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

Good morning, everyone, and welcome to the 25th Annual CS Technology Conference. I'm delighted to introduce FactSet CEO, Phil Snow; and recently appointed CFO, Linda Huber. By way of background, my name is Kevin McVeigh, and I couldn't think of a better way from a services perspective to start this conference. And we were joking the last conference we did, a live conference, was with FactSet before the pandemic. So to be able to end it that way and begin this way, I just couldn't think of a better outcome. You couldn't plan that. So Phil is going to give us just a brief overview of FactSet, and then I'm going to lead the Q&A. We're going to try to keep this as interactive as possible. So I have more than enough questions, but if there's questions from the audience, I'd encourage you to participate in as well. And with that, I'll turn it over to Phil.

Thanks, Kevin. It feels a little bit strange to be back in one of these chairs, but good to be in person. So for those of you that are not familiar with our company, just a quick overview of our footprint. So FactSet is a global company. We operate in 22 countries. We're in almost every financial center, and we've got a very large footprint in both India and the Philippines for the work that we do around content and technology, around 10,000 employees and over 160,000 users of our product, which is the flagship workstation, but we have a lot more users of our product that take data and feeds through different mechanisms. Well over 6,000 clients at this point, and we just had a tremendous year. So our purpose really is to drive the investment community to see more, think bigger and do their best work. FactSet is a platform company. We're in our fifth decade now and probably our fifth evolution of our platform. We've been investing tremendously over the last few years in the technology. So we've been moving up to the public cloud. We've been opening up the platform, more APIs for our clients to consume data and analytics and investing very heavily in new content sets. So I think of our platform in 3 layers. Probably the most valuable asset that FactSet has is the content that's on our system. So that bottom layer, we call our content refinery. FactSet collects about 25 core content sets ourselves. Maybe half of our employees are in the business of collecting that content. We have well over 800 third parties that provide data into our ecosystem. And then our clients trust us with their own data. So we have clients uploading portfolio holdings, for example. They've been doing that for decades, and we have one of the most complete sets of portfolio holdings in the industry. So one of our competitive advantages really is how we connect that data and how we make sense of it for our clients. And the velocity of data is moving more quickly. Our clients are needing to look through more data sets to find alpha and having that very well-connected data ecosystem is really one of the most valuable things. And if you're thinking about our business, that's certainly something I would pay some attention to. And on top of that, of course, we layer very good software. We have workflows across different types of clients on the buy-side, in the front office and middle office. We're beginning to do more with the back office of our clients. We're now very focused on making sure that our clients are getting data and analytics in the way that they want it. So not just a workstation product anymore, but we're thinking a lot about how people need to consume data and analytics to remain relevant. The financial services industry obviously is dealing with a lot of pressures. We see cost pressures in our client base, clients needing to look at more data to succeed. So really helping clients with that data management and workflow is something that we're very focused on. Linda, do you want to?

Sure. I'm very glad to be here. And having joined about 2 months ago, I started looking at some of these numbers that FactSet had put up, particularly for fiscal year 2021, which we've completed. So revenue growth was quite significant. Perhaps most importantly, we finished the year at more than 7% ASV growth, which, when we look later at the guidance, you will see as something we're going to commit to also for FY '22. Stock price has moved pretty nicely, and we're proud of that, but we still think it's an excellent buy within the group. Not sure that everyone realizes that FactSet has been around for more than 40 years. We've consistently increased our dividend, and the company's performance has been really quite remarkable over quite a long period of time. There are some financial aspects to the company that are probably not well enough appreciated. I'll talk a little bit about the subscription base of the company in a bit and some facts on pricing. But also just wanted you to know if you look at our investor presentation on our website, the growth of free cash flow from FactSet at 11.8% over the last few years is quite impressive, and our dividends have also increased 10%. So a lot of things to like in terms of how the company has performed. And Phil will speak a little bit more about the company, and I'll come back and talk a bit more about those financial attributes.

