Factset Research Systems Inc (FDS) — Q1 2023 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to FactSet’s first fiscal quarter 2023 earnings call. Before we begin, I would like to point out that the slides we will reference during this presentation can be accessed via the webcast on the Investor Relations section of our website. 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. 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 one follow-up. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, 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 is in the appendix to the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, Chief Executive Officer; and Linda Huber, Chief Financial Officer. I will now turn the discussion over to Phil Snow.

Thank you, Kendra, and good morning everyone. Thanks for joining us today. I am pleased to share our first quarter results. We grew organic ASV plus Professional Services by 8.8% year-over-year achieving adjusted diluted EPS of $3.99 and an adjusted operating margin of 38.3%. These results demonstrate our continued momentum coming out of fiscal 2022 and lay a solid foundation for executing on our full year targets. Last year's Q1 ASV growth was a record for us and this quarter's performance is a strong result for what is usually our seasonally lowest revenue quarter. The biggest contributors to this quarter's growth came from banking, asset owners, and private equity and venture capital clients, all of which exhibited double-digit growth rates. Small and medium-sized deals across client types drove ASV growth this quarter. Our investments in content and technology including deep sector private markets, APIs, and analytics solutions continue to support client retention rates and expansion. It's important to acknowledge the continued uncertainty in global markets. While conditions have been supportive, we are starting to see a more challenging environment for our clients and we are closely watching for signs indicating a prolonged change in conditions. These signs could include reduced client budgets, elongated sales cycles, material layoffs, and a reduction in new firm creation. However, FactSet has a proven history of stability and growth in volatile markets and we remain confident that our strategy and ability to execute will position us well even in a choppy economic cycle. As we look ahead, we remain focused on building the leading open content and analytics platform, reinforcing our position as an anchor partner for clients, allowing us to grow our share of the addressable market. At the foundation of our strategy is our commitment to further scaling our content refinery. We continue to grow and invest in critical content. For example, within our content and technology solutions business, our cloud-based real-time solutions are gaining traction with the launch of ticker plants in Europe and Asia, and our recently announced relationship with BMLL for enhanced tick history. The connectivity of our data powers hyper-personalized solutions that puts key information and analytical tools in the hands of investment professionals, enabling them to generate alpha across all market conditions. FactSet is an essential partner for our clients as they advance their digital transformations to increase efficiency and be more competitive. These transformations are critical and clients are prioritizing investments in technology and data to drive performance, giving us further confidence in the resilient nature of our business. Turning to our performance for the quarter, we continue to see strength in ASV growth across all our regions. The Americas remains the biggest contributor with organic ASV growth of 8.5% and growth was diverse across firm types, driven primarily by higher retention in banking. Private equity and venture capital clients also drove growth with Cobalt, our leading portfolio monitoring solution, plus the workstation securing client wins. Organic ASV growth accelerated to 8.8% in EMEA marking the region's strongest Q1 in recent history and the seventh quarter of increasing LTM growth. Performance was driven by higher retention among asset managers, asset owners, and banking. Asset managers also saw a higher expansion across the product portfolio, and we also continued to see healthy demand for our wealth solutions with Advisor Dashboard driving key wins. Finally, in Asia Pacific, we delivered organic ASV growth of 11.1%, driven primarily by expansion among asset managers and new business wins with asset owners. However, we also experienced headwinds in the region from macro factors including regional COVID policies, which resulted in slower decision-making among clients. In summary, I'm pleased with our first quarter results. We recognize the uncertainty in the market and are closely monitoring the macro environment for any signs of weakness. As we head into the start of calendar 2023, we expect to get a clearer picture of our second half as client budgets are finalized. Using our downturn playbook as a guide, we are focused on disciplined expense management and later in the call Linda will share the actions we've proactively taken. FactSet maintains a long-term view of our strategy and we will continue investing to sustain growth. We have a healthy pipeline of opportunities and as such we are reaffirming our guidance. I'll now turn it over to Linda to discuss our first quarter performance in more detail.

