FactSet Research Systems Inc. (FDS) Earnings Call Transcript & Summary

Starting next up, we're thrilled to have FactSet. Helen Shan, the CFO, who's actually quickly closing in on 2 years to be appointed CFO, July 2018, Helen brings a wealth of experience to the role, having spent time at some of the Marsh & McLennan Companies and prior stint at JPMorgan. And Rima Hyder as well. We want to do just a -- give a brief background overview on FactSet, and then we'll open it up to some Q&A. Over to you, Helen.

All right. Well, thank you, and thanks for everyone who's joining us today. FactSet is a global financial data and technology company, which helps move financial information throughout the investment world. Our job is meant to help investment professionals be able to have an advantage and have -- make smart and informed decisions. And the way we think about the investment professionals, our clients, they are asset managers, they're investment banks, they're wealth advisers as well as corporate. And what we do for them is we help for their individual type of workflows be more efficient and productive. And how we do that is through an open and flexible platform in which we really enable them to analyze the data to get insights, sometimes we push insights, to manage the risk and portfolio analytics where, when and how they want it. We really very much view that as the future. And so when we -- while we are organized and managed from a geographic perspective, we often look at our business through this lens, which you can see up here on the -- behind me, which talks about our businesses from a research, analytics, wealth and what we call CTS, which is our feeds business. So that is broadly what FactSet is all about.

Super. One thing, Helen, there's obviously been a lot of shifts in the competitive dynamic in the space in terms of the LSE, in the process of acquiring Thomson Reuters, got Bloomberg out there and then, ultimately, Cap IQ seeing incremental investment. Maybe talk about FactSet within the context of the positioning and some of the incremental decisions you made to drive some investment over the next 3 years. And so really, I think, within the context of the 4 end markets that you folks sell into, talk about how those investments can impact, I would say, particularly research, in particular, because I think that's going to be one of the big swing factors in the organic growth going forward.

Yes. No, happy to do that. The end markets and the landscape is changing quite a bit. It's very dynamic. Probably every industry can say that. But some things have been trends that have continued. If we think about the movement of active to passive, about wealth moving to more of the individual's hand and decision, data proliferation as well as consolidation and cost pressure, those are no different. We've been operating in that world for a long time. And so while clients have changed and competitors have adjusted, if I look over the last 40 years where FactSet has been very successful, what has built -- what has allowed us to be successful, I would kind of put them into 3 areas: one is content and technology; one is our open and flexible platform; and then also what is distinguished client service. Those are the tenants. And so when we think about competing and going forward and helping clients, we're really building upon those 3 things. So when we talked about our 3-year plan, investment plan, you can see behind me it was around content and technologies, which, of course, is executed by our people. And so when we think about how that's going to help us, on the content side, it's around providing more unique content. Sometimes it's our own, sometimes it's with how we focus on bringing other third-party content on. So for us, deep sector -- what we're calling deep sector is more around deep dives in certain individual industries, so banking and insurance and so on. Also on private markets, a huge opportunity there that is massively larger than what we've necessarily dealt with on the public side. We have some of that today, that's where our focus is going to be going forward. That is going to help from a retention perspective. You asked a little bit about research. That is certainly key there. If we think about even on the wealth content that we're providing, the expansion of that business is also relying on the kind of content that we have. On technologies, it is around API, new products. It's around personalization, which we'll get to both new logos as well as on a retention basis. So our view is our investments are building upon our successes that have made us who we are today. And I think that's how we're really competing against others and really helping the clients, which is what is most important.

Interesting. Because I think one of the historical concerns that you folks have been able to prove wrong over time is just the business being 85% buy side, 15% sell side, people worried about headcount in the industry overall.

Yes.

And you've clearly been able to outpace that through innovation. And maybe just talk about the dynamic of kind of headcount versus workforce solutions and how you've been able to continue to innovate and grow the business despite some of the structural headwinds from a headcount perspective, both the buy side and sell side.

