Factset Research Systems Inc (FDS) — Q1 2021 Earnings Call Transcript

Thanks, Rima, and good morning everyone. I'm pleased to report that FactSet has started its fiscal year on track to meet its first-half goals. We've learned a lot over the last year about how resilient our business is and how well we can work remotely, along with the strength of our client relationships. The last 12 months have also reaffirmed our investment strategy in content and technology. FactSet's focus on supporting client workflows across the entire portfolio lifecycle is increasingly serving as a differentiator for us in the market. We enter the new calendar year with increased visibility and measured confidence in our position. Our focus remains on maintaining our already high client retention, adding new clients, expanding wallet share with large strategic clients, and continued pricing discipline to capture more market share. Strong execution will be key to performance this fiscal year, and we are optimistic in our ability to close our pipeline. Our second quarter pipeline is higher now than it was at this point a year ago, and we have proven that we can execute well. Ultimately, we provide clients with critical data that is increasingly important. The demand for differentiated content is at an all-time high, particularly on the buy side, and FactSet's depth and scale in this area places us in a solid position. We believe we offer the strongest data concordance in the industry and coupled with FactSet's comprehensive suite of open and flexible technology solutions, we are driving more engaged and actionable C-suite level conversations. Moreover, our ability to link diverse content and convert unstructured data into structured meaningful financial insights is a key differentiator for us in the industry. We are the provider of choice for many of our clients looking to scale their technology and migrate their workflows to the cloud. We further improved our content and technology this quarter with the exciting acquisition of Truvalue Labs, one of the strongest ESG providers in the industry. I'm very pleased with the demand we see from clients and the speed at which we are integrating this company into the FactSet ecosystem. They were already a provider on the open FactSet marketplace and one of the many ESG data providers on our platform. Truvalue's pioneering AI technology, their alignment with SASB and the UN SDGs, combined with our existing library of content, creates a powerful engine for data collection and signal creation, adding tremendous value for clients across all our businesses. As we look at Q1, the growth rate for organic ASV plus professional services decelerated by 40 basis points over the last three months, ending at 5%. Our research business, which experienced higher growth due to stronger retention, helped support the ASV growth this quarter. The strength in research was offset by delayed decision-making that slowed our ability to close deals, as well as higher cancellations. We also saw increased activity in new business and expansion with existing clients. As we've said before, the first quarter typically tends to be our smallest quarter and is not necessarily an indication about performance for the remainder of the year. We're also pleased with improved results for both the adjusted operating margin and EPS this quarter, driven by higher operating results. Helen will walk you through the details in a few minutes. Turning to our regional segments, in the Americas, strong retention and expansion of our research solutions with our largest clients, especially banks and asset managers, helped sustain growth in this region. As we enter our second quarter of 2021, we anticipate closing on large deals within wealth, banking, and asset owners that we believe will help us stay on track to meet our first-half goals. Our EMEA region contracted this quarter, largely impacted by cancellations. The sales team is focused on mitigating these cancellations by increasing new business with ESG as a central theme. We have plans to deploy the Truvalue Labs product as a differentiated offering in this region. We also see good opportunities in EMEA for our CTS and analytic solutions. In Asia Pacific, ongoing conversations with clients around digital transformation and the portfolio lifecycle are building a strong pipeline across different markets. The Q2 pipeline looks strong as large deals, particularly in our analytics business, are moving from Q1 to Q2, as they near their final stages. We see solid demand for CTS data feeds across the region and our new business pipeline reflects that. We are confident in the second quarter pipeline across all regions, stemming from the demand we see for our products, especially with our end-to-end portfolio lifecycle solutions. We are the only provider of integrated solutions that originated from portfolio research to client reporting. We are targeting the front office with our robust research and analytics solutions, tapping into clients' technology budgets with digital transformation, focused on thematic-based selling, especially with ESG products, and continuing to provide holistic, open, and flexible solutions. This positions us well to meet our first-half goals. In summary, I'm proud of our team for delivering solid results this quarter. We are reaffirming our fiscal 2021 guidance. As we look at the world today, we are more confident than ever that the early investments we made in content and technology, coupled with solutions covering the entire portfolio lifecycle, have increased FactSet's value to our clients. While the short-term environment continues to be affected by the prolonged pandemic, we are taking steps to meet our fiscal year goals while maintaining cost and capital discipline across the organization. Our relationships with clients have strengthened during the pandemic, allowing us to build a stronger Q2 pipeline than we had last year. Above all, we have an exemplary team that has consistently demonstrated its ability to execute. I'll now turn things over to Helen, who will take you through the specifics of our first-quarter performance.