Thanks, Phil, and hello to everyone on the call. As you've seen from our press release this morning, we reported high single-digit organic ASV growth and double-digit year-over-year growth in revenue and adjusted diluted EPS. I'll now share more details on our first quarter performance. Consistent with our definition of organic revenues in ASV, we exclude any revenue in ASV associated with CUSIP Global Services when reporting organic related metrics for the 12 months following the acquisition date. We will, however, provide some specifics on CGS, so you can continue to understand its performance as part of FactSet. Beginning March 1, 2023, the first anniversary of the CGS acquisition, it will be included in our organic results as a component of our CGS business. As Kendra noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. We grew organic ASV plus Professional Services by 8.8%. As Phil stated earlier, this is a strong start to our fiscal year as compared to our typically lower revenue first quarter. Our performance reflects increased demand for our content and solutions, higher retention, and continued expansion. We saw strength in the workstation for banking, key client wins with our Enterprise solutions, and our subscription-based ASV continued to support value-based pricing. GAAP revenue increased by 18.9% to $505 million for the first quarter. Organic revenue, which excludes any impact from foreign exchange and acquisitions, increased 8.3% to $460 million. Growth was driven primarily by CGS and our Analytics & Trading and Research & Advisory solutions. All regions saw notable growth. From our geographic segments on an organic basis, revenue growth for the Americas was at 7.6%. EMEA grew at 7.2% and Asia Pacific came in at 14.9%. All regions primarily benefited from increases in Analytics & Trading and Research & Advisory solutions. GAAP operating expenses grew 10% in the first quarter to $333 million. Let me now review our expenses based on our primary cost buckets. Starting with people, our expenses grew 4% year-over-year, primarily due to increased salary expenses for existing employees and higher stock-based compensation expense. As a percentage of revenue, this was 572 basis points lower year-over-year, demonstrating our continued focus on achieving a sustainable balance of investment in our talent and productivity. Next, real estate costs decreased by 21% year-over-year, driven by the rightsizing exercise we performed in fiscal 2022. As a percentage of revenue, this was 181 basis points lower year-over-year. Third, technology expenses increased this quarter by 11%, driven by increased cloud spending. As a percentage of revenue growth was 51 basis points lower year-over-year. And finally, direct third-party content costs decreased by more than 12% year-over-year, driven by our continued focus on financial discipline and data governance. As a percentage of revenue growth was 156 basis points lower year-over-year. While this is a good result for the first quarter, we expect the annual rate to grow at 5% to 6% in line with the outlook we gave at our April 2022 Investor Day. Compared to the previous year, our GAAP operating margin increased by 517 basis points to 34.1% and our adjusted operating margin increased by 471 basis points to 38.3%. Improvement was driven by higher revenue, lower personnel costs as compared to revenue, and lower content and real estate costs. These expenses were offset by higher technology expenses and costs related to the integration of CGS. Regarding our first quarter margin, I want to remind everyone that our first quarter margins tend to be seasonally higher than in subsequent quarters. While we've had a strong first quarter margin performance on both a GAAP and adjusted operating basis, we remain committed to balancing investment in our business with returning value to shareholders. As such, we continue to anticipate 50 to 75 basis points of margin expansion for the full fiscal year 2023. Further, we expect our fiscal 2023 adjusted operating margin to be between 34 and 35%. This means we anticipate that margins will likely be lower in the subsequent quarters of fiscal 2023. You'll 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 sales was 380 basis points lower than last year on a GAAP basis and 450 basis points lower on an adjusted basis. On a GAAP basis, SG&A was 140 basis points lower year-over-year as a percentage of revenues and 20 basis points lower on an adjusted basis. Moving on, our tax rate for the quarter was 13.4% compared to last year's rate of 10.2%. Our higher rates were primarily due to higher pre-tax income and an increase in the UK statutory tax rate from 19% to 25%, which will continue for the foreseeable future. GAAP EPS increased 26.2% to $3.52 this quarter versus $2.79 in the prior year. Adjusted diluted EPS grew 22.8% to $3.99. Both EPS figures were driven by higher revenue and margin expansion and were partially offset by increased interest expense and a higher tax rate. As noted in our press release, adjusted EBITDA increased to $200 million, up 38.2% from the same period in fiscal 2022. And finally, free cash flow, which we defined as cash generated from operations less capital spending, was about $89 million for the quarter, an increase of 37.8% over the same period last year. This was due to higher net income, partially offset by increased capitalization costs related to internal use software. Before moving on, I want to provide additional financial housekeeping items to help with modeling. First, CGS continued to perform well, adding $3 million in incremental ASV for the quarter. We expect it to grow in the mid-to-high single digits. As a reminder, we will update guidance next quarter to include CGS. Once it is included as part of our organic results, we will no longer report on CGS separately. Next, interest expense for the quarter was $16 million. For the full year, we expect to end fiscal 2023 with interest expense of about $66 million. As a reminder, we paused share repurchases to prioritize debt repayment following the CGS acquisition. As such, no additional shares have been purchased since the first quarter of 2022. As of the end of November 2022, our weighted average diluted share count was 39 million shares. Moving on to the bonus accrual, given our performance so far, we expect the bonus pool for fiscal 2023 to be about $100 million. Our operating income benefited from the strength of the U.S. dollar versus major currencies we hedge. However, we expect exchange rates to be volatile throughout the year, so the impact will fluctuate. As a reminder, 95% of our revenue and most of our expenses are denominated in U.S. dollars. Next, we ended the fiscal quarter with capital expenditures of about $18 million, up $9 million from the prior year period. This was driven by increases in capitalization as well as technology expenditures. As we discussed on our last earnings call, we expect an increase in CapEx this fiscal year to be about $68 million at the midpoint as we move to our hybrid cloud strategy, increased focus on capitalization, and consolidate our offices in Paris as part of our real estate strategy. And finally, we expect our dividend program to continue delivering value to shareholders. Fiscal 2022 marked 23 consecutive years of growth and we paid a quarterly dividend of $0.89 on December 15. Our ASV retention for the first quarter remained greater than 95%. We grew the total number of clients by 13% compared to the prior year, driven by corporate wealth and private equity and venture capital clients. Our client retention remains at 92% year-over-year reflecting the stickiness of our Content and Digital platform. Turning now to our balance sheet, we continue to pay down the term loan related to the acquisition of CGS. In the first fiscal quarter, we made another planned prepayment of $125 million, bringing our gross leverage ratio down to 2.7 times from the initial 3.9 times level when we financed the CGS acquisition. Following our next planned prepayment of $125 million in the second fiscal quarter, we expect to be within our target leverage ratio of 2 to 2.5 times. The strength of our net income and adjusted EBITDA has allowed us to move faster than expected to reach this target. As a reminder, while we may make minor share repurchases to offset the dilutive impact of stock option grants during this time, we do not intend to resume our share repurchase program until at least the third fiscal quarter. Next, I'd like to discuss our downturn playbook. As Phil mentioned, we are still experiencing supported end markets and FactSet has historically fared well during periods of volatility. Should anything change, our downturn playbook gives us levers to reduce our operating expenses by 2% to 3% or $24 million to $36 million. Given market uncertainty, we have proactively implemented parts of our downturn playbook to protect margins and prioritize investment. Actions taken to date include limiting travel to client engagements and essential business needs, revisiting our real estate footprint, and focusing on the continued reduction of third-party content costs. In addition, we are also monitoring our open positions to ensure focus on roles that are essential to our business. Finally, we've restructured our cloud budget as part of our hybrid cloud strategy, which will use both cloud and on-premise computing to run our core platforms. This change will save more than $20 million over the next five years, including $7 million this fiscal year. In closing, we are confident in our ability to navigate the changing market conditions. While it's still early in the fiscal year, we have confidence in our pipeline as we look ahead, and as stated before, we are reaffirming our guidance for 2023. With that, we're now ready for your questions.

