Yahoo Finance FactSet Research Systems Inc. (NYSE:FDS) Q3 2024 Earnings Call Transcript
FactSet Research Systems Inc. (NYSE:FDS) Q3 2024 Earnings Call Transcript June 21, 2024
FactSet Research Systems Inc. beats earnings expectations. Reported EPS is $4.37, expectations were $3.9.
Operator: Good day and thank you for standing by. Welcome to the Third Quarter FactSet Earnings Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ali van Nes, Head of IR, Investor Relations. Please go ahead.
Ali van Nes: Thank you, and good morning, everyone. Welcome to FactSet’s third fiscal quarter 2024 earnings call. Before we begin, the slides we referenced during this presentation can be found through the webcast on the investor relations section of our website at factset.com. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions from investors. The call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may re-enter the queue for additional follow-up questions, which we will take if time permits. Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures.
Additionally, please refer to our forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today. Joining me today are Philip Snow, Chief Executive Officer; and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q&A portion of today's call. I will now turn the discussion over to Phil Snow.
Philip Snow: Thank you, Ali, and good morning, everyone. Thanks for joining us today. Before I speak about this quarter's results, I just want to point out that we scheduled today's call on a Friday to allow for observance of the Juneteenth holiday earlier this week. We finished our third quarter with organic ASV and professional services growth of 5%. Adjusted diluted EPS rose to $4.37 for the quarter and our adjusted operating margin was 39.4%. This quarter we continue to see the impact of clients' tightened budgets and cost rationalization. Trends we highlighted last quarter that were echoed by others in the industry. These pressures extend decision making and lengthen sales cycles. Also, as you may recall, the third quarter is seasonally our weakest of the year.
Against this backdrop, we continue to build on FactSet’s history of 44 consecutive years of revenue growth and 28 consecutive years of adjusted EPS growth. And in these 44 years, we have successfully navigated through even more difficult market positions than we face right now. Despite challenged end markets, this is an exciting time in our industry, particularly for technology companies with valuable data assets. We are harnessing the power of gen AI to build cutting edge solutions and capture market share. For example, we held our 11th client symposium in Miami in April, showcasing new products and the value they bring to clients. These new products are driving requests for hundreds of product demonstrations, creating new leads for our sales team.
Returning now to our third quarter, we concluded with 8,029 clients and nine net new logos. Our user count exceeded 208,000. Overall, ASV retention remained higher than 95% and client retention was 90%. Currently, we expect to finish the fiscal year with annual organic ASV plus professional services growth between 4% and 5.5%. Linda will provide further updates to guidance in a few minutes. Turning now to our performance by region, we saw slower growth in the third quarter due to continued market headwinds and the effect of the cancellation from the Credit Suisse, UBS merger, which impacted all of our regions. Overall, this cancellation accounted for approximately 30 basis points or two-thirds of our ASV deceleration quarter-over-quarter. In the Americas, gains from asset owners and wealth managers were offset by continued client cost rationalization, and the Americas region's organic ASV growth rate was 5.7%.
In the EMEA region, growth was driven by a price increase, sales to asset owners, and higher ASV from the analytics product suite. The EMEA region's organic ASV growth rate was 4.4%. And in the Asia Pacific region, we saw acceleration from buy-side firms driven by front office solutions and growing transactional revenues. The Asia Pacific region's organic ASV growth rate was 6.1%. Looking now at trends by firm types on the institutional buy side, we had a notable win this quarter, displacing a competitor at a large asset manager in the U.S. This win was driven by our advanced fixed income analytics. We took an enterprise sales approach and the client chose our portfolio performance solutions and analytics capabilities. We had another significant win with a global asset manager.
It moved to a multi-year agreement including middle office portfolio services. This contract aligns with the client strategy to consolidate vendors and to reduce total cost of ownership. These victories demonstrate our ability to provide tailored, high-value solutions to our clients. These clients also recognize that our ongoing management of their complex portfolio holdings positioned us well to do more for them. In banking we saw a decline from the Credit Suisse cancellation. This segment is still impacted by cautious hiring and a wait-and-see attitude toward overall capital market conditions. In wealth management, although growth was modest this quarter, the sector remains a tremendous opportunity for FactSet given our active pipeline. We're committed to enhancing our offerings to capture future growth and deliver compelling value to wealth advisors and their clients.
A great example of this is our recent investment in Aidentified’s, which was announced last week. By incorporating Aidentified’s relationship management data into FactSet intelligent prospecting solution, we're able to accelerate new client acquisitions for wealth advisors. This brings us to the fast evolving technology landscape where FactSet is well positioned to lead. We have more than 40-years of meticulously curated and connected data. We are trusted by institutional asset managers and retail wealth advisors with 16 million portfolios on our system, representing more than $30 trillion in assets. And on the sell side, FactSet is well established as the platform of choice for fundamental research workflows. For users on both the buy side and the sell side, FactSet has a unique breadth of data curated for their specific use cases.
