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

All right. Good morning, everybody. Thank you for joining us at our Americas Select Conference. Unfortunately, it is virtual again. We hope to do this in person in London next year, famous last words because we said that last year as well. So fingers crossed. But we're very pleased with -- to have with us today Phil Snow, FactSet's CEO; and Helen Shan, FactSet's CFO, and really looking forward to just getting the latest on the company. So thank you, Phil and Helen, for being here.

Thanks for having us, Manav.

Thank you.

So Phil, maybe if I can just start it off with you. I mean, throughout this earnings season, not only with our companies but in reading some of our colleague's notes, it sounds like a lot of CEOs and CFOs and C teams sound a lot more optimistic about the next, call it, at least 2 quarters and beyond into next year. Can you just give us some perspective from yourself and from FactSet's point of view and if you share that sentiment and why?

Sure. I'd be happy to. I mean, I think one thing that I would point to, Manav, is that we've successfully navigated the last year and learned a lot and think that there'll be new ways for us to operate moving forward, and we're very comfortable operating in this environment. But as we go back to the office in some way, shape or form, we think there's good opportunity there to optimize how we work and operate as a company. I would also point to our 3-year plan that we set out on 18 months ago, and we've been able to continue to execute on that. And we're beginning to see the fruits of some of that come to bear in this market. And then the client base, it's relatively healthy. Markets are up. And over the last year, clients, I think, surprised themselves in terms of how they were able to operate. And the increased urgency from the client base in terms of their own digital transformation and how they manage data and so on plays to our strengths as well. So we've had tons of good conversations over the last year about how we can help clients as they navigate that.

Got it. And just to touch on the client base a little bit, boy, it's actually quite interesting. I think hedge funds are the first year of inflows in a long time. It sounds like there's a need for active managers now given the volatility in the market. And the investment banks are doing well because there's a lot of [indiscernible] out there. So you would have thought once you got hit with COVID, you wouldn't almost have all your end markets do better. Is that what you're seeing as well? And is it perhaps one of the best setups you've had for some time?

Banking is certainly strong. It's great to see the activity there and all the work we've done to invest in our deep sector content and our analytics driving workstation sales. Hedge funds, as you mentioned, are having a good year. And the -- we sell a lot of data to hedge funds, so that increased first for our CTS product suite. And then on the buy side, the buy side has obviously faced a lot of headwinds. But the strategy that we have to open up the platform and invest in some key content for them is resonating, and we're sitting down and we're optimistic about what we can achieve within our core client base, which, as you know, is pretty heavily levered to active managers.

Got it.

And I think, Manav, just to add a little bit to that, a year ago, there were questions around whether there was going to be headcount reductions in banks, and also asset managers just got off a phone, in fact, with one of the banks, and then they have the opposite issue right now between IPOs and stack. So the world has changed a lot. And what I think puts us in a good place, regardless of that, is the fact that we are so deeply embedded in the workflow, and we make and help the analysts, let's say, in investment banking that much more productive. And right now, as you I'm sure are aware that, that is a key point for them, how do they get the most out of the folks that they have, and I think that plays to our advantage as well.

Yes, absolutely. That makes sense. Helen, if I can stick with you, Phil talked about kind of navigating through the crisis, adapting and now kind of this new future of work debate out there. Obviously, there's a cultural aspect. There's a keep employees aspect. But as a CFO, from a cost standpoint, how do you think that the pluses and minuses or the opportunities are in this future work, however you guys define it?

Yes. It's a question that we're talking -- trying to address a lot right now. I think from a cost perspective, we've got to be smart about how we approach it. So we -- there's a lot in terms of a longer-term and a shorter-term impact. The longer-term as it relates to footprint takes a while to determine. But I do know on a shorter-term perspective, folks do want to go back, and we believe in that team interaction and that camaraderie that has been lost for a while. So as we've talked a little bit in the past, there will be a difference in how we go to market, the amount of interaction, not only with ourselves but with clients. But I think that -- and some of that might become more of a change in the way we do the business in terms of more permanent piece of maybe G&A from that perspective. But I would see us maybe reinvesting that in part into the tools and technology that we have.