Thank you. Good morning. Linda, you gave us kind of the, what to expect from margins. I guess looking forward, I was just wondering, was there, is there any cadence for ASV throughout the year based on what you see in the pipeline or is there any seasonality to pricing perhaps that we should keep in mind?

Sure, Manav. Let me talk a little bit about margin and our expectations and then I'll let Phil go back on ASV and pricing, if that's okay. So to set the stage on margin for the first quarter, we had 570 basis points of margin expansion on, excuse me, 470 basis points of margin expansion as compared to last year, and about half of that has come from CUSIP. In looking forward, as we get past March 1st we will have lapsed CUSIP, so we won't have that additive margin increase from CUSIP. The rest of the margin increase came from the organic business which is great, and it is performing well. If we look at our cost buckets, Manav, a couple of things that we note here. Our third-party data costs are doing very nicely and in fact have moved down. Our real estate costs have moved down as well. Our tech costs are up, but we've had a good re-planning of our cloud strategy, which will result in $7 million of savings this year. So the big bucket to watch here is our people expenses. So we've got to keep a close eye on headcount and on compensation. So we will look forward to staying within our adjusted operating margin guidance of 34% to 35% for the year. But as we said in the script, we expect that margins might be lower for the next three quarters of this year than they've been for the first quarter. So I hope that answers the margin question. Sorry to go a bit backward, but Phil can now handle ASV and price.

Great. Hey Manav, thanks for the question. Yes, so for the rest of the year at least what we're looking at today, we're still looking more positive for Q2 and Q3 and Q4 than we were this time last year. Some of that is definitely supported by price. As we, as I indicated on the last call, we said we were going to go out at more than a 4% price increase and conversations are going well with clients. Clearly they're all going through their own introspection about trying to figure out what's happening in the markets and budgets and I believe are getting finalized now. So we'll have more visibility, but it's hard to argue, frankly, with the amount of investment FactSet has put into our platform over the last few years. So we've got great relationships with clients. Conversations are going well. We do believe that we'll be successful in executing on the price increase. And there's a lot going on in the markets right now. I'm cautiously optimistic. Our strategy is a good one and we'll get more information, particularly as we head into January in terms of what the rest of the year looks like. We have better visibility on Q2 and Q3 and as you know, Q4 is such a big quarter for us. We need a bit more information in terms of how that's going to play out.

Got it. Thank you.

Thanks so much. I also wanted to ask one on sell side really, really strong over the last six quarters, and I know last quarter you had called out upsell, and so I wanted to see if there were any sort of solutions that were particularly in demand. I know you just called out the CTS pipeline, but just anything that is just different now that you're able to upsell to sell side versus historically or things that they're demanding more than normal?

Most of it seats, Toni. So I think what you're seeing there is the investment that we've made in deep sector and private markets. So those new or newer content sets for FactSet that are getting expanded out are allowing us to get into maybe different parts of the bank, more users than we might have historically and just give us a good competitive advantage. So that's really helping with renewals and it's helping us gain new users of the banks.

Yep. Okay, great. And, and Phil, you mentioned a couple times the uncertain environment and starting to see this more challenging environment for clients. Is it the hiring that's sort of driving your comments there or is it this like slower to pull the trigger slower sales cycle? I guess what are the things that are really going on there?

Yes, a bit of both. So we're going to I imagine see less hiring on the buy side. We're also within institutional asset management, I should say, and for the larger transformations clients are going through, we're not seeing a lot of this yet, but I imagine that some of them may be deciding to pause some of these transformations that they're going to go through. I don't think it's negotiable with them. They have to go through these transformations, so we're confident that the solutions we're providing are the right ones. But it could be as they're trying to figure out their own futures they may be pausing on some of these larger deals.