Thank you, Phil, and hello, everyone. I'm happy to be speaking with you today, and I hope you and your loved ones continue to be safe and healthy as we enter the holiday season and end of the year. In our first quarter, we accelerated revenue growth, reflecting the momentum from our fourth quarter’s strong ASP performance and expanded our operating margin. We continue to progress in our investments in content and technology and, in fact, are using a portion of the cost savings associated with the ongoing pandemic to further fund initiatives in sales and product development. We are pleased to welcome the Truvalue Labs team to FactSet. Given that we closed the transaction in early November, the financial impact on our results is immaterial for this quarter. The acquisition adds approximately $5 million of ASV, which is included in our reported ASV plus professional services. We will exclude this amount for organic-related metrics for fiscal year 2021. As Phil stated earlier, we grew organic ASV plus professional services at 5%, reflecting a seasonal acceleration from the previous quarter and the seasonally slower start to our fiscal year. GAAP revenue increased by 6% to $388 million, while organic revenue, which excludes any impact from foreign exchange and acquisitions, increased 5% to $387 million. Growth was primarily driven by analytics and CTS. For our geographic segments, America's revenue grew 6%, EMEA came in at 5%, and Asia-Pacific revenue grew 10%. The regions primarily benefited from increases in analytic and CTS services. GAAP operating expenses grew 5% in the first quarter to $267 million, impacted by higher costs of sales. Compared to the previous year, our GAAP operating margin expanded by 30 basis points to 31%, and our adjusted operating margin increased by 40 basis points to 34%. These improvements are due to net savings and continued productivity through workforce mix and a reduction in discretionary expenses, including lower travel and office costs. These benefits will partially offset a higher spend in both compensation and technology. As a percentage of revenue, our cost of sales was 350 basis points higher than last year on a GAAP and adjusted basis. This result reflects increased hiring from fiscal year '20 as well as higher compensation expense for our existing employee base. Growth was also driven by higher technology spending, which includes our shift to the public cloud as part of our digital transformation and multiyear investment plan. This total was partially offset by lower third-party content costs. When expressed as a percentage of revenue, SG&A improved year-over-year by 380 basis points on a GAAP basis and 390 basis points on an adjusted basis. The primary drivers include materially lower travel and entertainment costs, reduced spend due to office closures, and lower facility expenses, offset in part by higher compensation costs. The pandemic-related savings are helping to manage a portion of our higher spend. Over the long term, we believe that a portion of the savings will become permanent. Moving on, our tax rate for the quarter was 16% compared to last year's rate of 14%, which included income benefits related to a change in the foreign tax rate, as well as credits tied to finalizing our annual tax return. GAAP EPS increased 8% to $2.62 this quarter, versus $2.43 in the prior year. Adjusted diluted EPS grew 12% to $2.88. Both EPS figures were primarily driven by improved operating results. Reconciliation of our adjustments to GAAP EPS is disclosed at the end of our press release. Free cash flow, which we define as cash generated from operations less capital spending, was $71 million for the quarter, an increase of 3% over the same period last year. This increase is primarily due to lower CapEx on facility spend, as we have finished a portion of our office build-outs. For the first quarter, our ASV retention continued to be above 95%. We grew the total number of clients by 6% compared to the prior year, reflecting the addition of more wealth and corporate clients. Our client retention improved to 90% year-over-year, which speaks to the mission-criticality of our solutions and the efforts of our sales team. For the first quarter, we repurchased 132,000 shares for a total of $43 million at an average share price of $327. We remain disciplined in our buyback program and committed to returning long-term value to our shareholders. We remain measured in our outlook on growth, and we continue to monitor the factors laid out last quarter, including potential delays in decision-making, tightening client budgets, and a challenging new business environment. As we begin our second quarter, we have more momentum and visibility into our business, as reflected in the size and quality of our pipeline, and our level of client engagement, particularly in their digital transformation. This is an area of competitive strength for FactSet. As we invest for long-term growth in content and technology, we are redirecting savings driven largely from the pandemic to fund additional hiring in sales and in the development of products, including in wealth and analytics. As noted earlier, we expect a portion of the travel and entertainment facilities-related costs to become permanent post this pandemic environment, enabling us to offset ongoing operational expenses. Our discipline in cost management is also reflected in our continued shift in workforce mix, as well as expense rationalization with external vendors. We believe these collective actions will allow us to achieve solid results that are within our FY21 guidance ranges. We are reaffirming our guidance for 2021. With that, we are ready for questions. Kevin, back to you.

