FactSet Research Systems, Inc. (FDS)
Q1 2009 Earnings Call Transcript
December 16, 2008 11:00 a.m. ET

Executives

Peter G. Walsh - Chief Financial Officer, Executive Vice President, & Treasurer
Philip A. Hadley - Chairman of the Board, Chief Executive Officer, & Director
Michael D. Frankenfield - Executive Vice President, Director, US Investment Management Services

Analysts

Kevin Doherty - Banc of America Securities
Randy Hugen - Piper Jaffray & Co.
David Lewis - J.P. Morgan
Jonathan Maietta - Needham & Company
John Neff - William Blair & Company, L.L.C.
Eric Ribner - George Weiss Associates
Shane Dinneen - Pershing Square Capital Management
Anne Griffin - Aragon Global Management LLC

Presentation

Operator

Welcome and thank you for standing by for the FactSet Research Systems first quarter fiscal 2009 quarterly earnings conference call. At this time, all participants are in a listen-only mode. During the question-and-answer session, please press “*1” on your touchtone phone. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. And now, I’d like to turn the call over to Mr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

Peter G. Walsh

Thank you Operator. Good morning everyone. Welcome to FactSet’s fiscal 2009 first quarter earnings conference call. Joining me on this call are Phil Hadley, Chairman and CEO, Mike DiChristina, President and Chief Operating Officer, Mike Frankenfield, Director of the US Investment Management Business, and Kieran Kennedy, Head of Investment Banking.

This conference call is being transcribed in realtime by FactSet’s CallStreet service and is being broadcast live via the Internet at www.factset.com. A replay of this call will also be available on our website.

Our call will contain forward-looking statements reflecting management’s current expectations based on currently available information. Actual results may differ materially. More information about factors that could affect FactSet’s business and financial results are in FactSet’s filings with the SEC. Lastly, FactSet undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events or otherwise.

Our call today will cover three topics. First, we’ll review first quarter results. Second, I’ll move to guidance for the upcoming second quarter. Third, we’ll close with our management team addressing your questions.

Before I talk about results I’d like to take a moment to highlight two items. One, included in this quarter’s EPS was an income tax benefit of $1.4 million which increased earnings by $0.03 per share. This income tax benefit resulted from re-enactment of the US Federal R&D credit in October 2008 retroactive to January 1, 2008. Two, this was the first full quarter of operations for FactSet Fundamentals. FactSet Fundamentals increased revenues by $800,000 and reduced earnings by $0.03 per share.

Now let’s move on to first quarter results. If there is a theme to our call today, it’s earnings. Our earnings results in the first quarter were outstanding and clearly demonstrate the strength of FactSet’s business model. In an ailing economy many companies are unfortunately reporting weak earnings. In contrast, FactSet reported year-over-year EPS growth of 26% even with the $0.03 dilution from FactSet Fundamentals.

We’re not immune to the challenges facing the economy today. The bleak economic news certainly worked against us and dampened our quarterly ASV growth and other metrics such as clients and users.

Nevertheless, we continue to make investments in people while other companies are reducing staff. We’re able to accomplish this continued growth because the key strength of our subscription business model is that it provides great earnings visibility. Our employees remain heads down focused on increasing our market share by deepening the engagement level of our users. We believe that putting the client first is the only reliable way to create lasting value for shareholders.

Let’s begin the highlights of the quarter with free cash flow. Free cash flow captures all the balance sheet and P&L movement. As a reminder, we define free cash flow as cash generated from operations which include the cash costs for taxes and changes in working capital less capital spending. Free cash flow generated during the first quarter was $30 million, more than two times our previous Q1 high. The increase was caused by higher levels of net income and noncash expenses and an improvement in working capital.

As I mentioned in our last call, please factor into your free cash flow analysis that FactSet pays variable employee compensation related to the previous fiscal year in the first quarter. This cash outflow reduced working capital by $32 million.

In addition please recall that FactSet also remits estimated tax payments for the first half of the year during Q2. In December we paid $14 million representing our estimated tax payment for the just-completed first quarter. The timing of estimated tax payments is consistent with prior years. Nevertheless, it distorts free cash flow in both the first and second quarters.