Factset Research Systems Inc (FDS) — Q2 2024 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to FactSet's second fiscal quarter 2024 earnings call. Before we begin, the slides we reference during this presentation can be found through the webcast on the Investor Relations section of our website. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions from investors. The call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may reenter the queue for additional follow-up questions, which we will take if time permits. Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, Chief Executive Officer; and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q&A portion of today's call. I will now turn the discussion over to Phil Snow.

Thank you, Ali, and good morning, everyone. Thanks for joining us today. In the second quarter, we grew organic ASV plus professional services by 5.4% year-over-year, delivering adjusted diluted EPS of $4.22 and an adjusted operating margin of 38.3%. Given challenging industry factors and continued market uncertainty, our results this quarter were mixed. You may recall that we anticipated the softer top-line growth from our December call. We ended this quarter with more than 8,000 clients, adding 75 net new logos, and our user count was 206,478, down 605 in the quarter, mostly due to consolidation following UBS' acquisition of Credit Suisse. In addition, please note that the ASV reduction impact of Credit Suisse is not reflected in our second quarter results. While we cannot share details about ongoing business discussions, our full-year guidance continues to assume a conservative view of the Credit Suisse reduction as we indicated last quarter. Overall, ASV retention remained greater than 95% and client retention was 90%. In terms of market conditions, client caution continued to delay purchasing decisions. We saw increased pressure on client headcount as they seek further efficiency gains. As a result, we saw higher erosion this quarter. We had fewer large deals in Q2 and saw a lower impact from our price increase, both of which contributed to a slower growth rate. However, industry cost-cutting appears to be stabilizing and we are starting to see pockets of recovery. As we signaled in our December call, anticipation of softer top-line growth drove our own difficult but necessary cost cuts, including headcount reductions during the quarter. Continued careful expense management will allow us to maintain margins and EPS growth along with investment in new products to drive future performance. Currently, we expect to finish the fiscal year at the lower end of our ASV growth guidance range of 5% to 7%. Turning now to our performance by region. America's ASV growth decelerated by 200 basis points from the prior quarter to 5.9%, mainly due to a large wealth cancellation, as well as banking erosion and lower price realization. The wealth cancellation resulted from a client's decision to move a custom non-standard workflow solution in-house following a change in its business strategy. In EMEA, ASV growth decelerated 40 basis points to 5%, mainly due to headwinds from lighter institutional asset manager renewals, partially offset by new business acceleration. In Asia Pacific, ASV growth decelerated 240 basis points to 5.6%. Softer banking expansion coupled with a larger institutional asset manager loss offset wins with asset owners. While new business accelerated modestly across regions, it was offset by greater reductions in both retention and expansion. On the institutional buy side, we saw headwinds across all firm types due to cost-cutting and continued headcount reduction. For example, in 2023, passive funds surpassed active funds in total assets under management. As a result, our institutional asset management clients are seeing continued increased fee pressure. To help offset this pressure, we have expanded our capabilities to address users' needs, including in the front office. Our managed services business is growing as our clients outsource more of their middle office workflows to FactSet. This helped drive some gains with asset owners. We have invested in our platform to reduce clients' total cost of ownership, or TCO. Given our ability to help clients do more with less, they are increasing their reliance on us despite fee pressure. As a result, we are investing in managed services given our growth in this area. We are leveraging our strength in the middle office to further enhance front-office solutions. This quarter, we displaced a front-office incumbent at an asset management firm in Asia, and we did this by connecting the client's entire workflow, including both OMS and EMS capabilities. We also won that business on the strength of our open platform. Simultaneously, we are developing GenAI-enhanced tools and copilots for portfolio managers and fundamental research analysts, which we believe will significantly reduce their time to insight. In dealmakers, we saw a higher erosion in banking and lower retention in private equity and venture capital. However, corporates are starting to see good momentum with investor relations users. At the same time, expectations are high around the effect generative AI will have on our industry. Initial client feedback has been extremely positive on our new GenAI solutions, including FactSet Mercury, a conversational way to generate answers and insights from documents and structured datasets that is in beta release as part of our FactSet Explorer program. We see early signs that large language models, working with our deep repository of well-curated data in our open platform, can power accelerated workflows for our clients. While we perceive that this trend will drive future growth, these initiatives need time to gain commercial momentum. In banking, our GenAI banker efficiency tools are gaining users. We had more than 200 GenAI meetings with our banking clients in Q2. Beta products in testing with clients include chart creator and investment banking office refresh API, which allows clients to automate cloud model updates. This is our first client-facing off-platform solution for banker automation, and we believe it can drive a new revenue stream. Finally, Transcript Assistant, our GenAI-powered chatbot, is in full release as announced last week. Transcript Assistant accelerates analysis of earnings call transcripts with a conversational, interactive interface. Clients have the freedom to ask their own custom questions or choose from a FactSet-provided prompt. User uptake has been strong. We are now expanding event coverage and comparative analysis in parallel with the FactSet Mercury integration. You can read more about Transcript Assistant in our press release from last week. Turning to wealth. Activity was more subdued this quarter given one large cancellation and no large deals. However, wealth partnerships are creating stronger connections with portfolio and business development workflows, in turn increasing senior executive level client engagement. We have recently driven major changes in the organization to position ourselves for future growth, including moving to our firm-type focus and reducing costs. Given this rapid pace of change, I am extremely proud of how the company has risen to the occasion. This change process may have been challenging in the short run, but has positioned us well for a market upturn. Finally, I want to highlight our FOCUS client event in Miami at the end of April. This event brings together top thought leaders, industry experts, and key decision makers from the finance and tech sectors. Our theme for 2024 is the revolution of an ecosystem, discussing the potential of artificial intelligence and machine learning. Attendees can expect a thoughtfully curated agenda with inspiring speakers, educational sessions, and opportunities for meaningful connections. Registration information can be found at focus.factset.com. I'll now turn it over to Linda to discuss our second quarter performance in more detail.

