Factset Research Systems Inc (FDS) — Q2 2017 Earnings Call Transcript

Thank you, Mike, and good morning everyone. Welcome to FactSet’s second quarter 2017 earnings conference call. Before we begin, I would like to point out that this slide we will reference during the course of this presentation can be accessed via the Investor Relations section of our website at factset.com. The slides will be posted on our website at the conclusion of this call. A replay of today's call will be available via phone and on our website. This conference call is being transcribed in real time and is being broadcast live. After our prepared remarks, we will open the call to questions from investors. To be fair to everyone, please limit yourself to one question plus a follow-up. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risk for forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Form 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, reconciliations to the most directly comparable GAAP measure are on the appendix to the presentation and in our earnings release issued this morning. This non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly titled measures reported by other companies. Joining me today are Phil Snow, Chief Executive Officer and Maurizio Nicolelli, Chief Financial Officer. I would now like to turn the discussion over to Phil.

Thanks, Rima. Good morning everyone and thank you for joining us on our call today. You just heard from Rima Hyder, our new head of Investor Relations. Rima is going to serve as the primary liaison with FactSet shareholders and the investment community, and we are really happy that she joined the FactSet team. I know you are all going to enjoy working with her. At FactSet, we partner with our clients to solve their greatest challenges. Over the last year, we have added significant building blocks through both innovation and acquisition to serve even more critical workflows for the investment community. The market is continually looking for ways to better manage risk and be more efficient, and FactSet is perfectly suited to help. In parallel to enhancing our core workstations, we have rapidly evolved our products suite to provide new solutions for our clients and to do it in new ways. We are really excited that our clients are now able to move on FactSet through the investment life cycle from research to portfolio management to trading to analytics and to client reporting. Let me now give you a quick overview of our quarterly results. Our organic revenues grew 7% year-over-year, and ASV during the second quarter grew organically at 6.5%. Adjusted diluted EPS increased 14% to $1.81, higher than the midpoint of where we guided last quarter. Our adjusted operating margin at 33% was at the midpoint of our guidance range. While we did see positive results, the organic ASV and revenue growth were below what we saw last year. Our results were impacted by cost pressures across the financial industry driven in part by the shift from active to passive investments. This quarter, we saw an increase in sales offset by a higher number of cancellations compared to the same quarter a year ago. We had a broad portfolio of wins across market segments and geographies. Including our price increase in the Americas, our organic ASV grew $16 million over the last three months. We saw great traction from our recent acquisition and exciting new wins in the wealth management business. It is difficult to predict if headwinds will lessen over time, but what we do know is that FactSet has a resilient business model, one that has previously executed well in a tough market. As you can see in our slide presentation, our business can be cyclical and organic ASV growth rates have fluctuated over the years, but that’s been a constant theme of growth. This growth, combined with our commitment to return value to shareholders, has greatly benefited our investors over the years. We continue to see strong growth in the Asia-Pac and EMEA regions, which now represent over 35% of our overall ASV. The international markets have been a growth driver and, at times, a good hedge against the market conditions in the U.S. Our recent acquisitions provide us with a greater footprint in Europe and open up more market share for us in the Asia-Pac region. We are definitely not satisfied with our current growth levels. You've heard me say before that there is a growing opportunity with our existing clients as we broaden our suite of offerings across different workflows and asset classes. Our recent acquisitions play a key role in unlocking more of that opportunity. Last quarter, I spoke about seeing a healthy deployment across our wealth business, and how it's an area of growth that affects us. In January, we announced our intent to acquire Interactive Data Managed Solutions, or IDMS. IDMS is a leading managed solutions and portal provider for the wealth management industry. This acquisition, when completed, will add significant scale and scope to our wealth business in the Americas and EMEA, and with access to our current footprint in Asia-Pac, it also gives us an exciting opportunity to expand our wealth business in that region. Just last week, we acquired BISAM Technologies, a leading provider of portfolio performance and attribution, multi-asset risk, GIPS composites management, and reporting. B-One, BISAM’s award-winning platform, is an outstanding complement to both FactSet's portfolio analytics suite and client reporting solutions. The acquisition of BISAM is aligned with our strategy to better serve the critical workflows in the entire portfolio lifecycle. At FactSet, we are at the perfect intersections of technology and finance which fuels our thinking on product innovation. The world's more open than it's ever been, and both volume and access to information are now at unprecedented levels. We see clients willing to outsource and move more workflows to cloud-based solutions. With significant investment and upgrades to our technology stack combined with our content and analytics, we are now able to offer new ways for clients to leverage the power of FactSet. In summary, FactSet has a resilient business model and best-in-class products with very strong client service. This powerful combination sets us apart from our competitors. We know how to innovate and engineer the most efficient tools for the financial industry, and at the same time, we continue to maintain financial discipline through cost controls, a lower effective tax rate, and an accretive share repurchase program allowing us to return value to our shareholders. Over the last six years to date, the average cash returned to our shareholders is 94% of free cash flow. Looking ahead to the second half of 2017, we are focused on the integration of our recent acquisitions and are excited about the opportunity to cross-sell a broad suite of solutions into our blue-chip client base. Let me now turn the call over to Maurizio to talk about the second quarter financial results and third quarter outlook. Maurizio?

