This summary is based on the second quarter fiscal 2008 earnings call conducted by FactSet Research Systems Inc. (FDS: chart) on March 18, 2008.
Chairman, Chief Executive Officer and Director: Philip A. Hadley
President, Chief Operating Officer and Director: Michael F. DiChristina
Senior Vice President, Chief Financial Officer, and Treasurer: Peter Walsh
Senior Vice President, Director of International Operations: Scott L. Beyer
Senior Vice President, Director of Investment Banking and Brokerage Services: Kiernan M. Kennedy
Senior Vice President, Director of U.S. Investment Management Services: Michael D. Frankenfield
Key Investors Issues
- Earnings per share rose to 59 cents versus 52 cents in the previous year.
- Quarterly revenue grew 20.6% over prior year to $140.2 million.
- The results include $2.4 million charges related to an increase in the estimate of the number of performance-based stock options that will vest in August 2008.
- Employee count at the end of the quarter was 1,828.
Second Quarter Fiscal 2008 Financial Highlights
During the quarter, there were three items that impacted the results:
- The revenues in the prior year quarter were aided by $1.2 million of incremental, non-subscription revenue from FactSet’s Partner’s product. Excluding the incremental $1.2 million, revenues were up 22% for the second quarter of 2008. Partners’ is a software product used to author equity research reports. Deployment fees related to Partners are not included in the calculation of annual subscription value, also known as ASV.
- Included in the quarter’s EPS was a charge of $2.4 million related to an increase in the estimate of the number of performance-based stock options that will vest in August 2008. During the second quarter, FactSet estimated that it was probable that the company would achieve ASV and diluted earnings per share growth of at least 20% on a compounded annual basis for the two years ended August 31, 2008. This reflects a higher performance level than previously estimated and accordingly increased the number of options that are estimated to vest at the end of fiscal 2008. This change in estimate reduced diluted earnings per share by 3 cents and decreased operating margins by 180 basis points, from 32.6% to 30.8%. The company has included non-GAAP financial measures to adjust operating and net income for the incremental of stock-based compensation.
- The U.S. Federal R&D Tax Credit expired on December 31, 2007. The effective tax rate is based on current enacted tax laws and appropriately reflects the credit only for the first four months of fiscal 2008. The expiration of the R&D tax credit caused FactSet’s fiscal 2008 effective tax rate to rise by 70 basis points in Q2.
Non-GAAP operating income, which excludes the $2.4 million incremental charge related to performance options, advanced 21% to $45.7 million.
- Non-GAAP net income rose 17% to $31.1 million in the second quarter. Non-GAAP EPS rose 19% to $0.62 per share. The growth rates of non-GAAP net income and EPS were adversely impacted by a 20% decline in other income, to $1.4 million for the quarter.
Revenue was $140.2 million, up 21% versus a year ago.
Excluding non-subscription revenues the growth rate was 22%. ASV increased $33.9 million during the quarter. Excluding $3.2 million from the acquisition of DealMaven and $400,000 from foreign exchange, ASV increased $30.3 million, or 22.5%. The firm defines annual subscription value, or ASV, as the forward-looking revenues for the next 12 months from all subscription services currently being supplied to its clients. The ASV change for the quarter was almost entirely derived from FactSet’s global investment management client base. The investment banking clients are carefully managing expenses during the current market-cycle downturn. While the firm is not players with ASV growth on the sell side, it has been encouraged by the fact that its user count from IB clients rose during each of the past two quarters.
FactSet’s investment management business is accelerating across all geographies and represents 78% of total ASV.
ASV growth rates in the U.S., Europe, and Asia all exceeded 20% at quarter end. During the second quarter, $6 million of the $33.9 million increase in ASV was due to a pricing change for most U.S. investment management clients. A 3% price change was announced in the summer of 2007 and took effect on January 1, 2008. The firm expects to repeat this practice on an annual basis. ASV was $575 million at February 28, 2009. On a constant currency basis, ASV advanced $104 million over the last 12 months, an organic growth rate of 22.5%. The management believes that its ASV performance this quarter demonstrates that it is important not to underestimate the value buy-side clients place on FactSet. This value is driven by a combination of three things.
- The firm’s advance applications, such as PA, the portfolio optimizer, portfolio publishing, alpha testing, portfolio simulation, and Marquee are all very powerful applications for end users.
- On top of these, advance applications is a wealth of data with global coverage that is completely integrated for premium content providers. It’s not to access to data for more than a hundred third-party providers, but the ease in which clients can mix and integrate their own data, especially their portfolios, into the advanced application.
- What brings the applications and data together is the firm’s drive to solve client problems. The client-friendly culture has translated into one of the best service reputations in the industry.
From a product perspective, portfolio analytics remains a strong and consistent source of growth.
The firm treats it comprehensive and it includes applications for portfolio attribution, risks, quantitative analysis, portfolio publishing, and returns based style analysis. The Portfolio Analyst’s work station is the largest revenue contributing member of the portfolio analytics product suite. At quarter end, there were 595 clients, who subscribed to this service. Users increased to 5,248, a growth rate of 25% over the prior year. The company has been pleased with the demand for its risk products and the effect of integrating and offering clients the choice of first-class risk providers, such as Barra, Northfield, and APT. Higher demand for the Portfolio Analysis workstation and quantitative products also have the affect of increasing subscriptions to the firm’s vast, benchmarked content, such as MSCI, Russell, S&P and FTSE. Marquee is now able to service the needs of a global investor. Its deployment is ramping nicely with user growth over 50% on a year-over-year basis. The firm has also been successful in selling its proprietary content, including facts and estimates, ownership data and information related to shareholder activism.
On the user side, professional subscribing at FactSet increased to 39,100, up 1,300 since November 30.
Client count was 2,021 at quarter end, a net increase of 28 clients during the past three months. Client retention remains above 95%, once again confirming the breadth and depth of the products that the firm sells supported by a high-quality client base.
The firm’s US business produced revenues of $97.1 million in the second quarter.