Thanks, Phil, and hello to everyone. As you've seen from our press release this morning, despite slower ASV growth, we improved margins and EPS in the second quarter. Second quarter organic ASV grew 5.4% while adjusted operating margin improved 130 basis points to 38.3%, and adjusted diluted EPS rose 11% to $4.22. I'll now share some additional details on our fiscal second quarter performance. As Ali noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. For the quarter, GAAP revenue increased 6% to $546 million on sales to asset owners, corporates, hedge funds, and private equity and venture capital clients. For our geographic segments, organic revenues grew by 6.5% in the Americas, 4.8% in EMEA, and 6.4% in Asia Pacific. Turning now to expenses. GAAP operating expenses increased 5% year-over-year to $364 million. This was driven by higher employee expense, net of a $7 million decrease in our bonus accrual, as well as by increased intangible asset amortization. Compared to the previous year, GAAP operating margin increased by nearly 50 basis points to 33%. This was due to increased revenues, partially offset by higher personnel expenses, including an approximately $11 million restructuring charge. On an adjusted basis, operating expenses grew 4%. Looking at each of our four major cost buckets in turn, as we've frequently discussed, technology continues to be our main area of expense growth. Specifically, technology costs increased 11% year-over-year. Technology costs now represent about 8.4% of revenue, consistent with our medium-term outlook. In contrast, employee expenses grew only 1% year-over-year, driven by increased compensation expenses, partially offset by the lower bonus accrual. This small increase reflects some of the cost reduction efforts we took during the second quarter. Next, our third-party content costs increased 3% due to higher variable fee expenses. And finally, real estate expenses saw an 8% decrease year-over-year as we took early and significant steps to reduce this expense bucket. We believe we have now rightsized our real estate footprint. As we have mentioned before, thoughtful expense management is positioning the company for future growth while allowing us to continue to invest in technology and strategic initiatives. Turning now to margin. Adjusted operating margin improved by 130 basis points to 38.3%. This was due to lower personnel expenses, given the lower bonus accrual and higher capitalization benefit, partially offset by higher technology expenses and higher bad debt expense. As always, 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 services was flat year-over-year on a GAAP basis and about 90 points lower on an adjusted basis. And SG&A as a percentage of revenue was 40 basis points lower year-over-year on a GAAP basis. The decrease was due to revenues outpacing the increase in SG&A expenses and lower compensation costs, partially offset by an increase in bad debt expense. SG&A was about 40 basis points lower on an adjusted basis. Turning now to tax. Our tax rate for the quarter was 16.4% compared to last year's rate of 16.1%. This increase was due to higher taxable income, offset by higher stock option exercises and higher foreign credits, which reduced the tax rate. Turning now to EPS. GAAP EPS increased 8% to $3.65 this quarter versus $3.38 in the prior year period. This was driven by higher revenues and margin expansion, partly offset by a higher tax rate. On an adjusted basis, EPS increased 11.1% to $4.22, also driven by revenue growth and margin expansion, partially offset by a higher tax rate. Adjusted EBITDA increased $218 million, up 9.2% year-over-year due to higher net income, driven primarily by an increase in operating income, excluding the impact of depreciation and amortization and the impact of non-recurring non-cash expenses. Free cash flow, which we define as cash generated from operations less capital spending, was $122 million for the quarter, a decrease of 17% over the same period last year. This was due to the timing of remitted payroll taxes related to employee stock compensation and higher income taxes payable, which are seasonally higher in the second quarter. Turning to share repurchases. For the quarter, we repurchased 113,050 shares for $52.3 million at an average share price of $462.23. Our fiscal 2024 share repurchase plan targets $250 million of repurchases. We have $188 million remaining for repurchases in the second-half of fiscal 2024. We remain disciplined in our buyback program and committed to returning long-term value to our shareholders. Combining our dividends and share repurchases, we returned $434.1 million to our shareholders over the last 12 months. And regarding leverage, during the second quarter, we paid down $62.5 million of our outstanding term loan, which brings our gross leverage down to 1.8 times. This is consistent with our plan to repay that term loan in full by the second quarter of fiscal 2025. Finally, as Phil mentioned, we've carefully managed our cost base while continuing to invest in GenAI and other strategic initiatives. We believe that we are well positioned for growth as the markets pick up. We are now ready for your questions. Operator?