Very helpful, thank you.

Hi, good morning. Thanks for taking my questions. I first wanted to just follow up on Toni's question and just ask if you're seeing any difference in terms of kind of end market health on a regional basis. There was obviously some disparate growth between the different regions, but just curious if your comments are pretty uniform across geographies or if there's anything to call out on a region by region basis?

I think they're pretty uniform, Andrew. Europe did have an exceptionally strong quarter this quarter, but as I look out into the next six months, there are different puts and takes there by region. Asia looks a little bit stronger, frankly, for the next six months maybe than the Americas and EMEA, but I wouldn't say that there's any one region that's dramatically different than others. In terms of where we might see more effects from recession, I would imagine that Europe just generally might get hit harder than other regions. But we haven't, we don't see a lot of impact from that yet.

Got it. Thank you. And then for my follow up, I wanted to ask about the digital strategy, if you know I know you hired a new CTO, Kate Stepp half the year ago, wondering if there are any major takeaways from her involvement with the strategy. Sounds like you're restructuring the cloud budget and that's going to result in some cost savings. Any more color on what's happening under the hood there that would be great. Thank you.

Linda's been spending a lot of time with Kate.

Yes. First of all, Andrew, Kate has been with the company for quite a number of years, so she has changed position, but she's not a new hire. What we did was we sat down and we looked at the cloud budget and we concluded that not everything needs to be on the cloud. So we have kicked up our CapEx, as I said in the housekeeping and we are looking to move a few items back into data centers. We've had to buy some new servers, things like that. But we think the long-term balance for the company is better with some on-premises computing core capability as well as cloud capability. So we've rebalanced that over the next five years we'll save $20 million. With that change, we'll save $7 million this year, which is very helpful. But again, it's just a rebalancing of what we're doing with the cloud versus on-premise computing. And Kate has been very helpful as we've thought through what we want to do with the technology budget. So hope that helps you.

Yes, thank you very much.

Hi, this is John filling for Ashish. Thanks for taking my question. Maybe just quickly on the people cost, it seems like head count is up around 7% over the last 12 months, really focusing Content & Analytics, Trading & Sales, could you maybe talk about any potential benefits you're seeing on just hiring technology talent as well as just the people bucket as a whole? Thanks.

I’ll begin and Linda may want to add some thoughts. This is an excellent market for talent, and we have been quite successful in hiring the individuals we aimed for in recent months, while attrition has decreased. Linda and I are monitoring this closely. We want to ensure we’re not overextending ourselves, but we do see an opportunity to continue enhancing our talent and making further investments. We are optimistic that we won’t have to significantly reduce our hiring efforts. However, as we have done in past cycles, maintaining our investment without experiencing severe challenges on the personnel front will certainly benefit us in the long run.

Yes, as Phil said John, we're watching headcount day by day. It's very important that we get that right and not run too hot. As Phil said, our attrition has come down very nicely. Some of that is the result of the market being a little bit more employer friendly and some of the moves we made in our compensation last year to make sure that we're rewarding our people and our high performers appropriately. So we got that right. You're right, we have increased headcount quarter-over-quarter for the first quarter. About 65% of that headcount is in centers of excellence, so our lower cost locations. And we've been very careful about bringing on that headcount largely to support our deep sector effort, which we've talked about before, to help with the sales effort and to assist with analytics and trading. So, so far so good, but the trends are attrition down and hiring has to be sized accordingly to make sure we don't get out over our skis. But we are seeing a much healthier retention picture than we did at this time last year which is a really nice thing. So hope that gives you a bit more clarity.

Yes, that's great color, thank you. And maybe quickly, could you just talk about the wealth pipeline and maybe if there's been any change in tone around client conversations as well as the sales cycle?

Yes, the wealth pipeline continues to be healthy. We have a good mix of larger deals that we continue to work. And now in terms of markets, that's one of the markets where we just feel like in the long run we've got just such a great opportunity and more tailwinds.

Yes, hey. Hello everyone. Just coming back to what you're seeing in different client segments or regional, can you also expand your comments on the pricing side, is it pretty uniform? Any sort of pushback you're getting? One of the things that we've heard, for example, is in Europe with all the FX changes year-over-year asking them for more in dollar terms, when the currency has devalued so much over the last year is increasingly harder. So just curious if there's anything you would call on, on pricing by customer set or region? Thanks.

Yes, nothing I'd call out yet, Alex. So similar to last year, not a lot of conversations have reached my desk, which is a good sign in terms of how the conversations are going. And as I've said it's very hard for clients to argue with the value that FactSet has put into the product. So my sense is that clients are understanding this. Everyone is seeing it everywhere in terms of inflation and we're coming in, I believe, at a very moderate place relative to what clients may be seeing from other providers, which gives us a great opportunity to capture more market share. We've certainly gotten some inbound opportunities as a result of that for sure.

