FactSet Research Systems Q2 2024 Earnings Call Transcript

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Provided by Quartr
March 21, 2024

There are 16 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to FactSet's Second Fiscal Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Allie Veines. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to FactSet's 2nd fiscal quarter 2024 earnings call. Before we begin, the slides we reference during this presentation can be found through the webcast on the Investor Relations section of our website at factset.com. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions from investors.

Speaker 1

The call is scheduled to last for 1 hour. To be fair to everyone, please limit yourself to one question. You may reenter the queue for additional follow-up questions, which we will take Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risks of forward looking statements and the use of non GAAP financial measures. Additionally, please refer to our Forms 10 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 discussion on this call will include certain non GAAP financial measures.

Speaker 1

For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, Chief Executive Officer and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q and A portion of today's call. I will now turn the discussion over to Phil Snow.

Speaker 2

Thank you, Ali, and good morning, everyone. Thanks for joining us today. In the Q2, we grew organic ASV plus professional services by 5.4% year over year, delivering adjusted diluted EPS of $4.22 and an adjusted operating margin of 38.3%. Given challenging industry factors and continued market uncertainty, our results this quarter were mixed. You may recall that we anticipated the softer top line growth from our December call.

Speaker 2

We ended this quarter with more than 8,000 clients, adding 75 net new logos and our user count was 206,478 down 605 in the quarter, mostly due to consolidation following UBS's acquisition of Credit Suisse. In addition, please note that the ASV reduction impact of Credit Suisse is not reflected in our 2nd quarter results. While we cannot share details of our ongoing business discussions, our full year guidance continues to assume a conservative view of the Credit Suisse reduction as we indicated last quarter. Overall, ASV retention remained greater than 95% and client retention was 90%. In terms of market conditions, client caution continued to delay purchasing decisions.

Speaker 2

We saw increased pressure on client headcount as they seek further efficiency gains. As a result, we saw higher erosion this quarter. We had fewer large deals in Q2 and saw a lower impact from our price increase, both of which contributed to a slower growth rate. However, industry cost cutting appears to be stabilizing We are starting to see pockets of recovery. As we signaled in our December call, anticipation of softer top line growth drove our own difficult but necessary cost cuts, including headcount reductions during the quarter.

Speaker 2

Continued careful expense management will allow us to maintain margins and EPS growth along with investment in new products to drive future performance. Currently, we expect to finish the fiscal year at the lower end of our ASV ASV growth guidance range of 5% to 7%. Turning now to our performance by region. Americas ASV growth decelerated by 2 100 basis points from the prior quarter to 5.9%, mainly due to a large wealth cancellation as well as banking erosion and lower price realization. The wealth cancellation resulted from a client's decision to move a custom non standard workflow solution in house following a change in its business strategy.

Speaker 2

In EMEA, ASV growth decelerated 40 basis points to 5%, mainly due to headwinds from lighter institutional asset manager renewals, partially offset by new business acceleration. In Asia Pacific, ASV growth decelerated 2 40 basis points to 5.6%. Softer banking expansion coupled with a larger institutional asset manager loss offset wins with asset owners. While new business accelerated modestly across regions, it was offset by greater reductions in both retention and expansion. On the institutional buy side, we saw headwinds across all firm types due to cost cutting and continued headcount reduction.

Speaker 2

For example, in 2023, passive funds surpassed active funds in total assets under management. As a result, our institutional asset management clients are seeing continued increased fee pressure. To help offset this pressure, we have expanded our capabilities to address users' needs, including in the front office. Our managed services business is growing as our clients outsource more of their middle office workflows to FactSet. This helped drive some gains with asset owners.

Speaker 2

We have invested in our platform to reduce clients' total cost of ownership or TCO. Given our ability to help clients do more with less, they are increasing their reliance on us despite fee pressure. As a result, we are investing in managed services given our growth in this area. We are leveraging our strength in the middle office to further power front office solutions. This quarter, we displaced front office incumbent at an asset management in Asia and we did this by connecting the client's entire workflow, including both OMS and EMS capabilities.

Speaker 2

We also won that business on the strength of our open platform. Simultaneously, we are developing At the same time, expectations are high around the effect generative AI will have on our industry. Initial client feedback has been extremely positive on our new Gen AI solutions, including FactSet Mercury, a conversational way to generate answers and insights from documents and structured data sets that is in beta release as part of our FactSet Explorer program. We see early signs that large language models working with our deep repository of well curated data in our open platform can power accelerated workflows for our clients. While we perceive that this trend will drive future growth, these initiatives need time to gain commercial momentum.