Yes, hi. Good morning. So I wanted to talk a little bit about the pipeline and what you're seeing from here. Phil, I think you said that industry cost cutting appears to be stabilizing, and you're seeing some pockets of recovery. So maybe just start there and give us a sense of what you're hearing from your clients?

Yes. Well, from my conversations with clients, it seems much more constructive in the last three months than it was towards the end of last year. Engaging with clients and salespeople, there's definitely a sense that activity is increasing. We're noticing heightened pressure on client headcount, particularly. However, our enterprise solutions and platform solutions are demonstrating good strength. I'm cautiously optimistic that as we move into the second half, while Q3 may be weaker, Q4 should be stronger than last year. Now, I'll hand it over to Helen for more details.

Sure. Thanks for your question. Yes, we're seeing a healthier pipeline in H2 versus H1. We're seeing higher deal volume. I would say that the pipeline is more along the lines of last year, if not a little bit stronger. The makeup is about half of it is coming from the buy side, 20% in the dealmakers or banking, 20% wealth, and the rest in partnerships. So we're seeing the pipeline accelerate since the beginning of the calendar year, really the strength in data solutions, in the middle office and in Quant Solutions. But as Phil was just saying, timing on decisions is a little bit difficult to gauge. And more of our pipeline, I would say, is in the later stages of the funnel, which gives us more confidence, but many of them are really more into the fourth quarter.

Great. Thank you.

You’re welcome.

Yes, thank you. Phil, so I just wanted to touch on the managed services comments you made, I think. If you could just help elaborate exactly what you were referring to in investing more in the managed services? What percentage of your revenues today is managed services? And is it fair to assume that's a lower-margin business? Just I was hoping you could elaborate more on that.

Sure, Manav. Thanks for your question. You're right that it represents a much smaller portion of our business, and we are primarily focusing on the subscription aspect of FactSet. This reflects our identity as a company and our ongoing direction. However, we have noticed that as we evolve into an enterprise solution for our clients, delivering essential services—especially in analytics and off-platform—we are providing an elevated level of support that benefits our clients. We believe there is a significant opportunity for clients to outsource certain solutions to FactSet, allowing us to leverage our expertise. A notable example is the large outsourced performance deal we secured at the end of last year, for which we heavily invested in our team to enhance its development. We are witnessing ongoing momentum and interest in this area. While it is indeed typically a lower-margin part of our business, we believe that when combined with the main solutions we offer, it presents a great opportunity for us.

Hi, good morning. Thanks for taking my question. I was wondering if you can share a little bit more color on how much pricing, cross-selling and new logo drove Q2 ASV growth, and how much do you expect them to drive growth for the full-year?

