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

Good day, and thank you for standing by. Welcome to the FactSet Third Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Toomey, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to FactSet's Third Quarter Fiscal 2026 Earnings Call. Before we begin, the slides we reference during this presentation can be found through the webcast on the Investor Relations section of our website at factset.com. A replay of today's call will be available on our website. After our prepared remarks, we will open the call to questions. The call is scheduled to last for 1 hour. To be fair to everyone question, you may reenter the queue for additional follow-up questions, which we will take if time permits. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2. Discussions on this call may contain forward-looking statements. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our Forms 10-K and 10-Q. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today, both of which can be found on our website at investor.factset.com. During this call, unless otherwise noted, relative performance metrics reflect changes as compared to the respective fiscal 2025 period. Joining me today are Sanoke Viswanathan, Chief Executive Officer; and Josh Warren, Chief Financial Officer. I will now turn the discussion over to Sanoke.

Thank you, Kevin. Good morning, everybody, and thank you for joining the call. Q3 performance was strong with our fifth consecutive quarter of acceleration in organic ASV growth. We grew ASV by 7.1% to $2.48 billion across all regions and client types. Adjusted operating margin was 34%, reflecting the investments that we've made this year. Adjusted diluted EPS was $4.53, up 6.1% year-over-year. Our client engagement and growth trends this quarter show that our 4 foundational strengths of Connected Data, embedded workflows, service excellence and broad and deep distribution are becoming even more valuable as our clients deploy AI widely. Five example client wins from this quarter demonstrate the breadth and depth of our solutions and the tangible impact of strategic investments we have made in new products such as managed portfolio services, deep sector content and real-time detail. We won a mandate to deliver turnkey performance, risk and reporting managed services to one of the largest global sovereign wealth funds. We expanded our engagement with a large global OCIO to provide comprehensive reporting and digital capabilities wrapped with managed services from our subject matter experts. We signed a 5-year enterprise contract renewal at a major global bank. The scope has increased to include more data consumption with deep sector content playing a key role. LPL Financial, the largest independent broker-dealer in the U.S. that supports over 32,000 financial advisers selected our real-time data platform to support their cloud native trading application and intraday portfolio P&L workflows. We displaced a long-standing incumbent to expand our presence at a large global investment manager across our front-end middle office, already a top 20 client seeking to further consolidate their operations with FactSet. Each of these 5 wins represents an existing client, expanding their relationship with FactSet, underscoring meaningful room to grow within our current relationships. Last quarter, I shared the 3 priorities guiding a transformation in how we do business, commercial excellence, productivity improvement and long-term strategy. This quarter shows tangible commercial and productivity outcomes and our AI road map taking shape consistent with our strategy. First, the commercial excellence initiative is resulting in stronger new business growth, retention and expansion of ASV. As we roll out better tools, increased conversion at every step and streamline our processes in marketing, sales and customer success, we are seeing improvement throughout the sales life cycle. Our new website resulted in more top-of-funnel demand generation. Pound rates improved by 8%, engagement increased by 8% and prospects, marketing qualified leads and sales qualified leads grew by double digits. In Q3, our pipeline conversion from marketing activity increased 15% year-over-year, and win rates for these opportunities improved by 27% with 76% of the resulting ASV coming from new business. The corporates, asset owners and institutional asset management client types were particularly strong. We are rolling out a new AI-powered sales enablement platform to our entire team targeted at improving the quality of our sales pitches, increasing deal velocity and improving win rates. Beyond these traditional levels, we are transforming our model for retention and expansion as our clients adopt AI. Q3 was the fourth consecutive quarter of double-digit growth in ASV for our data solutions with MCP contributing to the momentum. Over 90% of our top 50 clients are now using 4 or more FactSet AI solutions. And quarter-over-quarter, overall ASV growth among clients using our AI solutions was 50% higher than for the rest of the book, early evidence that our AI adoption is helping drive retention and expansion opportunities. The AI transition is also accelerating the shift of our business model from [indiscernible] linked contracts to flexible enterprise agreements that encompass our growing data analytics and workflow capabilities. The majority of ASV renewed in Q3 was in the form of enterprise agreements all renewed for durations of 3 years or more. Average contract term extended by roughly 30% while broadly preserving pricing, underscoring the foundational value attributed to FactSet by our clients as they adopt AI. Second, we are rolling out AI agents, streamlining operations and reducing complexity to generate sustainable productivity improvements and operating leverage. Let me highlight a few examples in engineering, data operations and client service, our 3 largest operating cost centers. In Q3, we scaled AIUs across our product and engineering teams. coding-related token use grew 5x quarter-over-quarter, while committed lines of AI written code grew almost 10 times. Coding agents now author 27% of committed code in the engineering teams using these tools with rollout continuing across the organization. With these efficiency gains, we initiated a roughly 10% reduction in our technology workforce and freed up significant capacity to accelerate strategic product development. We are embedding AI across the full data operations life cycle from collection through quality assurance. Where we have fully implemented new tools, we have reduced operator touch time for data table extraction by more than 50%. We are now scaling this playbook with clear goals to improve quality, timeliness and unit cost. In M&A data, we have dramatically