So just a little bit more here on our digital platform, I'm sure you have access to this. One thing I definitely want to highlight is the open nature of our platform. Today, you might have seen a press release. So Amazon -- we're the first company in this space to have our data available in the Amazon Marketplace available to the Redshift clients. So we put 30 core content sets up there as well as our analytics APIs. So we're really focused on making sure that we're teeing up the value that we create in the places that our clients want to consume it. Another very good example of that is Snowflake. So we've had our data and analytics in Snowflake now for some time. But again, I think, thinking about us more as a technology company is important. We're having way more conversations with CTOs and our clients than we used to. We used to sell just the market data or directly into the front and middle office. But now we're sitting down with technology teams. We're helping them blueprint out their technology landscape and we're overlaying all the capabilities of FactSet to help them rationalize what it is they're doing from a technology and data spend standpoint.

So I mentioned that we'd look a little bit more at the financial attributes of the company. So not sure it's really well enough understood that 98.6% of the revenues from FactSet are subscription-based. So if you're looking for a subscription-based model that has very high retention, we're a great investment. The other piece down here in the footnote where we talk about the nature of the ASV, which allows us to execute value-based pricing. Our contracts, in fact, the majority of them, allow for 3% price increases or at the rate of inflation. So given that Chairman Powell has said this morning that he may remove the word transitory from the potential for inflation, we sit in a very good place being able to manage that. So we're very pleased about that fact. And if we continue on, this is the guidance for fiscal '22. We've talked about the continued growth in the top line at 7% plus. We've talked about the margin, which is very important to us. The adjusted margin last year, we ended at 32.6%. We're looking at the midpoint this year of 33% adjusted margin. And you can see the tax rate, the diluted EPS and so on. In terms of capital allocation, we're thinking quite a bit about this. It might be noted that perhaps at this moment, FactSet's balance sheet, which has no long-term debt, might not be completely optimized. So we're thinking about this. And our next earnings call, which has been announced on December 21, we'll see what more we have to say about that at that time. We're managing our expenses quite carefully. If you look at the full investor deck, you'll see an example there of our SG&A expenses have gone from 25% to 21%. That's the result of very careful management. And our capital allocation priorities as we look at fiscal year 2022, we'll continue to invest in our businesses. They're very strong businesses that require reinvestment to ensure that we have the best products for our clients. We will continue to buy back our stock, which we've done very effectively. Our dividends, as I said, have grown at 9.7%. We are a growth company. So the dividend yield will probably not be at the top of the stack for every company that you follow, but we do have a healthy dividend. And we will continue to look at acquisitions. So increased focus on what we're doing with capital allocation. And once again, very pleased to be here, and I think that may be it. And we may -- oh, the final thing to think about here is the investment thesis for FactSet is very strong. So we have consistent long-term growth, 7% plus on the top line. The total shareholder return has been very strong over the past few years. The investments that we started making about 2 years ago are working quite well. If you look at the top line growth and Phil will, I'm sure, speak some more about that. And in terms of operational excellence, we are being very careful with our expense base, and we are focused on margin expansion but at the appropriate pacing. So with that, we'll see what Kevin has to ask us.

Great. Thank you all and thank you all for taking some time out. Phil, I wanted to start with Linda. Just you've had some amazing hires, obviously, overall in terms of you scaled the franchise. But if you think about a lot of the more recent momentum, you really put this in place 3 years ago with some of the incremental investments you made, I think, initially with a focus on the core research platform. So maybe talk to that a little bit. But then I also wanted to help frame where you are relative to your competitors because I think one of the more underappreciated parts of the story is, a, the moat you have within the business. But I think in particular, the way you've rearchitected the business, I feel like it's much more open than a lot of your competitors. And again, the way I've always thought about the story is the market share in and of itself is a lot more rigid than I think what the stock discounts. So maybe talk about the competitive dynamics a little bit. And what's interesting is, I think historically, people have always focused on whether it's Bloomberg, Cap IQ, Thomson Reuters now part of Refinitiv, and then FactSet. But I think with the way the portfolio is evolving, you start to take on more of some of these emerging vertical software platforms in terms of your DNA. So maybe talk about that evolution a little bit because I think that's part of the story that and I think that really captures a lot of why you're seeing a re-rating of the stocks. And again, you've been at this 3 years, right? And I think people think you turn the switch on. There's been a lot of hard work that you have done.