Hey, it’s Helen. Thanks for the question. This quarter, the growth in the price increase for the Americas was $25 million, which aligns with fiscal year 2022 but is lower than last year due to our ability to leverage some inflation and CPI from the previous year. Nevertheless, the overall price increase continues to contribute positively. I would say that our price realization compared to our rate card is about the same as last year, varying slightly across different firm types. As previously mentioned, our price realization for new business is lower than last year, likely reflecting a more competitive environment. However, we've actually seen an increase in total new business annual subscription value, with higher new logos, even though the average price per logo is somewhat smaller. Therefore, I believe we are maintaining a similar growth rate to what we have experienced in the past.

Hi. Thank you for taking my question. I was hoping you could talk about your expense cadence for the rest of the year. You had really strong margins this quarter. So just curious, your expectations around OpEx for the back half, and was there any timing shift from 2Q into the back half?

Thank you, Heather. It's Linda. We had talked about how our expenses tend to ramp up as we move through the calendar year. So I think it's fair to say that margins we've been fortunate enough to put up in Q1 and Q2 will decrease a bit as we move through the back half of the year. So we did adjusted operating margin of 37.6% in Q1 and 38.3% in Q2. So I think it would be fair to expect arithmetically something closer to 35% for the back half of the year to get us to the midpoint of our guidance of 36.5%. And again, it is our intention to hit the midpoint of that guidance on adjusted operating margin despite a slightly softer top line. So you should expect a little bit of the technology cost to continue to move up as we go through the year. And of course, we've taken some actions to ensure that we have the appropriate headcount and appropriate location for our employees going forward. So we think we're in a good place, and we are prepared to deal with the cost base so that it works for the lower end of the revenue range. So we've got all that in the mix and so a little bit lower in the back half of the year. Thanks.

Yes, hello everyone. Phil, would love to come back to some of the commentary you made for the third quarter and fourth quarter outlook. It sounds like third quarter, you said fairly soft relative to last year. So maybe you can just flush out if that's, again, lower pricing expectations or just lower net sales. And then on the fourth quarter, you sound pretty optimistic. So maybe you can just back that up a little bit, because I think you made a comment that hiring was actually an area that's still pretty soft from what you can see, and I think the fourth quarter is very dependent on hiring. So it maybe flushes out, maybe you just have a great pipeline of non-hiring-related Q4 expectations. So a little bit more color would be great.

Sure. Yes, I'll start, and I'm sure Helen will have some additional comments. Thanks, Alex. Yes, I mean, Q3 is typically a smaller quarter for us anyway. What I can sort of point to is that we have a large number of seven-figure deals in the pipeline and probably a higher number than we had this time last year. So there's certainly an appetite out there for large enterprise solutions with all types of different firm types. So I mean, in your reports, you sort of point to the hiring on the buy side and the sell side, and it's certainly come down in both areas. The sell side was weak last Q4. I'm not sure that we're expecting anything different than that this year. But if rates do get cut and the banks feel optimistic, we could see a tailwind from that. But I'm not sure it's any more of a headwind, frankly, than we saw last year. On the buy side, I think we're going to continue to see increased pressure on headcount as we move forward, particularly with generative AI. But that's all baked into our thesis in terms of our enterprise solutions and what we're doing to product. And despite that, we've got 200,000 seats approximately today. There might be 9 times or 10 times that many seats out there in the industry. So we've doubled the number of seats on FactSet in the last five years or so. And we still feel even with increased pressure on headcount, there's a good opportunity for us to tie the front office to the middle office to the back office. And particularly on the buy side, we have the portfolio holdings of our clients. That's one of our key differentiators. And the firms that are going to win are the ones, I think, that can help the large firms continue to consolidate with a very good TCO conversation, which we're leaning way more into than we have in the past.

Yes, that's correct. Thank you for your question, Alex. As I mentioned, we have a strong pipeline for the second half of the year. Phil is concentrating on seven-figure deals while I am focusing on both six and seven-figure deals. We're seeing almost a 5% increase in total numbers year-over-year, which provides us with greater visibility and confidence. Due to the conversations around total cost of ownership, much of the pipeline is centered on competitive displacements, which has been robust for us. Our ability to convert these opportunities will be crucial. The strength of the markets, especially in capital markets and deal flow, is important, particularly regarding banking and wealth. At the moment, we are not expecting banking to suddenly improve compared to last year, though we will have more clarity in the third and fourth quarters.

Hi. Good morning. I wanted to ask about budgets and maybe cyclical sensitivity from like a business line or maybe even product-type perspective. It sounds like you've seen some stabilization. There's some pockets of recovery. But I'm just curious, are clients maybe more apt to push off platform or workstation purchases or decisions than they are on the data side or on the middle office side? Just curious if there's a difference in the way that people are prioritizing their budgets and their spend at that level or from that perspective?

