Yahoo Finance FactSet Research Systems Inc. (NYSE:FDS) Q1 2024 Earnings Call Transcript
FactSet Research Systems Inc. (NYSE:FDS) Q1 2024 Earnings Call Transcript December 19, 2023
FactSet Research Systems Inc. beats earnings expectations. Reported EPS is $4.12, expectations were $4.1. FDS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the FactSet Q1 Earnings Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ali van Nes, SVP IR. Please go ahead.
Ali van Nes: Thank you and good morning everyone. Welcome to FactSet’s first fiscal quarter 2024 earnings call. Before we begin, the slides we referenced during this presentation can be found through the webcast on the investor relations section of our website at factset.com and are currently available on our website. 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. The call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may re-enter the queue for additional follow-up questions, which we will take if time permits. Before we discuss our results, I encourage all listeners to review the legal notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures.
Additionally, please refer to our Forms 10-K and 10-Q for discussion of risk factors that could cause actual results to differ materially from those 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, and Kristi Karnovsky, Chief Product Officer for the Q&A portion of today's call. I will now turn the discussion over to Phil Snow.
Phil Snow: Thank you, Ali, and good morning, everyone. Thanks for joining us today. In the first quarter, we grew organic ASV plus professional services by 7.1% year-over-year, delivering adjusted diluted EPS of $4.12 and an adjusted operating margin of 37.6%. This quarter we closed two marquee deals that serve as proof points for our long-term strategy even as macro conditions remain challenging. The first was a large wealth win at a major U.S. firm where we displaced a competitor as a result of this deal, our user account increased by more than 17,000 seats. The second was a significant trading win at one of the largest U.S. asset managers, highlighting the strength of our open platform and portfolio lifecycle solutions. We ended this quarter with almost 8,000 clients and 24 net new logos, ASV retention remained greater than 95% and client retention was 90%.
Nevertheless, since our last earnings call in September, sales cycles have continued to lengthen challenging our near-term forecast. Client budgets remain restricted due to lower deal making volume layoffs and geopolitical uncertainty. So while the Recent Federal Reserve commentary may be positive for the macro environment, we are revising our fiscal 2024 top line guidance to reflect ASP growth of $110 million to $150 million or 6% growth at the midpoint. We will also be implementing a cost reduction program in the Q2 of FY ‘24. This program will support our investments in multi-year initiatives such as deep sector and real time and allow us to accelerate our AI strategic investments. We expect to review variable costs and personnel related costs with the goal of delivering adjusted operating margin within our original guidance range of 36.3% to 36.7%.
Linda will say more about this later in the call. Turning now to our performance by region. Growth this quarter was driven mainly by the large wealth win in the Americas, as well as solid demand for data solutions, offsetting weaker results in other parts of the business. Americas ASV growth accelerated 88 basis points over the prior quarter to 7.9%, where outside of wealth, lower net hiring in banking and asset managers led to softer demand for workstations, compared with a year ago. In EMEA, organic ASV growth decelerated to 5.4% mainly due to a slowdown in our core buyside markets in the U.K. and France. Our clients are experiencing reduced revenues and margin pressures which led to delays in planned projects and slower sales cycles. Higher demand for data solutions partially offset these headwinds.
In Asia Pac, we delivered organic ASV growth of 8% driven by solid gains with asset owners, partially offset by seasonal banking layoffs. From a firm type perspective, wealth accelerated the most compared with last quarter due to the marquee deal I mentioned earlier. While pipeline visibility remains limited and so the broader market recovered some momentum, ongoing C-suite conversations at several firms point to continued opportunity to displace wealth competitors. For deal makers, we added new logos in private equity and corporates, but not at the rate we saw last year. Churn and lower seasonal hiring led to erosion in banking. On the institutional buyer side, cost cutting and headcount reductions at institutional asset managers caused a deceleration in workstation sales.