Yes. It has been. Yes. And a natural evolution of the last 4 decades, frankly. So what we decided to do just over 2 years ago was take the margin back a little bit and reinvest in content and technology. So on the content side, we made a big commitment to investing in what we call deep sector content. So going into 8 industries and going much deeper and broader in terms of the type of data that you might want to get for financials, for energy, for media, those types of things, real estate. So we've made very good progress on that front, Kevin. And I think a lot of the performance that you've seen from FactSet on the sell-side over the last year was driven by that as well as obviously very strong trends in the market. But we were able to capitalize on that because of that investment we made in deep sector. We also made a big commitment to investing in the wealth space. So we view that as primarily greenfield for FactSet. It's not the biggest part of our business, but we see it's one where there's a lot of very positive trends for us and the wind at our back. So investing in some content that would be relevant for wealth advisers. Private markets is obviously a big area of growth. It's one that I don't think we've capitalized on as much as some of our competitors. So I feel we're a little behind that, but made a big commitment to investing in private markets. We've done a lot to bring some partners onto the system, get those integrated. We've made an acquisition recently of Cobalt, which gives us good portfolio monitoring capabilities for GPs. So that's certainly an area of focus and one that we expect to drive some further growth in the future. And then last but not least, ESG. We made an acquisition of Truvalue Labs just about a year ago, and that's an area of strong focus for us as well. So that, along with the technology investment that I spoke about, were the 2 things that we sort of allocated a ton of capital to. And on the technology side, it was really moving to the public cloud, opening up the platform and just, first, we opened up content APIs and then the APIs to a lot of the engines that drive some of the more sophisticated analytics within the FactSet platform in the analytics space, for example. So that's -- we're seeing great returns on that in the second year of that investment.

And maybe talk a little bit about client behavior because it feels like clients are obviously working much more distributed workforce post-COVID. And one of the things that stood out to us as you folks were working through COVID was the amount of incremental client service that you folks extended to your clients and whether it was extending capabilities to competitors -- to clients that use competitors, talk about some of the returns on that because I think that's another subtle part to the story that it's almost like the market's come to you in a lot of ways more than you ever would have anticipated as a result of COVID, not to diminish your hard work.

Yes. Client service has always been, I think, something that we take very seriously. We've always had a very high-touch model. We've still been high touch even though it's been virtually. But we've got a lot of trust within our client base. So as we build out these new capabilities, we feel that clients want to do more with us essentially. The strategy that we've laid out is resonating with clients in terms of how they need to manage data and where they're moving themselves in terms of technology. So all of that served us well. And when the pandemic first hit, we were very quick to offer immediate access to our clients that may not have had it at home. And I think we got a lot of goodwill out of that, Kevin. And just to go back to your original question about how we're positioned in this space. I'd say we've got about 5% of the total market. We sort of think of our market as a $30 billion market in terms of revenues. I would say FactSet can address close to half of that today with our capabilities. But as we build out more, we believe that our strategy is going to allow us to keep capturing market share from the key competitors that we have.

Phil, more recently, you also announced the decision to merge the desktop and wealth business. Maybe talk to that a little bit. And again, I think it goes to the clients become almost more seamless, but just as the offerings become more uniform, but maybe talk about that strategic decision a little bit.

Yes. We've broken out wealth originally as its own business just because it was such a greenfield opportunity for us, and that was led by Goran Skoko. We also acquired a digital business that wasn't just pointed at wealth but did have a lot of wealth clients. So a lot of the growth that you've seen in our desktop business has been driven by some very large wins we've had on the wealth side and just -- not just in big shops, but we've had a large volume of deals on the wealth side. So that's been probably the first place that we've really leveraged our web-based workstation tremendously. You saw us grow our footprint at 16% last year for workstations. That wasn't just wealth. A lot of it was sell-side and other client types. But we felt it was a good opportunity to take the workstation piece of the wealth business, combine it with research, which has been doing really well, get some synergies there and break off that digital piece of the wealth business and combine it with CTS, which is our off-platform business. So we see great synergies for both of those businesses with that combination.

Great. Is there any questions from the audience?

What innovations in research are you planning going forward since you're talking about being in great businesses? I mean, it may not be as great for us, the users, for you as a business, but just go into that a little bit and how it might be changing.

