FactSet Research Systems Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 22, 2023

There are 19 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the FactSet Research Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kendra Brown, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to FactSet's 3rd Fiscal Quarter 2023 Earnings Call. Before we begin, the slides we will reference during the presentation can be accessed via the webcast on the Investor Relations section of our website at factset.com and is 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.

Speaker 1

To be fair to everyone, please limit yourself to one question and one follow-up. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risk of forward looking statements and the use of non GAAP financial measures. Additionally, please refer to our Forms 10 ks 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 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.

Speaker 1

Joining me today are Phil Snow, Chief Executive Officer and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shannon, Chief Revenue Officer for the Q and A portion of today's call. I will now turn the discussion over to Phil Snow.

Speaker 2

Thank you, Kendra, and good morning, everyone. Thanks for joining us today. I'm pleased to share our 3rd quarter results. Our organic ASV plus professional services grew 8% year over year. This was driven by double digit ASP growth in analytics, where we saw strength with asset managers, asset owners and hedge funds and the successful execution of our international price increase.

Speaker 2

These gains were offset by headwinds to workstation growth among wealth, banking and corporate clients A deceleration in expansion among partners. Our investments in content and technology have strengthened our competitive position, allowing us to navigate market volatility successfully. In the Q3, we saw broad based growth across all firm types with double digit ASV growth from our Wealth Management, Banking, Hedge Fund, Corporate and Private Equity and Venture Capital clients. In Analytics and Trading, we saw continued strength in the middle office as our suite of portfolio reporting, fixed income, Performance and Risk Solutions accelerated growth year over year. Content and Technology Solutions also had double digit ASV growth with demand for company data and data management solutions driving ASV this quarter.

Speaker 2

And in Research and Advisory, We see continued opportunities to capture additional desktops in banking well. Workflow driven capabilities also contributed to growth with our Research Management Solutions suite accelerating year over year. We ended the quarter with adjusted diluted EPS of $3.79 and an adjusted operating margin of 36%. As we enter our 4th quarter, we are focused on operational efficiencies and disciplined expense management to support margin expansion, grow EPS and provide capital to invest in our strategic priorities. As part of this effort, we are working to reduce the run rate of our expense base by about 3%.

Speaker 2

Savings will come primarily from rightsizing our workforce, which we expect also will decrease by about 3% and further reducing our real estate costs. As discussed last quarter, we are seeing a modest deceleration in ASV growth. And while the markets have remained largely resilient amid macroeconomic turbulence, our clients do remain cautious. Clients have also been executing their own downturn playbooks, resulting in delayed decisions and restricted spending. We also see continued staffing adjustments with firms on both the buy and sell side reducing headcount, often targeting mid and senior level professionals.

Speaker 2

And while we have a stronger pipeline than last year with a good mix of deals that should drive expansion in new business, Client decision making is taking longer. We're also monitoring developments in the banking sector. Early sentiment is mixed on fiscal 2024 class sizes. And while some clients are slowing hiring, others are adding junior bankers in preparation for a market upturn. Overall, our top 200 clients, including many of the leading global investment banks, make up 2 thirds of our book.

Speaker 2

And the vast majority of these clients have multiyear contracts, including minimums and 90 day cancellation windows. Given these points and our high ASV retention rate, which is consistently greater than 95%, we believe we have effective downside protection. With this outlook for the remainder of the fiscal year, we are reaffirming guidance for organic ASV growth and revenue, but guiding to the lower end of our previously disclosed ranges. In addition, we are increasing our guidance for adjusted operating margin and adjusted diluted EPS. Linda will provide further details on this later in the call.

Speaker 2

We are confident in our strategy and ability to execute. Unlike our clients, we are ensuring that we are well positioned as the market stabilize and the capital market cycle turns. We have a long term view of our Business and are committed to investing for growth and becoming a more efficient organization. As part of this approach, Starting September 1, we are reorganizing by firm type to better align our operations with those of our clients. Analytics and Trading will become our buy side organization, focusing on asset managers, asset owners and hedge fund workflows.

Speaker 2

Research and advisory will become dealmakers in wealth, focusing on banking and sell side research, wealth management, corporate and private equity and venture capital workflows. And finally, we are combining our content and contents and technology solutions groups to create 1 data solutions organization. This will create end to end management of our data from collection and acquisition to client delivery. We'll provide more details on our progress and the performance of our firm types as we refine the structure over fiscal 2024. Technology is rapidly evolving.

Speaker 2

Now with a focus on generative AI, our open platform and connected content will strengthen our partnership with our clients. While generative AI is not new, FactSet has been using AI and machine language in our products for many years, and the recent advances in large language models, or LLMs, present new Our strategy is to build a generative AI foundation and capabilities empowering our workforce to transform our end user experience rapidly. We are investing in generative AI technology to drive next generation workflow solutions. We will also continue to invest in the scaling of our content refinery. We've committed additional resources to LLM initiatives as part of our investment process, and FactSetters are excited about these investments as we equip All products and engineering teams to use generative AI in their development work.

Speaker 2

Our early work in generative AI has focused on improving client support, Automating content collection and transforming our products with improved search and co pilot solutions. Here are a few examples. During our recent hackathon, almost 1 third of FactSetters' projects used LLMs to solve business problems or to improve the client experience. Teams worked on enhancing banker efficiency, pitch automation and discoverability using our modernized connected data. Earlier this month, we used ChatGPT to produce Call Street earnings call transcript summaries, reducing summation time by more than 90%.

Speaker 2

This process is currently available for all S and P 500 Companies and we plan to dramatically expand coverage later this fiscal year. We are also testing AI powered agent assist tools that understand FactSet proprietary codes. This use case is compelling. Questions about FactSet Coding comprise half of our daily client call volume. And finally, we see significant opportunities to accelerate content automation Using generative AI, we have several promising efforts underway to extract information that has previously been difficult to retrieve.

Speaker 2

Our differentiator remains our content, including our real time and deep sector data for which we have also increased investment. FactSet has an incredibly strong moat of 40 years of proprietary content and data, cleanly sourced, auditable And stitched together with our concordance and symbology, it is not easily replicable and is incredibly valuable to FactSet and our clients. Turning to our performance. We saw continued acceleration across all our regions. Americas organic ASV growth accelerated year over year to 8%, growing through wins with premier asset managers and asset owners.

Speaker 2

These gains were partially offset by workstation headwinds with wealth, banking and corporate clients. EMEA was the biggest contributor to growth this quarter with organic ASV growth accelerating to 7.4%. Growth was strongest in banking given improved retention with banking clients and improved retention at new business with hedge funds. Higher retention was also a key driver in the region as the ASV uplift from our price increase offset increased erosion. In contrast, expansion slowed as cost pressures created higher budget scrutiny, lengthening the sales cycle.

Speaker 2

Finally, Asia Pacific delivered organic ASV growth of 10.5%. Performance was driven by Wealth Management, Hedge Funds and Private Equity and Venture Capital clients with improved retention and ASV uplift from higher realized price increases. Australia was the strongest contributor to growth with wins among asset managers and asset owners. However, sector consolidation and net negative seasonal banking hiring contributed to a small deceleration. We also saw acceleration in Japan and India, driven by banking with a positive increase in workstation purchases In summary, we continue to execute well in challenging markets.

Speaker 2

As we head into the close of our fiscal year, our pipeline remains solid, And we are unwavering regarding execution excellence and cost discipline. As we combine relentless client focus with exciting new technologies, I am confident in our ability to drive growth. I'll now turn it over to Linda to take you through the specifics of our Q3.

Speaker 3

Thank you, Phil, and hello to everyone. As you've seen from our press release this morning, we delivered solid operating results in the Q3 with continued growth for organic ASV, GAAP revenue and adjusted diluted EPS year over year. I'll now share some additional details on our Q3 performance. 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% year over year.

Speaker 3

While we are seeing lower expansion and higher erosion due to the macroeconomic environment, our performance reflects excellent execution by our sales team. Pricing realization continues to improve with our international price increase adding $17,000,000 in ASV this quarter, up $4,500,000 from last year. Internationally, 7% more clients were subject to the annual price increase than in the prior year. Fiscal year to date, our 2023 price increase has yielded $18,000,000 more ASV than last year. GAAP revenue increased by 8.4 percent to $530,000,000 for the Q3.