Thank you, Phil, and good morning to everyone on the call. In the second quarter, we continued to grow ASV and EPS and delivered solid results within our guidance range. As Phil stated, we are investing in our future growth with the goal of offering our clients complete enterprise solutions for their investment portfolio lifecycle. Let's now go through the second quarter results. GAAP revenues in the second quarter increased 4.5% to $294 million and 7% to $282 million on an organic basis versus the second quarter of 2016. GAAP revenues from the second quarter of 2016 included the Market Metrics business which was sold in the fourth quarter of 2016. Organic ASV increased 6.5% year-over-year and $16 million from our first quarter of fiscal '17. This increase was primarily driven by price increases of $9.5 million and new sales opportunities, offset by cancellations. U.S. revenues grew to $192 million, and organic revenues in the U.S. were up 6% compared to the year-ago second quarter. International revenues increased to $103 million; on an organic basis, the international growth rate was 9%. International business continues to perform well and as Phil already stated, it continues to be a growing part of our overall ASV. Moving down the income statement, let's take a look at our operating expenses. Operating expenses for the second quarter totaled $203 million, an increase of 3% year-over-year. The second quarter cost of services expressed as a percentage of revenues increased slightly by 70 basis points compared to the year-ago period. The increase was driven by higher compensation due to base salary changes after the annual review cycle, incremental hires in our centers of excellence in India and the Philippines, and acquisitions from CYMBA and Vermilion offset by lower data costs related to the sale of Market Metrics. SG&A expenses expressed as a percentage of revenues were down 160 basis points compared to the second quarter of fiscal 2016; the decrease was primarily as a result of lower employee compensation due to the sale of the Market Metrics business in the fourth quarter of fiscal 2016 and higher rent expense from new office locations. Our adjusted operating margin, excluding $1 million in acquisition costs for professional fees from the recently announced BISAM and IDMS transactions, and $4 million of intangible asset amortization, was flat at 33% this quarter versus the second quarter of 2016. Adjusted operating income grew 4.5% to $97 million excluding $4 million of intangible asset amortization and the $1.4 million of non-recurring acquisition costs. Adjusted net income, which excludes non-recurring acquisition-related costs, intangible asset amortization, and the working capital adjustment to the Market Metrics disposition, increased 9% to $72 million while adjusted diluted EPS grew 14% to $1.81. Free cash flow for our second quarter was $71 million, a decrease of approximately $10 million from the same period last year. We define free cash flow as cash generated from operations less capital spending. The $10 million decrease was the result of higher client receivables. Our DSOs were 40 days at the end of the second quarter compared to 34 days in the prior year period. The increase in days is driven by our recent acquisitions, the timing of client payments, and a lower number of business days in February 2017. It's important to note that two-thirds of the accounts receivable balance