Yes. So yes, sure. So we call it our research business. But in there, we have desks for buy-side research analysts, sell-side research analysts, investment bankers, wealth advisers, portfolio managers, corporate users. There's a whole host of different types of users that use FactSet on their desktop. One of the things that we're laser-focused on is pushing more information to our users like you rather than you having to configure FactSet to pull it out. So really acting as the co-pilot essentially for you and helping you sift through all the information that you might need to on a daily basis to make decisions and really helping you understand what your next best action might be. Wealth is actually the place that we've done the most work on that recently. So in the last year, we released something called the Advisor Dashboard. So a wealth adviser could have all of the individuals or families that they're managing in front of them, but we would come in and tell that wealth adviser, like here are the first 20 things we think you should do today based on the holdings of your clients as well as what's happening in the market. So using cognitive computing and other techniques to sift through news, all of the information that companies are reporting to help research analysts in that way. So that's new.

Can you go through the dynamic that where you were, one of the new features kind of within a package took price increase. And then for a time, maybe the last 5 or 6 years, you've been unbundling those features and then pricing them apart. Is that kind of a good summary of some of the...

I don't know if that's a great summary. So I think the FactSet workstation is usually over the last at least decade, I would say, it's been a bundled product where you get most of the analytics and content. And we continue to reinvest in that like you would expect in your phone, for example. So we understand we've got to put more in there to keep your business at that same price point. But we do have a lot of add-on products from our analytics suite that you would pay more for. So if you wanted a risk module from us, that would not come automatically. So yes?

So that's been very profitable. If we look at the runway we have to do that, will everything be from here all apart?

No. I mean, you still can buy the FactSet workstation, which we grew at 16% and get a very good experience that way. If you want to consume data and analytics from us through Snowflake or through Amazon or through our own APIs, that might be priced differently, right? That might be just priced on the content set that you're getting, the frequency, how you're using it, how many people you're getting at, how many people at your firm using it, really the value proposition. So that's something we have to start thinking about as our business model there. So for people that are not just workstation users but want to consume value in different ways, what's the appropriate way to price that value?

Yes. So when you think about some of the advances you've made with wealth management and you think about just that question in particular, there's maybe 10 million, 15 million, 20 million new entrants to the markets here in the U.S. that are really retail, right, that use some of your products, use your StreetAccount for decades. There's a lot of products that seems really well suited to a kind of mobile, social-first, retail new entrant to market. I guess thinking about retail because it seems to be kind of a hot space right now and a moving market that is interesting.

Yes. Yes. We're getting closer to it. So I think the reason we were able to do well in the wealth space was the investment we made in technology. So previously, it wasn't tenable for us to do that until we moved to more of a web-based platform. So it's a good point, I think, if we can figure out the right model for that. StreetAccount is a great example, right? So that's sort of our news service that we'll sell to you just by itself. I think that does open up more opportunity for us in the future.

What about crypto? Do you guys like pay for crypto coverage?

It hasn't been a big focus for us, but it's certainly something we're looking at.

Phil, one thing I think that's super underappreciated about the story is the caliber of the data. So maybe talk about -- and as you transition more into private data, ESG, that becomes even more unique as opposed to maybe aggregating, right, 10-Ks and 10-Qs, not to minimize the historical context of it. But as you do that, the data becomes more valuable. It's going to drive more. It becomes just a more powerful ecosystem. Maybe talk to that, particularly given the focus more recently on ESG and private market data and just the capabilities you have internally, coupled with the external data licensing and maybe the ingestion process a little bit because as I've always thought about the sector, too, the market share was always a lot more rigid to me. And one of the reasons was the uniqueness of the data, right, use certain skills and capabilities and functionality across the 4, but it's also the data that the clients are leveraging. So maybe talk to that a little bit. And that just gets more and more unique, I think, given some of the strategic focus you have.