Speaker 2

In banking, our Gen AI banker efficiency tools are gaining users. We had more than 200 Gen AI meetings with our banking clients in Q2. Beta products and testing with clients include ChartCreator and Investment Banking Office Refresh API, which allows clients to automate cloud model updates. This is our 1st client facing off platform solution for banker automation and we believe it can drive a new revenue stream. Finally, Transcript Assistant, our Gen AI powered chatbot is in full release as announced last week.

Speaker 2

Transcript Assistant accelerates analysis of earnings call transcripts with a conversational interactive interface. Clients have the freedom to ask their own custom questions or choose from a FactSet provided prompt. User uptake has been strong. We are now expanding event coverage and comparative analysis in parallel with the FactSet Mercury integration. You can read more about transcript assistance in our press release from last week.

Speaker 2

Turning to wealth, activity was more subdued this quarter given one large cancellation and no large deal. However, wealth partnerships are creating stronger connections with portfolio and business development workflows, in turn increasing senior executive level client engagements. We have recently driven major changes in the organization to position ourselves for future growth, including moving to our phone type focus and reducing costs. Given this rapid pace of change, I'm extremely proud of how the company has risen to the occasion. This change process may have been challenging in the short run, but has positioned us well for a market upturn.

Speaker 2

Finally, want to highlight our focused client events in Miami at the end of April. This event brings together top thought leaders, industry experts and key decision makers from the finance and tech sectors. Our theme for 2024 is the revolution of an ecosystem, discussing the potential of artificial intelligence and machine learning. Attendees can expect a thoughtfully curated agenda with inspiring speakers, educational sessions and opportunities for meaningful connections. Registration information can be found at focus.factset.com.

Speaker 2

I'll now turn it over to Linda to discuss our Q2 performance in more detail.

Speaker 3

Thanks, Phil, and hello to everyone. As you've seen from our press release this morning, despite slower ASV growth, we improved margins and EPS in the 2nd quarter. 2nd quarter organic ASV grew 5 point operating margin improved 130 basis points to 38.3 percent and adjusted diluted EPS rose 11% to $4.22 I'll now share some additional details on our fiscal 2nd quarter performance. As Ali noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. For the quarter, GAAP revenue increased 6% to $546,000,000 on sales to asset owners, corporates, hedge funds and private equity and venture capital clients.

Speaker 3

For our geographic segments, organic revenues grew by 6.5% in the Americas, 4.8% in EMEA and 6.4% in Asia Pacific. Turning now to expenses. GAAP operating expenses increased 5% year over year to $364,000,000 This was driven by higher employee expense, net of a $7,000,000 decrease to our bonus accrual, as well as by increased intangible asset amortization. Compared to the previous year, GAAP operating margin increased by nearly 50 basis points to 33%. This was due to increased revenues, partially offset by higher personnel expenses, including an approximately 11 our as we frequently discussed, technology continues to be our main area of expense growth.

Speaker 3

Specifically, technology costs increased 11% year over year. Technology costs now represent about 8.4 percent of revenue, consistent with our medium term outlook. In contrast, employee expenses grew only 1 some of the cost reduction efforts we took during the Q2. Next, our 3rd party content costs increased 3% due to higher variable fee expenses. And finally, real estate expenses saw an 8% decrease year over year as we took early and significant steps to reduce this expense bucket.

Speaker 3

We believe we have now rightsized our real estate footprint. As we have mentioned before, thoughtful expense management is positioning the company for future growth, while allowing us to continue to invest in technology and strategic initiatives. Turning now to margin. Adjusted operating margin improved by 130 basis points to 38.3%. This was due to lower personnel expenses given the lower bonus accruals and higher capitalization benefit, partially offset by higher technology expenses and higher bad debt expense.

Speaker 3

As always, you'll find an expense block from revenue to adjusted operating income in the appendix of today's earnings presentation. As a percentage of revenue, our cost of services was flat year over year on a GAAP basis and about 90 points lower on an adjusted basis. And SG and A as a percentage of revenue was 40 basis points lower year over year on a GAAP basis. The decrease was due to revenues outpacing the increase in SG and A expenses and lower compensation costs, partially offset by an increase in bad debt expense. SG and A was about 40 basis points lower on an adjusted basis.