increase was from billings outstanding 60 days or less. You may have noticed in the press release we issued this morning that we changed our definition for client and user accounts. Our client count definition now captures clients with ASV greater than $10,000 versus the previous threshold of $24,000. This lower threshold allows us to capture smaller clients such as family offices and smaller hedge funds, as well as more data feed clients. As our business evolved and we look to align our metrics internally and externally and enhance our disclosures, we felt we needed to update how we account for clients. Our net client count increased by 143 clients this quarter to over 4,400. Our net user count increased by approximately 1,500 users to over 85,000. The new user count definition accounts for users from workstations previously not captured due to certain product bundling, as well as users of the web product. The increase was driven by workstation deployments across wealth management as well as displacement of key competitors at large institutional clients. We have provided you with schedules of historical client and user counts under the old and new definitions on the back of our press release. We repurchased approximately 480,000 shares for $181 million during the second quarter under our existing share repurchase program. As Phil stated, we have continued to return value to our shareholders. Over the last 12 months, we have returned over $485 million to stockholders in the form of share repurchases and dividends. Recently, our Board of Directors approved a $300 million expansion to the existing share repurchase program; including this expansion, approximately $337 million is currently available for future share repurchases. In our third quarter, we entered into a new credit agreement and borrowed $575 million at favorable rates to pay for the BISAM acquisition and repay our existing debt of $365 million. We remain committed to returning capital to shareholders and maintaining a balanced capital allocation framework. Now let's turn to guidance for the third quarter of fiscal 2017. For the fiscal third quarter, we expect our GAAP revenues to be in the range of $301 million and $307 million. BISAM is expected to add approximately $6 million to third quarter revenues. The midpoint of our organic revenue guidance is 6%. The proposed IDMS acquisition is not included in these numbers as it is expected to close later in our fiscal third quarter. We plan to update our third quarter guidance once IDMS is closed. Our GAAP operating margin is expected to be in the range of 30% and 31%, which includes a 90 basis points reduction from BISAM. Adjusted operating margin is expected to be in the range of 32% and 33%, which includes a 30 basis points reduction from BISAM. The annual effective tax rate is expected to be in the range of 25% and 26%. GAAP diluted EPS is expected to be in the range of $1.68 and $1.74, and adjusted diluted EPS is expected to be in the range of $1.80 and $1.86. The midpoint of the adjusted diluted EPS range represents 12% growth over the prior year. In summary, we're pleased to see our solid performance in the current market conditions. Our continuing growth this quarter highlights the strength of our business model, and we remain confident in our ability to return value to our shareholders. Thank you for your participation in today's call. We are now ready for your questions.