Hi, good morning. Thanks for taking my questions. Really strong margin performance in the quarter, nicely above the full-year guidance range. Given you maintained the full-year guide, I was just hoping you could speak to the mix of factors driving the implied step-up in expenses through the second half of the year. Mostly just wondering how much of that implied increase is investment spend versus maybe a return to a portion of those T&E costs or the facility costs you called out. Just trying to get a sense for that and maybe the cadence of spend throughout the rest of this year?

Sure. Thanks for your question. So yes, we are pleased with how we're performing. When we think about the benefit in this quarter, it comes in part from the higher revenue growth, given the strong Q4, and that's offset by both growth and expansion in compensation and technology. The salary growth comes with the new hires. We did quite a lot in Q4 and that's coming through. And that's why when they become more of a run rate, which is more in Q1, we’re going to see that come through for the rest of the year as well as our merit increases. So that's why there’s a bit of that cadence that we'll see come through post Q1. And we've also been doing additional spend in sales and product hiring and development, and that's going to see that come through for the back half of the year also. I think when we talk about the part that's going to be more permanent, that is really when we’re back to an ongoing normal, whatever that’s defined as an environment. But we’re going to start to lap partly into Q2, but more into Q3 and Q4. That’s also why, from a margin perspective, we’ll see that play out through the rest of the year, and so that margins will reflect that as well.

Understood, thank you. And then, obviously, one of your competitors announced a major merger late last month. I was hoping you could speak to how you anticipate the competitive dynamics in this space to evolve as a consequence of that deal. And then second, what your outlook is in terms of consolidation in this sector broadly, and whether you anticipate continued activity of this type going forward? Thank you.

Hey, Andrew, it’s Phil Snow. I’ll take that one. So, what we’re focused on is our strategy, which we feel really good about. So if you think about FactSet and how we differentiate ourselves in the marketplace, much of that has been driven by the workflows that we build out around client portfolios, particularly on the buy side and increasingly with wealth. So, our strategy encompasses covering the portfolio lifecycle, from research through to client reporting, and how we can do that in combination with the investment we're making in digital transformation for our clients. So, that's the piece of the market that we see as being truly differentiated for FactSet, along with the concordance we offer between those portfolios and all the data sets we have on our platform. We believe there's some real advantages to that strategy and the agility we have when we talk to our clients. The consolidation of the industry has been happening for a long time, but we don't necessarily see this particular deal as something that would impact us negatively.

Great. Thank you.

Thank you. Good morning, guys. I just had a question on the Truvalue Labs acquisition. I think the cross-sell opportunities seem pretty evident. I was just curious about what this means for the ESG strategy because I think, in the past, you were more ESG-agnostic, just passing through other data through your system. Does this change that? How should we envision what you guys are working towards in terms of ESG?