For asset owners and hedge funds, elongated sales cycles further dampened results. Finally, new business in the sales of data solutions drove growth with partners across regions. Overall, the tension was flat in the first quarter with the positive effects of the fiscal 2023 price increase partially offset by higher cancels and erosion. Over FactSet's 45-year history, new product releases have driven our strong market position. These included Universal Screening in 1986, Portfolio Analytics in 1995, and FactSet Fundamentals in 2008. Last week, we added to this list with the beta release of FactSet Mercury, our new conversational AI interface. FactSet Mercury is a large language model based knowledge agent. It uses natural language to request company information, provide supporting contacts, and also suggests next steps.
Users can also ask for any chart using natural language, which is then prepared and delivered into Microsoft Office. FactSet Mercury is part of FactSet Explorer, a product preview program. We are working on Explorer with our leading banking clients and will soon offer it to institutional buyside and wealth clients. Also, last quarter, we released AI enhanced transcript highlights and news summaries, which received positive reviews from our users. These are just the first of many workflows that will use generative AI to improve our client's efficiency. And along with these AI initiatives, work continues on deep sector and real time, the wealth workstation and the portfolio life cycle. Each of these multi-year investments is driving growth, including last quarter's big wins in banking and asset management.
Finally, the private credit market is growing fast and is almost the size of the leveraged loan market. It is well served by both our data solutions and our middle office analytics. For example, Cobalt can be used for private credit fund portfolio monitoring. We can also extend our fixed income capabilities to private credit risk assessment, benchmarking and performance monitoring. In summary, I remain confident in our strategy and the health of our business, and I am optimistic about the opportunity ahead of us. Demand for our high-value products remains strong, demonstrated by our marquee wins this quarter, and increased interest from global firms consolidating to FactSet’s open platform. I'll now turn it over to Linda to discuss our first quarter performance in more detail.
Linda Huber: Thanks, Phil, and hello to everyone. As you've seen from our press release this morning, Q1 organic ASV and revenue growth exceeded 7%. I will now share additional details on our fiscal first quarter performance. As Ali noted, a reconciliation of our adjusted metrics, compared to GAAP is included at the end of our press release. First, a few observations on macro conditions. Last Wednesday, the Federal Reserve decided to hold rates constant and signaled three quarter point rate cuts next year. Inflation has eased, but remains higher than the Fed's 2% target. Equities rallied on the news as rates fell across the yield curve. While this news was helpful, it will take time for capital markets and deal activity to pick up.
As Phil mentioned, we expect that market recovery will come later than we anticipated in our September fiscal year 2024 guidance. For the quarter, GAAP revenue increased 7% to $542 million. Organic revenue, which excludes any impact from acquisitions and dispositions over the last 12-months and foreign exchange movements, increased 7% to $541 million, due to higher wealth sales and increased sales of data. For our geographic segments, organic revenues grew by 8% in the Americas, almost 6% in EMEA and 8% in Asia Pacific. Turning now to expenses, GAAP operating expenses increased 6% year-over-year to $353 million, driven by higher employee expense, technology costs, and royalties. Compared to the previous year, GAAP operating margin increased by approximately 80 basis points to 35%.
This was due to a decrease in professional fees, personnel and facilities costs, partially offset by higher technology-related expenses. On an adjusted basis, operating expenses grew 9%, primarily driven by technology expense, which increased 28% year-over-year. We've continued to invest in technology to drive growth with technology costs now representing about 9% of revenue consistent with our medium-term outlook. Employee expense grew 8% year-over-year primarily due to increased salaries for existing employees. Third-party data content costs increased 12%, due to lapping a one-time accrual release in the first quarter of fiscal 2023, as well as higher variable fee expenses. Finally, our continued efforts to right-size our real estate footprint resulted in a 1% decrease in year-over-year facilities expenses.