Speaker 3

Organic revenue, which excludes any impact from acquisitions and dispositions over the last 12 months and foreign exchange movements increased 8.5 percent to $530,000,000 Growth was primarily driven by Analytics and Trading and Content and Technology Solutions. For our geographic segments, on an organic basis, Revenue growth for the Americas was 9%, benefiting from increases in Content and Technology Solutions and Analytics and Trading. EMEA revenue grew at 7.5%, primarily driven by Content and Technology Solutions and Analytics and Trading. And finally, Asia Pacific revenue growth came in at 7.9% due to increases in Research and Advisory and Content and Technology Solutions. While GAAP operating expenses decreased 8.6 percent year over year to $358,000,000 Adjusted operating expenses grew 9.4%.

Speaker 3

The drivers were as follows: 1st, people. Our costs rose 10% year over year in the Q3, primarily due to increased salaries for existing employees. As a percentage of revenue, this was 68 basis points higher year over year, driven by higher salary growth as a percentage of revenue, partially offset by higher labor capitalization and lower bonus For fiscal 2023, we still expect the bonus pools to be in the range of $100,000,000 to $105,000,000 Headcount increased by 12.9% year over year with most new positions in our centers of excellence. Overall, 65% of our employees are located in our centers of excellence. Next, facilities expense remained relatively flat, increasing by only 1.6% year over year as more employees return to in office work.

Speaker 3

Our continuing efforts to right size our real estate footprint mostly offset this increase. As a percentage of revenue, facilities expense was 24 basis points lower year over year. Moving on, technology expenses increased by 22.5%, driven by 3rd party software costs and higher amortization of internal use software, partially offset by lower cloud related expenses and lower depreciation. As a percentage of revenue, growth was 90 basis points higher year over year. In partnership with our Chief Technology Officer, Kate Stepp, we've realized increased capitalization through improved time tracking and other efforts.

Speaker 3

Technology costs currently equal 7.8 percent of our revenue and will likely continue to increase as we invest for growth. As part of our medium term outlook, we anticipate technology costs being 8.5% to 9.5% of revenue. And finally, our team continues to do an excellent job of controlling third party content costs with expenses increasing by only 1.9% year over year despite the inflationary environment. As a percentage of revenue, growth in third party content costs was 31 basis points lower year over year. Given the pressure on our top line, it is imperative that we focus on cost management.

Speaker 3

Using our downturn playbook, we took proactive steps to control our expenses, protect margins and preserve EPS. We're now going to further identify areas where we can reduce costs. As part of the efforts Phil spoke about earlier, we plan to take an approximately $45,000,000 restructuring charge in the 4th quarter. This charge includes approximately $15,000,000 to $20,000,000 for continued real estate rightsizing as discussed in last quarter's call. Compared to the previous year, our 3rd fiscal quarter GAAP operating margin increased by 12 60 basis points to 32.5 percent, mainly driven by the prior year's $49,000,000 impairment charge and expenses related to the acquisition of CGS.

Speaker 3

Excluding both non recurring transactions, GAAP operating margin was around 30 basis points higher than the prior year. Adjusted operating margin decreased by 60 basis points to 36%. This was largely driven by higher personnel costs and technology expenses, partially offset by lower third party content costs and lower facilities expense. You will find an expense walk from revenue to adjusted operating income in the appendix of today's earnings presentation. As a percentage of revenue, our cost of sales was 7 basis points higher than last year on a GAAP basis and 283 basis points higher on an adjusted basis, largely due to personnel costs, expenses related to CGS and technology costs.

Speaker 3

As a percentage of revenue, our impairment expense was 9.94 basis points lower than last year on a GAAP basis as we lapped the prior year's impairment charge. On a GAAP basis, SG and A was 2 69 basis points lower year over year as a percentage of revenue and 46 basis points lower on an adjusted basis, primarily due to decreases in professional services, partially offset by increased personnel costs. Turning now to tax. Our tax rate for the quarter was 16.9 compared to last year's rate of 12.2%. Our higher tax rate is primarily due to lower stock option exercises.

Speaker 3

Our current expectation is that we will end fiscal 2023 with an effective tax rate of 14% to 15%. While we continue to experience variability, which includes increases in foreign tax rates, we are researching strategies to help reduce the overall rate. GAAP EPS increased 79.3 percent to $3.46 this quarter versus $1.93 in the prior year, driven by the lapping of the prior year's non recurring items, partially offset by a higher effective tax rate. Adjusted diluted EPS grew 1% to $3.79 primarily due to revenue growth offset by a higher effective tax rate and lower operating margin. Adjusted EBITDA increased to $205,000,000 up 15.6% year over year due to higher operating income.

Speaker 3

And finally, free cash flow, which we define as cash generated from operations less capital spending, was $193,000,000 for the quarter, an increase of 9% over the same period last year. This was primarily driven by cash generated from working capital changes and the timing of income tax payments. Our ASV retention for the 3rd quarter remained greater than 95%. We grew our total number of clients by 451 compared the prior year, driven by corporate and wealth clients and partners. With client retention of 92% year over year, Our sales and client support teams are to be commended for continuing to execute well despite market conditions.

Speaker 3

We remain committed to returning long term value to shareholders. As previously discussed, we resumed share repurchases in the 3rd quarter. We repurchased 165,950 shares for a total of $67,100,000 at an average share price of $404.29 Under our current plan, which we anticipate completing in the 4th quarter, $114,200,000 was available for share repurchases as of May 31, 2023. And additionally, this week, our Board of Directors approved a new share repurchase authorization plan of $300,000,000 that will take effect on September 1. Over the last 12 months, combining our dividends and share repurchases, we've returned $202,100,000 to our shareholders and recently increased our dividend by 10%.

Speaker 3

This marks the 24th consecutive year of dividend increases. And finally, our guidance for fiscal 2023. While there are signs that the macro environment will start to recover over the next few months, the markets remain uncertain. Last quarter, we updated our guidance to reflect organic ASC growth of $145,000,000 to $175,000,000 a slight deceleration from the guidance provided at the beginning of the fiscal year. This range reflects ASV growth of $135,000,000 to $165,000,000 from the core business and $10,000,000 in ASV growth from CUSIP Global Services.

Speaker 3

We also updated our revenue guidance from $2,080,000,000 to $2,100,000,000 which was a slight deceleration from the previous guidance. As discussed earlier, we are reaffirming our guidance for those metrics, but at the lower end of the ranges. For GAAP operating margin, we expect our one time restructuring charges to decrease our guidance range to 29% to 30%, a 50 basis point decrease from the previous guidance. GAAP diluted EPS is expected to be in the range of $12.24 to $12.65 For adjusted metrics, we expect our financial discipline and cost management focus to drive an adjusted operating margin of 35% to 36%. This represents a 100 basis point increase from previously communicated guidance range and meets our 2022 Investor Day outlook 2 years ahead of our 2025 target.

Speaker 3

Finally, we are increasing the range of adjusted diluted EPS by $0.25 at the midpoint to $14.75 to $15.15 for fiscal 2023. In closing, we are encouraged by our performance this quarter and our ability to execute on a solid pipeline as we finish the fiscal year. We are confident in our ability to balance macro headwinds with margin expansion and expense management to continue investing in our people and products. As the pace of innovation accelerates, our deep content mode An open digital platform will strengthen our partnership with our clients and allow us to capture additional market share. We are committed to sustainable growth and excited about the opportunities before us.

Speaker 3

And with that, we're now ready for your questions. Operator?

Operator

Thank you. Our first question comes from the line of Manav Patnaik with Barclays. Your line is now open.

Speaker 4

Good morning. This is Brendan on for Manav. Just first off, I want to ask on The ASV guidance, obviously, the high end is still there, but you're talking about it closer to the lower end. Is the higher end still Possible, is there did you leave it that way because there's a couple of deals in the pipeline you're not sure if you're going to close, so that's not to count on that? Or can you just walk through the Because of the way you've kind of framed the guidance update.

Speaker 5

Sure. This is Helen. Thanks for your question. I'm happy to kind of give you some further color on that. H1 was solid for us, but we had already seen end markets begin to soften, which is why we reduced the guidance last call of the $15,000,000 2 thirds coming from banking, As we said, and a third coming from delayed decisions or reduced spend.