So, you mentioned in your comments the impact that you are seeing from the shift from active to passive, and I mean it's well known in the industry this is something that’s been going on for a number of years. And so my question is, are you seeing something in terms of a tipping point in terms of cost or headcount or something else that is starting to impact the industry? I am also asking in terms of how we should model out the rest of 2017 in terms of ASV growth?

That’s a great question Bill, thank you. So it is an ongoing trend, I would say that what we are observing is that trend is more pronounced in the Americas than we are seeing in the EMEA and Asia-Pac regions, and you see that reflected in our growth rates. So we anticipate that it will continue to head in this direction for a little while. What I would say is that we have a broader suite of solutions than we had historically to help mitigate some of that. First of all, we have a multi-asset class system now, so we have a lot of clients using us for fixed income capabilities, and many of our products throughout analytics and research are very well suited to passive investors as well as active investors. So it's a trend that we're aware of. It's definitely putting cost pressure, particularly on the Americas investment management side of the business. But it's one that with our recent acquisitions and innovation we feel like we are in a good position to address.

And for my follow-up question, on the BISAM acquisition, how does that fit into FactSet strategically? Because FactSet has historically been a distributor of third-party models, and it would seem that BISAM would in some ways compete with these firms, so that’s the question.

Yes, so actually it doesn’t really compete with them. BISAM is really a performance system, so it gives a client lockdown returns for the official performance that they're reporting to their clients and the market. BISAM did a very small acquisition of a firm called Cognity, so it does have some risk capabilities in it but it's primarily a performance system. It's something that FactSet has looked to build for a long time. We were making some progress, but when the opportunity to go out and get the market leader came along, we were very excited by that, and I can tell you that the reaction from our clients has been exceptionally positive. I'm out here in San Francisco this week with the team and a lot of the salespeople out here have been telling me that their clients have actually been sending them congratulatory emails and can't wait for a meeting.

First off, I was wondering if you can speak to the portfolio wins you referenced earlier, Phil. Any sense of the geography, client profile, buy-side versus sell-side versus what we've been seeing recently from you guys? And as you look to improve your growth profile, what is it that we need to see for that to happen? Is it the market environment needing to improve or stabilize a little bit, or is it something your acquisitions and solutions needing to gain greater scale?

I'll go over a few things here. On a regional basis, we've reported that we did very well in Asia-Pac; that continues to be a strong region for us, and we are very focused on it. EMEA came in strong, and we were a little bit weaker in the Americas. In terms of client types, we did exceptionally well again this quarter with wealth end-client sponsors. From our product suite standpoint, the analytics suite had a very good quarter, and what I do want to highlight, I mentioned it in my earlier comments, is we actually sold more products this Q2 than we did last Q2. The pressure that we saw was on existing clients—the cost pressures that they're facing. So we're seeing consolidation of funds and on the desktop, it's becoming sort of a market share gain where somebody that had a couple of services historically is now being forced to choose between one or the other, and we did see more users leaving the firm. So we have a strong pipeline, our sales team is executing very well, but we are facing headwinds of cancellations within clients. I would say, and I've said this before, that part of our largest opportunity is really in our blue-chip client base. So when you look at FactSet's Top 100 clients, that's a large percentage of our ASV. These are long-standing clients; they're not going anywhere. And with the recent acquisitions we have, we have a real opportunity to cross-sell what we bought, and as we integrate it, unlock even more opportunity for those clients moving forward. So that's one of the things that we're very focused on, and we don't necessarily need to see the markets turned around for us to grow faster. Our thesis is that we can do that by executing well on the strategy that we've laid out for the firm.

And one for Maurizio, that's similar—Maurizio, if you had to parse it out year-over-year, margins implied in your guidance, adjusting for BISAM, what would you say are the biggest drivers here? Perhaps how much is due to your product suite changes versus ASV deceleration, and what do we need to see for margin performance to stabilize year-over-year and perhaps improve?

So, when we look at the margins of FactSet, prior to the most recent acquisitions, it is very comparable to our margins historically. And so what we need to see is we need to continue to grow these ASV from these acquisitions and embed these into our product suite so that we can push up the margin overall from the cost that we acquired with each one of these acquisitions. We have done that with previous acquisitions, and quarter-by-quarter, the margin of that business has gotten more and more towards the FactSet overall margin. But we need to continue doing that as we purchased a number of companies over the last six months. And conversely, as we grow ASV in the coming years that’s when we will see more leverage in our margin.

Phil, can you talk a little bit more about what BISAM does that you guys were not already doing? It seems that you had a pretty decent, or very robust platform in light of the portfolio attribution stuff. And can you also comment on how fast the companies were growing? A little bit more specificity from Maurizio on the margin profiles of the businesses.