Speaker 3

Turning now to tax. Our tax rate for the quarter was 16.4% compared to last year's rate of 16.1%. This increase was due to higher taxable income offset by higher stock option exercises and higher foreign credits, which reduced the tax rate. Turning now to EPS. GAAP EPS increased 8% to $3.65 this quarter versus $3.38 in the prior year period.

Speaker 3

This was driven by higher revenues and margin expansion, partly offset by a higher tax rate. On an adjusted basis, EPS increased 11.1 percent to $4.22 also driven by revenue growth and margin expansion, partially offset by a higher tax rate. Adjusted EBITDA increased $218,000,000 up 9.2% year over year due to higher net income, driven primarily by an increase in operating income, excluding the impact of depreciation and amortization and the impact of non recurring non cash expenses. Free cash flow, which we define as cash generated from operations less capital spending, was $122,000,000 for the quarter, a decrease of 17% over the same period last year. This was due to the timing of remitted payroll taxes related to employee stock compensation and higher income taxes payable, which are seasonally higher in the Q2.

Speaker 3

Turning to share repurchases for the quarter, we repurchased 113,050 shares for $52,300,000 at an average share price of $462.23 Our fiscal 2024 share repurchase plan targets $250,000,000 of repurchases. We have $188,000,000 remaining for repurchases in the second half of fiscal twenty twenty four. We remain disciplined in our buyback program and committed to returning long term value to our shareholders. Combining our dividends and share repurchases, we returned $434,100,000 to our shareholders over the last 12 months. And regarding leverage, during the Q2, we paid down $62,500,000 of our outstanding term loan, which brings our gross leverage down to 1.8 times.

Speaker 3

This is consistent with our plan to repay that term loan in full by the Q2 of fiscal 2025. Finally, as Phil mentioned, we've carefully managed our cost base while continuing to invest in Gen AI and other strategic initiatives. We believe that we are well positioned for growth as the markets pick up. We are now ready for your questions. Operator?

Operator

Thank Our first question comes from Faiza Alba with Deutsche Bank. Your line is open.

Speaker 4

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

Speaker 5

Yes. Well from, hey, Faiza. Yes, from my conversations with clients, it feels way more constructive in the last 3 months than it did towards the last 3 months of last year. So just being out there with the clients talking to salespeople, it definitely feels like activity is picking up. We are seeing, I think, increased pressure on headcount at clients in particular, but I would say our more enterprise solutions and off platform solutions are showing some good strength there.

Speaker 5

So I'm cautiously optimistic here that as we move into the second half, we'll probably have a weaker Q3, but I'm cautiously optimistic that Q4 will be stronger than last year. And I'm going to turn it over to Helen now for a bit more detail.

Speaker 6

Sure. Thanks for your question. Yes, we're seeing sort of a health we are seeing a healthier pipeline in H2 versus H1. We're seeing higher deal volume. I would say that the pipeline is more along the lines of last year, if not a little bit stronger.

Speaker 6

The makeup is about half of it's coming from buy side, 20% in the deal makers were banking, 20% well from the rest of partnerships. So we're seeing the pipeline accelerate since the beginning of the calendar year. Really the strength in data solutions in the middle office and in quant solutions. But as Phil was just saying, timing on decisions is a little bit difficult to gauge. And more of our pipeline, I would say, are in the later stages of the funnel, which gives us more confidence, but many of them are really more into the

Speaker 4

Q4. Great. Thank you.

Operator

One moment for our next question. Our next question comes from Manav Patnaik with Barclays. Your line is open.

Speaker 7

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

Speaker 7

I was hoping you could elaborate more on that.

Speaker 5

Sure, Manav. Thanks for the question. You're right, it is a much smaller piece of our business. And we really are stressing sort of the subscription part of FactSet. I think that's who we are as a company and how we continue.

Speaker 5

But what we have observed is as we become more of an enterprise solution for clients and we're delivering more mission critical services for them, particularly with analytics and off platform that you need sort of another level there to sort of help the clients. So we do think that there's a good opportunity for clients to outsource solutions to FactSet and leave it up to us to do what we do best. And a good example of that was last at the end of last year, we had that very large outsourced performance deal with one of our clients where we really invested heavily in this group to build that out. And I think we're seeing continued momentum and interest in this. So it's a piece of our business that we think is necessary.