Speaker 5

Over the last 90 days this past quarter, we've seen those trends continue. First in banking, For example, middle market firms, which had been doing quite a bit of hiring, picking up from other universal banks that were letting folks go, We saw that begin to slow down and we did see some universal banks have some large reduction as well. Now given our 90 day notice period, Client decisions that were made in Q1 of the calendar year or early spring get reflected more in this quarter, which is why you're seeing Some of that net reduction gives us some greater visibility. And we also saw some erosion pickup on the buy side as well with clients looking for cost reduction. But the positive piece of it, as Linda indicated earlier, we're still above 95% ASV retention and we're seeing that diversification of spend in banking, for example, as we sold more in Analytics and fees as many of the firms there are looking to do more technology and off platform solutions.

Speaker 5

So that's a positive. The second is timing. Client reviews are taking longer with more authorization on spend. We saw more deals move from Q3 into Q4, but also Into FY early FY 2024, part of the reason really is budget constraints. Clients want to pursue even cost saving projects, They don't have all the IT resources they need or some of that requires some initial upfront spend to accommodate.

Speaker 5

So For us, many of the opportunities that we see in the pipeline are open, but we can see and expect some of that to be delayed. But a clear trend is that clients are looking for more help in taking on some of their non core activities. And that's going to provide momentum for us both in managed services as well as data manage Mint Solutions. And then the last is reduced spend and some reduced hiring. In Q3, we had the same number of 6 figure Expansion and new logo wins in the previous year, but the average size was a little bit less, 4% lower.

Speaker 5

And so and then expansion that we've seen in the past from hiring has slowed down as well and the same pieces are impacting on new business as well. But the positive sign is that we're not losing out on the opportunities. The number of deals falling out is the same as in previous years, and we've had great strength in the middle office solutions with performance and risk. So we're just trying to give Our best thinking at this point, we've got confidence in all of the client interactions and value discussions, but we want to be realistic as it relates to market timing and ability to monetize. So it's about timing as opposed to our faith in the pipeline itself.

Speaker 4

Great. Thank you. And then just thanks for all the detail. A quick follow-up Linda on the margin. Obviously last year it was Caused a bit by surprise, the Q3 to Q4 decline.

Speaker 4

Could you just help us with We're seeing the updated guidance, but just help us with how you're thinking about that sequentially. It looks like the midpoint would be Almost not quite 500 bps, but almost, which is what it was last year. So if you could just help us with how to think about that.

Speaker 3

Yes. Brendan, happy to give you some further color on that. So obviously, given the top line situation, We had to focus a little bit harder on costs. And we've had very good support from the organization to work on this. So you're right, sequentially, The margin will be considerably higher than it was before, and our guidance of 35% to 36% adjusted is what we had said would be the exit rate for 2025.

Speaker 3

So we're well ahead of schedule. In terms of what we're doing, There are really two concepts here. One is we're looking to take a charge in the Q4 to reduce our run rate going into 2024. And then we've also taken some actions to reduce expenses already in 2023. So let me talk about what we've done in 2023 first.

Speaker 3

So the first thing that we did was we pulled back and pretty much almost slowed and then stopped hiring as we came through the Q2. So that reduced the pace of salary ramp. And we kind of expect that over the course of the year that will give us $15,000,000 back. On 3rd party content, we've done really well. We've held costs there very nicely.

Speaker 3

That's come in about $10,000,000 lower than we had expected. The technology team has done its part. We've increased capitalization quite a bit as you've seen. And that has Flattered the salary line and it's shown up a bit more in the tech line, but still the tech team has managed to save about $7,000,000 And then the facilities charges we took last year, have come through a bit stronger than we had expected. So that saved about that will save about $5,000,000 So all that comes up to kind of $37,000,000 $38,000,000 that by the end of this year, we will be able to save.

Speaker 3

And then to position ourselves for next year, we talked about a charge we're going to take in the Q4. These decisions are very, very difficult to make, And we've spent a lot of time thinking about them and trying to make sure that we're doing the right thing at the right time. So we're expecting, as we said, we'll be taking a charge of about $45,000,000 Please give us kind of $5,000,000 of variability on either end of that because we're not done yet. We're expecting that we'll bring the workforce down by about 3% or less. Real Estate will provide another $15,000,000 to $20,000,000 as we talked Before, we will also look to do a few other things, which will be helpful.

Speaker 3

So a total of about $45,000,000 charge, which will help the run rate as we go into 'twenty four to get everything right sized. Again, these are very difficult decisions, and we really appreciate the Support of the entire organization, to try to get the cost basis correct, as we deal with the AirPockets situation in the top line. So hope that Brendan is helpful to you.

Speaker 4

It is. Thank you.

Operator

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.

Speaker 6

Hi, thanks. Good morning. I wanted to follow-up on the margin question. Based on your updated full year guide for margins, fiscal 4Q margins are tracking to Contract year over year to approximately 30%. Can you talk about the reasons behind the year over year margin contraction?

Speaker 3

Yes. George, I think you're light by about close to 200 basis points. I think we're going to be closer to something more like in the 32% range for the 4th quarter. This is the result of we do have More people and higher salary run rate costs than we did at this time last year. We also have a 12.9% increase 12.9% increase in the number of employees that we have, though 2 thirds of those are in lower cost locations.

Speaker 3

So it's basically that. It's the increase in both employee, primarily salary run rate costs and technology costs. But again, we've taken some pretty dramatic actions here to bring the annual adjusted operating margin up 100 bps to 35 to 36. The 4th quarter is traditionally our heaviest expense quarter, as you know, and we're expecting our bonus expense there will be somewhere around Another $25,000,000 It's been pretty consistent over the 1st 3 quarters of this year. So as you know, the margin I'm sorry, the bonus adjusts depending on how our performance goes.

Speaker 3

So we expect it to be flattish this year as opposed to last year where we had a big uptick in the bonus accrual in the 4th quarter. So I hope that that helps you. And I think we have made it clear we have pretty intense focus on expense control.

Speaker 6

Got it. That's helpful. And then, you mentioned the 35% to 36%, it's a pull forward of what was originally targeted to be 2025 Fiscal 2025 margins, have you provided an updated outlook for what EBITDA margins could be in fiscal 2025? And what would be A reasonable pace of annual margin expansion over the next 2 years.

Speaker 3

George, it's an excellent question And one that we're spending considerable time on ourselves. I don't think I want to jump to 2025 when we haven't even Finalized plans yet for 2024 or even given guidance on 2024. So, let's say that we had spoken about, on average, 50 to 75 basis points of margin expansion. We've worked hard. We moved faster.

Speaker 3

We get a lot of comments on these calls about what we're doing with the margin, and I think we've proved We're working pretty effectively on it. So let's see how we go. We will have made very good progress this year. And if you have if you're willing to be a bit patient with us, we'll talk some more about this as we go into 2024 guidance next in our next quarter earnings call. So a bit of patience and we'll see where we get to.

Speaker 6

Great. Thanks very much.

Operator

Thank you. Our next question comes from the line of Alex Kramm with UBS. Your line is now open.

Speaker 7

Yes. Hey, good morning, everyone. Two questions on ASV. I'll do them 1 by 1. The first one is a little bit more near term.

Speaker 7

Can you just when it comes to the Q4 and the outlook, there was a question before, but when you think about the guidance here, If I assume the low end, can you actually just tell me what that means for the Q4? What's implied? There were a lot of restated numbers. I think you did done $84,000,000 in organic so far this year. So that would imply, I think, dollars 61,000,000 by my math, but not sure if that's the right number.

Speaker 7

And If that is the right number, it's a slight reduction from last year, but given this environment and slowdown in hiring classes, it seems like it could be worse. So just maybe put that 4Q implied in the context of the environment.

Speaker 5

Hi, Alex. It's Helen. I'll take a shot at your question here. You may be including please keep in mind that CUSIP is included in our numbers. So I can't quite tie to what you've just said.

Speaker 5

That might be a good question for Kendra later on. But I'll just talk about perhaps the Q4 pipeline overall, if that can be helpful to you. So when we think about the pipeline, as I mentioned before, it's a pretty solid pipeline, equally weighted across Our 3 workflow solutions, so in analytics, research as well as CTS, most of the pipelines in Americas and CTS. And so at this point, given our notification period, we have a pretty good visibility into cancel. So we've taken that into account.