Hi, Manav, it's Phil. I would think of this the way that we've handled some other new content sets that we've gotten into. We still want to be that ecosystem where the concordance we offer and the software we provide is a reason clients want to come to FactSet. So we have upwards of 20 ESG providers within the open FactSet marketplace, and I believe we've integrated about nine of those within our workstation and other workflows just based on client demand. I don’t anticipate that changing. I think what we can do, if we own an asset that is differentiated, like Truvalue, is we can further integrate it through the different workflows for our clients. We see exciting opportunities for Truvalue, just in terms of continuing to sell it as a discrete product, which could be a feed or an API just for the signals, but we can really embed it in our Research Management Solutions. We can attach it to the portfolios. I think ESG will become ubiquitous across portfolio management with the strength we have in our portfolio analytics product, enabling clients to configure the groupings and columns they want to know about their portfolio, incorporating this data into their workflows.

Got it. And maybe just if you could give us an update on Open:FactSet; it's been a while. Maybe some metrics or how things are going there?

Yes, it's been an evolution. We continue to add lots of alternative data providers to Open:FactSet, and you can look at those now through the FactSet website where we have the entire library of data. The strategy is evolving as we go, as we learn more about what clients want. I would describe Open:FactSet now as not just accessing alternative data providers in modern research environments, but it's really the opening up of FactSet's technology stacks. So we continue to deploy more APIs so that those who want to enter the FactSet ecosystem and create value, either with content or technology, can do so. We see momentum both in alternative data providers and in our ability to monetize that, as well as the use of APIs, which has been driven mostly through the analytics group so far. All the power of PA that clients use for the workstation is now integrated into their own technology stacks and workflows if they wish to do so. It’s a big piece of our strategy that differentiates us as we go to market.

Got it. Thank you, guys.

Thank you. Phil, just touching on that digital transformation strategy point, I know you just mentioned the APIs, but maybe you could talk about where you are on the move to the cloud, how much is sort of left to go? And what are the biggest opportunities encompassed within this digital transformation theme? Because I know you've talked about your clients going through this process as well. So is there a way to quantify it, or is this more about taking share versus others as you sort of personalize things? Any perspective or insights would be helpful? Thank you.

Sure. One metric that could be useful is how far we've come in terms of moving to the public cloud. We said a year ago that our plan was to be 80% in the public cloud by the end of our original three-year plan, which would be seven quarters from now. Currently, we're 35% of the way there. That's something we're measuring closely. Lately, I've been talking with many CTOs and CIOs regarding their workflows and technology. For our largest clients, our strategic client group and regional teams are engaging in open conversations about their workflows and technology stacks. We help blueprint that for them and overlay access capabilities across their entire workflow, helping them consolidate the number of providers they deal with. The largest clients traditionally have dealt with hundreds of providers, and the trend is focusing on one or two firms for future platform partnerships to streamline these interactions. This is something we're excited about, especially as we look at the second half of the year in terms of our pipeline, and securing larger deals.

Additionally, we are making good progress in terms of content automation and processing speed. These components are part of our digital transformation and are being carefully measured and tracked.

That's great. From the comments in both the press release and earlier in the call, you sound like you have more conviction in the market, with the robust pipeline and your investment strategy aligning with client needs. However, your guidance still calls for further deceleration in ASV by the end of the year. What’s the bridge there? It sounds like you have momentum right now. Why the deceleration?

We are certainly anticipating a strong Q2, as I outlined in my comments. Walking through Q2, we will gain additional visibility into the second half. It's often difficult to have a high degree of confidence beyond six months. The best time for us to modify our guidance would probably be in March after we've cleared Q2 and have more palpable insights regarding our second-half pipeline.

Got it. Thank you.