Our rich data ecosystem is a singularly robust and safe foundation for harnessing the power of generative AI. Specifically, our clients benefit from the combination of our data, our knowledge of clients workflows, and our new generative AI tools. Together, they are producing unique insights and efficiencies for our clients. At FactSet, we are energized to help our clients find new ways to surface insights to set them apart from their peers. We're doing this with live demonstrations of our new products that are available right now. As a result, FactSet is the trusted partner of choice, given that accuracy requires both seasoned judgment and traceable data sources. At FactSet, we have both. A prime example is our portfolio commentary product released last month, which generates complete detailed investment performance summaries in about a minute.
Portfolio commentary combines our comprehensive data and deep domain expertise to provide tailored and highly efficient outputs. We also launched the new portfolio manager hub, an end-to-end solution that integrates all elements of a portfolio manager's workflow, from news and research to analysis and trade simulation. PM Hub adds a gen AI back chatbot called Portfolio Assistant to tap into our data to provide precise, traceable answers all without leaving the platform. Enthusiastic client response to portfolio commentary and PM Hub give us confidence that we can extend our buy-side middle office presence to front office users. And on the sell side, FactSet Mercury optimizes the company research workflow for junior bankers. Using a single trusted conversational interface, we are working towards producing pitch books and charts on demand.
We expect users to save another 10 hours per week using this tool in addition to the five to 10 hours per week that they said they saved with FactSet before we released Mercury. As banking conditions improve, we are confident that bankers will seek out FactSet Mercury to give them better speed, accuracy, and efficiency. Looking ahead, we have a multi-year strategic investment plan built on three key pillars. First, we are expanding our market data for deep sector, private markets, alternatives, and real-time applications. With real-time market data, for example, we aim to compete for market share by transitioning to cloud-based solutions. By enhancing our [Indiscernible] plans cloud capabilities and expanding content coverage, we can offer more scalable, reliable, and cost-efficient data services.
We're well positioned to capture market share when clients demand modern cloud-based infrastructure. Secondly, client workflow. Beyond our middle office business, we are heavily investing in our front office capabilities covering both fundamental and quantitative research. Our offerings for the sell side, particularly in banking automation, are gaining traction with top global banks and boutique firms. Our wealth franchise also continues to grow with significant new opportunities in the pipeline. Thirdly, generative AI. This foundational strategic initiative, we believe, will begin delivering incremental ASV in fiscal 2025. As we mentioned, our new portfolio commentary in FactSet Mercury are already driving demand. And last week, we announced our off-platform AI solutions for technologists.
These include a new generative AI data package, a conversational API powered by FactSet Mercury, and a new AI partner program to bring FinTechs and AI startups onto FactSet platform. Together, we expect to see ASV growth from tech savvy financial firms and hedge funds. In summary, I am extremely excited about our competitive opportunity. As demand for traceable quality data grows, particularly for financial decision making, we are adding critical AI tools to deliver real advantages for our clients. Our partnership-focused approach has made FactSet a preferred provider has positions as well for even greater success when market conditions improve. I will now hand it over to Linda to discuss our second quarter performance in more detail.
Linda Huber: Thanks, Phil, and hello to everyone. As you've seen from our press release this morning, despite slower ASV growth in the third quarter, we improved margins and EPS, and we are increasing guidance on both of these for the fiscal year. I'll say more about that later. First, our results for this quarter. As Ali noted, our usual reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. For the third quarter, organic ASV grew 5%, while adjusted operating margin improved 340 basis points to 39.4% and adjusted diluted EPS rose 15% to $4.37. For the quarter, GAAP revenue increased 4% to $553 million on sales to institutional asset managers, asset owners, partners, and corporates.
For our geographic segments, organic revenues grew by 5.5% in the Americas, 2.4% in EMEA, and 3% in Asia Pacific. Turning now to expenses, GAAP operating expenses decreased 2% year-over-year to $350 million. This was driven by lower compensation expense, mainly due to a reduction of $8 million to our annual bonus accrual, as well as a reduction in salary expenses and payroll taxes, partially offset by higher intangible amortization and cloud-related costs. Compared to the previous year GAAP operating margin increased by approximately 420 basis points to 36.6%. This was due to increased revenues combined with reduced operating expenses as a result of lower compensation expense. On an adjusted basis, operating expenses decreased 1.2%. And now looking at each of our four major cost buckets in turn.