Oh, that's helpful, thank you. I have a follow-up regarding the wealth side. You mentioned in your press release the launch of Model Center, which I believe took place in early November. It sounds to me like what you're describing resembles a shelf, similar to what an investment does, for example. Can you discuss the revenue model for that business? I understand it's still in the early stages, but does this indicate that you are expanding the scope of the workflows you plan to offer in the wealth segment, rather than just adapting current services for wealth? Can you also share some ideas about what you envision doing that you aren't currently doing?

Yes, it is absolutely a sign of that Alex and consistent across the other firm types that we're servicing. So FactSet is continuing to push beyond being just a workstation company. We've gone way beyond that already. But we're giving a lot of thought to within each client type what adjacencies can we get into and as we open up the platform and work with other partners, what more can we do for clients? Wealth, wealth is a relatively newer firm type for us, so there's a lot more, I think, room for us to expand than some other firm types where we're more well established. That's probably a good follow-up with Kendra later in terms of the detail on the Model. There's probably a little too much detail for this call and if you want to have a follow-up with our wealth team, I’m sure they’d be very happy to talk to you about what they’re doing there.

All right, sounds good. Thank you very much.

Hi, thanks. Good morning. You noticed that clients are pausing on larger deals. Are there any large deals coming up for renewal this fiscal year or any competitive large RFPs that you’re involved in?

There are, I mean, hey George, thanks for the question. There are deals like that every year. So I think this year and Kendra can or Linda can get into this later if we need to. But I believe there are less large renewals this year than we might have seen in previous years. So there are definitely a couple. And there are a couple of very interesting deals that we’re working on that are larger in Q2 and Q3 and Q4 for this year, some sell-side related, some partner deals.

Got it. And secondly, you mentioned you’re seeing longer sales cycles, a little bit slower hiring. Can you talk a bit about what you’re seeing with overall client enterprise budgets, the direction that those are moving in?

Yes, we are monitoring these aspects closely. Currently, we haven't observed significant changes, but there are signs that they could be emerging. Recently, there was a Financial Times article discussing how asset managers are reallocating funds towards technology platforms, highlighting the investments necessary for competitiveness. This trend aligns well with the advancements we've made at FactSet through the PLC and our efforts to expand our platform and collaborate with partners, some of which we have publicly shared. These transformations are ongoing, and clients are unlikely to completely abandon them; it’s a matter of how quickly they proceed. Overall, I remain very positive about our standing in the market and our capability to execute on these opportunities.

Great, very helpful. Thank you.

Yes, good morning. First question, can you just comment some more on the marketplace, the traditional buy-side out there? Just talk a little more specifically about the pressure points maybe that might be building there for the longer potential sales cycles? Just what’s going on with that traditional part of your legacy business? I’ll start there.

Yes, overall, it’s looking pretty healthy. There's less hiring compared to last year, but it hasn't decreased significantly. The buy-side figure mentioned in our press release consists of various components, so it might be helpful to break that down for clarity. The two types of firms currently facing the most challenges and showing lower revenue than last year are corporates. Although we added several corporates this year, they represent a smaller portion of new firm creation for the quarter compared to the previous year. Additionally, we experienced fluctuations with partners this quarter. Regarding the buy-side figure, institutional asset management, hedge funds, and wealth management are either slightly below last year or about the same in terms of the current environment. On a positive note, asset owners are performing exceptionally well. Asset owners typically adopt a longer-term perspective, and we are seeing significant success in that area compared to last year. This is encouraging, particularly with our work on the PLC and collaborations with partners. We are also witnessing strong adoption of multi-asset class solutions among asset owners, along with positive trends in fixed income. Hopefully, this provides a clearer understanding of the overall buy-side figure we've shared.

Okay. And then, Linda, if I could ask on the cost side of things, I’m scratching my head a little bit here. Your fiscal fourth quarter costs were meaningfully higher than the third quarter costs or the quarter. You guys just finished here by roughly $30 million if you take out the various one-time items and stuff. I know you’ve called out last time we spoke on this at about, say an extra $6 million or so was incentive compensation in August quarter versus the May quarter, but then the total cost here in the November quarter in a good way fell back down to the May levels and stuff from last year and stuff. The lumpiness here of the cost, maybe you could just talk about that, maybe just a little more specific about how we should think model out the costs for the rest of the year versus this lower number in the first quarter? Thank you.

Yes. Thanks for that, Craig. And your observations are correct. In the fourth quarter, we really worked hard to ensure that we had compensation right. So you saw a couple of things. You saw a merit pool, which was stronger than usual to deal with inflationary adjustments in a number of countries and the U.S. You also saw bonuses, which were quite fulsome because we had a very strong FY 2022. And then you saw that we also worked harder on equity, and equity-based compensation moved up as well in FY 2022. So the goal there while we were running strong, was to make sure we had a compensation picture correct for our employees coming off the great resignation. So as we move forward into this year, we’re watching our costs very carefully. The entire situation has shifted, Craig, to one of conservatism around costs. I talked about our three buckets that are going well and are nicely controlled. I think the place where we watch here very closely is our people bucket, which includes both headcount and compensation costs. So we’re watching those very, very carefully, as Phil said. A couple of things to notice on the revenue side for the first quarter. Last year, we had a record ASV level in Q1 that was about $17 million. This year, we’re running at about half of that. So the timing change matters to us in terms of how the revenue comes through later in the year. So that makes my job just that much more exciting to make sure that we’re managing correctly for the margin. So we’re doing that. The other thing, Craig, to take a look at is the dollar had been very strong. Recently, the dollar has been retracing about one-third of that strength. So we have to be careful on the impacts of the later ASV, on timing and the conversion to revenue. And then we also have to be careful on what’s happening with FX, which has been unusually bouncy as we have moved through the last couple of quarters. So hope that helps, but we’ve got an eagle eye on those cost buckets and we did pretty nicely managing them in the first quarter. I’m happy to have the 38.3% margin in the bank, and that will help us as we move through the rest of the year. So prudence is the name of the game here. Hope that helps.

