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

Yes. No, but it's obviously ongoing search. I think both. Is it primarily external or both?

It's a mix of both. We have some very talented organizations in the -- folks in the financial organization as well, and it's really got that sort of balance. But we're -- I'd like to say we're near our final stages. So we hope to be able to announce something.

That would be fantastic. Also for you to focus on your new role. I don't want to get rid of you, no.

That's all right.

But now -- so now -- but now, I can put you to the test in your role for a minute then on the CFO role. So let's talk about operating leverage in the business. Your margins have been hovering around 32%, 33% in the last few years, I think you have suggested that you should be able to expand margins next year again. So maybe just think about or remind us where you are in terms of margin expansion on a multiyear period, how you balance that with investments. And I know you may move to a different role soon, but I assume the philosophy will largely stay the same. So maybe give us a quick update. In particular also, as you think about next year, as I said, I think you said that given some of the things that we've seen this year, next year should be expansion again.

Right. So just to be clear, I'm not giving any guidance on FY '22. And we talked earlier around our targets. That is definitely our target. I'll talk more broadly to your point, Alex on what we see is driving towards that. I think from our perspective, it starts in two ways. One is it will start with the fact that we're going to have faster revenue growth, right? That is a margin enhancement right off the bat there. And I think that's where the investments that we're making will help that. Some of this will be more volume-based and there were certain products that we are bringing to market, I would say, really will have greater -- to use your term, leverage or far more to the bottom line. So I think some of the digital products that we have, a, have higher margin. I do think we're seeing that in the -- again, the volume that we're seeing there. I think that the investments that we're making now, we were on a good path on our operational efficiencies back into '19. We're continuing to see the migration going from high to low cost. We're continuing to see the efficiencies that we've got in productivity as we have folks that are focusing much more on the higher-margin products. And then cloud, the growth that we saw in terms of expense last quarter, which we talked a lot about, we think that, that will manifest itself once we're able to move much more into cloud-based and off of our current on-site platform that will help us on margin in particular. And then the last bit, this is more internal, is that we're using our own cognitive capabilities and helping us be much more efficient from a content collection side as well as some of the analytics that we're bringing. So it's never going to be one piece, Alex, it's going to be both top line. It's going to be the type of products that we're bringing to market and it will also be about our own efficiencies that I think will help drive the margin expansion.

To get a little bit more specific for a second, and you already talked about it, but on the cloud migration, I think some people have been very focused on that. I believe you're about 80% done with that, and the plan is to be done by the end of fiscal '22, so basically a year from now. So can you give us a little bit more specific numbers? How much of the cost this will free up? And then also -- and I guess part of it, not only free up, but again, I assume some of that will be reinvested. So maybe you can touch on that. But then really turning this cloud migration also to the top line side, what are the revenue benefits coming out of this? Are you going to be in a better commercial position, again, thinking about your new role here for a minute?

Yes. No, absolutely. So with a clarification I would make to -- a little bit to your question is, our goal is to have our content and our applications 80% migrated at the end. There's always going to be some piece that will be -- I'll use the term landlocked for the moment. So about 50% of our way there. And so our goal is still to be at the 80% migration level by the end of '22. So when I think about the benefit and whether we reinvest, it's a little bit of the mix, right? We're moving much more from a CapEx to more of an OpEx environment. So we'll see that. The nice part about that is it will be more variable in nature. Now that being said, there's good and bad with that. Being more variable, it does mean that as clients use it more, there's a cost. We've seen that pick up and our data exploration product, just as a reminder of what that is. So when clients are interested in looking at not only our data but as well as third-party data, they can go to the site, they can see all the different feeds that are available as well as the APIs and then they can go into a cloud environment and try that out. Now the benefit that comes to us is in the form of a greater activity, but also a shorter sales cycle. So in the past, if a client wanted to try out Feeds, there was a much more lengthy process. You had to actually get set up, get clearances, send feeds, have the clients themselves work in their own environment. That might take weeks or months depending on the bureaucracy around that. Today, if they want to try something, we can get them set up in a matter of hours. They can go play with the data, they can upload their own. They can see whether some of their models work. So that clearly shortens the exploration time. So that helps us. That being said, as they are doing more activity, there's a cost related to that. And so that's why we've seen some of our cloud costs go up. But that conversion, which is what we're carefully watching, of going from the exploration into sales, is where we think we're going to see some of that benefit. So putting back, well, I don't like the cost per se, I do see the benefits coming in and returns coming in from a fee -- from a revenue perspective, and that's where our focus will continue to be. So this was never meant to be a one and done or a clear path. There's going to be improvement, speed, clients being able to try our products more quickly. The APIs allow them to do it, whether -- however they want it, in terms of receiving the information, and that's where we're going to find the total benefit, I think, both from a cost as well as a top line perspective.

