Services: Michael D. Frankenfield
Senior Vice President, Director of International Operations: Scott L. Beyer
Key Investors Issues
- Earnings per share increased to 67 cents, up from 60 cents in the same period of fiscal 2007.
- Net income rose to $33.6 million as compared to $30.7 million a year ago.
- Revenues rose to $153.7 million, an increase of 19% compared to the prior year.
Fourth Quarter Highlights
Free cash flows generated were $39 million and $116 million over the fiscal year.
- Drivers of free cash flow were levels of net income, a 19% increase in non-cash expenses, a $6 million improvement in working capital partially offset by a $10 million of capital expenditures.
- Capital expenditures net of landlord contributions were $9.6 million. Expenditures for computer equipment were $5.7 million and the remainder covered office space expansion. Major expenditures included adding four HP Integrity mainframes to data centres and building up new space in Paris, Chicago, and Norwalk.
- Ending cash and marketable security balances was $143 million, down $49 million over the past three months. The company invested $67 million in connection with the purchase of Thomson Fundamentals, $12 million to repurchase common stock, and paid a dividend of $9 million, up 50% from the third quarter. At quarter end there was $105 million in remaining share repurchase authorization and share outstanding were $48 million.
Revenues were $153.7 million, up 19% versus a year ago.
- Revenue growth rate was unaffected by FactSet Fundamentals. Excluding FactSet Fundamentals, non-GAAP operating income advanced 20% to $51.3 million and non-GAAP net income rose 16% to $34.3 million. The growth rate of net income was tempered by a 65% decline in interest income from lower US interest rates over the past 12 months.
- ASV increased $25.5 million organically when excluding currency and $2 million acquired from Thomson. The increase was derived from strong performance from both the US and non-US investment management businesses. At August 31, 2008, ASV was $615 million, up 19% from a year ago. Excluding acquisitions and currency ASV grew 18% organically or $92.6 million over the last year.
- Professionals using FactSet increased to 40,100, up 500 users. Find count rose to 2,085 as of August 31st, a net increase of 41 clients.
- While the positive ASV change was not significant, user count rose again on the net basis during the quarter. Over the last 12 months, FactSet’s sell-side user base has grown 16%.
- Investment management business is 79% of total ASV. In the United States the sequential change in ASV doubled compared to the just-completed third quarter.
- US IM business registered the highest quarterly change in net new clients since the February 2007 quarter.
- Outside the US investment management business delivered healthy growth driven by Portfolio Analytics, Risk, and Marquee.
- Worldwide, Marquee users are up 45% year over year. Demand for advanced services in computing power related to portfolio analysis, risk, and quantitative analysis also continues throughout the client base. At quarter end, PA2.0 was deployed by 637 clients, up 18% over the prior year. There were 5,730 users of PA at quarter end, an increase of 22%.
- The US business produced revenues of $106 million, up 16%. Revenues from overseas increased to $48 million. Keeping currencies constant in the growth rate from the non-US operations was 23%. By region, revenues from European and Pacific Rim operations were $38 million and $10 million respectively.
- ASV by non-US based clients grew to $195 million, representing 32% of the company-wide total. Client retention remained above 95%, once again confirming the high quality of product suite and of client base.
- Operating expenses were $103.5 million and operating margin was 32.7%. Excluding FactSet Fundamentals, operating margins were 33.4%, a 90 basis increase from the fourth quarter. This margin increase is temporary and primarily the result of workstations sold to summer interns in the fourth quarter.
- Cost of sales as a percentage of revenues was up just 10 basis points. Higher compensation was partially offset by lower computer maintenance and amortization of intangibles. The decrease in computer maintenance is a result of replacing all mainframes and both data centres over the past year. The decrease in amortization expense was caused by the full amortization of certain assets from previous acquisitions compared to previous years. The increase in compensation was driven by new employees.
- SG&A expressed as a percentage of revenues declined 50 basis points year over year. This decrease was driven by lower occupancy costs and marketing expenses partially offset by higher compensation costs. The decrease in occupancy costs was caused by leveraging existing space. Lower marketing costs were the result of keeping investment levels consistent with last year while growing revenue base. Higher compensation costs were driven by more employees.
- Employee count as of August 31st, 2008, was 1,934, up 6%. Excluding acquisitions, head count rose 16% from a year ago.
- Regarding FactSet Fundamentals, these activities reduce operating income by $1.1 million and EPS by a penny. The EPS dilution was lower than guidance due to the transaction closing in late July.
- Lower US interest rates cause interest income to decrease 65% to $800,000 versus prior year. This decline is the reason why growth rates in revenues and operating income were higher than net income in EPS. At no time during the year did a competent of FactSet’s cash investments encounter a write off or a decline in value due to a ratings change, default, or increase in counter party credit risks.
- Effective tax rate was 34.2%. This rate is consistent with the prior year, excluding the $1.1 million tax benefit last year.
First Quarter 2009 Outlook
- Revenues are expected to range between $154 million and $157 million. The high and low end of the range has been decreased to account for potential future reductions in services to Lehman Brothers, Merrill Lynch, AIG, and Washington Mutual. FactSet believes the related exposure is approximately 1.5% of ASV or $10 million. The mid-point of this range represents 16% revenue growth year over year. The fourth quarter also included $1.4 million in non-subscription revenues from workstations sold for summer interns.
- Operating margins, excluding FactSet Fundamentals, are expected to range between 31.5% and 33%. This guidance assumes a reduction in sequential quarterly margins of 90 basis points due to workstations sold to summer interns in the fourth quarter. Other income is expected to be between $600,000 and $1 million.
- The effective tax rate is expected to range between 33.8% and 34.6% and assumes the US federal R&D tax credit is not re-enacted.
- EPS dilution from FactSet Fundamentals remains at 4 cents per share. The primary expense drivers are the amortization of deal costs, including the database updates from Thomson and new employee growth to support the collection operations.
Fiscal 2009 Outlook
Capital expenditures net of landlord contributions are expected to range between $32 million and $38 million.
Key questions from the fourth quarter earnings call conducted by FactSet Research Systems Inc. on September 23, 2008.