So yes, the main difference with the performance system is that the returns are locked down historically, and then you get a degree of accuracy to multiple basis points for official client reporting. Our existing products do that in some cases, but the real power comes from the flexibility in the system, the ability to do ad-hoc analysis within the middle office. Some client reporting does that, but this really takes it to another level. BISAM is a firm that we would run into all the time within our largest clients; in fact, most of the BISAM clients are already FactSet clients. So connecting the two systems together and adding the risk capabilities we have and the publishing solutions, that really just creates a powerhouse suite for us and our clients in the performance area. It was a missing piece; it's one that we've known about for four or five years and just not had the ability internally to build to the quality of something that BISAM has been doing for much longer.

So the growth rate for BISAM is higher than the rest of FactSet; it's in double-digit growth rates historically, and that’s the trend going forward for BISAM.

Can I sneak one in, Maurizio? Can you give the organic growth rate at both ends of the guidance range? Is it five to seven getting you to six, or is there a little bit more specificity?

No, that’s essentially the range; it's right at between 5% and 7%. And that’s why I gave the middle of that range of 6%. That’s right in the middle of that range.

So Phil, you have done a handful of larger transactions here in the last couple of years in the M&A market. So I am wondering if maybe your attitude towards M&A has changed; has it become more important to the growth story? And what's missing in the portfolio now that you would like to have?

Great question. No, we have been very intentional about going out and finding some pieces for the investment management workflow that we decided it would be easiest to acquire and integrate than build ourselves. So each acquisition represents what we considered to be good workflows for us to integrate with the already fantastic FactSet products. So we are not out in the market looking for tons of acquisitions to grow; that’s not it. With our latest acquisition of BISAM, we feel very well positioned in that investment lifecycle that we talked about earlier. So our focus now is going to be shifting to the integration and cross-selling of these acquisitions. If the right asset comes up and it is something we are interested in, we'll be opportunistic, but we're not going to go out and continue at this pace.

Got it, thank you. And then Maurizio, maybe I am reading too much into this, but I think in response to an earlier question about trends in margin, you suggested that one point at the completion of the integration of the acquired properties being completed, we could expect to see some leverage in margins. Does that suggest that your view has changed a little bit? Because I think historically you have talked about keeping margins essentially flat on a go-forward basis. Would the objective now be to try to move the margins up some over time?

What I was alluding to was our margin has been affected by these acquisitions and it has trended slightly lower from each of the acquisitions. The goal is to get that margin of these acquisitions back to the historical FactSet margin, and then over the coming years, as we continue to grow the business, we would expect some greater leverage within our margin going forward as we scale the business.

My question is on IDMS; it seems one could infer from your commentary so far that the acquisition is relatively small, but it appears based on our research that it could be more than double the revenue BISAM. Can you help us bracket that? I know that the deal is not closed yet, but certainly we would expect it to close in the next 30 days. I would like to include it in models, so could you bracket some of the potential revenue addition margin and then bracket the purchase price?

Peter, it's Maurizio. Unfortunately, we can't give that information just yet because it's not closed. As soon as it closes, we will send out the press release and provide our guidance updates and include the information that you are looking for.

Okay. I'll try a different one. You changed the methodology on the metrics for clients and users; could you give us the numbers on the old methodology for one final quarter so we can kind of compare it to what we are forecasting?

Yes, the metrics on the old methodology on their users and clients are very similar to the increases historically in both of those categories. There is not a significant change in the quarter under the old methodology, and again we made this change so that we're portraying the business internally and externally in a way that aligns closely with how we're measuring it.

Hi, this is actually Greg calling on behalf of Manav. Just wondering as you broaden the suite of products that you are offering to the clients; from a commercial perspective, does the conversation go more to an enterprise-type model versus proceed? How are you guys thinking about that?

Yes, that's a great question Greg, it's something we're looking very closely at. The way that we want to—and in some ways have been—charging our clients is really based on the value they are receiving from our service. So if that's an enterprise solution, whether it's a suite, that's the way we're beginning to think about it. As we broaden our suite our products, not just with CPS and analytics, but with these acquisitions, we're beginning to take a much closer look at that and we're becoming less leveraged to the workstation number that you've been used to seeing from us.