Yes, especially considering that the second half tends to be stronger for us. We have greater visibility, and there are aspects we track that reflect more significant deals moving from Q1 to Q2 which Phil mentioned. This reflects a broader range in our ROI.

Excellent. Thanks again.

Hi, this is Mario Cortellacci filling in for Hamzah. With the growth in your new customer count, which I believe is at 6%, can you provide some insights on the wealth channel? Are there larger opportunities in the pipeline, and how does the current mindset shift in this space appear?

Yes, hi, it’s Phil. There are larger, chunky deals ahead, and we see much enthusiasm from the marketplace surrounding larger wealth deals. We continue exploring those. Meanwhile, there are a high volume of smaller wealth deals as well. This mixture, combined with our ventures into digital, which is reported under the wealth business line, positions us well. The market demands sophisticated tools for wealth advisors while still valuing the human element. Clients will demand insight from wealth advisors moving forward. We're excited about products like our new advisor dashboard, which helps wealth advisors manage their extensive portfolios and prioritize daily tasks effectively using good old FactSet software coupled with cognitive computing.

One of the outcomes from our digital transformation projects has been focused on this area. It's a proof point of combining our technology with client needs.

Great, thank you. Just one more and I will turn it over. On the Truvalue acquisition, you touched earlier on the opportunity. Can you talk about its differentiation? You have other competitors who are more qualitative or quantitative. Where does Truvalue fit in your competitive landscape, and why did you choose them over others?

Truvalue was one of the first ESG providers leveraging machine learning and AI in its collection process. It's focused on the quantitative side. The product processes unstructured text and identifies signals using cognitive computing, which we're excited about. This was a two-part acquisition due to both the ESG signals that Truvalue creates and the technology they employ. We believe this technology can be applied to further segments of our business.

Great, thank you.

Hi, thanks. In terms of pricing, have you made concessions during COVID for customers experiencing tough times? What are you hearing about client market data budgets? Is COVID materially impacting this or is it going to be a relatively normal year?

A few months ago, a few clients anticipated they would have difficulties moving forward. We dealt with some clients to maintain our long-term relationships, commonly resulting in some temporary concessions or negotiations for long-term benefits. This approach has worked exceptionally well for us over two decades. As for client budgets, I believe we are heading toward a relatively normal year. Clients are looking to consolidate technology and data, potentially identifying ways to be more efficient while seeking to improve the wallet share that goes to FactSet.

Got it. That's helpful.

Great, thanks. Phil, you mentioned that the demand for differentiated data has never been higher. However, it appears that your third-party content costs were down in the quarter. Does that imply more investment, or is a lot connected to technology transformation? Any thoughts around those two dynamics?

Our entire content costs involve third-party content. We spend significantly on technology and content while investing in new areas, such as deep sectoral private markets. I don't think the degree of investment will necessarily reflect in third-party costs. Helen, do you want to add anything?

Yes, we're managing our budget tightly. While we have more content providers, we've been judicious in rationalizing duplicates or inefficiencies based on price.

That’s helpful. What about ESG from a client perspective for 2021? Do you have the datasets you currently need, or would there be more acquisitions needed?

There will be more demand. Whether through third-party integration or other assets we may acquire directly, we will remain vigilant about trends in the ESG space. The strength of our platform is the ability to bring data together efficiently in a unified environment, allowing clients to analyze various datasets.

Thank you.

Hi, good morning. Thank you for taking my questions. Can you provide more details on some of the ASV drivers and the cancellations referenced? What’s driving revenue, considering the research product is growing faster than wealth management and analytics?

Sure. The research numbers were down, but the relative overall retention was higher than last year. That's why the small quarter is impactful. We expect stronger performance in Q2, which is traditionally a larger quarter for us. Higher visibility will be indicative of which businesses will drive growth in the first half.

Can you discuss the selling environment? Have your sales execution capabilities changed due to remote selling?