Yes. Part of that is following the trend part of the type of product and solutions that we provide. So if you want to take us back away and say, okay, it was a very much of a workstation user-based model, in the end, we need clients who buy things. So of course, it's always going to be about that in some form. So that's roughly, for us, let's call it, 50% of that is driven more from a people-based. But if you think about the other products like, for example, our CTS, which is feeds, that's not based off of people. Wealth, to a large extent, isn't necessarily based off of it because of an enterprise model, what you're doing is large deployments of that. And I would say some of the real growth areas, even within analytics, is based more on usage or poll as opposed to a feed-based model. We're not moving away completely from that, but I think that mix has changed and will continue to evolve as we go forward. And that's why we talk a lot more about workflow versus just -- we think that's a better way to look at our business.

And can we think about that with kind of some of the improvements in retention and how we think -- you should think about retention over the course of time?

Yes, it's a great question. Our -- we report over 95% of ASV retention. That's pretty high, right? But I wouldn't be doing my job if I didn't say we should do more, right? I want 100%. Whether that's realistic, it's for us to determine. But I think the more that we enhance the product, the more that we -- clearly, the cost of sales from retaining clients is much better than trying to get a new one. So in my view, we're going to continue to work on that. We've put a little bit of a difference with our new head of sales, a higher focus on retention targets, for example, that we're giving out at a much more disseminated level, and we believe that's going to, again, help. In every 50 basis points of retention, there's 50 basis points of growth.

Sure. Well, one of the things that I think have been kind of, when where we're doing our initial diligence on FactSet, was probably underappreciated kind of the stickiness of the market share. And kind of, I think, even from an institutional perspective, I don't think the market appreciates enough kind of your differentiated content and approach relative to Refinitiv or Bloomberg or Cap IQ. Maybe just remind us where the innovation sits and, again, not only from a differentiated product but also content. Because one thing that we've seen time and time again is people worrying about vendor consolidation. Really haven't seen it, and I think part of that just underscores the differentiated products that you folks bring to research and other areas as opposed to some of your competitors.

Yes. We like to call -- we do talk a lot about being open and flexible, and that really is important. We do have proprietary data. But we also realize you can't be all things to all people. And so our ability, especially, I'll say, on the analytics side, if you want to have the end-to-end solution, we can provide that. But if you want best of breed, you have internal, you have some third-party pieces along the way, we will implement and connect. And that is a differentiating factor. As it relates to the research side, the content side, for example, again, we bring a lot of third party's data to us as well and put it in a concordance, which I think is a true differentiator. You can buy data, but can they all speak to each other? Can you measure it the same way? Can you get the same consistent results, depending on the analysis that you do? We are really good at that. And I think that is, again, another differentiating factor.

Great. And again, I think related to the market share, it really underscores itself. Maybe talk about wealth a little bit. You've obviously had a couple of real nice wins with BofA last year and just some of the investments in wealth. Because as I look at kind of the growth opportunity, it feels like it's in data feeds, it's in wealth, and then you start to see some incremental step-up in the core research product. Just any thoughts on wealth and then, ultimately, data as well.

Now wealth is a great business for us. And I think what's interesting there is that we -- the reason we've been able to really get into that market, so to speak, is because we developed a web-based product and that allowed us to do a much wider deployment in a much more quick fashion. But that's not -- wasn't the reason we did it, but it ended up being something we could truly leverage. So it's a greenfield from that perspective. I mentioned earlier about the trends in the industry, the fact that I believe in follow the money. So the money is moving more towards the individual. And that's clearly a place of focus and where we can go. We can also leverage the fact that financial adviser may have been using more basic tools. And yet what we know is we can -- we know we provide can -- now they don't need all of that specification, at least not off the bat, but the ability for them -- they really are managing a portfolio, just a portfolio of clients, and being able to either get alerts or focuses or be able to do scenario with risks in mind. That is something that will make them that much more productive and, quite frankly, help their clients. So we think that there's a lot of opportunity there in wealth as well. And as you mentioned, BAML was a good stepping-stone for us in that arena.

Sure. And maybe we'll talk a minute -- we talked a little bit about the investment spend, but just the progression of that over the next 2 years. And then just remind us where we should start to see the benefit from the organic growth as we think about kind of 2021 and the projections on that.