Got it. All right. We'll come back to costs and margins later. Phil, maybe just staying macro, U.K., since this is technically a London conference, Brexit finally happened. Obviously, they got hit hard with COVID as well. Maybe just some flavor of if that broad positive sentiment, we just talked about it, what are the dynamics specifically in your U.K. business?

Yes. The U.K. has had very strong performance for us over the last couple of years. So I've got a lot of confidence in that team. And in Europe, in general, I think we had a tough loss in Continental Europe in the second quarter, but I think the European team is executing well, and we see good opportunity over there for sure.

Got it. And is the competitive dynamics in Europe and U.K. different than the U.S.? Or would you say that one-off loss you just referred to was just a unique situation?

That was a unique situation. That was in our digital business. So it was a relationship that had come through one of the acquisitions we did over the last 3 years. So I would say globally that the competitive dynamic doesn't change that much. There are regional nuances, but that didn't have much to do with what you would consider our typical major competitors.

Okay. That's helpful. And then maybe just in terms of countries, maybe just one since it's in the papers every day, India, you have a lot of employees there. Can you just talk about if the situation there presents a short-term, medium-term risk at all by any means?

I think we're fine. It is our largest office. We do have, I think, maybe over 4,000 employees that are employed in India. And obviously, many of them are personally affected, either themselves or through their families. So through this entire pandemic, we put the health and well-being of our employees first, and we're doing everything we can to support our employees and their families in India from a health care standpoint, making sure that they have as much opportunity as anyone else to get vaccinated and that we're giving them the flexibility they need to take care of their loved ones. We are in an earnings season, but because we have very robust business continuity plans globally, we're able to take whatever overflow we need and manage that out of our Manila office and other offices, if needed. So it is affecting productivity a little bit, but we're able to compensate for that with other regions as we navigate this period, which is obviously crisis and terrible for our employees over there. But we're -- hopefully, there'll be some light at the end of the tunnel soon and we can get on the downside of this curve and things can get back to more of a normal state.

Got it. That makes sense. That's good to hear as well. Helen, just some perspective on -- we've seen, obviously, a lot of companies, not just yourself, shift resources to India, to Manila, to other countries like that. And that's presented itself with a margin opportunity, I guess. And so I was just curious, how much more can that be done? Or do you have plans in terms of that kind of resource reallocation?

Yes, there's 2 pieces, I think, as you think about that journey. One is the reallocation, to your point, where you're saying we're hiring less in high cost and moving into what we call centers of excellence, which are generally in the lower-cost regions. I think we've done that -- we've done a lot of that. I mean that still continues. Now it's about when we do with our investments, for example, our new hires and how does that mix go. And what we've been seeing in the larger centers, we're maintaining that mix. So for that dollar -- the next headcount, we're looking much more so around the centers of excellence. In our investments, there are some areas where you have very specific capabilities, that would be more often found like in digital or in sector specialists and the higher cost. But we're able to maintain that mix. And I think, again, it's less about the reallocation and more about the allocation go forward.

Okay. That's helpful. Phil, we recently held an investor call with Demetry, FactSet's CTO, and we thought it was fascinating, and clearly, investors found it valuable as well. But maybe just for the purpose of this audience, could you just give us a high-level view of where you see FactSet in its technology evolution, maybe a few stats on how much is on the cloud and so forth today?

Sure. I'd be thrilled to do that. So we are on a journey to get 80% of our stack up into the public cloud. We're on track and halfway through that now. So I would say we're probably 40% plus in terms of that. We've done a lot of work to open up the platform through APIs. So you could be -- it could be that you just want to consume content through an API or it might be that you want to consume one of our engines that drives analytics, for example. So we're going through that in a very methodical way and exposing that to clients. We've also made it possible for people to take components of our workstation and embed those in other applications like Salesforce, for example. So the really exciting thing here is as clients become more sophisticated about their workflows, as they want to be more efficient, and that means going to probably less products and windows, we're able to slot in where we need to if someone doesn't want to come to our workstation, for example. So every week now, I'm seeing exciting examples of how we're taking components of FactSet and stitching them together in new ways for clients or integrating them with other third-party systems. And we really believe that this is the way the world is going. And we feel that we're actually very well equipped to do this given how well integrated we are as an organization and the amount of agility that we've been able to uncork as part of this digital transformation in our own company.