Speaker 5

You're right, it is typically I think a lower margin business, but we think overall combined with the solutions that we're including with it, which is the main part of the sale, that it's a good opportunity for us.

Operator

Thank you. One moment for our next question. Our next question comes from Kelsey Bizzou with Autonomous. Your line is open.

Speaker 3

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

Speaker 6

Hi, it's Ellen. Thanks for that question. So this year, growth in the price increase on the Americas was $25,000,000 this quarter, which is in line with FY 2022, although lower than last year as we were able to take advantage of some of the inflation and CPI on last year's situation. But the overall price increase continues to provide that uplift. I would say the price realization against our rate card is about flat to last year.

Speaker 6

It does vary across firm types, plus or minus a few percentage points. As noted before, price realization in new business is lower than last year, I think reflecting that more competitive environment. But we've actually seen total new business ASV increase. So we've had higher new logos, although average, a bit smaller on the average price. So I do think that it's continuing to provide that sort of same growth rate that we've seen in the past.

Operator

Thank you. One moment for our next question. Our next question comes from Heather Balsky with Bank of America. Your line is open.

Speaker 8

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

Speaker 8

Thanks.

Speaker 3

Yes. Thank you, Heather. It's Linda. We had talked about how our expenses tend to ramp up as we move through the calendar year. So I think it's fair to say that the margins we've been fortunate enough to put up in Q1 and Q2 will decrease a bit as we move through the back half of the year.

Speaker 3

So we did adjusted operating margin of 37.6 in Q1 and 38.3 in Q2. So I think it'd be fair to expect arithmetically something closer to 35 for the back half of the year to get us to the midpoint of our guidance of 36.5%. And again, it is our intention to hit the midpoint of that guidance on adjusted operating margin despite a slightly softer top line. So you should expect a little bit of the technology costs to continue to move up as we go through the year. And of course, we've taken some actions to ensure that we have the appropriate headcount and appropriate location for our employees going forward.

Speaker 3

So we think we're in a good place and we have prepared to deal with our cost base so that it works for the lower end of the revenue range. So we've got all that in the mix and so a little bit lower in the back half of the year. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Alex Kramm with UBS. Your line is open.

Speaker 9

Yes. Hello, everyone. Phil, would love to come back to some of the commentary you made for the Q3 and Q4 outlook. It sounds like Q3 you said fairly soft relative to last year. So maybe you can just flush out if that's again lower pricing expectations or just lower net sales?

Speaker 9

And then on the Q4, you sound pretty optimistic. So maybe you can just back that up a little bit because I think you made a comment that hiring was actually an area that's still pretty soft from what you can see and I think the Q4 is very dependent on hiring. So it maybe flushes out, maybe you just have a great pipeline of non related 4Q expectations. So, a little bit more color would be great. Thanks guys.

Speaker 5

Sure. Yes, I'll start and I'm sure Helen will have some additional comments. Thanks, Alex. Yes, I mean Q3 is typically a smaller quarter for us anyway. What I can sort of point to is that we have a large number of 7 figure deals in the pipeline and probably a higher number than we had this time last year.

Speaker 5

So there's certainly an appetite out there for large enterprise solutions with all types of different firm types. So I mean, in your reports, you sort of point to the hiring on the buyer side and the sell side, and it certainly come down in both areas. The sell side was weak last Q4. I'm not sure that we're expecting anything different than that this year, but if rates do get cut and the banks feel optimistic, we could see a tailwind from that. But I'm not sure it's any more of a headwind frankly than we saw last year.

Speaker 5

On the buy side, I think we're going to continue to see increased pressure on headcount as we move forward, particularly with generative AI. But that's all baked into our thesis in terms of our enterprise solutions and what we're doing to product. And despite that, we've got 200,000 seats approximately today. There might be 9 or 10 times that many seats out there in the industry. So we're we've doubled the number of seats on FactSet in the last 5 years or so.

Speaker 5

And we still feel even with increased pressure on headcount, there's a good opportunity for us to tie the front office to the middle office to the back office. And particularly on the buy side, we have the portfolio holdings of our clients. That's one of our key differentiators. And the firms that are going to win are the ones I think that can help the large firms continue to consolidate with a very good TCO conversation, which we're leaning way more into than we

Speaker 2

have in the past. Helen?