Fair enough. And then maybe you can give an update on the FactSet web rollout. I think you rolled it out last quarter and traction there and what you're hearing from clients?

It's early days, we're hearing positive things. The new technology that we have really provides a more intuitive user experience on the web product. We're still converting some of our more advanced applications. We expect our flagship screening product to be in there very shortly with some really nice default reports for clients that we didn't have in the older version. We'll be moving PA into the web version soon, so all the work we've done for PA3 will be over there. I think once we get the bulk of acquisitions in there, we'll begin to see a broader uptake for the web product.

Maybe if you could just frame for us how much less mature is your European business versus both Asia and the U.S., and any potential regulatory changes in that landscape that could impact you, either positively or negatively?

So, I think we do see more upside in those regions, just based on some of the trends I already mentioned, as well as they are less mature markets for us. The majority of the acquisitions that we've done recently also have a good footprint in Europe that allows us to cross-sell these existing FactSet suites. Many of the acquisitions don’t have any presence in Asia; they did not have the scale essentially to go out there. We have offices all over the Asia-Pac region, and that's going to provide us a great opportunity to cross-sell those products with the existing FactSet footprint. On the regulatory side, that is definitely an opportunity for us, which we're already capitalizing on in some ways in Europe. We have a lot of solutions outside of the workstation where we package our content and analytics in a way that solves various regulatory requirements like Solvency II. We're getting a lot of interest around that and what we're doing there. We have solutions within the Portware application, and it allows clients to solve various product methods. So we view regulatory as a growing opportunity for us, and we will be focusing more on that.

Great. And just a follow-up question: you referenced acquisitions versus building your own credit offering in doing some of these deals. Could you maybe frame for us what does the competitive environment look like on the workflow side? We are very familiar with the desktop side and what's going on there. But are you competing with one or two big guys, or is it mostly customers doing this in-house themselves? Who do you view as your biggest competitor on the workflow side? And maybe there are several, but any color around that would be great. Thank you.

I think those are very good questions. I think the way I would like to answer that is one of the themes that we are really hearing from our clients is that they want to see more consistent data across their enterprise. So the data that they are using in the middle office, the portfolio managers, and traders will be using in the front office. There is a great thirst within our user base to see consistent data. So that’s really what's been driving a lot of our activity here, and as we integrate the data and get the content flowing between the systems, we are going to be able to satisfy that need for our clients.

On the Method Two comments, it sounds like your client base was kind of moving to press a bit more. Can you just kind of give some more color on the opportunity that you see arising there, either in terms of new products or market share gains?

It’s a great question. We are still looking at that; we can solve different pieces of it. It is a large opportunity. Knowing that’s where a level of cost pressure is coming from, the client base—it's not just a shift from active to passive, but it's the need to spend more on regulatory solutions. The opportunity is packaging a lot of the content we have in smaller ways for the clients, creating analytics. We have many building blocks but we are still in the process of putting all that together, so it’s too early for me to really give you a sense of what the true opportunity is there.

And is there anything we should maybe think about in terms of how the buy-side currently pays you right now? Maybe this is more served on the Portware side, but is that we should consider as that regulation comes into force? I guess specifically with respect to maybe unbundling or things like that.

No, we don’t see any significant change there, to be quite honest.

I wanted to go back to the cancellations phenomenon just to get a sense: is this sort of the same dynamic you have been talking about for a couple of quarters and is it accelerating? And also, you have sort of alluded to the importance of your Top 100 clients. Could you contrast the cancellation trends you are seeing in the Top 100 clients versus, I guess, non-Top 100 clients?

Yes, we can't provide you that level of detail, but I would say this cost pressure is ongoing. I wouldn’t say it's necessarily accelerating. I mean it's just a combination of point merging, layoffs, and users no longer being with firms. In the areas that FactSet serves, a certain amount of cost pressure as clients consolidate. Sometimes what we'll do is we'll have long-term contracts with the clients, but there is cost pressure on the existing business essentially as we move forward.