Yes, I'll address that. It's a great question. I would suggest looking at it more by size rather than firm type. In our premier accounts, which are our largest clients, they represent about 41% of our total. These clients have flat budgets and are looking for ways to allocate resources for investing in generative AI. This makes large decision-making more challenging. We are experiencing significant demand, and part of our growth in the second half of the year is due to our data solutions, which aligns with market expectations. We're seeing that the larger deals are linked to the platform, and we have a solid pipeline for those. However, we need our clients to feel secure enough to proceed. Meanwhile, data remains a strong sector for us and we believe it will be a key driver in the latter half of the year.

Thanks so much. Helen, you just mentioned a couple of questions ago the pipeline focusing on the competitive displacements and how that's been very strong. Is that directionally, I guess, stronger than it has been? And just any changes in the competitive environment maybe because of the challenges in the market has it been a little bit more competitive when you're sort of up against other players? Thanks.

Yes. No, thank you, Toni. So yes, I would say a couple of things. The type of total cost of ownership conversations is definitely higher. We've had a lot of C-suite conversations, which I would say is probably more than we've had in the past. And the need to find, I'll say, new alternatives is on top of clients' minds. So I'd say yes to that. As it relates to the pricing, as mentioned on new business, we're seeing greater pressure there. Is pricing overall coming down? I would say it depends on the firm type of large deals. I think you're seeing more of that leverage coming through. But so far, our price realization has been flat to last year.

I believe we are in a very strong competitive position. The buy side is seeing increased interest from clients who want to engage with us more, which is providing good opportunities for discussions on total cost of ownership. For the first time in my career, I am noticing a stronger push from the top for cost savings and some users are getting less choice than before, which is working in our favor. Additionally, some of our competitors have platforms that are becoming less flexible and unable to scale, and we are taking advantage of that. On the wealth side, we are performing extremely well. There was a one-off occurrence this quarter, but it shouldn't raise concerns about the long-term trends for wealth. We still have significant opportunities ahead and a solid pipeline. We are also expanding the workflows we are tackling for wealth, including areas like prospecting and proposal generation. Therefore, I see a lot of potential in wealth. Furthermore, with our ongoing investment in specialized content in deep sectors, private markets, and technology advancements in generative AI, I think we have a vast opportunity not just in banking but also with smaller firms such as private equity, corporates, and hedge funds where we may not have been as active previously. I believe we are well-positioned, and when the market conditions improve, we can fully leverage this situation.

Good morning, and thank you for taking my questions. I'm trying to understand some of the comments made. Can you explain why you expect lower organic ASV growth and GAAP revenue to be at the lower end of your guidance? Your remarks about the pipeline were encouraging, especially for the fourth quarter. You mentioned that the UBS-Credit Suisse deal influenced your lowered expectations. Is there any specific event that contributed to this decision? Additionally, I would like to hear about your updated outlook regarding the capital markets recovery. How are you factoring that into your current guidance? Thank you.

Sure, Owen, I'll address that. There are a few factors we've considered. We have a strong pipeline, as mentioned. However, we are also affected by the CS-UBS merger, which we discussed in our last call. The timing of that is beyond our control, which is reflected in our lower guidance. Additionally, there was a significant wealth cancellation Phil mentioned, which is a one-time event but still affects our outlook. We're adopting a more cautious perspective on the environment. I'll let Linda discuss the capital markets aspect, but we're not factoring a recovery bounce back into our numbers.

Yes. So Owen, just to be absolutely clear, in planning for this year's continuing revenue outlook, we have included what is going on with the Credit Suisse situation. We cannot tell what quarter that will occur, and there are ongoing business discussions. So stay tuned. We'll see how it plays out, but we've been conservative and we have included that in our guidance. So now regarding capital markets, things changed again yesterday. Chairman Powell was quite dovish in his comments. As of today, the June rate cut probability is north of 70% for 25 basis points of cutting in June. The Fed is looking at three rate cuts over the course of the remaining calendar year. The probability of the June cut went up 15 percentage points from where we were Tuesday. So if you think about it, I think of Chairman Powell as metaphorically driving the family station wagon. And we keep asking, are we there yet, are we there yet for rate cuts? And he says, we're not quite there yet. So we're waiting. The trends are very positive. The Swiss National Bank cut interest rates by 25 bps this morning. The Bank of England held constant. And we saw some IPOs yesterday, the Astera IPO traded way up yesterday, which is a good sign. And Reddit priced at the high end of its range, which was $31 to $34 priced at $34. So seeing IPOs is a really good sign, and we are seeing better information on the timing of rate cuts. We now wait with a bit of a lag as to when that impacts our business. So again, there is a bit of a lag. So that's why Phil had talked about the third quarter, we're not hugely optimistic about that, but the fourth quarter is certainly starting to look much better. So hope that's helpful to you. And we keep asking the same question, are we there yet on the rate cuts, but we're going to have to wait. Thanks.