Speaker 6

Yes. No, that's exactly right. Thanks for your question, Alex. Yes, as I mentioned, we do have a healthy H2 pipeline. Still focused on the 7 figure deals, I focus on 6 and 7 figure deals.

Speaker 6

So that's up year over year, I'd say almost sort of 5% in terms of total number. So I think that gives us some greater visibility and confidence. And because of these total these TCO conversations, a lot of the pipeline is focused on competitive displacements, which has been strong for us. So the ability for us to convert those will be important. The strength of the markets, both capital markets and flow of deals are important, as you know, especially as it relates to banking and wealth.

Speaker 6

For right now, we're just we're not assuming that banking is all of a sudden going to pop up with sort of flat to last year, although we'll know more as you know in the Q3 and Q4.

Operator

Thank you. One moment for our next question. Our next question comes from Andrew Nicholas with William Blair. Your line is open.

Speaker 10

Hi, good morning. I wanted to ask about budgets and maybe cyclical sensitivity from like a business line or maybe even product type perspective. It sounds like you've seen some stabilization. There's some pockets of recovery. But I'm just curious, are clients maybe more apt to push off platform or workstation purchases or decisions than they are on the data side or on the middle office side.

Speaker 10

Just curious if there is a difference in the way that people are prioritizing their budgets and their spend at that level or from that perspective.

Speaker 6

Yes, I'll take that. That's a great question. So let me try to touch on that. I would look at it maybe not necessarily on firm type, but maybe even size. So in our premier book, which is our most key large accounts make up about 41% of our total.

Speaker 6

For them, they're really looking for the ability to they'd have flat budgets and so they're really looking for the ability to make some room to invest in GenAI themselves. And so I think that's where making large decisions becomes a little bit tougher. We're seeing a lot of demand. Part of the growth in our H2 is on the data solution side. And I think that reflects some of what you would expect in the market.

Speaker 6

So I think what we're seeing is, yes, the larger deals are related to platform. We have a good pipeline of them. We need clients to feel comfortable enough to be able to act on it. And

Operator

question. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

Speaker 11

Thanks so much. Helen, you just mentioned a couple of questions ago, the pipeline just any changes in the competitive environment, maybe because of the challenges in the market? Has it been a little bit more competitive when you're sort of up against other players? Thanks.

Speaker 6

Yes. No, thank you, Tony. So yes, I would say a couple of things. The type of total cost of ownership conversations is definitely higher. We've had a lot of C suite conversations, which I would say is probably more than we've had in the past.

Speaker 6

And the need to find, I'll say new alternatives is on top of clients' mind. So I'd say yes to that. As it relates to the pricing, as mentioned on new business, we're seeing greater pressure there. Is pricing overall coming down? I would say it depends on the firm type.

Speaker 6

On large deals, I think you're seeing more of that leverage coming through. But so far, our price realization has been flat to last year.

Speaker 5

Add to this, Tony, that I think we're in a very strong position competitively. When I think about the buy side and the fact that we've got portfolios on the system and clients want to work more with us, it's really giving us a good opportunity with these TCO conversations. And I'm seeing for the first time in my career much more of a top down push for a cost savings and giving some of the users a little less choice than they had in the past, which I think in many cases is tipping things in our favor. We're also seeing that some of our competitors' platforms are becoming less flexible and less able to scale, which we're taking advantage of. So that's on the buy side.

Speaker 5

On the wealth, we're doing incredibly well there. We had that one off thing this quarter, which I wouldn't be concerned about if you're thinking about sort of the longer term trends for wealth. We still have a lot of large opportunities in front of us, some good ones in the pipeline. And we're beginning to expand the workflows that we're addressing for wealth, including things like prospecting and proposal generation. So I see a lot of opportunity on the wealth side.

Speaker 5

And then with our continued investment in content around deep sector, private markets and the technology investment we're making now around generative AI, I think there's a massive opportunity for us, not just across banking, but across some of the smaller firm types that we deal with like private equity, corporates and even hedge funds where we may not have played as much in the past. So I think we're set up very nicely here. And I think when the market turns, I think we'll really be able to capitalize on this.

Operator

Thank you. One moment for our next question. Our next question comes from Owen Lai with Oppenheimer. Your line is open.