Yes. So when we -- we have a longer-term view. And our view is we want to invest for growth. And growth comes in 2 forms. It comes in the form of the top line, but I would say it also comes from productivity gains. And so when we think about the areas of growth that we're looking at, so back -- let's talk a bit about content for a moment. So there, we're looking at private markets, which would be -- which we've made a lot of progress, first, by hiring someone who can execute on that strategy, who comes from that world, who knows what it's about in terms of the -- what a client needs from the retail side, from an asset management side. So that's step one, right, to be able to do that. We're doing that hiring on these lines. On deep sector, we've already launched banking last year. We've got insurance that came through just recently. Our next is going to be real estate. So we've got this [ big ] part covered. So we're going to do some more of the different sectors, but that's where the building comes in on that front. But all that does take some time, right? We're not going to see -- and we've made the decision that we're going to invest first. And that's not an easy decision to make. We certainly felt that at first, but we still believe that's the right thing to do. On the technology front, it's about accelerating some of our current existing products. Retention is a big part of what we're thinking about. So things such as personalization, things like APIs and being able to pull in data in a way that our clients want to ingest and consume it, that's all part of our technology spend. And then also along the lines of moving to the cloud, right, which will give us greater stability and security but also allow some of the innovation that we couldn't do in the current state. So I'll give you an example. When you talk about private markets and the fact that the amount of data that's needed for that, I've heard different things, could be 100x what we see at the public side, you cannot do that for people. We're not going to be able to do that by having a bunch of people scrape data or try to analyze that. You need the technology, whether it's through a data lake or through machine learning, to be able to truly get that into an ingestible form for our client. That can be done because you've got the cloud, right? And so again, a key part -- the technology and the content are not separate investments, they're very much integrated together. But these things will take time. So you asked the question around the organic growth of it. We're not looking at year 1. If we think about the revenue, the ASV as it comes in, I would say we expect very little in this year and about 25% the following year and 75% really coming out of year 3. That's essentially the breakout we've talked about. But in the meantime, we'll be spending pretty consistently over the 3-year period, that will be the $15 million each year. And we'll be getting some productivity savings around it. I started off by saying some of the investment is both top line, but it's also around how can we do it in a more productive manner. And we'll see that come through like the migration to the cloud. And again, that's very much a 3-year plan.

Okay. You mentioned it once. The 3 things we've been hearing a lot about are private market data, kind of ESG and then, ultimately, China as well and, as said in the private earlier on, they made the point that there are 8,000 public companies, now there's 4,000.

Yes.

The private market could be dwarf what the public market is. How are you positioning for that opportunity in private and, ultimately, the growth in China and then even from an ESG perspective? And what can that mean? I mean I know it's kind of abstract, but it's an area, I think, there's a huge growth opportunity and is a multiyear opportunity as you're thinking about the business?

Yes, I think those are all excellent points. So private markets, that's partly why we're investing, right? When we look at the number of clients, to your point, number of companies way outstrip the number of public companies that are listed today. So our investment over the next 3 years is not only for us to build up our capabilities. And if you think about private market, let's talk about the fact that, that's made up of many different pieces. There's private company, there's private debt, there's VC, there's PE, there's real estate, so on and so forth. So we're going to be tackling those from a strategic standpoint and, I'll call it, different phases. And the other piece is where -- geographically, where do we focus our efforts? Those are part of the things that's part of our strategy that we're working through. So we believe that will be important of providing our clients and differentiating ourselves. As it relates to ESG, it's clearly a growth area as well. We provide a lot as it relates from the perspective of on our open market -- [ active ] marketplace where we have data sets that are very much on the ESG front, whether they provide scores or things like that. And we're building some more of our capabilities in terms of the type of analytics that we do, that we'll be able to help support ESG. But that is, again, part of what we're focusing on right now. China is small for us, right, at this juncture. And everyone thinks China's a terrific opportunity, and we think so, too. But I think in that one, we're probably rigging ourselves in. We opened up our Shanghai office a year or so ago. And Hong Kong has been a great base for us. And so we'll build from there.