Yes. I mean that was pretty clear in talking to Demetry. Do you think -- obviously, everyone is doing this, it almost feels like everyone needs to be digitized per se. Do you think it's a strong competitive differentiator, a revenue opportunity outside of just all the cost and agility benefits?

Yes. I believe it's a competitive advantage for us. I think we're at a good size to be able to do this. And FactSet has always been a very well-integrated platform. We've grown organically, but mostly have done a bunch of tuck-in acquisitions, but by and large, our tech stack is very well integrated, and this is resonating with our clients. So I believe we've got the scale to do this where even our largest clients, if they want to -- if they do want to engage with us.

Got it. And Helen, just for some perspective, a 2-part question. One, how much -- just some rough estimates of how much gets spent on technology in the base at any given time. And then if you could just help us with the latest investment that you've announced just in terms of how much has been spent and what the cadence of what's remaining is left because it seems like there's always a little bit confusion on the timing there.

Right. And just for clarification, Manav, when you talk about new investment, meaning what we reinvested from the end of last year?

Correct, yes.

Okay. So when we think about the -- go to your first part, which is when you think about the technology spend in the cloud, as we talked about, we're pretty far along with that. The fixed costs are going to be there for -- it's hard to shut off a data center, for example. So that's going to take a little time as we go through that migration. The nice part about the fact that we're -- we probably have done even more than we expected in terms of the migration. So that means that you've got that double cost in a way, and that's part of the issue as it relates to that. I think we're well on our way, and we'll be able to realize more of the revenue and the expense as they are more variable post the full migration. As it relates to the investments that we announced at the end of last year, we've made -- I would say we're pretty far along there. That has more to do with hiring as it relates to sales in some of our specialist groups and then also a little bit more into product. But both in terms of the progress and the milestones, I would say we're spot on at this juncture.

Okay. Got it. And Phil, over the years, FactSet has always, I think, prioritized growth, which I agree and it's important. But you've also kind of managed the margins in that low 30s levels, if you call it. Just a little bit more on your philosophy on that kind of balance or trade-off the way you look at it.

Yes. So I think 18 months ago, we committed to investing more in our business historically than we have from a margin standpoint. So we're optimistic that, that's going to drive top line growth and that will allow us to continue to invest in the business. I do think, over time, even though it's not probably short or medium term, there is an opportunity for us on the margin side. But right now, we are committed to making sure we're investing as much as we can in both technology and content to get back to a higher top line growth rate.

Got it. And is that margin opportunity longer term kind of contingent on breaking out of this mid-single-digit growth range and going into the high single digits? Or can you do that even with mid-single-digit growth?

That's a very good question. It certainly would help. Have to have the top line grow faster. As we really complete our own digital transformation, I do believe there is an opportunity for us to be more efficient than we are today in lots of different areas of our business. So completing that internal digital transformation in terms of how we operate as well as the migration to the cloud, when we get to the other side of that, I think there's a good opportunity.

Got it. Well, that's a good segue then, Helen, to talk to you about your new position. So Chief Revenue Officer, I guess, pressure is on you to increase that growth Phil just talked about because Demetry has got the cost handled on the tech side. Can you just talk about the new role and what perhaps your focus will be?