Thank you so much. I wanted to focus on your client count growth. User count growth was really strong, but we're seeing client count growth slowing. Is there anything specifically going on there? Or is it just tough comps? Or any color would be great.

Sure, this is Helen. I believe our growth in client count is primarily due to acquiring new business. You're observing that trend currently. However, there's nothing in particular that we are monitoring. Generally, this growth is driven by corporate engagements and wealth segments. This quarter, we did experience solid growth in our partner segment, particularly from the fintech side. Therefore, we're not placing a significant focus on the client count.

Thank you. Linda, I want to go back to the question on the ramp for cost if we could in the back half of the year. It seems to me just looking at your guidance here, your revenue guidance, your operating profit guidance for the year that it's gutted you up quite significantly your cost in the back half of the year by roughly $60 million over the six months versus the first half of the year and stuff? And if I got that math right, why is that? I mean obviously, in recent years, your fourth quarter has ticked up the cost versus what you reported in the second quarter. But prior to the last two years, that was not necessarily the case. So I just want to hear a little bit more color on that, please. Do I have that right, you are expecting cost up significantly in the second half of the year, which does seem a little strange to me.

Craig, you're right. We will see a ramp in the back half of the year. Total expenses for the second quarter, $337 million, and we do expect that those will ramp. This is mostly driven by the technology cost. And Craig, what we're seeing is we have to build in more cloud costs as gen AI takes off and as we get increased demand on that front. So most of this comes from the technology budget. Personnel costs will remain quite flat. As we had said, we have rightsized those, and we reduced our bonus accrual by about $7 million. So the bonus accruals went for the first quarter, it was $30 million with some adjustment going on, $20 million in the second quarter. You should probably pencil in the low 20s for the third and fourth quarter, given what we're seeing now. And keep in mind that our employees are paid sort of half on top line growth and half on margin. So the margin piece is about where we want it. The top line piece, we're anticipating a little bit of slowness. So we've adjusted that down for the bonus calculation. On real estate, we've done quite well, bringing those costs down. And third-party data costs are about flat. So mostly it is about increases in the tech budget driven by increased amortization as that moves through and also the cloud expense as we look to fuel the gen AI efforts of the company and our clients. So hope that helps you there, Craig.

Thanks for having me on. We're starting to hear from some management teams in the sector around internal efficiency opportunities from generative AI. I was wondering if you could talk to how big an opportunity that might be for FactSet and when we might expect to see that in the P&L. I'm wondering if the opportunity is similar in size to peers or maybe a little smaller, given you have the majority of employees already in low-cost centers.

Russell, it's Phil, and I'll start and I'm sure Linda has some additional comments. So yes, we've been talking about three areas there where we've been focused. So as you can imagine, there's a lot of developers at FactSet. So they are currently being armed with tools that look very good in terms of being able to increase the efficiency of producing code. The question is like how do we apply that? Do we apply it to more product? Or do we apply it in other ways? So I think we're getting a good handle on what those efficiency gains could be and which parts of our tech stack and product it makes sense to apply them. We're also looking at content collection. But as you mentioned, we have quite a large number of our employees in low-cost locations. So we've done a lot to automate workflows for content collection over the years. This adds, I think, some more utility to that even. So there's some good opportunity there. Although the people of costs there are much lower, so the efficiency gains may not be as high as they are with engineering, for example. And then there's a big opportunity for us in terms of just supporting clients. So FactSet is a very good tool. Some people use it in different ways. Some people use it in a programmatic way. So there's a lot of coding that's involved if you really want to customize your workflow. So I think it can really help both clients and people that support those clients internally. So those are three of the bigger buckets. We do see opportunity. And we're going to be looking very hard at how we can apply that in our rolling three-year plan. So we're just beginning our efforts there to think about a budget for next year and the following years, and this will certainly be part of that equation.