Speaker 5

The rest is up to execution. Our sales force, as mentioned by Linda, is doing a great job in trying to be diligent and working with clients to close The transaction, so the variables right now on timing on decisions, the mix of larger transactions, which tend to take more time. I mean, nearly 70% Our pipeline is in 6 or 7 figures, and bank hiring remains unclear because we're seeing both increased and decreased hiring classes across the larger banks. So The quality of the pipeline and we have ample coverage to meet our ASV range, but there are dependencies on external factors that make this outcome a little bit more difficult than maybe in previous years to predict. So that's why we give a sense of the range of where we stand at this point.

Speaker 7

All right. I'll follow-up on the exact number for the 4Q implied later then. In terms of my second This is maybe a little bit of an early look into 2024, but let me put it in context a little bit. If I go back to The investment phase, so basically before you I think 2017 to 2019 or so, the ASV growth in average was something around 5%. And I would say when I go and look at that environment, it was a fine environment, not great.

Speaker 7

And then obviously went into a great environment in the last Couple of years, but now I think we're seeing layoffs, we're seeing even on the buy side staff reduction. So I would say The environment we're entering here is markedly worse than what we saw prior to your investment. So again, if I put that in the context of the 5% or so growth that you did in that period, like is that a good starting point to think about what's about to hit here? Or How would you describe the outlook, I guess, a little bit more quantitatively?

Speaker 2

Hey, Alex, it's Phil. Thanks for the question. So We're really optimistic about the future. I mean, obviously, there's been a series of things that have happened that have caused clients to slow down their decision making and sort of think More about their businesses during this period, but we're hoping that with the debt ceiling now getting resolved, We're sort of at the bottom of that uncertainty, and we've done so much to evolve our product over the last few years that we feel we have a completely different mix coming out of this. First of all, the opening up of the platform, that is providing a significant impact to our business and our ability to interact with our clients, co develop with them, help them with their own digital transformations.

Speaker 2

And now with this sort of once in a decade Event with generative AI really catching hold, we feel like we're in pole position to take advantage of that. So that's one thing. And then the investment that we made in deep sector and private markets, which we're still in the early days of, we believe that's going to help us significantly On the sell side, even if the headcount numbers are down, it's going to really help us with retention and expansion. And these investments are also going to allow us to do more in corporates, private equity and other firm types. So overall, we're very optimistic.

Speaker 2

We feel like we made the right bets there. And with this new wave of technology, we feel like we're in even better place to disrupt the market.

Speaker 7

Okay. Fair enough. Thank you.

Speaker 5

Wealth has been the big driver for us as well. So I think we're really a different company than we were pre back in 2017. Wealth has been a huge driver of growth for us, and all the investments that we've made as mentioned So I do, Alex, think we're fundamentally much broader, much more diversified than we were back then.

Speaker 7

All right. Yes. Thanks again, Allen.

Operator

Thank you. Our next question comes from the line of Heather Balsky with Bank of America, your line is now open.

Speaker 8

Hi, thank you. I wanted to ask A couple

Speaker 9

of questions on the

Speaker 8

margin. So the first question is and I know someone else previously kind of asked about how you're thinking about margins going forward. But I'm curious in terms of some of the pullback on costs, how much of that is permanent? And how much do you think comes back as sales and ASV start to reaccelerate? And then I have a follow-up.

Speaker 3

Heather, I think that's a difficult question for us to think about or for us to answer right now. Maybe if we Ask you to stay tuned as we go into FY 'twenty four guidance that would be important. I think the statement that It's important here as we are committed to margin expansion, doing that at a reasonable pace with the appropriate balance, Ring fencing the investments that we're making in the company, that's very, very important to us. So I think we will continue to keep a very focused eye Language models, which should help with efficiency in our content collection. So, I think we will look to honor that 50 to 75 basis points of margin expansion on average over the next few years, But not every single year will look the same.

Speaker 3

And maybe I'll ask Phil if he has anything else he would like to add.

Speaker 2

Well, I just I think We have a long term view of our business. So through all of this, we want the top line is very important to us. And A year or so ago, we talked about maintaining a high single digit growth rate over the next few years. So certainly that We keep that in mind, I think, along with what Linda has been talking about, about sustainable margin expansion. So we feel we can chew Chew gum and walk at the same time, particularly with all of the advancements we've made in technology.

Speaker 8

That's really helpful. And then as a follow-up, It's interesting to hear about how you're thinking about investing in AI and you just mentioned that there's Some efficiencies you think you can get from there. I'm curious, especially with it all being very new, how should we think In terms of investment versus savings, and I realize it's early days, but are there any plans to kind of ramp investment spend around that So you can realize the longer term benefits, do you think you can kind of realize both? I'm just curious how that dynamic works.

Speaker 2

Yes, let me spend quite a bit of time on this. It's an excellent question. So the first thing I want to do to frame this for everybody listening is that FactSet is probably one of less than 5 companies on the planet that has the decades of data that's important to this Industry stitched together in a clean way. So that is so important, and I would argue that the value of what even what was called Commoditized data before has gone up. So we have that.

Speaker 2

That is a moat that we will continue to build on. And I talked earlier about the merging of our data. We've created data solutions out of 2 groups at FactSet, but that is something that's so valuable to FactSet The Content Refinery. We've done a lot already to re architect our data hub and how we collect data, but this is going to supercharge those efforts essentially. So that is at the foundation, something that's critically important.

Speaker 2

FactSet is also masterful at stitching data together. So you're going to have to have well concorded data, Quality data, you're going to have to have the trust of the clients in this market. You don't want to have products That are creating hallucinations or things that aren't true, right, for our clients. So FactSet has all of those components, We're going to be focused on the 3 things. First of all, the product.

Speaker 2

We want to create that wow factor for our clients and the ability to come in and essentially surface anything or ask questions. And a lot of the examples that are out there today in the market, we've been doing those for years. You can already go into FactSet into our search bar and type in Sort of basic questions and get those answers back very accurately. We're focused on the next level of that. So that's important.

Speaker 2

We have a lot of people Thinking about that. Content collection, which Linda just mentioned, this is something that we've been doing for decades. We've More and more efficient added over the years and we continue to invest in that. So this could actually provide a great opportunity for more efficiency, But it could also create an opportunity to put more even more data in the platform. So that is something we have to consider carefully.

Speaker 2

And the 3rd bucket is really the support of our clients. I mentioned in my opening comments that about 50% of the help desk questions we get or around FactSet, FQL language or FDS codes, which I'm sure many of you are using and have using the models that you use So build FactSet and other things. So these are three areas of significant impact. The whole company is rallied around this. It's one of those things that really just gets everyone motivated.

Speaker 2

So it's a little less about like how many 1,000,000 of dollars are we going to set aside to invest in this. It's how do we get the whole company thinking about this and making sure that this is part of the fabric of what they do every day. So we're so energized by this and we feel there's a massive opportunity for us moving forward in both the product side and potentially the efficiency side.

Speaker 8

Great. Thanks for your help.

Speaker 2

Yes. You're welcome.

Operator

Thank you. Our next question comes from the line of Stephanie Moore with Jefferies. Your line is now open.

Speaker 10

Hi, good morning. This is Hans on for Stephanie. Could you just update us on the pipeline in the wealth channel? And could you give us an update or an idea of the mix of the customer size in the pipeline? Is it mostly kind of large contracts that you could potentially win there?

Speaker 10

Or is there sort of a lot of smaller wealth advisers that could move the needle for you?

Speaker 5

Hi, it's Alan. I'll take that. Thanks for that question. Many of the wealth firms right now are looking to modernize their platforms. We've seen that most recently with RBC, Bank of Montreal, Rockefeller, Raymond James.

Speaker 5

And so to that end, we've really helped develop Our brand in the wealth space and then the open and flexible technology solutions is really separating us from the competition, especially as it relates to Advisor Dashboard and the other facet components that really lock into a client CRM or other platforms. So as a result, we're having a lot of robust efficiency conversations with both existing and prospects. And so the pipeline is quite strong. In fact, I would say it's as high as we've seen in recent years. But this goes back to the same Dynamics, I've talked about before that especially on larger deals, the ability for a client to make a decision and to execute is taking more time and senior attention.