And I assumed this sort of explains the deceleration in the domestic ASV growth. It looks like it was down by an order of magnitude of 150 basis points. And it sounds like your pricing that you usually put in place this quarter was pretty status quo versus the year-ago?

Yes, so I would say net new business, just in terms of the smaller points that we added, a lot, and the price increase was consistently last year. The difference you saw was in the existing client base. One thing I will point out is that traditionally, we included our SP&A or Strategic Partnerships and Alliances revenue with our investment management revenue, and that’s a very lumpy business, often involving seven-figure deals. A couple of things that happened in this quarter contributed to that drag you are seeing on the IM business.

And it sounded like from some of your commentary, the wealth management solution continues to trend at a pretty robust clip, so there is no drag there, if anything—

It did really well. So in the uptick that you saw in receipts for us this quarter, there were a couple of really exciting wealth wins and a very large win on the sell side of the global banking and research group.

Is the global syntax index an attempt to get into the indexing market, and do you see opportunities there?

I think what you have is a great question, Joe. This is really just a continuation of really partnering firms out there to help them build indices and ETFs with our taxonomy, industry classification, and a lot of firms leveraging that in that way. So we partnered, I think with a firm over in Asia for this one.

Okay, and anyway to quantify the new opportunities in the portfolio versus yield? Even a ballpark would be great. Are the new opportunities 25% of the portfolio? Are they 50%? Just trying to get some idea there. Thanks.

Can you— I didn’t quite understand the question. Can you restate that?

So, it sounds like you are kind of mixing your portfolio here. You have some stuff that’s kind of not doing so well, the active management; then you have the BISAM, maybe in the investment banking, but then you’ve got a number of things that are doing well, including multi-asset class, wealth management, internationally. So I am just trying to get a feel for what percentage of your portfolio you think is doing very well; some of the new opportunities that you highlighted versus some of the standard stuff that you have provided in the past that maybe isn’t doing as well. Is it a quarter of the portfolio? Is it half of the portfolio? Just trying to get a sense there.

So you mentioned a lot of different dimensions there; there is geography, there is client side, and there is workflow. I mean we see great opportunities throughout the whole portfolio. It's a little bit different each quarter, but we are still growing. We are doing well in investment management; we're just not growing as fast as we did the last three quarters. But we see a way for us to kind of reaccelerate that with all of the great products that we have and the integration that we are going to do.

Sorry if this came up in the prepared remarks, but I think this is for Maurizio. If I look at my model, it seems like the employee count actually came down quarter-over-quarter. Maybe just confirm if I have this right, and if this is correct, what does this suggest in terms of what you are doing or what you are seeing out there, if you are reacting with some cuts internally here? So maybe just flush it out please.

Yes, so when you look at headcount between Q1 and Q2, we were down about 121 employees in our headcount, just quarter-over-quarter, and that was over 90% driven by attrition in the U.S. If you look at our headcount between the U.S. and Europe, it was very stable. So we had attrition in these locations, but we also had some new employee classes that started. So we were stable in headcount when you look at the U.S. and Europe.

And then just secondly, sorry to come back to the whole pressure discussions you had. You obviously gave a lot of color here, just to make sure I understand this right, or maybe if I should add a little bit. When you're talking about pressure, is it really a discussion mostly around the desktop side of the business, or are you seeing selling pressure and cost consciousness also on some of the other things that you're doing away from the desktop? I guess what I'm trying to say is, are you seeing the same kind of double-digit growth in the non-desktop business? And is that really— as a business shifts more towards those enterprise workflow solutions, should we feel more comfortable about the growth rate than if you were just a desktop player?

Alex, it's Phil. Thanks for the question. I would say if you aggregated our acquisitions that we've done as well as our CCS and our analytics business, that certainly is growing faster than the desktop business, and its pressure on kind of the users of that fund. We're going to—I think that's where the industry is heading, and we're going to see more clients try to do more with enterprise solutions and fewer people.