Speaker 7

Good morning and thank you for taking my questions. So I'm trying to reconcile some of the commentaries here. Could you please talk about the reason of anticipating lower ASV organic ASV growth and GAAP revenue to land at the lower end of the guidance? And I mean, your comments about the pipeline was quite constructive, especially for the Q4. I mean, is it because of the UBS Credit Suisse deal that lead you to lower your expectation?

Speaker 7

Or is there any specific event that drive your decision? And then one more, it's about your outlook, your updated expectation about the capital markets recovery. Could you please talk about how you incorporate that into your guidance right now? Thanks a lot.

Speaker 6

Sure. Owen, I'll touch a bit on that. So I think there's a couple of things that we've taken into account. Yes, we do have a very strong pipeline, as mentioned. That being said, we also have the impact of the CSUBS merger.

Speaker 6

We talked a little bit about that on our last call. Timing of that, of course, is not in our we don't control that. So that's being reflected in our lower end of the guidance. We also had the large wealth cancel that Phil just mentioned there. That is a one off, but that also plays into our view as well.

Speaker 6

And we are a little more conservative in how we're looking at the environment. I'll let Linda talk about the capital markets piece, but we don't try to build in a bounce back into our numbers.

Speaker 3

Yes. So Owen, just to be absolutely clear in planning for this year's continuing revenue outlook, we have included what is going on with the Credit Suisse situation. We cannot tell what quarter that will occur. And there are ongoing business discussions. So stay tuned, we'll see how it plays out, but we've been conservative and we have included that in our guidance.

Speaker 3

So now, regarding Capital Markets, things changed again yesterday. Chairman Powell was quite dovish in his comments. As of today, the June rate cut probability is north of 70% for 25 basis points of cutting in June. The Fed is looking at 3 rate cuts over the course of the remaining calendar year. The probability of the June cut went up 15 percentage points from where we were Tuesday.

Speaker 3

So if you think about it, I think Chairman Powell as metaphorically driving the family station wagon and we keep asking, are we there yet, are we there yet for rate cuts? And he says, we're not quite there yet. So we're waiting. The trends are very positive. The Swiss National Bank cut interest rates by 25 bps this morning.

Speaker 3

The Bank of England held constant. And we saw some IPOs yesterday. The Astera IPO traded way up yesterday, which is a good sign. And Reddit priced at the high end of its range, which was $31 to $34 priced at $34 So seeing IPOs is a really good sign. And we are seeing better information on the timing of rate cuts.

Speaker 3

We now wait with a bit of a lag as to when that impacts our business. So again, there is a bit of a lag. So that's why Phil had talked about the Q3, where we're not hugely optimistic about that, but the Q4 is certainly starting to look much better. So hope that's helpful to you. And we keep asking the same question, are we there yet on the rate cuts?

Speaker 3

But we're going to have to wait. Thanks.

Operator

One moment for our next question. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Speaker 12

Thank you so much. Wanted to focus on your client count growth. User count growth was really strong, but we're seeing client crowd growth slowing. Is there anything specifically going on there? Is it just tough comps?

Speaker 12

Any color would be great.

Speaker 6

Sure. Hi, this is Helen. So yes, I think a lot of our client count growth is driven by new business. So I think you're seeing a bit of that take place right now as you're seeing that come down. But I don't think there's anything in particular that we're looking at.

Speaker 6

Typically that's driven by corporates and wealth. This quarter, we actually saw some good growth in partners, which is a little bit more on the FinTech side. So I don't we're not looking at the client count as something that to be focused on necessarily.

Operator

Thank you. One moment for our next question. Our next question comes from Craig Huber with Huber Research Partners. Your line is open.

Speaker 9

Thank you. Linda, I want

Speaker 13

to go back to the question on the ramp for cost that we could in the back half of the year. It seems to me just looking at your guidance here, your revenue guidance, your operating profit guidance for the year that it's got to go up quite significantly your costs in the back half of the year by roughly $60,000,000 over the 6 months versus the first half of the year and stuff. And if I got that math right, why is that? I mean, obviously, in recent years, your Q4 has ticked up the cost versus what you reported in the Q2. But prior to the last 2 years, that was not necessarily the case.