Speaker 5

About that, but that may take a bit of time. So to your question around the rest of the book and the sizes, there's really a mix. You've got lots of small Coming through last year, I would tell you that we had a lot more new logos in wealth, especially as they're hiring more teams. This year that's been a lot softer. So we've seen some net pullback there.

Speaker 5

But we remain very positive on our ability to continue to gain share in the wealth space. And it really is both on the large deal front, but as well as on the smaller transactions. And we continue to grow at high single digit and low double digit levels.

Speaker 10

Got it. That's helpful. And then just in terms of revenue growth, could you maybe parse out in terms of how much is coming from price, Cross sell and new logo wins. Is it still kind of roughly 1 third between those three buckets? Or is there maybe any one of those kind of driving growth here?

Speaker 5

Sure. It's very much still similar. I would say for new logos, it is a little bit less than we've had in the past. Usually talked about 2 thirds coming from existing, 1 third coming from you. I would say it's a little bit lower because of the market.

Speaker 5

Our price increase this year has been a terrific driver, so that's a bit of a bigger piece of our existing. And we've had great acceptance in terms of The clients understand the new value that we've added over the course of the year and we've not had much pushback as it relates to our ability to capture that amount.

Speaker 10

Got it. That's helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.

Speaker 11

Thanks so much. I wanted to go back to the topic of data. And so I guess there's 2 questions that I wanted to ask. So Phil, you mentioned the value of the data going up and I guess, 1, do you see that potentially impacting the cost of the data that you're getting going forward? And 2, Wanted to also understand maybe some additional color on initiatives in terms of creating the proprietary data.

Speaker 11

Just what are you getting that is not from public filings? Anything like that would be super helpful. Thank you.

Speaker 2

Sure. I think Linda mentioned earlier, we do get quite a bit of data from 3rd parties, but we've done a good job of managing that. And as we move forward, I think given the tools that we have Tonet, I think there's more that we might be able to do that where we're self reliant on that. So Maybe sources that historically we relied on 3rd parties for that we didn't have the capacity to get or just one focused on It presents that opportunity. So there's going to be a balance there for sure, but I think we collect so much of the data ourselves And there's a ton of value in that, that we feel like there's a good balance.

Speaker 2

And because of our platform, 3rd parties are going to continue to need to Pipe their data through platforms like FactSet, where clients want a consolidated, well integrated approach where they get the analytics and support on top of it that they expect. So That balance for us I feel very good about. I think net net will be positive on that one. In terms of data that we get from non public From sources that are more difficult to collect from. There's a lot of stuff that's easy to collect like the SEC filings, obviously, but there's a lot of stuff that you Get from local municipalities that's in badly formatted word documents or PDF files or other places.

Speaker 2

That stuff is available. It's just historically been very manual and very difficult for companies to collect at scale. So those are the types of things that we can now scrape together In a much easier way, a lot of that's you could attribute to sort of deep sector type data. So that would be a good example for me is just continuing to go deeper in the current industries that we're looking at for deep sector and more And making sure more importantly that all of those data points, are stitched together. So it's one thing to collect the data, But the other thing is how do you tie it together so that analysts like yourself can make sense out of the data and you have to spend less time on lining that up yourself.

Speaker 11

Super helpful. And I know that it's a little bit early to start talking about price increases for next year, But I did want to just ask, you've been working a lot on price optimization and bundling and a strategy around that. Just trying to understand that if we go into a period where it's just more challenging than it has been. I guess, how do you see Price playing out in sort of a worse environment, are you able to still optimize price well because of the strategies you have in place Or does potentially next year if things stay like they are now, is pricing a little bit less of a driver in that type of environment? Thanks.

Speaker 5

Sure. I'll take that one. And it's a timely one given what The U. K. Just decided this morning as well.

Speaker 5

So yes, you're right. With inflation coming down, That would impact our ability to raise our prices next year, but we are continuing to have that Higher price realization from packaging from bundling. We are selling very much from a firm type perspective, which allows us to really bring a much more fulsome solution to the client. So the average size, what we're trying to aim for, Tony, is also a larger per transaction and that'll be one of the things that we look at From a KPI perspective, I will say for existing clients, even this quarter, we continue to improve our price realization nearly 120 basis points. Now on new business, we've seen that come down and it's not surprising as you think about the environment that we're in and More competitive situations, so we're being smart about that.

Speaker 5

We might drop a bit in terms of the pricing for new business, but then we try to lock in for Longer contracts. So that's the push and pull on that. But it's still a little bit early to talk about 2024 and we'll see where things land later on in the fall.

Speaker 11

Thanks so much.

Operator

Thank you. Our next question comes from the line of Kevin McVeigh with Credit Suisse AG. Your line is now open.

Speaker 12

Great. Thanks so much. Hey, I don't know if this would be Linda or Phil, but Linda, I know you mentioned some green shoots potentially forming. Can you maybe help us reconcile that to the 3% headcount reduction? Is that a function of just more efficiencies or just reallocation?

Speaker 12

I wanted to start there if possible.

Speaker 3

Yes. I'll take a start and then Phil may have some more to say about this. So I think we have to adjust The business for the top line that we have now, Kevin, and I think there's sort of a lagged effect here on some of the decisions that banks made earlier in the year. So it's possible that this is the darkest point here before the dawn. We don't know.

Speaker 3

We hope that that's the case. So we need to right size the employee base and make sure that we're putting the right resources against the right products, for example. We're being very careful in how we're selectively pruning the employee base, less than 3% It's a reasonable change, but not one that should have a huge impact on how we run the business. You've heard from some of the heads of the Global Banks that they are seeing some green shoots, that capital markets activity is picking up, that M and A activity is picking up. So it's hard to keep the capital markets down for more than a year at a time.

Speaker 3

We will be looking forward to FY 'twenty four and seeing What's going on there? But it's possible that we've come through the most difficult time. As we said in the prepared remarks, we're seeing Different situations from different companies. Some are preparing for what may be an upturn next year, others are still in consolidation mode. So people are sort of all over the place and we're managing our business prudently to make sure that we're dealing well with now and we're very ready for what comes next.

Speaker 3

Maybe Phil might want to add to

Speaker 2

that. And maybe I'll just add to some thoughts on the core buy side business of FactSet. So I know at the end of our Press release, it shows our growth rates for buy side and sell side, and it shows the buy side going down, I think, 80 bps. So Part of that really just has to do with the fact that we've now included CUSIP in those numbers. So I think you can attribute about 75% of that change to just CUSIT being included, which is a mid single digit grower.

Speaker 2

But when we report the buy side, It includes at least today institutional asset management, asset owners, hedge funds, as well as partners, corporates, wealth and private Not private equity, that's Niselle, I'll say. But the IAM, hedge fund and asset owner Form types all did better this Q3 than last Q3. So despite this environment, we're doing really well with the buy side. And the middle office solutions that we have in analytics are best in class now, and we feel like all the work we're doing to improve the front office Experience on the buy side is going to begin to pay off pretty soon. So we feel really good about that.

Speaker 2

So despite this environment, When you look at our user count, it went up this quarter. It didn't go up as much as last Q3, But every firm type that we have, we had an increase in users. So we do feel like we're sort of through the worst of it. But it does take clients a little bit of time to sort of feel that themselves and begin to speed up decision making again. So I don't think it's going to snap back immediately, We do feel as we sort of work our way out of this that we feel good about our prospects going into next year.

Speaker 12

That makes a lot of sense. And then just Linda, as a segue, there's been a ton of M and A in your sector, right? NASDAQ just acquired Adenza, Deutsche Borse in the process of acquiring Symcor, really underscores everything that you folks have been bringing to market for a decade now. Any thoughts as to where you focus within that ecosystem? And then you had some decent detail on next gen work And I've never thought of you folks historically as much on the back office.

Speaker 12

I guess maybe any thoughts as M and A as you potentially consider it internally or potentially externally. I know that's probably a tough question, but what you're seeing in the market is really endorsing what you folks have been doing for a decade. So just any thoughts around that?

Speaker 2

Yes. So, I mean, obviously, you highlighted 2 of the deals that recently came to market. So I don't I think what NASDAQ is doing, that's We don't compete with NASDAQ, and I think the business that they acquired, we don't we won't really play in that workflow. But we feel very good about our strategy, our consolidated platform, our prospects, we feel like we have the scale to continue to take market share aggressively. Linda and team have done an awesome job of sort of getting CUSIP integrated with the rest of FactSet and paying down our debt into the range that We committed to, so we do feel that we're very well poised here if we wanted to do something.