It's Stephen Sheldon in for Tim. You talked about some displacement in competitors within your larger client base, and some of that sounds like it’s driven by consolidation. So can you maybe talk about what you're seeing in terms of what’s driving the decision between how they're consolidating vendor spend?

Can you—I didn't understand the question. Can you restate?

Well, so if they're consolidating towards you guys, I guess why would you win? And if they're moving away, I guess just in a broad sense why—if someone is consolidating and moving away from you, what's the reason that you might lose in those situations?

Yes, FactSet wins for a lot of different reasons: technology, content, analytics, and service. Overall, clients really do want to partner with us. They really trust FactSet. We've built very good relationships with our clients; the quality of our content is exceptionally high, and the flexibility of our workstation is good, so clients can really customize their workflow to the way they want to do it. Our consultants and our client-facing staff are the best in the market, essentially, out there helping the client. So in the long run, we know we have the best people and a great product, and we're very bullish about the future. In some cases, we may not have all the pieces today that a client needs when they're consolidating, and for contractual reasons or other reasons, we won't win this time, but we are really bullish that we'll win in the long run.

Yes, first question in terms of debt that you have been taking out to finance some of these acquisitions, and presumably you will take out a little bit more for IDMS. Is there any appetite there to determine, or are you comfortable maintaining the credit facility?

We are comfortable right now maintaining the credit facility given where the cost of capital is today.

And then follow-up question, I know this came up on the call a couple of quarters ago, but I am not sure I totally understood the explanation. Can you walk me through the apparent disconnect between your commentary on elevated cancellations and the fact that your client retention rate remains very stable at 95% of ASV?

Sure, this is Maurizio. So the calculation in our retention rate is really based on the last 12 months of clients that have canceled and the ASV that is canceled. Keep in mind when clients cancel, there are lower-end clients on FactSet. All of our Top 100 clients don’t cancel FactSet altogether. So the ASV from canceled clients in that calculation is from clients that cancel FactSet 100%, so that number is small compared to the overall total. It doesn’t capture existing client cancellations, and that’s where you see the difference between the two.

Hi, this is Patrick in for Toni. Phil, I believe you mentioned you think FactSet's market opportunity could amount to as much as 10 times your current share. Can you give us a bit more color on the largest pieces of that opportunity, either by user, product, workflow, or geography?

Sure, I would say geographically, it's a pretty evenly split. When you look at some of our largest competitors, which I am sure you are aware of, you just have to look through the research workflow, portfolio management, trading, analytics space, and investment banking. We think about the solutions that we have today and how much market share they have. That’s one way that we think about it. The other thing that we are doing, you've heard me talk about the CTS business before, our content and technology solutions—that’s a rapidly evolving suite of products which allows our clients to do very interesting things outside of the workstation and within their enterprise. With some of the technology advances we have had with our NextGen project, we are now actually able to unbundle certain pieces of the products and allow clients to use that within specific workflows with that building. So we are very bullish on that; there are a lot of other offerings within that suite, but that is an area of our business which will actually open up even more market share as we move forward.

Thanks, Phil. And then just a quick follow-up: do you feel any cost-cutting pressures are less serious in wealth management? And then given that there are many instances of asset managers and financial advisors being frequently under the same roof, I wonder if you have been able to bundle products into enterprise-wide contracts?

So we are seeing that’s a relatively newer market for us. We are seeing less cost pressure there from an existing standpoint, so I think it's more of a greenfield opportunity. It has been a lower-priced solution than our institutional asset management solution, which has allowed us to gain market share, and we are beginning now to do much larger deals with the technology advances that we have made. I think you'll see with IDMS, it will open up even more opportunity for us across the entire wealth spectrum. What we'll have now are solutions that we can provide to the wealth market all the way from the top end down to clients that need thousands of users. We are very excited about that; I think that’s going to be a good opportunity for the company. Thank you everyone. We look forward to talking to you again next quarter.