Yes that's good. Thanks guys.

Yes, hi. Good morning. So I wanted to ask about the competitive environment. Over the last several years, my perception is that you’ve gained share as some of your competitors have been busy integrating deals, and you’ve been investing. But it looks like there’s now, new products that they’re rolling out. So I’m curious as we head into a potentially more challenging environment, how would you characterize your competitive positioning across your various products?

Hi Faiza, thank you for your question. I would describe our position as exceptionally strong. Starting with the FactSet workstation, all our investments in content are reflected there, and we've significantly upgraded many applications for our clients, enhancing ease of use, searchability, and alerting. You can see this improvement in our workstation numbers across various firm types, which have grown considerably over the past five years. In terms of analytics, we've made great progress with the portfolio lifecycle and are collaborating with asset servicers and other partners to become a key partner for our clients from back to front offices. There is significant opportunity in this area. The market is looking for valuable solutions and companies that lead in technology and innovation, and FactSet meets those criteria. Regarding the CTS front, we've expanded that product suite significantly, and we're particularly excited about real-time solutions. Although it represents a small portion of CTS currently, there's a vast market share available in real time. We've made a recent investment in BMLL, which is an excellent tick history product, essential for complementing real-time offerings. This area presents great opportunities for us to assist our clients further. The investments we've made over the past three years, along with those we continue to make, position us well. It's also worth noting the strong relationships we maintain with our clients, many of whom have been with us for a long time and are trusted partners. In times like these, they need our support, and we've been there before and will continue to be. I feel very positive about our competitive position, more than I have in nearly my entire decade at FactSet.

Great, thanks for that. And then just as a follow-up, I wanted to ask about capital allocation and the interest expense guide that you provided, Linda. Just want to confirm, are you assuming sort of no further debt pay down? Because I think you raised the interest expense guide, and I understand that rates are a little bit higher, but I feel like you’ve also been paying down debt, so I just wanted to clarify sort of any assumptions behind that guide?

Yes. Faiza, I think we've mentioned this a bit in the script. So let’s talk about our leverage levels and go back and think about that. So when we purchased CUSIP, our gross leverage level went up to 3.9 times. We’ve made a number of pay downs of $125 million basically per quarter. Now our gross leverage ratio is 2.7 times. We’re looking to get back within what would be considered typical for our level of investment grade rating, which is 2.5 times to 2 times. So we have one more payment to make, which is what is anticipated to get inside that leverage level. And then we may not continue at the exact same pace of pay down prepayment on that term loan as we had done before. At that point, we’re going to speak to the rating agencies, be clear to resume our share buybacks and we’ll think about what we want to do with that. The remaining Board authorization, I want to be crystal clear here, authorization is $181 million. That doesn’t mean that’s what we’re going to spend. That means that’s what the authorization is, so you can note that. And we’re going to think about what we want to do with this after we have those conversations. So the interest expense presumes all those things that I had mentioned. And if we do get back into the share repurchase market, please note that’s going to be back-end loaded and it won’t move the average share count all that much for FY 2023 as a whole. It will be helpful as we move into FY 2024. So hope that, that gives you all the detail that you need, Faiza.

Yes, thank you Linda.

Thanks so much. I want to revisit the downturn playbook you discussed. Of the $24 million to $36 million, how much have you implemented? Is it around one-third? The $7 million this year is obviously additional, right Linda? I just want to ensure I understood your comment correctly.

Yes, Kevin, it would be useful to consider the midpoint of that range. I believe we’ve implemented about one-third of it. We’re closely evaluating our travel and entertainment expenses, as maximizing our revenue is a top priority. We’re also reviewing our plans regarding personnel and are being very cautious about new hires, as we mentioned previously. Regarding bonuses, it's challenging to predict how that will turn out at the end of the first quarter. To clarify, we anticipate approximately $100 million in bonuses, of which we've accounted for about $24 million this quarter. Typically, that figure increases as the year progresses, potentially reaching around $26 million in the fourth quarter, but that remains uncertain. Should our performance fall short of expectations, there is a possibility that our bonus allocation could decrease by $10 million, equating to roughly another one-third. However, it's still too early to discuss that. Our focus is on ensuring we manage our hiring pace properly and prioritize the technology budget. We plan to reassess our real estate needs as we approach the fourth quarter, with any savings from those adjustments mostly materializing in FY 2024 rather than being beneficial in FY 2023. Nevertheless, we are keeping a close watch on all these areas to support revenue growth. As Phil mentioned, our pipelines for the second and third quarters look stronger than last year, which is important to highlight. We’re managing a bit of a timing shift and are aligning our costs accordingly. I hope this provides the clarity you were looking for, Kevin.