First, as we have frequently discussed, technology continues to be our main area of expense growth. Specifically, technology costs increased 26% year-over-year. Technology costs now represent about 9.5% of revenue. Secondly, in contrast, employee expenses fell 8.6% year-over-year, driven by lower compensation expenses due to earlier cost reduction efforts and the lower bonus accrual. Third, our third-party content costs increased by 9%, due to the timing of changes in variable fee expenses. And finally, real estate and related expenses saw a 14% decrease year-over-year as we saw the benefits of early and significant steps we took to reduce this expense bucket. As we've mentioned before, thoughtful expense management is positioning the company for future growth, while allowing us to continue to invest in technology and strategic initiatives.
Turning now to margin, adjusted operating margin improved by 340 basis points to 39.4%. This was primarily due to an adjustment to the bonus accrual, a one-time payroll tax adjustment, and lower salary expense. The bonus accrual was reduced by about $8 million for the fiscal year, given our lower ASV achievement. This change added about 160 basis points to our adjusted operating margin in the quarter. Additionally, earlier cost rationalization efforts resulted in another 130 basis points of the 340 basis point adjusted operating margin improvement. And as always, you will find an expense block from revenue to adjusted operating income in the appendix of today's earnings presentation. As a percentage of revenue, our cost of services declined by 90 basis points year-over-year on a GAAP basis.
Cost of services was approximately 40 basis points lower on an adjusted basis. The decrease was primarily due to lower compensation expense, partially offset by an increase in intangible amortization and cloud-related costs. And in SG&A, as a percentage of revenue, it was 320 basis points lower year-over-year on a GAAP basis. SG&A was approximately 300 basis points lower on an adjusted basis. The decrease was primarily due to lower compensation expense, a reduction in bad debt expense, and lower facilities costs. Turning now to tax, our tax rate for the quarter was 17%, compared to last year's rate of 16.9%. This slight increase was primarily due to higher pre-tax income, partially offset by increased utilization of foreign tax credits and additional tax benefits from stock-based compensation.
Turning now to EPS, GAAP EPS increased 18.2% to $4.09 this quarter versus $3.46 in the prior year period. This was driven by higher revenues, margin expansion, and a lower share count, partially offset by higher interest expense. On an adjusted basis, EPS increased 15.3% to $4.37, also driven by revenue growth and margin expansion, as well as reduced share count, partially offset by higher interest expense. EBITDA increased to $240 million, up 16.9% year-over-year due to higher net income. Free cash flow, which we define as cash generated from operations, less capital spending, was $217 million for the quarter, an increase of 13% over the same period last year. This was primarily driven by higher net cash from operating activities and reduced spending on property, equipment, and leasehold improvements.
FactSet continues to be a strong producer of free cash flow. And turning now to share repurchases for the quarter, we repurchased 135,150 shares for approximately $60 million and an average share price of $442.12. Our fiscal 2024 share repurchase plan targets $250 million of repurchases. As of May 31, 2024, we had $128.1 million remaining for repurchases in fiscal 2024. Also, yesterday we paid a quarterly dividend of $1.04 per share, which represented a 6% increase in the regular quarterly dividend from the previous quarter. This marks the 25th consecutive year we have increased dividends on a stock split adjusted basis. We remain disciplined in our buyback program and committed to returning long-term value to our shareholders. Combining our dividends and share repurchases, we returned $430.1 million to our shareholders over the last 12 months.
And during the third quarter, we paid down $62.5 million of our term loan, which brings our gross leverage down to 1.7 times. This is consistent with our plan to repay the term loan in full by the second quarter of fiscal 2025. As Phil mentioned earlier, given the delayed recovery in our end markets, we are now guiding to incremental organic ASV plus professional services growth of $85 million to $120 million for the fiscal year, reflecting 4.8% growth at the midpoint, down from our recent guide to approximately 5%. Revenues are now expected to be in the range of $2.18 billion to $2.19 billion for the year. On the other hand, our expectations for margin and EPS growth for the year have gone up. Specifically, GAAP operating margin is expected to be in the range of 33.7% to 34%, up approximately 100 basis points from prior guidance.
And adjusted operating margin is expected to be in the range of 37% to 37.5%, up 70 to 80 basis points from prior guidance. Adjusted EPS is now expected to be $0.40 higher than prior guidance in the range of $16 to $16.40. The effective tax rate guidance remains unchanged in the range of 16.5% to 17.5%. In closing, we continue to manage our cost base carefully so that we can deliver value to our shareholders, while maintaining investment in gen AI and other strategic initiatives. We believe that we are well positioned for growth as the markets pick up. We're now ready for your questions. Operator?
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