I believe growth would have been faster without the current selling environment. We’re reaching equilibrium and adapting to remote selling. Smaller client sales cycles are more efficient, much of which will ensure a stable growth trajectory in Q2, and we are learning how to monetize intricate offerings effectively.

Thank you.

Good morning, everyone. Can you elaborate on the nature of the cancellations? What are you seeing about the clients and products affected? Also, you highlighted EMEA as particularly an area of elevated cancellations?

There were some lumpier cancellations in EMEA tied to hedge funds. Helen, do you have more detail?

Yes, those cancellations are impactful due to the small quarter. While we have generally enjoyed better retention, EMEA cancels primarily involved hedge funds. The overall sales volume and decision-making capability are key factors in our relative success.

Thank you. Can you provide an update on deep sector progress?

We are about 15 months along in our initiative. We're pleased with our product side, and the team is fully built. We are working to deliver two or three deeply detailed sectors. This will initially enhance retention, particularly on the banking side, and ultimately pave the way for broad usage across numerous clients.

Thank you.

Thanks for taking my question. Could you provide any quantifiable savings from lower travel and entertainment costs due to the pandemic for this quarter?

In this quarter, it would be around a point of savings compared to last year. We used those savings to cover higher expenses in both compensation and technology.

And how should we think about the permanent reductions going forward?

While it’s hard to predict specifics, I estimate a permanent reduction of about 25 to 50 basis points compared to 2019. This will help us fund new initiatives, and the transition will become evident post-pandemic.

Thank you for that. What about the headcount growth in sales and content? Any particular focus areas for either side?

We’re directing resources to areas where we see good opportunities for growth. For instance, in CTS we've increased focus, alongside corporate opportunities. This isn't about particular geographies but more about potential.

Thanks again.

I wanted to delve deeper into the selling environment. Can you elaborate on the longer sales cycles and client budgets on average year-over-year?

The sales cycle for our analytics suite is longer, especially when involving client workflow discussions, stretching over six months. However, sales cycles for deploying FactSet workstations or feeds have shortened as virtual interactions have proven efficient.

How are client budgets evolving year-over-year?

We don't possess visibility into client budgets to provide specific numbers, but it’s apparent that they are focusing more on digital transformation budgets, which should lead to increased spending overall.

Thank you.

Can we assume that the Truvalue Labs acquisition indicates an increased focus on owning data in the CTS space as opposed to a resale model? Or do you anticipate maintaining a hybrid approach?

This continues our long-standing strategy; FactSet has vast proprietary data and over half our workforce is invested in data collection. Truvalue remains small relative to our overall strategy and content budget. We will continue to integrate data from various sources, whether collected internally, through third parties, or acquisitions.

Thank you.

I’d like to delve further into the Truvalue acquisition. The run rate here is $5 million. Is that primarily the revenue we expect from Truvalue? Does this acquisition give you the foothold you need in ESG, or will more acquisitions become necessary to make it a significant part of your strategy?

You’re correct regarding the run rate, which is enjoying healthy growth. Our strategy aims to integrate unique content successfully. ESG is undoubtedly trending upwards, leading us to explore essential data acquisitions while maintaining our commitment to offering clients a comprehensive platform for data evaluation and analysis.

How much of your guidance is dependent on a return to work during this fiscal year, and what's your assumption regarding this?

I don't think it’s a significant factor. We assume the return will be stronger in the latter half of the year, which will mainly impact cost rather than operational efficiency. We’ve been performing well remotely.

Thank you all for joining us today. I'm encouraged by the conversations we're having with our largest clients and the continued progress our team has made on our investment plan. I look forward to executing on a robust pipeline and to continuing to help our clients solve problems and access critical data anytime, anywhere. While prolonged uncertainty makes our annual performance somewhat unpredictable, we remain focused on developing our content, technology, and people to deliver value to our shareholders. Please take care this holiday season and if you have any additional questions, feel free to call Rima Hyder. We look forward to speaking to you next quarter. Operator, that ends today's call.