Speaker 13

So I just want to hear a little bit more color on that, please. And do I have that right? You are expecting costs up significantly in the second half versus the first half, which does seem a little strange to me one more thing if I could add, because you had a pretty large restructuring charge in the Q2, one of the larger ones you had in recent years that should help the cost of anything obviously. So any thoughts I appreciate. Thank you.

Speaker 3

Craig, you're right. We will see a ramp in the back half of the year. Total expenses for the quarter, dollars 337,000,000 and we do expect that those will ramp. This is mostly driven by the technology cost. And Craig, what we're seeing is we have to build in more cloud costs as Gen AI takes off and as we get increased demand on that front.

Speaker 3

So most of this comes from the technology budget. Personnel costs will remain quite flat. As we had said, we have right sized those and we reduced our bonus accrual by about $7,000,000 So the bonus accruals went for the Q1, it was $30,000,000 with some adjustments going on $20,000,000 in the second quarter, you should probably pencil in the low 20s for the 3rd Q4 given what we're seeing now. And keep in mind that our employees are paid sort of half on top line growth and half on margin. So the margin piece is about where we want it.

Speaker 3

The top line piece, we're anticipating a little bit of slowness. So we've adjusted that down for the bonus calculation. On real estate, we've done quite well bringing those costs down and third party data costs are about flat. So mostly it's about increases in the tech budget driven by increased amortization as that moves through. And also the cloud expense as we look to fuel the Gen AI efforts of the company and our clients.

Speaker 3

So hope that helps you there, Craig.

Operator

Thank you. One moment for our next question. Our next question comes from Russell Fausch with Redburn Atlantic. Your line is open.

Speaker 14

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

Speaker 2

Yes. Hey, Russell, it's Phil. And I'll start and I'm

Speaker 5

sure Linda has some additional comments. So yes, we've been talking about 3 areas there where we've been focused. So as you can imagine, there's a lot of developers at FactSet. So they're currently being armed with tools that look very good in terms of being able to increase the efficiency of producing code. The question is like how do we apply that?

Speaker 5

Do we apply it to more product or do we apply it in other ways? So I think we're getting a good handle on what those efficiency gains could be and which parts of our tech stack and product it makes sense to apply them. We're also looking at content collection, but and you mentioned we have quite a large number of our employees in lower cost locations. So we've done a lot to automate workflows for content collection over the years. This adds, I think, some more juice to that even.

Speaker 5

So there's some good opportunity there, although the people costs there are much lower. So the efficiency gains may not be as high as they are with engineering, for example. And then there's a big opportunity for us in terms of just supporting clients. So FactSet's a very good tool. Some people use it in different ways.

Speaker 5

Some people use it in a programmatic way. So there's a lot of coding that's involved if you really want to customize your workflow. So I think it can really help both clients and people that support those clients internally. So those are 3 of the bigger buckets. We do see opportunity and we're going to be looking very hard at how we can apply that in our rolling 3 year plan.

Speaker 5

So we're just beginning our efforts there to think about our budget for next year and the following years, and this will certainly be part of that equation.

Speaker 3

Yes. Russell, it's Linda. You should look for those efficiency gains in our FY 2025 guidance. We've only given these new tools to our engineers relatively recently. They're reporting good things, but it's a little early to put a number on it.

Speaker 3

We think the biggest advantage from this will be cost avoidance as we bend the cost curve and perhaps as the engineers get more efficient, we can sort of ramp down some of our hiring. So we think that that's a bright spot, but we're going to look to 1st direct GenAI efforts outwardly to make sure that we're able to generate ASV with those efforts, and you'll see more of that at our Focus Conference. And then in FY 2025, the Focus will turn more constructively to internal cost savings. We've been managing the cost of the company pretty darn effectively, I would say. And we're looking to ensure that we are able to continue to do that, but Gen AI is only a portion of that.

Speaker 3

So thanks for the question.

Operator

Thank you. One moment for our next question. Our next question comes from Keith Housum with Northcoast Research. Your line is open.

Speaker 7

Thanks. Hey, Linda, question for

Speaker 2

you on capitalized cost. It seems like the amortization cost going up, the capitalized cost has been going up year over year as well. I guess can you give us a little bit of color about what you expect it to be in 2024 versus 2023? And then how long are you amortizing this cost for?

Speaker 3

Yes, great question. We are we've added some automation to our time tracking, which has helped us be more accurate. And I think for the year, we're looking somewhere between $80,000,000 $85,000,000 which is better than we did last year. I don't have that number right at hand, but it has grown. So you're going to see some more coming through in terms of that capitalization.