Yes. No, I think that's right. I'm no longer able to hide behind in giving everybody else a hard time. But the reality is I've been -- I've got a couple of advantages. One is I've been part of discussion around the investments and the strategy. And so I know where we want to go. And now we're in execution mode. So I think that helps a lot. The second is we've got a very strong sales team that had been operating well in this very trying environment. So from that perspective now, it isn't anything that needs or requires material changes or anything. Quite frankly, it's a little bit of just pushing through what we want to hone in on. When I think about where our goals will be or what our focus is, it's a bit of a continuation. So it's going to be on the enterprise solutions, whether it's with C-suite discussions, we're really selling and growing on the expansion. We've talked about in the past, if you think about, about 2/3 of our growth rate has really come from existing clients, so how do we then expand more on that front. I think we've gained a lot of capabilities during the pandemic, so everyone is sort of inside sales at this juncture. So how do we continue and leverage that, I think we've done very, very well, and I would see that as a trend that continues, Manav. And then lastly, just even further defining on go-to-market. The buy side, sell side and even within each of those categories, we're taking the investments that we've made and have those products very much dedicated to those user types and helping educate them more on that in a way that operating virtually allows that in a more intense way than in the past even. So I think all of those are the things that I'm going to help focusing on with the team to drive that growth. And as you said, I'd be accountable for that going forward.

That's good. Well, good luck in that role. We'll be asking you a lot more questions there then. But -- and just before, obviously, you transfer your CFO duties, maybe just some perspective on -- since you came in, I mean, clearly, you've done a lot for FactSet already, just -- maybe just a recap for the audience what you've done, or maybe asked another way, like where have you left the finance organization? Like what is the -- what is your success going to be really in charge of doing for the next few years?

Yes. No, thanks for that question. I think when I think about what we've done, both for the financing and this organization, really, its impact on the company is the -- we've got our own sort of digital transformation within finance. So we moved from homegrown to much more of an enterprise solution. The processes are improved. Our focus is much more on being a business partnership. So while we moved to Workday, for example, that was a key one, what it allowed us to do is to focus on analysis and less about the manual processes. So we've gone through a lot of our clients have wanted to go through. So that's helped a lot. I also think from what we've done for the company is that greater focus on empowerment and budgets. We saw that in FY '19 with the improvement of our margins by 190 basis points. And then we saw that continue in part in '20, although some of that was lifted by the situation that we're in. But as we exit now into -- as we are in '21, I think what we find ourselves is much better from a transparency into our own businesses. The rigor and discipline around how we look at investments and the fact that what we've got left now is getting even more so into defining from an M&A perspective or from organic, how do we better track all of the returns that we're getting. And I think the person who will come in after me will hopefully take that into that next level.

Got it. All right. That's super helpful. Phil, I briefly touched on competition earlier, but I just wanted to ask the question again. So you've seen LSE by Refinitiv, Deutsche Börse has bought Axioma and ISS. You've seen a big merger in that space. There's a lot going on within and tied to kind of this market data, data angle. Does that -- how does that change your thinking? Does that tempt you into thinking of a large deal yourself? Do you feel like you're missing out? Or -- just some thoughts there would be helpful.

Well, we certainly -- one of the other things that Helen has brought is a lot more discipline around the corporate development and evaluating what our options are there. So we are continuing to look at a large number of opportunities for us when it comes to either unique content, maybe some technology. And of course, we've always said that we're -- we have the balance sheet to support a larger transaction if it makes sense. What I don't want to lose focus on, though, for our company is how do we really become that sort of modern platform for our industry and making sure that all of the benefits that we're getting from transforming ourselves and not last -- in building scale for scale's sake. So I do believe we've got a real competitive advantage when it comes to how we integrate data and how we take our own content, the client content and third-party contents, and stitch that together for people. And then our portfolio analytics, we believe, is differentiated. We built a lot of like really unique workflows for our clients around the portfolios. And then I think in terms of how we service the market and how we go to market, building up, opening up the platform and really defining what that next generation of FactSet service looks like for our clients, those are the 3 things I would point to that are differentiating that we believe strongly we can build on and continue to have success even if we don't do a larger transaction.

That's interesting. And you brought up the concept of scale, and I was just curious, again, LSE, Refinitiv, Bloomberg is a big animal. So you don't feel like that scale defined by just a bigger company is a disadvantage at the moment?