Very, very helpful. And then just a quick follow-up. I know you talked about the centers of excellence. Is there any way to think about how the kind of the current employee footprint is today and where you think that can get to over time?

Hi Kevin, it’s Phil. So if you are talking about where the talent is located?

Yes.

Yes. The past few years have been quite interesting from a talent perspective. We’ve gained a lot of insights. We’ve adopted a hybrid work model, which is why Linda is discussing real estate expenses. As a result, we have more options globally, and our centers of excellence in India and the Philippines are performing well. Moving forward, our goal is to secure the best global talent while exploring all available opportunities. We have also made some changes to enable hiring in more locations if necessary, and we are currently working on that initiative.

Very helpful. Thank you.

Hi, this is Hans Hoffman on for Stephanie. So for my first question, given you guys sort of noted sort of a more challenging environment, could you just update us on what you’re seeing in terms of client cancellation trends?

So far, things are okay, and we are being cautious as we approach the new year while clients finalize their budgets. Our press release indicates we are seeing a net increase in users and funding, which shows our business is still growing. Although the absolute numbers are lower compared to last year, there’s no significant panic among our clients, and we remain competitive. I want to stress that these are indicators we value. We are managing our operations effectively, and we feel confident in our ability to perform well regardless of the market conditions, as FactSet has a solid track record in this regard.

Got it, that’s helpful. And then just for my follow-up, could you just talk a bit about where you sort of see the biggest opportunity in the sort of next stage of investment in technology and content?

There’s a great opportunity given that we’ve opened up the platform. So we’ve done some press releases about partnerships we have, but really taking all of the components of FactSet and going in and being the anchor partner for the very largest firms is a big opportunity. When you look at the buy-side institutional asset management, we’re doing very well in what we call our premier book. So our premier book also extends to the sell-side, but it’s close to our top 100 clients. And that client base is doing actually very well on a relative basis to last year. So some of the weakness that we might see has to do more with smaller firms in the middle markets, and I think less small firms getting created or potentially some firms going out of business. But overall, within the clients that are much larger where we have a big percentage of our ASV and a big percentage of our opportunity, we’re seeing very positive signs there.

No one has asked us about the CUSIP business to this point in the call, and I want to make sure that we’re clear that we also see opportunity coming from the CUSIP business. It’s not technology exactly as the last questioner had asked. But let me just point out some interesting points on CUSIP. So we’re very happy with the acquisition. We’re very happy with the team and we’re very happy with our relationship with the American Bankers Association, which is going great. We were just down to see them a few weeks ago. So CUSIP’s growth of $48 million contributed in revenue in Q1, about $42 million of that from subscriptions and the rest from the issuance business, about $6 million, which is a little bit slower, but still really good growth in the things you don’t think about like municipal bond issuances and also certificates of deposits, which have grown very dramatically as interest rates continue to grow on those types of investments for individuals. Overall, we see very good opportunities in a couple of areas: one is expanding CUSIP to the private markets; second would be expanding CUSIP to the leveraged markets; and third, potentially as different packages of the ESG, for example, carbon credits are traded, we see growth there. So CUSIP has done a really good job for us. We will lap it, as we said, the 1st of March. We come off our technical services agreement. The only blip there with CUSIP is the days sales outstanding. That has extended a bit. And as we move into the lapping on March 1, we are going to tighten up on those days sales outstanding. So hope that’s helpful to everyone, our biggest acquisition to date and we’re pleased with its performance. We have one more quarter where we will give you the details on CUSIP. After that, it is subsumed in the CTS business, as we said. So with that, I may have front-run some of Shlomo’s questions, but maybe we can move on.

Thank you. Yes, Linda, you absolutely did front-run the AR DSO question. I was going to ask you about that coming back up again. But I want to shift to just a little bit. Historically, the sell-side has been a lot more volatile in downturns than the buy-side. Is there any difference in the combination or the composition of what’s in the sell-side right now that would lead you to believe that the case would not be the same if we end up in some of the banks just decide not to hang on to people the same way? Is there some way that you would think that we wouldn’t start to go – or start to see there be more of a drag on the growth as opposed to being a positive for the growth?

If there are large layoffs Shlomo, in investment banking, that certainly would affect us, but the – as I mentioned earlier, right, the CTS business, we’re beginning to sell more than just workstations to the banks. So that’s a very positive sign that there’s other things we can sell them in terms of workflows and other departments we can go into. And again, the investment that we’ve made in content for deep sector and private markets just puts us in a much stronger position and potentially open up new users for us. The other thing that I haven’t spoken about that’s in the sell-side number is our private equity and venture capital firm type. So that’s not massive, but it is growing very quickly. And over time, I expect it to be a meaningful contributor. So that is definitely something to keep an eye on. We called it out this quarter as being one of the drivers of the quarter. And as I look out into the next six months, it’s private equity, venture capital firms, the sell side and asset owners that look the strongest. So I think the PEVC and the CTS piece, in particular, are just a couple of things that will be hedged if those – if big layoffs do occur in investment banking.