Speaker 3

It probably has not peaked out quite yet, but we feel pretty good about what we're doing there and that it's very helpful to everyone involved that we spread these costs generally over 3 years would be the normal situation there. So pretty much right down the middle of the road in terms of how you would think about the time period over which we spread those costs. So I think that should help you a little bit. As we move forward, we'll probably look at that capitalization percent of revenues kind of moving up to 3% to 4% of revenues. I think we had previously said sort of 2.5% to 3 But again, with automated tools, we are doing a better job of tracking the cost of building software and then moving that through in a capitalized manner.

Operator

Thank you. One moment for our next question. Our next question comes from George Tong with Goldman Sachs. Your line is open.

Speaker 15

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

Speaker 6

Hey, George. It's Talen. Yes, let me get to that. So I would say, it depends, right? So I think, when you're talking about some of the smaller deals, maybe in PVC, and in some cases in banking, it might be a little bit more competitive.

Speaker 6

I think some of the competitors sometimes leverage like we do, one of some of their stronger enterprise deals if they're able to do so. I think we're seeing benefit actually in places like an asset owners where our packages from a value perspective are really resonating. So I do think it depends. We're not seeing again any huge differences as much as everyone's just fighting hard for trying to get that new logo.

Operator

Thank you. One moment for our next question. Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open.

Speaker 7

Hi, thank you very much. Linda, I just want to focus a little bit more on this expense control. You've gotten nicely ahead of things. So even though revenue is coming in softer, you're still going to hit the EPS range, likely the high end of that. But just wondering if this environment continues for longer than you expected.

Speaker 7

And let's say, we're still sitting here in this few quarters and saying are we there yet. You've done a lot of real estate. There's you squeeze down on the bonus pool. Like what operationally, what are the next steps that you take to kind of continue to move the margin up and invest in the generative AI and frankly the product development that you're going to need to drive the top line? Like what do you focus on after this?

Speaker 3

Yes. Shlomo, it's a great question and one that we discussed with our Board of Directors earlier this week. I think we've done a pretty good job on all the cost buckets. You're right, we wanted to plan to take these charges at midyear, so we adjust our expense rate in some areas down as we go through the rest of the year. So, over the past few years, unfortunately, we've had to take 3 sort of different rounds of personnel actions and we want very much for those to be done.

Speaker 3

We consider those to be done with the possible exception of a huge geopolitical event that we haven't planned. So we want to think that we have the cost cuts well in hand. And I think what we're looking for as we move into FY 2025, is we have to look at closer to flat personnel growth. So we're going to try to ensure that we've got that model right. I think we've got our offshore balance about correct, which is about 68% right now.

Speaker 3

But we did want to get the expenses right for the rest of the year in keeping with the lower end of the range on the top line, so everything comes out well. From here, I think we're in a pretty good place. I think we've done what we need to do. And we're hoping that are we there yet that we do get there soon enough that we can see some help from the top line. But we've got the cost well in hand and I think we've thought it through and executed pretty well.

Speaker 3

So thank you for that Shlomo. That's great.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Phil Snow for any closing remarks.

Speaker 5

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

Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Key Takeaways

  • FactSet delivered 5.4% organic ASV-plus-services growth in Q2 and an adjusted EPS of $4.22 with a 38.3% adjusted operating margin, but expects to finish the year at the lower end of its 5–7% ASV growth guidance.
  • Challenging market conditions—client caution, consolidation pressure from UBS’s acquisition of Credit Suisse and fewer large deals—drove slower top-line growth and a modest decline in user count to 206,478.
  • Strategic cost cuts, including headcount reductions, an 8% year-over-year real estate expense cut and tight expense management, drove a 130-basis-point improvement in adjusted margins despite increased technology investments.
  • Investments in new offerings, notably generative AI solutions (FactSet Mercury, Transcript Assistant, banker efficiency tools) and expanded managed services, are poised to drive future client efficiency gains and revenue growth.
  • Regional ASV growth decelerated to 5.9% in the Americas, 5.0% in EMEA and 5.6% in Asia-Pacific, though ASV retention remained above 95% and the company added 75 net new client logos in the quarter.
A.I. generated. May contain errors.
Earnings Conference Call
FactSet Research Systems Q2 2024
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