We don't. I mean, in some cases, it does give them the ability to negotiate if they've got more hooks into a client. But typically, you want to win on value and for the long term. So most of the conversations we're now having with the larger firms is -- and everyone has to go through sort of this existential analysis for themselves about like where the industry and they are going. So I do believe clients need to figure out who they want to hitch themselves to for the next 5 or 10 years. And if they believe in our vision and where we're going, rather than making some short-sighted decisions, I do think that, that's -- that plays to our advantage and doesn't necessarily put us at a disadvantage versus clients that just have scale and a lot of different things. It may not be as well integrated.

Got it. Okay. That makes sense. So Helen, back to you, I mean, I guess, you talked about focusing more on these enterprise-level contracts kind of to Phil's point on who do you hitch yourself with longer term. Can you just give us some perspective on how much of your contracts are in the enterprise level? Or just broadly, what are the terms of those contracts and -- just to appreciate what you're starting with?

Yes, sure. When we talk about enterprise -- and everyone has a little bit of a definition around that. But for us, most of our large clients are in some form of an enterprise contract. So it will be based off of bands as it relates to the number of users, for example. So it's not really a one-to-one type of setup. They are multiyear in how they are structured. And they're usually under more of a larger sort of MSA where lots of the new products that we bring on can get added on much more quickly. So it's an easier discussion with our clients. So that largely goes across our 2 largest businesses, analytics and research. I think as we talk about going forward, this goes back to the point around the expansion. What we're trying to do with our largest client is to take more of the share of wallet. And we've been able to do that either in analytics as it relates to reporting risk and performance, that's helped quite a lot there. The fastest-growing business we have is on the CTS side with feeds, and that adds on. So when we think about where we're continuing to get very strong growth in addition to the retention has been with the larger clients, and by nature, that is more of an enterprise contract setup.

Got it. If you can just take the remainder of the time just to talk about the broad different buckets that you have, Phil. Maybe just on the research side, to start off with, that's, I guess, what people interpret as the traditional desktop side of the business. It's been flattish. I think it was up a little bit in FY '20. Is that -- if you just keep that flat to slightly growing, is that a good outcome? Or what can that business look like?

I'm very optimistic about that piece of our business. And as I mentioned earlier, the investment we've made in deep sector has made a big difference on the banking side. And that team has done a phenomenal job of reengineering a lot of the reports that we have that sort of go into that core research offering. So part of our thesis on getting back to high single digits, if you remember, is to grow the research business in low single digits and not having it be flat essentially. So I'm optimistic, and I think the trends that have played out, as you mentioned, over the last year and a little bit of a resurgence on the active management side are playing into our strengths there. So there's still a lot of desks out there even if the desks -- the perception is they might be going away. I don't think they're going go away completely anytime soon. We still have a lot of territory that we can capture with that co-workstation. And once you have that, it's very easy to cross-sell a lot of our other products.

Got it. That makes sense. Yes, you're right about the seats. I mean it feels like every year, we talk about the industry shrinking, and it feels like it just keeps staying flat or growing even more so. Maybe one day, hopefully not, but we'll see. Just in that research business, when you win business from a competitor, is that -- I know you want to sell on value based, but what are the top 2 or 3 things you win off? Is price typically a big discussion point for the client?

Price is going to be important, for sure, and there's more overlap with that piece of our business in our industry across competitors. So I think that clients do have a little bit more leverage there. But I think it's functionality, honestly. So it's -- you have to have the right content for the clients. And we've got a lot of unique contents, but many of our competitors also have the same kind of major types of content sets. But a big reason why clients love FactSet is the analytics that you can do, how easy it is to navigate the platform, our integration with Microsoft Office suites and now a broader set of other tools and our service model. I think clients really like working with FactSet consultants, and they have that trust with us to sort of help them with their work. I think it's a mixture of things, but I would speak to that experience using FactSet and how easy it is to sort of navigate and look for new things.