Yes. So the data -- ESG, private markets, data is becoming more unstructured and harder for firms like FactSet to collect. So the winners are going to be the ones that can adapt to more unstructured data and connect it to all the other data sets that you as end users would want to look at to analyze it. So that's really our core competency. That's how we build our company actually. We started off by integrating third-party content, not our own content. So for us, that's our differentiated advantage is the entity data map that sits behind all of this content and how quickly we can ingest that content and get it back to the market in a way that's lined up for a user to begin analyzing the data. So that's -- ESG and private markets are 2 good examples of that. Deep sector is another one. We're seeing a lot of uptick of what we call our data management solutions. So that's part of our CTS suite, but that's probably one of the fastest-growing pieces of that business. It's not just the raw data that we're selling to clients, it's how we're connecting it and it's that map behind it. So we see a ton of opportunity for that, Kevin, on both the buy-side and the sell-side as clients try to rationalize all of the content they have in-house and needing to look at other content sets.

And as you think about the evolution of your clients, right? And look at T. Rowe acquiring Oak Hill, right, in terms of just as clients merge, as you start to see obviously Refinitiv being sold to the LSE. Maybe talk about your client evolution a little bit because obviously you're shadowing the needs of your clients, but have you seen a meaningful change in that over the last -- obviously, maybe talk about that experience over the last 5 to 10 years in terms of actually the client evolution in and of itself.

The different types of clients?

Sure.

Yes. So I mean, traditionally, FactSet was very focused on the buy-side, particularly institutional asset management and asset owners. On the buy-side, we've done much better with wealth recently, but we do sell to a lot of corporates as well. That's a very fast-growing piece of our business. It's not one that we break out separately, but it's part of the buy-side the way that we report it. So we see a lot of opportunity to go into different types of clients. Private equity and VC firms, that's a relatively new area for us as well and one that we're seeing big growth in. So I would say those are sort of 2 of the -- wealth, private markets and corporates are kind of those 3 sort of newer areas for us that are growing quickly.

And then Linda traveled all this way. Obviously, Linda is an amazing hire for you. Helen transitioned over to Chief Revenue Officer. So you really scaled the bench. But Linda, you bring a wealth of expertise to FactSet. I would like to ask expectations coming in versus, I know you're still relatively new but puts and takes? And then obviously, you're incredibly well respected by the investment community. How do you think about initial impact on FactSet overall?

Sure. It's been a great period of time since I've joined. The culture of FactSet really is unique, very positive and really very client-centric, which is really a great thing. I think there's so much opportunity and so much runway ahead of the company. As I've mentioned before, we are thinking about capital allocation. There's room to run there. And we do, of course, look at various acquisition opportunities, both ones that are brought forward by our business lines as well as ones that come to the market through other means. So we spent some time working on that as well. And so optimization of the balance sheet is an effort that I've undertaken, but we also have to be careful that our expense base and our margin focus continues to be there. So that's something else that we're thinking about. Looking at sort of the 4 big expense buckets, which are people, first of all, and important to note that half of our employees are in our centers of excellence, which are offshore, which is very helpful to the expense line. Secondly, looking at the cost of our third-party data, which is an important thing to make sure we have a good handle on. We also have to think a bit about our real estate footprint, which is something that I think many companies are looking at these days, but our very flexible work options, work-from-home options for our employees, we think, is a very big competitive advantage in terms of hiring, but we can look at our real estate footprint more efficiently. And then probably the second ranking expense item is really the technology expense. We've come a long way through the investments we've made in that technology line. A couple of years ago, our technology spend was about 4% of revenues. That's kind of light for this sort of industry. If you look at our new investor deck, it says that we're at about 7%, which is more in the ZIP Code of where we need to be. So one of the things I'd also like to do is make sure that we can show to our investors that the investments we've made are paying off appropriately. So we're looking to make sure that we can connect that story, connect the dots a little bit more effectively for the investors. But generally, you can see the top line growth has really, really been sort of turbocharged by those investments. So we're really pleased with that result.

Even the visibility, I mean, the ASV growth has been just really, really impressive. So with that, I'll end it there because I don't -- I think -- unless, Phil, do you have any closing remarks? Again, it's...

Yes. Just we're having fun at FactSet, incredibly consistent performer, very thrilled that Linda has joined us. So we have a very good balance of external talent and executives that have been at the company like myself 20 to 25 years. So we feel like we've got a winning team here, Kevin, and we're excited for the future.

It's been an amazing story. Congratulations, really, truly.

Thank you.

Thank you all.

Thanks, Kevin.