Speaker 2

And to sort of build on Linda's comments, we're beginning to see some activity, right? So some interesting things are beginning to bubble up. We're in a position to do them if we want to, and we've been consistent in saying that the areas that make Since with FactSet or Wealth, Private Markets, those are at least a couple. We haven't changed our view there. It's just a question of when those assets that We're interested in becoming available and if we can get them at a price that makes sense for the company.

Speaker 2

But it is something we're focused on and it's a muscle that we've continued to develop. Anything you want to add there, Lynn?

Speaker 3

No. I just Kevin wanted to point out, we levered up in order to do the CUSIP deal to 3.9x gross leverage, we're back down inside the 2.5x, which would be sort of a more normal range for the investment grade ratings that we have from Moody's and Fitch. Now we're down to 2.2x gross leverage. We're slowing down on repaying our term loan, sort of moving to $60 ish million a quarter of paying back that term loan. So we have room even within leverage levels for our current rating.

Speaker 3

And then we have a very good track record with the rating agencies that we took our leverage considerably higher and then we brought it down. We committed to doing that and we executed on it. So We feel that we could take that path again if there's something that Phil feels is strategically important to us and hits our hurdles of having appropriate growth rates and appropriate margins. So the finance team's job is to be prepared and provide capacity, and we think we have that. So I think we'll continue to lean forward in our foxholes and we'll see what happens next.

Speaker 13

Thank you.

Operator

Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel, your line is now open.

Speaker 14

Hi, thank you very much for taking my questions. Just from a high level, I just want to make sure I'm What happened in bridging the commentary from last quarter to this quarter. Last quarter, the discussion was that small to midsized clients We're slowing decision making, but the larger clients were really kind of on the same path that you guys had expected. Is what's happening now that your the larger clients are also kind of slowing down on that decision making? And then also in the banking clients, it seem Last quarter, you thought that that was something that was very much tied to what you would have seen, if there would have been contagion from Silicon Valley Bank and And we didn't really see that, but is it a matter of kind of the markets just being choppy so that the clients Are still kind of hard to read in terms of where it's going to net out for hiring.

Speaker 14

I just want to make sure I'm understanding that that's really what's going on behind it. And then have a follow-up question about cost takeout.

Speaker 5

Thanks, Dola. This is Helen. I'll try to get to all those points. If I miss anything, Pull me back in. So I think last quarter, what we indicated was that we were seeing slower Decision making across the other firm types, so not focusing on small or mid, but just separate from banking.

Speaker 5

So I think that that is what we're continuing to see as this last 90 days. So it wasn't based off of size, it was more of an overall other than The banking firm type we were trying to pull out separately. If I think about banking overall, I would say that The impact of the layoffs is probably a little bit more than we had expected really due to the market. You're right, we don't necessarily See the contagion from SVB, necessarily, they were not huge clients of ours per se. Obviously, Credit Suisse is 1.

Speaker 5

And so I think there's more of the general deal level, which as Linda alluded to, if that picks up, then we will likely ride with that. But until their confidence comes back, We're seeing a more muted hiring. Now it does depend. Some of the firms are actually same as last year and some firms have come down. So that's a little bit why the mix is a little bit harder to tell.

Speaker 5

So that's the difference that we've seen, Shlomo, since the last 90 days. We continue to see some pullback on banking and the rest is more, as I said, let's call it 50% of the total, 30% is really due to delayed deals and the rest is Reduced size and some additional erosion.

Speaker 14

Okay. And then just, I'm not used to seeing facts at doing more General reductions in force, usually the company at least prior downturns, I don't see that very much. Can you talk about a little bit where you're taking the costs out? I mean, how are you being surgical enough to make sure that you're not impacting the potential to grow the business?

Speaker 2

Hey, Shlomo, it's Phil. Thanks for the question. So I'll frame it for you this way. So we I talked in my opening comments about a bit of a reorganization that we're going through. And we've started a bit of that.

Speaker 2

The rest of it will happen by September 1. But part of this rationale is really getting better aligned by firm type. So some products move around within the business lines. All of the quota carrying staff moved under Helen now. So previously, we had our sales For the different product lines in the business line, so they've now been organized by workflow.

Speaker 2

And then thirdly, we brought together the Content and CTS teams because we were creating sort of an extra layer on top of the content to deliver it, but because we've made so much progress in how we The second thing is This year during our investment process, we went through the product portfolio and decided to deprioritize some Product lines that historically we've been very reluctant to do. So it was a bit of a sort of reemphasizing what's important to us, What do we need to do less of and what should we be investing more in? And then as we've sort of evolved as a company, we looked at some roles that historically had made sense For us to have, but maybe we need less of those now. So it's a little less about just pure cost reduction, even though it's obviously important for us to Manage the margin and deliver operating income as we described. But I so I'd say it was a combination of those things.

Speaker 2

So I feel very good about this. And obviously, we've grown our headcount significantly in the last year, right? We've grown our headcount by at least 1,000 people. We talked about reducing our workforce by less than 3%. So I think this is just a sort of good annual managing of the business as we set ourselves up for the next year.

Speaker 14

Thank you.

Speaker 3

It's Linda. You had asked a question in your written work and we want to make sure we get All the questions answered. You had asked about what's going on with other income and the answer to that is about $3,300,000 on that line. We had some old CGS receivables, which had been written off, but that money came through. That shows up in other income, just so you are clear as to where that's come from.

Speaker 3

And thank you for noting the reduction in five of 5 days and our days sales outstanding going from 46 to 41. So thanks for that and I think we'll move on.

Operator

Thank you. Our next question comes from the line of Owen Lau with Oppenheimer, your line is now open.

Speaker 15

Yes. Thank you for taking my question. So going back to AI on both revenue and expense line item. On revenue, could you please talk about How Gen AI can potentially impact your revenue model? So is it more like this is an add on service That allows you to better negotiate for pricing or you can separately charge for AI enhanced products.

Speaker 15

And then on the cost side, I mean, there's a lot of excitement about the cost saving opportunity. But could you please give us a sense of How much labor costs you can, let's say, save if you have a full AI implementation today? Thank you.

Speaker 2

Sure. Hey, it's Phil. Thanks, Owen. So the way we're thinking about it at least today, right, is we're just going to significantly Improve the search capabilities on FactSet. That's sort of one thing that we're focused on.

Speaker 2

We think there's other sort of research that we can produce from the content we have today that will be valuable to clients. So we're still evaluating this, But my guess is, right, that we're going to just continue to improve that experience of the FactSet user, that's using like some version of our product, which will allow us to take more market share from our clients and improve retention. So I think that's how I would think about it for now. And on the cost savings side, yes, it's easy to sort of put numbers in a spreadsheet and say, okay, we'll get rid of half of this type of user, but it's Obviously, not that simple an equation. So data and technology keeps moving.

Speaker 2

It always has. You always need to produce more value than you did the previous year. So the question for us is that balance between, okay, What are the cost efficiencies we can gain versus how much of that do we want to reinvest in the product? So we're going to maintain that long term view. And I think even if we felt we could take out significant costs, we believe again that the top line is important and reinvesting that in more functionality and more data is a good thing.

Speaker 2

So we're at the beginning of this. It's moving very quickly. We are moving very quickly. And as I mentioned in my opening comments, we think that the big buckets of opportunity are within product, within content collection and with Support, but we just we don't know exactly where it's going yet other than we feel really good about our position.

Speaker 15

Got it. And then on the deep sector work, Phil, you mentioned a little bit on that. Can you give us a little bit more color on The timing to launch more products, I know you have some beta products there. And then would that 3% labor Reduction impact the pace of this deep setter work or no? Thanks.

Speaker 2

No, absolutely not. Deep sector is one of our major Product initiatives, it's gotten significant investment over the last few years. It's getting more through this year's investment process. And we're including it in today in our product. So if you're a FactSet user today, you will just see more and more functionality and more data appear Depending on what company you're looking at and what sector that's in, we're also creating feeds of this.

