FactSet Research Systems, Inc. (FDS)
Q2 2009 Earnings Call Transcript
March 17, 2009 11:00 a.m. ET

Executives

Peter G. Walsh - Chief Financial Officer, Executive Vice President, and Treasurer
Philip A. Hadley - Chairman of the Board and Chief Executive Officer
Scott Beyer – Head of Non-U.S. Operations

Analysts

Kevin Doherty - Bank of America/Merrill Lynch
Peter Appert – Piper Jaffray & Co.
Jonathan Maietta - Needham & Company
John Neff - William Blair & Company, L.L.C.
David Lewis - JPMorgan
Eric Ribner - George Weiss Associates

Presentation

Operator

Welcome to the FactSet Research Systems second 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 will turn the call over to Mr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

Peter G. Walsh

Thank you, operator and good morning everyone. Welcome to FactSet’s earnings conference call for the second quarter of fiscal 2009. Joining me are Phil Hadley, Chairman and CEO; Mike DiChristina, President and Chief Operating Officer; Scott Beyer, Head of our Non-U.S. Operations; Kieran Kennedy, Director of Investment Banking and Mike Frankenfield, Director of our US Investment Management business.

This conference call is being transcribed in real time 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 can be found 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.

Today we will divide our time among three areas. First, I will review Q2 results. Then I will cover guidance for the upcoming third quarter. Finally, we will close by addressing your questions.

Before we discuss the details of the second quarter it is valuable to touch on three areas we control that has our current focus. One, our market share. Even in a market that is contracting, share increases drive revenue growth. The fact that our ASV change was positive we believe indicates our market share is increasing. Two, reinvesting in our product suite. We estimate our opportunity is still more than ten times our current size even after adjusting for the market downturn. FactSet is operating from a position of strength because we ratcheted up our product investment before the market turmoil and have the financial flexibility to maintain it while the market resets.

Please do not lose sight of the fact that our EPS is growing in double digits even while we execute on major investments such as FactSet Fundamentals. Three, our company is well organized and has the skill to implement operational efficiencies. This is a topic that historically we haven’t covered in great detail. It is more relevant now because strong execution on this front funds our investment and growth ideas while helping support our operating margins.

Let’s turn to the review of the second quarter. We are in the midst of a once-in-a-lifetime set of economic conditions. Despite this environment, FactSet today announced robust top and bottom line results. Revenue growth was 12%. Operating margins rose to 33.2%. EPS increased 20%, exceeding Street expectations. We have performed against a backdrop of a harsh business climate for our clients. ASV grew $4 million organically but more importantly it was positive.

FactSet is the only firm in our industry that offers clients the ability to adjust service levels on a monthly basis. We believe that the fact that our ASV grew during the past three months is a clear testament from clients how relevant and integrated our products are in their workflow. As time progresses, FactSet expects to benefit as client cost saving initiatives focus more on firms to offer annual contracts.

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 includes the cash cost for taxes and changes in working capital less capital spending. During the last 12 months, free cash flow rose 24% to $143 million. Free cash flow generated during the second quarter were $29 million, up 23% over the year-ago quarter. Free cash flows generated in the first half of 2009 exceeded last year’s total by 88%.

Drivers of free cash flow during Q2 were record levels of net income and higher non-cash expenses partially offset by a decline in working capital. The decrease in working capital was caused by a $10 million increase in accounts receivable and the timing of U.S. Federal estimated tax payments.

There are three reasons why we are very comfortable with the quality of our accounts receivable. One, as we reminded listeners on last quarter’s call, every second quarter we issue annual invoices for services to be provided over the calendar year. This year annual invoices aggregated to $11 million. Accordingly, this annual invoice process increased accounts receivable and deferred revenues.