Shlomo, just a couple of things to note. The M&A pipeline is still very strong. So there might be some interest to making sure headcounts stay pretty fulsome at the investment banks. Also, some of the trimming you’re seeing now, those firms have not engaged in that what would be more normal trimming through the pandemic. So it’s been a couple of years since they did that, and you’re seeing some of that happen. And again, there’s the question of headcount versus compensation for them. So we’ll see what happens next. But analyst classes look to be about the same size. The lesson learned through the pandemic is that those more junior employees are important. They have to be brought on and trained. So just a few more points there that might help you.

Okay, thank you. And then just, I’m trying to make sure I understand the tone, which sounds more conservative with some of the comments that you’ve made about the strong pipelines. Is the cost actions that you took to implement some of the downturn strategy, just looking at the world around you versus what you’re actually seeing happening with your pipeline and with your sales cycles, is that what’s going on? Because it seems like the sales seem to be going pretty well, at least that’s what the narrative sounds like.

Well, one is we’re just taking a long-term view here to sustainable margin expansion. So Linda has I think, come in and really put in a good framework for us. Some of that is just sort of a multi-year effort to make sure that we expand our margin on a reasonable basis. Attrition has come way down because of all of the great actions we took through the year. And people expense is our biggest expense. So I think that’s – the thing we’re keeping an eye on the closest is just making sure that our headcount expense is moving ahead at the right pace. And yes, there’s so much news out there right now about possible recession and layoffs and cost cutting. We’re just – we’re positioned well relative to a lot of other companies just in terms of our business model and our investment, but we just want to make sure that we’re being conservative enough as we get into January when clients will be printing their budgets. We still don’t have great visibility on what the budgets of our clients are going to look like. So that’s the thing that I think will give us a lot more confidence in terms of the numbers that we can project.

Okay, thank you very much.

Yes.

Thank you. Good morning, Phil and Linda, I appreciate it. In terms of just trying to understand, and I guess going forward, if we do hit more of a downturn, where the risk is greatest for FactSet in terms of customers closing? I noted that PE and VC firms. If I would think we most likely would like to close, you guys are doing very healthy now. So where do you see the business risks of losing customers as we do go into this year downturn?

I believe that smaller firms that are not competitive face the risk of closure, and hedge funds could be one example. For us, hedge funds are somewhat in the middle of the spectrum over the next six months, as they appear to be performing adequately. This is another area where we are succeeding from a CTS standpoint. It’s rare for FactSet to completely lose a large asset manager or a bank. We maintain some presence there. Our focus is on gaining market share within those firms, so I am not overly concerned about firm closures. However, it is difficult to manage that aspect. Our primary focus should be on the largest accounts that present the greatest opportunities moving forward.

Great, I appreciate that. And then in terms of your revenue stream, remind me – I know most of it is being recurring, but what portion of your revenue is nonrecurring? And how did that do in the quarter versus, I guess, obviously, recurring part?

It's a very small percentage of our revenue, likely less than 2%. We're closely examining it, and if it would be beneficial to break it out, we'll definitely consider it moving forward. I think it may have decreased slightly. Typically, it trends with ASV and closely aligns with the analytics business. Most of the professional services revenue comes from analytics implementations.

Great, thank you. Good luck.

Thanks.

Thank you for taking my questions. Could you please give us an update on your ESG initiatives? How should we think about the impact of your ESG initiatives to your revenue and expense this fiscal year? Thank you.

Hey, Owen. So FactSet’s overall, our overarching ESG strategy is just to be an agnostic agent in the ecosystem for our clients. ESG is so fragmented. There’s different focuses region by region globally. And we probably have the best selection of ESG in the market. And we integrate so many other providers. In fact, that adds its value in terms of concording that data so that firms that are creating their own ESG composites don’t have to go through all the pain of managing the data. So building applications on top of that to provide clients their own tools to create their own view, that's primarily what we’re focused on. It’s not a meaningful contributor to ASV today. I think some of it probably doesn’t show up directly as ASV as its own product, but there’s a lot of value that we’ve put into the workstation. So I believe most users that subscribe to a workstation can access whatever ESG products they’re subscribing to in the market. So that’s really where our primary focus is right now.

Got it. That’s it from me. Thank you for taking my questions and happy holidays.

You, too. Yes. So thank you all for joining us today. We’re off to a good start in fiscal 2023. While economic uncertainty persists, we are constantly talking to our clients and are really well prepared to respond to any market environment. I’m confident in our ability to drive continued sustainable growth, and FactSet is a consistent performer with a proven history of successfully navigating volatility. We have a resilient business with an innovative product mix, differentiated content, and diverse end markets. And we are only further strengthening our offerings as we continue to invest in our products to enhance our competitive position and the value we deliver to clients. Before wrapping up, I really want to thank all FactSetters globally for their continued high level of execution and engagement and hopefully, everyone at the firm is having fun. I know I am. I think most FactSetters are. We’ve invested, and we have a great culture. So it’s a good place to be right now. Please be well this holiday season. We look forward to speaking with you again next quarter. And in the meantime, feel free to contact Kendra Brown with any additional questions. Operator, this ends today’s call.