Speaker 2

So the discrete Product sales would be more feeds if you wanted to use that as part of your quant or research product. But it is having a nice impact for us, Particularly in banking now, with retention and a lot of these a lot of why you win or lose in banking is these large Multi year deals with the bigger banks and we feel that we're in a better position than ever as those come up for renewal.

Speaker 15

All right. Got it. Thanks.

Operator

Thank you.

Speaker 2

Welcome. Yes.

Operator

Our next Question comes from the line of Craig Huber with Huber Research Partners. Your line is now open.

Speaker 16

Great. Thank you. Can you talk a little bit further about the investment firms out there that your clients and talk about the pipeline, the tone of business and maybe Separated between the hedge funds, the midsize investment firms and the global investment managers out there, is there much Difference between that going on right now. I know you touched on this before. I just want to hear a little bit further about the tone of business and the pipelines across the 3 separated out, please.

Speaker 5

Sure. Happy to do that. So when we take a look at the investment management firms, I break them out into a couple of different pieces. Like you said, there's hedge funds. We call it in our buy side, we have asset owners as well as investment management firms.

Speaker 5

The larger ones who have begun and really are committed to their digital transformation are the ones that we have the most success with because they are ready to go and they really are working with us, whether it's through blueprinting things that we've done with them or to really help put in some of the Solutions for them. So that pipeline has remained strong. And so when I talk about the fact that they are clients that are ready to make Move forward, but maybe are constrained either by bandwidth or by initial dollars. Those are the ones, Craig, that I'm more referring to. I think some of the smaller firms, if they haven't really started that or gotten committed To that journey, then those are the ones that are pulling back right now and not necessarily spending where they would have done it last year.

Speaker 5

As it relates to hedge funds, we've actually done quite well with them. They continue to form new biz and actually are buyers of our data. And it doesn't even when we talk about funds, it doesn't even have to be hedge funds. It can be for any of the asset managers, if they close a fund and open a new one, A new fund, we are able to capture that as well. So that's really the state of what we're seeing in the markets.

Speaker 16

Thank you for that. My final question, CUSIP, I heard you say somebody say briefly, you said growing mid single digits. Is that what actually grew year over year in the core, which is finished here? And what's sort of your outlook for that business? And how has the integration gone from your perspective so far?

Speaker 2

Well, so the integration has gone swimmingly well, and we believe that we're going to hit all of the metrics that we set out to meet on the numbers side by the end of the year. Issuance is a bit down. I think you probably saw that in quarter in this quarter. But if you believe that the markets are going to come back, Hopefully, we see an upswing there. But all of the commentary we made previously about this business, which we don't break out completely separately, None of that has changed.

Speaker 2

Great. Thank you. You're welcome.

Operator

Thank you. Our next question comes from the line of John Mazzoni with Wells Fargo. Your line is now open.

Speaker 17

Hey, this is I'm filling in for Seth. Just a quick one. Could you just remind us what percentage of the international book was captured during this round of price increases? I believe you said 7% More year over year, but what was that base?

Speaker 5

Hi, this is Helen. So the number I'm trying to get to your 7%, but We're up $17,000,000 in price increases, which is $4,500,000 higher than the previous year. And of course, this is on top of the 31 that we captured in Americas in the last quarter.

Speaker 17

Okay. And then maybe just on a different note, if kind of the environment continues to be a bit sluggish, Could you just remind us around the different levers that you pulled and really what area we are in, in terms of innings, in terms of the downturn playbook and What those buckets could look like if we would potentially see another year or 2 of kind of sluggish economic growth and potentially lower headcounts? Thanks.

Speaker 3

Yes, it's Linda. I think we had talked about the headlines being we're looking to take approximately a $45,000,000 in the 4th quarter and where we started with the easier to move buckets, Maybe not easier, but the ones that probably have less implication for the employee base. So we started with real estate. We've Taking a total now of close to when we get done with the 4th quarter, close to $80,000,000 of real estate downsizing. So that one has been worked through pretty well.

Speaker 3

When we talk about 3rd party data, an increase in cost of only 1.9% in a highly inflationary environment, That one has gone very well also. And on the technology budget, you know that we're keeping some capabilities on premises, which saves $20,000,000 over 5 years, and we've greatly increased capitalization through accurate time tracking. So we've dealt with the tech budget as well and we continue to do so focusing on third party software purchases And also on cloud usage, which is not for clients to make sure we've got all that right. So then we get to people and that's where it gets tricky. We took the steps of taking hiring just to essential hiring then to hiring freezes and only now are we looking to do Somewhat of a reduction in the number of employees that we have, but as Phil said, we had increased the headcount by 1,000 people over the course of the last year.

Speaker 3

So trimming by 3% seems to be a reasonable choice. Now if situation gets worse, we'll have to think Further about this, the big buckets are the technology spend and the people expense. So we'll continue to look at those. I think we've done a pretty good job in pulling back on all our costs. That's why you see margin guidance going up 100 bps.

Speaker 3

So A lot of good work being done across the organization to make sure we are right sized and we have the right resources in the right places. Hope that helps.

Speaker 18

It does. Great color. Thank you.

Operator

Thank you. Our next question comes from the line of Faiza Alwy with Deutsche Bank. Your line is now open.

Speaker 9

Yes. Hi. Thank you. So I know we've covered a lot of ground. I just had A couple of quick clarification questions.

Speaker 9

One is follow-up on Alex's question regarding the ASV Base, if you don't mind just confirming for us that the base for fiscal 2023 for that $145,000,000 increase Is 202,700,000? I think that would be very helpful for everyone.

Speaker 5

The base meaning the total amount of ASV that we have right now?

Speaker 9

The total amount of ASV that you had at the end of 22 that you're going to grow off of by $145,000,000

Speaker 5

Got it. Candace is going to come back to you specifically on that because we want to make sure that we're giving you apples to apples.

Speaker 2

Okay. Yes. That's unclear. Yes, in all of your follow-up meetings, I think we'll get to that.

Speaker 9

Okay. Okay. Okay. Sounds good. And then just a second, I guess it's a clarification question, and I might be stating the obvious.

Speaker 9

But What I'm hearing is that given the overall macro environment, demand environment, we might be below The medium term targets as it relates to the top line or the ASV growth, but we expect to make up for it on Margins such that we're able to maintain the 11% to 13% EPS growth outlook that you had talked about at Investor Day last year. Is that the right way to think about fiscal 2024? And if so, Like are there any parameters that you can put around it?

Speaker 3

Yes. Faiza, taking this question First, while my colleagues are looking for those numbers to make sure we have it right, it's too early to talk about 2024, But we take very seriously the responsibility of rightsizing the cost base so that we can hit our margin targets and thus our EPS targets. I think it's pretty important to note that despite these difficult conditions, we've taken up the margin guidance for this year, which is a pretty important change for us. And you're correct on the margin focus and also the EPS number. I'll turn it back over to Helen for any follow-up on the top line.

Speaker 5

Yes. No, I just wanted to go back to your questions to make sure that I understood it. So if you're asking about the total ASV For FY 2022, I think you said $2027,400,000 That is the number I would use.

Speaker 9

Okay. So we should expect that number to be up By $145,000,000 to get to the fiscal 2023 ASV?

Speaker 5

Well, it depends on where we end the year. But yes, our ranges include CGS and this would include CGS as well.

Speaker 9

Okay. Okay. If I can just follow-up on that because it does imply that the 3 month Growth in ASV from 3Q into 4Q sort of accelerates given where you ended 3Q. So I'm curious, like is that just timing? Or is there something else that we didn't talk about on the call that's going to help the acceleration?

Speaker 5

I think probably this makes sense for you to follow-up with Kendra afterwards. I'm not sure when you say accelerate. If you're asking whether our 4th quarter is larger than our 3rd The answer is yes. Historically, it's always been larger and it will be larger this time around as well.

Speaker 9

Okay, sounds good. Thank you.

Operator

Thank you. Our next question comes from the line of Keith Housum with Northcoast Research, your line is now open. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.

Speaker 13

Hi, good morning. Appreciate you taking my question. I just have one because you covered Quite a bit. And it's on the content collection side. It sounds like that's one of the major opportunities you've identified in terms of Cost savings and one of the maybe operational benefits tied to AI.