Looking at margin, adjusted operating margin decreased by 70 basis points to 37.6%, driven by the previously mentioned higher technology expenses partially offset by lower facilities, professional services, and T&E expenses. As always, you'll find an expense walk from revenue to adjusted operating income in the appendix of today's earnings presentation. As a percent of revenue, our cost of services was about 140 basis points higher than last year on a GAAP basis and about 220 basis points higher on an adjusted basis, largely due to technology and personnel costs. And SG&A as a percentage of revenue was 230 basis points lower year-over-year on a GAAP basis and about 150 basis points lower on an adjusted basis. This was due to decreases in professional fees, facilities expenses, and personnel expenses.
Turning now to tax, our tax rate for the quarter was 15.2%, compared to last year's rate of 13.4%. This increase was primarily due to lower benefits related to stock option exercises and restricted stock vesting. The remainder of the increase was due to higher pre-tax income and a higher foreign tax rate, partially offset by foreign tax credits. Turning now to EPS, GAAP EPS increased 9.1% to $3.84 this quarter versus $3.52 in the prior year. This was driven by higher revenue and margin expansion, partially offset by a higher tax rate. On an adjusted basis, EPS increased 3.3% to $4.12, driven by revenue growth, partially offset by margin compression and a higher tax rate. EBITDA increased $219 million, up 9.3% year-over-year, due to higher net income and higher income tax add-backs.
And finally, free cash flow, which we define as cash generated from operations, less capital spending was $139 million for the quarter, an increase of 56% over the same period last year. This was driven by significant higher net cash from operating activities, which was nearly $50 million greater year-over-year due to higher cash collections. Turning to share repurchases for the quarter, we repurchased 135,950 shares for $59.9 million at an average price of $440.67. We intend to continue our share repurchases during fiscal 2024 with a target of $250 million of purchases spread ratably throughout the year. We remained disciplined in our buyback program and committed to returning long-term value to our shareholders. Combining our dividends and share repurchases, we returned $378.6 million to our shareholders over the last 12-months.
As a reminder, we also increased our dividend by 10% to $0.98 per share in the third quarter of fiscal 2023. And finally, turning to our revised guidance for fiscal 2024, as Phil mentioned earlier, we expect that the market recovery will happen later in the year than anticipated when we first gave guidance for fiscal 2024. Given this revised view, we are guiding to incremental organic ASV plus professional services growth of $110 million to $150 million, reflecting 6% growth at the midpoint, down from our original 7% growth guidance. Given the headwinds in ASV and the lag timing of ASV in the first-half of the fiscal year, we are lowering our expected revenue range to $2.2 billion to $2.21 billion. At the midpoint, revenue growth is also expected to be approximately 6%, a deceleration of about 75 basis points from our previously issued guidance.
We've reduced our GAAP operating margin guidance to 32.5% to 33%, which is down from 33.1% to 33.5%. However, it should be noted that we have not changed our adjusted operating margin guidance of 36.3% to 36.7%. At the midpoint, this provides 30 basis points of continued margin expansion. While we have already met our adjusted operating margin medium term outlook of 36%, we are committed to balancing continued sustainable margin expansion with investments to drive top-line growth. It is also worth noting that our effective tax rate guidance has been reduced by 50 basis points to 16.5% to 17.5%. And finally, adjusted EPS is expected to range from $15.60 to $16, which represents 7.8% growth at the midpoint and a $0.10 reduction from guidance at the midpoint.
As Phil mentioned, we continued to execute disciplined expense management to support strategic investment to grow our top line. Accordingly, we expect to take a $10 million to $15 million charge in the second quarter of fiscal 2024. Focus areas for expense reduction include both variable and personnel related costs. Despite the uncertain environment, we remain confident in our long-term growth. We have a diverse pipeline and are seeing improved price realization and increased interest in our products. In addition, our enterprise contracts and diverse end markets provide us with downside protection in an uncertain market. As a result, we are confident that we are positioned well for the future. We are now ready for your questions. Operator?
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Seth Weber from Wells Fargo.
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