Okay. Got it. I just want to touch on 2 more things before we run out of time. So first, just on the wealth business, right? I think of research as your institutional investors and then wealth is their own category. Clearly, you've had some marquee announcements there. You seem to be growing 9%, I think it was last year. Can you just talk about -- I know you haven't sized the TAM before, but maybe just a perspective on whether it's how -- which inning you are in the picture you feel? And what's driving that opportunity recently?

It's very early innings, and we believe that's a market that has a lot of positive trends associated with it that we could capture. We do, today, serve a pretty narrow part of the workflow for wealth. So the wealth advisers are really using our research news and [ folks ] product, which is suburb for their workflow. And we're now beginning to introduce some really creative tools that are driven by cognitive computing, like the advice to dashboard, which links to the portfolios that they might be managing and so on. So that particular market, we estimate is probably around $2 billion, and we have a small piece of that and are very optimistic that we can take market share there. But there are more workflows in the wealth space that we're beginning to look at to say, okay, like if we want to capture more of the adviser wealth workflow like we do for institutional asset management, what would that mean? So that is an area of focus for us in terms of our strategy.

Got it. One last one for you, Phil, and then I'll end with Helen. We recently had Hendrik Bartel, the CEO of Truvalue Labs at our ESG day, and we've known him for some time, and we like the Truvalue Labs product. But Phil, maybe if you can just help us understand and appreciate how that's going to fit into the FactSet, whether it's the workstation or the strategy, because maybe I'm being too optimistic here, but it feels a little bit like when you acquired StreetAccount and now none of us can live without it, so just curious if I'm getting too bullish on that aspect or not.

Yes. So we've already done a lot of integration, Manav, and we -- a good example would be if you wanted to overlay the Truvalue Labs data over your portfolios to see how your portfolio is stacked up from an ESG standpoint, you can already do that. So just -- ESG is going to be so pervasive around different parts of our clients' workflows that getting it integrated into each piece of that was -- that was sort of the first order of business. Like StreetAccount, we will expand the coverage. So when we acquired StreetAccount, it was really a U.S.-only product. Truvalue Labs isn't just U.S.-only by any means, but there's an opportunity to expand more geographically, get into private markets and so on. And then there are other areas of ESG that Truvalue Labs has not played in before, and we are going to essentially build out some other offerings to create a more complete ESG offering for our clients. So we'll have our own strategy there. But the other piece of it is we, I believe, already have the most choice of ESG in our platform. So we will continue to integrate other ESG providers, and if somebody wanted to look at 3 or 4 different firms -- or 3 or 4 different ESG providers and do some analytics on top of that, we'll be able to do that in FactSet.

All right. That sounds interesting. All right. We're almost out of time here. So Helen, maybe I can just end with you. And it's the standard kind of capital allocation question that every investor wants to know. And so I was just hoping you could remind us of your priorities and any nuances to them in terms of how you've evolved that framework over the years since you've joined here.

Yes, sure. No, happy to do that. So the framework that we go for, and we're so lucky to have such a solid business model, recurring revenues and solid cash flows, so that's been such a good part of the -- our ability to have done well during this last 12 months. And how we look at our capital -- we start first with looking at our strategy and where can we invest organically. And that's what we had decided to do back at the end of '19 and have continued, and we believe progressed very well through that. So that's our first piece of it, and that's been in capabilities as well as people. Then we move on to say if there are ones that will be better done from a returns perspective, which is something that we take a look at very closely from an acquisition, and Truvalue is a great example of that, then we will use our capital for that. We have a pretty focused view as it relates to returns on a risk-weighted basis as well as on a payback period and what will help an acceleration of our top line growth. And then the shareholder, which we've had a terrific track record of returning over 80% of our free cash flow back to them. And we think that, that's the right way to go. And we'll balance between all 3 as we go forward with the right use of capital.

Got it. That's super helpful. Well, look, we're out of time. So I really appreciate both Phil and Helen. Thank you for being here and for your insights.

Great. Thanks for all the great questions again, Manav, and see you in London next year.

Yes, hopefully. All right. Take care, everybody.

Take care. Bye-bye.

Bye.