Speaker 13

I'm just curious and I apologize if this is too technical of a question, I'm not an engineer. But is what is it about the shift from regular AI Our historical AI to generative AI that is making that a more realistic or outsized opportunity? Is it Making kind of the coding that goes into content collection cheaper or more efficient or is it the technology's ability to Maybe understand language better. I'm just trying to understand what has changed over the past 6 months that makes that A bigger deal today versus last year as an example, especially considering you're a company that's invested in machine learning and AI for several years as you noted.

Speaker 2

Yes. So I mean, that's a pretty technical question. So there are the things that you mentioned, certainly, will help. We're exploring all of the different things that could make it more efficient. Today, The content collection process is a combination of machine and human.

Speaker 2

So we feel for a lot of things. Just obviously still going to need a human in the loop for good judgment and So on quality assurance, so it's probably a little bit more of the tools themselves evolving to a way where We can get the information in front of the human in a more teed up way where it makes them just much more efficient. So We use street account as the first example here. So our street account news service, which many of you use, does an awesome job. And it has historically of pulling together The different sources, getting it in front of a professional who then puts it into bullet points, which make it so easy for you to consume.

Speaker 2

And what took one of these very skillful people 30 minutes to do previously for an S and P 500 company Took them 2 minutes, right, in this last iteration. And that's just like the very beginning of trying something fairly simple. So that's a massive efficiency. We still need that person to look it over, make sure that they're adding the added value that they will always add To get there, but that's just one very clear example. This is a rapidly evolving space, and we just We're partnering with lots of firms here.

Speaker 2

We're evaluating lots of different LLMs, including open source. But we're very Encouraged by the early signs that we've seen on both the content collection side, as well as the coding side.

Speaker 13

Very helpful. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of Russell Quelch with Redburn. Your line is now open.

Speaker 18

Yes. Thanks for having me on the call. So in terms of Generative AI, following on from what you just mentioned there. I guess we may be at the point where this starts getting reflected into relative valuations and I think it likely comes through the multiple before the P and L. So I was interested to hear, Phil, your comments suggest that FactSet are in pole position to be a beneficiary on this topic or in this area.

Speaker 18

And maybe a challenge to that view would be that generative AI is likely to primarily benefit Proprietary data owners that have invested to sort of label their data and have built their own LLMs in house on top of this, particularly if regulation stops Financial service companies using open source data and models. So given some peers are more tilted towards proprietary data and have built their own Fully labeled datasets and proprietary LLMs for financial markets. Can you maybe explain a bit more your comment on why you think you're in pole position in this area, please?

Speaker 2

Sure. Thanks Russell. It really has to do with the data that we have on FactSet. So we collect a ton of proprietary content ourselves. We also are very trusted to integrate 3rd party as well as client data.

Speaker 2

So it's that amalgamation and that library of all that data that's well stitched together that investment professionals will need to use. And it's the reason they've used platforms like FactSet over the years. So we're in a That's what you need to really get going. I think if you're a firm that doesn't have that data already, sure, you could start today and maybe be more valuable in the future. But recreating all of that history for a fundamental analyst, a quant analyst, if you're looking at client portfolios, it doesn't matter.

Speaker 2

That is, one of the key things that folks are going to need. So it's not going to matter how good your technology is Unless you're pointing it at quality data. And there have been other instances in our industry of people trying to come up with cheaper alternatives to Faxit and other providers. And I don't think many of those have been successful, frankly. So I do think that given the data we have, given the relationships we have with our clients, Given all the investment we've made in our platform to sort of be AI first and open the platform and redo the content refinery, All of those things for us and having the relationships and the trust with our clients, all of those things add up to me to be a very powerful formula.

Speaker 18

Yes, it's interesting. Thanks, Phil. Maybe just as a quick follow-up in terms of different topic, ASV. Is there a risk to the medium term ASP guidance? And will you be revisiting the medium term guidance at Q4 in addition to providing

Speaker 2

If you're talking about the medium term guidance we gave out at Investor Day, I think was last April. Yes, we're obviously going to be taking a close look at FY 'twenty four, and we'll give more color on that when we speak to you in 3 months.

Operator

Our last question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Speaker 2

Thanks so much. I know it's late, I'll just ask one. You talked about the uncertain environment here. And I think Linda, you said you might be optimistic that it might be darkest before the dawn. What are you looking for and what should we be looking for to get some confidence

Speaker 15

that the skies are starting to

Speaker 2

Bob, it's Phil. I'll start and I'll let my colleagues chime in if they want to. One of the things of these banking hiring classes that will be Very interesting to see. I think we've seen a bit of both already, but we don't really get good color on that until we get further into Q4. So If the larger banks decide to hire classes of the size they did previously or larger, that is a very good sign to us.

Speaker 2

Continuing to look at our premier clients, as Helen mentioned, we've done very well within some of the largest buy side firms. For me, that's one of the most important things that we can do. Some of the slowdown you've seen is just we've had less new logos from Corporate clients, Private Equity, Venture Capital, those types of firms. But for us, just seeing That confidence and engagement from the biggest banks and the biggest buy side firms, that to me is most important. And we have terrific Engagement on both sides now.

Speaker 2

So clients really want to talk to us. And the fact that we now have opened up the platform, we have a lot To say in terms of data and technology, we're getting a level of engagement that previously we hadn't. Something we did last Which is worth mentioning is we had something called Developer Day. So we had over 200 clients log into a session of FactSet Where they met with our engineers essentially and got educated about all the ways they can now code directly against FactSet and use us. And That's something new for us and I think a very good sign of things to come.

Speaker 3

I would add that it's Linda. In the past In a short period of time, we've come through 500 basis points of rate increases from the Fed, the banking issues that were happening in March, Credit contraction that's resulting from some of those issues and then the self imposed debt ceiling issues that recently cleared. So those are 4 macro factors that have been very disruptive to the capital markets that have absolutely nothing to do with the help of FactSet's basic products and business. So the capital markets are cyclical. And for those of you who are Newer to the industry and perhaps earlier in your careers, this sort of capital market slowdown happens every few years.

Speaker 3

And generally, when the markets reopen, things rebuild very quickly. The hiring and firing cycles at banks, Helen and I were talking about Just the other day as 2 former investment bankers, they wax and wane. It's just the way the industry works. So I would caution against overreaction. But I'll turn it over to Helen and see what she has to say.

Speaker 5

I echo what Linda said and I guess one other Piece for you to consider, unfortunately, our banking book is built on multiyear contracts and the bulk The ASV, which is with the large global banks have minimums. So from a headcount perspective, in that specific situation, The cancel exposure is less than 3% of our total AISC. So to the point that Linda is making, one of the things that we'll be looking at is as hiring picks back up, we'll see that Pickup as well. Our focus during these periods of time is on retention. We want to keep what we have.

Speaker 5

And again, our high ASV retention, I think, is a real It's emblematic of the long relationships, but also the work that we've been doing. And so when the hopefully the markets pick back up, there's greater confidence by clients. We'll see that expansion in new pickup as well. So again, we're very comfortable with where we stand today.

Speaker 2

All right. It's very helpful. Thanks so much.

Operator

Thank you. I'd now like to turn the conference back over to Phil Snow for closing remarks.

Speaker 2

Thank you all for joining us today and all the great questions. We look forward to speaking with you again next quarter. In the meantime, feel free to Contact Kendra Brown with additional questions. Operator, that ends today's call.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • FactSet delivered 8% organic ASV plus professional services growth in Q3 driven by double-digit ASP gains in analytics, though workstation demand softened among wealth, banking and corporate clients.
  • The company ended Q3 with $3.79 adjusted diluted EPS and a 36% adjusted operating margin, and raised full-year margin and EPS guidance while reaffirming organic ASV and revenue targets at the lower end of prior ranges.
  • Management plans to cut its expense run rate by ~3% via a Q4 one-time restructuring charge (~$45 million), rightsizing the workforce ~3% and further reducing real estate costs to support margin expansion.
  • FactSet is investing in a generative AI foundation to improve search, automate content collection and enhance client support, with early wins including ChatGPT-powered earnings summaries and AI agent assist tools.
  • Shareholder returns remain a priority—Q3 buybacks totaled $67 million, a new $300 million repurchase authorization takes effect September 1, and the company marked its 24th consecutive annual dividend increase.
A.I. generated. May contain errors.
Earnings Conference Call
FactSet Research Systems Q3 2023
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