Yes. Thank you. And thanks for reminding me on the progress there, mixing up my numbers a little bit. But yes, 50% and 80% at the end of next year. Shifting gears then for a minute, competitive environment. Can you give us a little bit of an update? Where are you seeing the most success, the most challenges? Anybody emerging? Everybody is so focused always on the big 4 kind of workspace terminal, whatever you call these days, providers. But they clearly, as the business has evolved, you're competing with a lot of other people. So anything to point out where things are changing where you're having more success or challenges?

No, I wouldn't say anything has changed in any material way. I mean there always will be large competitors as well as smaller ones. Many of them are -- we all partner, as you well know, with them as well. So I would not say that we've seen any particular changes. We've done well. Relatively speaking, we still have, what I would say, a smaller market share. So there's lots of opportunity there. We don't necessarily just need to make a market grow. We just have to win. And I think on all fronts, we're continuing to see good progress there. The investments that we've made in deep sector are helping us. The digital investments that we've made, in particular, let's say in wealth, are helping us. The new products such as Adviser Dashboard and the game plan that we're showing in terms of our own product development, have really resonated with both banking, wealth as well as I would say, on the asset owner side. So on all 3 fronts, I'm a little bit of the mindset that you can't get blind -- you can't get overly focused on just your competitors, you've got to focus on the client, and that's what where most of our time is spent on.

That's great. And it sets us up well for later maybe some of the products if we have time. But thanks for mentioning the deep sector and wealth, in particular, big focus areas for us. Just to stay on competition, just a little bit more in detail. I think people are -- can't ignore that the competitive dynamics have changed a little bit or are changing a little bit with some of these larger deals happening, I mean, S&P-IHS Markit, obviously, in my world and then also LSE-Refinitiv, the European side, at least from the LSE perspective. So again, can you give us a little bit of an update on how these deals impact you? I mean, generally speaking, clearly, the companies are going to be a little bit distracted and maybe that's an opportunity. But I would also argue that these companies will be large organizations in the future, they will be able to deliver and bundle solutions differently and maybe more broadly than you can. So as a more maybe focused provider, like how do you compete with that? How is it not going to get tougher as everybody is looking at vendor consolidation and doing war with the bigger guys. And yes, like -- are you more worried now than you were maybe 2 years ago?

Yes. No. If -- the one thing we know is that change continuously happens, maybe the one benefit of being -- having a smaller market share is that you've always been trying to fight against big guys. So if the bigger get bigger, it doesn't really necessarily change for us. I think what we have to then focus back on and what we do focus back on is what's best for the client and also what are our competitive strengths. For us, our competitive strength remain our open platform. So we provide either best-of-breed or the bundled solution. So it depends very much on what the client wants. We focus on our concorded content. So we've got the -- we believe, the best out there in terms of not only our own content but also the ability when we bring a third party on for all of that to speak to each other. We've had this discussion before, where having lots of data available is nice, but it has to actually work well together. And we believe we have the best out there. Our investments in technology, therefore, give us the ability from a speed perspective, from a latency perspective, from a reliability perspective, I think that's also key. In the end, the client isn't sitting there saying, "Well, who's bigger and who's not." They care about who can provide them the best reliable service. And that's where I think we do the best in. No doubt, as others continue to improve, we are as well. We don't -- we've been -- we've continued in the different spaces against whether it's against S&P on the banking side, Refinitiv on the wealth side, Bloomberg on the asset owners and IM on the asset manager side, it hasn't changed. And so I go back to the points that we care about what the client cares about, and that is reliability, the strength of our product and our open platform.

