This summary is based on the third quarter fiscal 2008 earnings call conducted by FactSet Research Systems Inc. (FDS) on June 17, 2008.
Management:
Chief Financial Officer: Peter Walsh
Chairman, Chief Executive Officer: Philip A. Hadley
Director of U.S. Investment Management Services: Michael D. Frankenfield
Key Investors Issues
- EPS were 65 cents per share compared to 56 cents per share last year.
- Profit totaled $32.5 million from $28.6 million in the same quarter a year before.
- Revenue was $147 million versus $121 million in the year-ago quarter.
Third Quarter Highlights
Revenues reached $147 million, an increase of 22%.
- Operating margins were steady at 32.5%.
- When excluding the tax benefit of 4 cents a share in last year’s third quarter, EPS grew by 25% to 65 cents per share.
- This achievement is due to a combination of delivering world-class service to a loyal client base, while developing products and services that are highly integrated with clients’ work flow.
During the last 12 months free cash flows generated were $120 million.
- Free cash flows were $46 million.
- Free cash flows exceeded net income by 41% and over the last 12 months free cash flow and net income are nearly identical.
- Drivers of free cash flow were record levels of net income, $9 million of non-cash expenses, and a $17 million improvement in working capital, partially offset by $13 million in CapEx.
- Capital expenditures for computer equipment were $7.6 million and the remainder covered office space expansion. Major expenditures included adding eight HP Integrity mainframes and building out new space in Chicago, Paris, and Norwalk locations.
- Ending cash and marketable securities balance was $192 million, up $45 million over the past three months.
- The company paid a dividend of $5.7 million. The quarterly dividend paid will increase 50% to approximately $8.6 million starting in the third quarter. The company did not repurchase common stock and at quarter end there was $117 million in remaining share repurchase authorization.
P&L revenue was $147 million, up 22% versus a year ago.
- Operating income advanced 22% to $48 million.
- Other income declined 60% to $900,000.
- Effective tax rate rose 2.4% to 33.3%. Net income rose 14% to $33 million. Excluding the tax benefit of $1.9 million in the year-ago quarter, the percent increase in net income was 22%.
- On an organic basis ASV increased $18.2 million, or 20%. Including currency and the cancellation of services to Bear Stearns, ASV increased $14.7 million. The change in ASV in the third quarter was derived from FactSet’s investment management client base. Overseas client base contributed strong ASV growth of 26%, including currency effects. Investment banks continue to manage expenses during the current market conditions. The adverse ASV change due to Bear Stearns was $2.6 million.
- At May 31, 2008, ASV was $590 million, up 21% over the last 12 months. Of this total, ASV from FactSet’s domestic operations was $403 million. Overseas operations supported ASV of $187 million, representing 32% of the company-wide total.
- Professionals using FactSet increased to 39,600, up 500 users from the beginning of the quarter. Client count was 2,044 as of May 31, 2008, a net increase of 23 clients. The moderate growth in user count reflects the difficult operating environment for investment banks. The user count change from the ID side was flat, even when including the cancellation of 300 seats from Bear Stearns.
- Net new client growth, while healthy, was lower than previous quarters due to a reduction in new firm creation. The company is pleased about the deepening engagement of existing FactSet users. The ability to consolidate multiple services into one through the FactSet platform has proven to be a compelling opportunity for clients to recognize efficiencies.
- Marquee users are up 47% year-over-year. Demand for portfolio analytics continues. This suite is comprehensive and includes eight applications that each produces a separate revenue stream. The suite is centered on applications for portfolio attribution, portfolio publication, risk and quantitative analysis. The portfolio analysis workstation is the largest revenue contributing member of this product suite. At May 31, 2008, there were 607 clients, representing approximately 5,500 users, who subscribe to this service.
- Client retention remained above 95%.
U.S. business produced revenues of $102 million.
- The U.S. business grew 18% over the year-ago. On the international front, revenues increased to $46 million. Excluding currency, the growth rate from overseas operations was 29%. By region, quarterly revenues from European and Pacific Rim operations were $36.3 million and $9.4 million respectively.
- Operating expenses were $99 million and operating margin was 32.5%, up 10 basis points from last year. Cost of sales as a percentage of revenue was 10 basis points higher than the prior year. Higher compensation and proprietary content collection was partially offset by lower computer depreciation and maintenance. The increase in compensation was driven by new employees.
- Higher proprietary content collection represents investments to capitalize and the future data needs of clients. Computer depreciation declined from utilizing a shorter useful life for mainframes last year to account for transition to HP’s new Integrity machines. The decrease in computer maintenance is a result of retiring alpha mainframes and the maintenance cost being included in the price of Integrity mainframes for the first year.
- SG&A expenses, expressed as a percentage of revenue, were flat year-over-year. Efficiencies in rent and T&E were offset by global engineering conference held in May 2008. The conference was not held in the prior year and reduced SG&A margin by 50 basis points.
- Employee count was 1,826. Over the last 12 months the number of employees is up 18%.
- Effective tax rate was 33.3%, an increase of 2.4% over a year ago. The rate in the year-ago quarter was lower due to $1.9 million of tax benefits primarily related to deductions for fiscal 2006.
- Other income was $900,000, a decline of 60%, or $1.3 million. This decline resulted from lower U.S. interest rates over the last nine months.
- EPS grew to 65 cents per share, up 25% versus the year-ago quarter, when excluding the $1.9 million tax benefit last year.
FactSet signed an agreement dated as of April 22, 2008, with Thomson Reuters to purchase a copy of the Thomson Fundamentals database and related assets.