Yes. Russell, it's Linda. You should look for those efficiency gains in our FY '25 guidance. We've only given these new tools to our engineers relatively recently. They're reporting good things, but it's a little early to put a number on it. We think the biggest advantage from this will be cost avoidance as we bend the cost curve. And perhaps as the engineers get more efficient, we can sort of ramp down some of our hiring. So we think that, that's a bright spot, but we're going to look to first direct Gen AI efforts outwardly to make sure that we're able to generate ASV with those efforts, and you'll see more of that at our FOCUS conference. And then in FY '25, the focus will turn more constructively to internal cost savings. We've been managing the cost of the company pretty darn effectively, I would say, and we're looking to ensure that we are able to continue to do that, but gen AI is only a portion of that. So thanks for the question.

Thanks. A question for you on capitalized costs. It seems like the amortization cost is going up, the capitalized costs have been going up year-over-year as well. I guess can you give us a little bit of color about what you expect it to be in 2024 versus '23? And then how long are you amortizing this cost for?

Yes, that's an excellent question. We've implemented some automation in our time tracking, which has enhanced our accuracy. For the year, we anticipate somewhere between $80 million and $85 million, an improvement from last year, though I don’t have the exact number on hand, but it's definitely increased. You can expect to see more in terms of capitalization, which hasn't quite reached its peak yet. We're optimistic about our progress, and it's beneficial for everyone to typically spread these costs over three years. So, we’re essentially in line with how these costs are usually distributed over time. This should provide some clarity. Moving forward, we might see the capitalization as a percentage of revenues rise to about 3% to 4%. Previously, we indicated around 2.5% to 3%, but with our automated tools, we're tracking the costs of software development more effectively and capitalizing them accordingly.

Hi, thanks. Good morning. You mentioned earlier that price realization against your rate card is about flat versus last year, and that price realization in new business is a bit lower, reflecting a more competitive environment. Can you talk a little bit about where you're seeing the most competition come from? And how would you describe pricing trends among your competitors?

Hey George, it's Helen. Yes, let me get to that. So I would say it depends, right? So I think when you're talking about some of the smaller deals, maybe in PVC and in some cases, in banking, it might be a little bit more competitive. I think some of the competitors sometimes leverage like we do on some of their stronger enterprise deals if they're able to do so. I think we're seeing benefit actually in places like in asset owners where our packages from a value perspective are really resonating. So I do think it depends. We're not seeing again any huge differences as much as everyone is just fighting hard for trying to get that new logo.

Hi. Thank you very much. Linda, I want to emphasize expense control. You've made great progress. Even though revenues are softer, you're still likely to reach the high end of the EPS range. I am curious, if this environment lasts longer than expected, and we find ourselves in this situation for a few more quarters, what are your operational steps to continue improving margins and investing in generative AI and product development to drive revenue growth? What will be your focus moving forward?

Yes, Shlomo, it's a great question and one that we discussed with our Board of Directors earlier this week. I think we've done a pretty good job on all the cost buckets. You're right, we wanted to plan to take these charges at midyear. So we adjusted our expense rate in some areas down as we go through the rest of the year. So over the past few years, unfortunately, we've had to take three sort of different rounds of personnel actions, and we want very much for those to be done. We consider those to be done with the possible exception of a huge geopolitical event that we haven't planned. So we want to think that we have the cost cuts well in hand. And I think what we're looking for as we move into FY '25 is we have to look at closer to flat personnel growth. So we're going to try to ensure that we've got that model right. I think we've got our offshore balance about correct, which is about 68% right now. But we did want to get the expenses right for the rest of the year in keeping with the lower end of the range on the top line so everything comes out well. From here, I think we're in a pretty good place. I think we've done what we need to do. And we're hoping that are we there yet that we do get there soon enough that we can see some help from the top line. But we've got the costs well in hand, and I think we've thought it through and executed pretty well. So thank you for that, Shlomo. That's great.

Thanks, operator. So in closing, while results this quarter were mixed, actions taken this quarter position us well to capitalize on market shifts. Our focus at FactSet is on innovating for our clients' long-term efficiency, and that's the reason we really remain an anchor partner for them. And I'm confident in our ability to execute on the opportunities we talked about in the pipeline for the second-half. Operator, that ends today's call.