Thanks again for that. I guess speaking of M&A -- well, not your M&A but others. But let's get to your business. I mean, how do you view the landscape right now? I mean, it seems like you haven't been as active as you maybe were a few years ago, and there are a few more sizable deals. I know you've done a couple of things this year. But are you just more prudent than others, and that's why you may be missing out on deals? Valuations are expanding. We all know that. But what areas are you interested in if you are looking to complement the business?

Yes, sure. So you're absolutely right. The market has been very active. I would say we've looked at any -- every deal that's been transacted that we think is relevant to us. So we don't feel at all that we're inactive from an internal perspective. But we're also very disciplined. That might be a little bit more of my CFO hat on, Alex, for a moment, but I care about returns. What I don't want to do is a transaction that we don't have strong confidence in, that we think really is additive, that is better to buy than to build. And these valuations in a lot of ways, we haven't provided the kind of returns that we think is needed. We've embarked in a way and a lot of investment back into the company. We talked one of your first questions is around that point each year, right? So if you think about that, that is a lot of dollars. And in a way, we've done our own acquisition. We've done it just on an internal basis, and we think the returns are quite high from that perspective. I'm sure you do the ROI on us already, and you can see that. The smaller acquisitions we've made have been exactly in the areas that we've wanted. We talked about proprietary content, differentiated content. We see that in TVL with ESG, we're seeing that in our BTU Analytics, which is very much around our deep sector focus. We've done another small one in -- with Cabot, which really helps us on the analytics and our front office of helping the portfolio manager be that much more smart in terms of their own performance. So for us, we've been very focused on what we think we need and we take a very disciplined view, and we'll continue to do so. And if we find something that we think inherently gives us the returns on a much larger size, then we'll do that. But we'll remain disciplined for now.

Yes, and maybe others are not. So...

I'm sure they have their own returns as well.

We'll see how this all ends. But yes. Turning the M&A question around 4 minutes, it does seem like when I look at some of the deals that are happening in the space, that the information services companies, at least the ones that we are covering, they're deemphasizing the proprietary terminal or workspace and -- as the primary distribution mechanism, but they're really focused on selling proprietary data through a variety of pipes, APIs, et cetera, but distribution is important. So I guess, what -- why would a large organization see value in what you bring to the table and potentially want to own something like you?

Right. Well, I can't speak for other companies. I can speak for the fact of why I think investors overall, anyone, would want to own us from an investment perspective. And from my perspective, Alex, goes back to what are our core value drivers. Our core value drivers are the structure of our business. We are a high subscription business. We've shown our stickiness from the percentage of retention of both clients and ASV. We have strong margins from a perspective of -- and cash flow that comes from it. So to me, that is why anyone would want to invest in us. I think the fact that we've continued to grow both end users and number of clients reflect the strength. And as a result of that strong number of users that we've got, that allows us to be able to sell more into that, more value and as well as product into that client base. So from my perspective, I don't really worry about what other companies might think. But if any investor, the reason they want to own us, is for those reasons as well as the investments we've made for the future.

Fair enough. And yes, thanks for reminding us what's exciting about the business from any angle. I promised you to shift back to some of the products a little bit and I think we only have 5 minutes left here. But you mentioned deep sector. It's been an area that I feel like others have differentiated themselves with. So what's -- and now that you're getting into the space too, the obvious question is, what is the demand that you're seeing? Can you drive better economics through additional deep sector sales? Or is this just you need to do it to remain relevant and help with that retention that you talked about earlier?

Yes. So our deep sector strategy, which we embarked on late '19 and early into '20, really has done well. We're on track. We have 3 sectors that are more fully out and we have, I would say, portions of the other ones out as well. And we've got quite frankly, some very strong lighthouse accounts that have given us tons of feedback. So we're able to really iterate on that. The fact that we can show what our game plan is in expanding in all of the different sectors, has helped us on retention. And I won't go into a lot of detail, Alex, for competitive reasons, but we can see that. We can see the type of clients that we've continued to, not only hang on to, but to grow, that would be both on the large clients as well as midsized clients. So the BTU Analytics that we acquired, which really has a focus around some of the energy, is another piece of that puzzle, and that's going to resonate extremely well as we go forward. So those are helping us very much on the retention side, but not just on retention. As we're building this all out, I can tell you, again, the conversations that we're having, I would say, with perhaps clients that we have good relationships that haven't necessarily done as much on the banking side, and we're seeing that improvement as well. And so we remain to have a lot of confidence in the deep sector strategy.

Okay. And then not -- this is not as much product but more customer type, you mentioned wealth before, but it's one of the areas that you break out in your kind of like annual growth updates, but it's clearly important to you. Any update you can give us on progress uptake? You had the RBC win this year that was after the BofA a couple of years ago, I think, makes you an even more legitimate vendor in the space. Anything to point out there as you look forward in the opportunity set? And also, the competitive response that you've seen from incumbents?

Yes. No, that's -- it's definitely a growth area for us, and we remain very, very high on it. You're right. We do report out on wealth. That is our business in particular. But the one thing and maybe I will touch on a little bit, Alex, is we look at wealth firms and if we sell into wealth firm, that would include some of our other products. So that would include things in CTS, that would include things like Feeds, that would include Analytics, for example. So when we look at the wealth firm type, we're continuing to see strong growth, not only from the other products. We're seeing wealth firms want more in terms of API as well as in analytics. So in some of the newer products like the Adviser Dashboard, which allows an adviser to open up his or her day and be able to see what the portfolio looks like, where the risks are for their clients, what are the signaling pieces that would be most helpful to her. And I think that has been very well received and a direct benefit from some of the digital investments that we've made. So we continue to be very buoyant on the fact that the market share growth, we hope in wealth as well as overall as the wealth market overall increases or dollars continue to go into that wealth market under AUM will benefit us, and we expect that to continue going forward.

I'm cognizant of time, but one thing I should have asked when we talked about M&A was on capital allocation in general. So maybe in small thing -- maybe, again, for the benefit of the investors or potential investors on the webcast here, just give us a quick update how you're thinking about capital allocation outside of M&A, which we talked about. And maybe I'll ask already from a closing perspective, I had a couple more things, but anything that you feel like you want to leave the audience with as well that may have not come across as much? Or did you feel like you really need to stress of what sets FactSet apart from an investor, but also a corporate perspective?

Sure. Yes, absolutely, Alex. Thank you for that opportunity. I'm going to wrap that all together. So when I think about capital allocation, I'll go back to, which will be part of the closing comments anyway, the investment thesis for us. We have a business model that is incredibly solid. I mentioned that already, high retention and high overall subscription value -- subscription growth, but also very strong cash flows. When I think about the one thing I didn't have to think about during this whole pandemic at all was around liquidity. And I think that remains a strong benefit to us. But we also use that cash to return back to shareholders. So if you look at what we've done in terms of our consistent growth in our dividends, in terms of our return to shareholders as a percent of free cash flow, all are in the 80% range, incredibly high. And so we're very judicious about how we use our capital. That's why in a way, that we're very careful around how we're investing back from acquisitions that we talked about. But if we don't, we return it back to the shareholders. And so the business model is what I would look at when I think about the thesis, when we think about our growth, our strategy, it's all around the client. It's very much around what we call our content refinery, about providing that differentiated concorded content. When we take a look at the workflows, we have strength and opportunity both on the buy side and the sell side workflow. I think that we continue to have a long runway there. And then lastly, I would say from an operational perspective, we have high margin. We've had high ROI and all the investments that we're making, and we'll continue to make by the way, because we are a technology company. We'll need to invest back in the company. But we continue to be very much in the mindset of hitting our longer-term growth targets, and we believe we will be able to do so. So I appreciate you letting me join you today, Alex, and happy to do so hopefully, sometime in the future.

Thanks again for this, and thanks for the wrap-up comments here. Good luck in the new role. Yes, hopefully, we'll see you again at some point. And I know your fiscal year ends in August, but hope you still get to enjoy a little bit of the summer, nonetheless. So thanks again for joining us.

Absolutely. Thanks, Alex. Take care.