reduced turnaround time for deal updates. Within FactSet Fundamentals, one of our largest data sets, we've consolidated multiple data pipelines into one, allowing us to redeploy significant capacity and reduce the size of this team by 5%. Our client service teams are seeing early positive results from digitization pilots we are running. This reduce the need for manual onboarding activities from our consultants, enabling them to spend more time on strategic user health and retention efforts. In Q3, approximately 4,000 bankers used our digital onboarding tools and the capacity unlocked resulted in a 22% quarter-over-quarter increase in live user interactions by our consultants. This helped drive a 5-point increase in Net Promoter Score among our junior banker population in Q3, building on the momentum from last quarter. We are in the early stages of these efforts, but together, they are aimed at a structural reduction in our cost to serve while improving overall quality. As we realize the full impact of these productivity initiatives, we expect to see further scale benefits and operating margin improvement. Finally, we are developing our strategy based on a strong foundation of connected data, embedded workflows, service excellence and deep and broad distribution. These strengths make FactSet a trusted government platform for institutional finance and are even more important to our clients as they make their AI transition. As a starting point for our clients, we have launched our AI solutions under the banner of FactSet Intelligence. It consists of 3 layers that accelerate our clients' AI adoption, the trusted data ecosystem governed and optimized agentic infrastructure and intelligent workflows build for hybrid workforces. First, a trusted data ecosystem, including FactSet, client and third-party data. Data is the fuel for AI and has to be high grade to provide the right quality output. FactSet's MCP server built on a robust ecosystem of content APIs has over 450 clients actively engaged under contracts and trials. API call volume is experiencing rapid growth with Q3 volumes at 13x the level we experienced in Q2. We expect this to continue as we make more data sets available through MCP. Clients can now access our data through all major frontier lab platforms, including Anthropic, OpenAI, Google and Microsoft. Our MCP enables access to high-quality, comprehensive and auditable data sets presented through the same endpoints used by our own developers. The quality of our data delivery through MCP is driving expansion at clients where we are already embedded in high-value workflows. For example, we launched our portfolio analytics MCP just last week, bringing our signature portfolio analytics into agentic workflows. Portfolio Analytics has long been central to how our buy-side clients measure performance, manage risk and meet reporting obligations, and we believe we will unlock significant value for clients by extending these capabilities to agnetic use. We are also extending our AI solutions in the data layer to client, internal data and third-party data. FactSet's unique strength in entity resolution, ontology and concordance in partnership with Snowflake, Databricks, Google and AWS position us well to help clients build out their enterprise knowledge graphs. Second, FactSet has governed and optimized agent infrastructure. Our clients want to curate and optimize multiple horizontal and vertical AI solutions. To meet this demand, we are rapidly rolling out infrastructure to become the integrated agentic platform for our clients. We already support millions of models and billions of formulas and data points across the nearly 250,000 users of our workstations every day. Users can discover our agents soon build, test and publish their own agents and even integrate third-party agents, all while maintaining the security standards, data entitlements, audit logs and cost optimization that clients expect and get every day from FactSet. While the user interface may very well evolve as agentic workloads take off, we are confident in the value we deliver to our clients and are already seeing significant client interest in rationalizing various experimental efforts and consolidating their AI implementations with us. Third, intelligent workflows for hybrid workforces. As we roll out agented capabilities, we are working closely with clients to redefine how they get work done with a hybrid workforce of humans and agents. Through the partnership we announced with [indiscernible] in March, we have launched a fundamental transformation in investment banking workflows with our Capital Markets Intelligence suite of agents. Senior bankers can now send an e-mail to an agent describing what they need and receive insights and artifacts directly Built on current FactSet data, comparable company analysis and deal precedents, automatically generated and delivered back. What used to take hours or days now happens in minutes, freeing up capacity for higher-value client workflows and interactions. We are seeing strong early engagement with active or pipeline trials at over 30 of our top 100 banking clients. We will roll out similar capabilities to our buy side and wealth clients in the coming weeks with our Institutional Research Intelligence and Adviser Intelligence product suites. We announced strategic partnerships with InSync Analytics, Genius AI and [indiscernible] AI to advance these capabilities and supplement our internal agent development road map. Across all layers of FactSet intelligence, we see significant growth opportunity as our clients consume more data through many new channels, consolidate their agentic deployments with us and reimagine their workflows with our agentic solutions. To further accelerate our product innovation, we announced a strategic partnership with Google Cloud this week, expanding our distribution through Google Cloud's enterprise channels and unlocking new revenue opportunities. The partnership will focus on 3 main areas: enhancing FactSet's workstation with Google's enterprise search, deep research API, grounding and other multimodal capabilities, using Google Cloud's AI platform. These capabilities will supplement FactSet's trusted and connected data and analytics and improve the breadth and depth of our AI-enhanced insights. FactSet will bring our financial intelligence directly into Gemini Enterprise and expand our MCP and agent sharing functionalities, creating interoperability between the FactSet [indiscernible] and Gemini Enterprise. This builds on the previously announced deep mind, deep research collaboration. FactSet will also develop and launch a new generation of agents using the Gemini Enterprise Agent platform designed to improve efficiency, execution and decision-making across key client workflows. As AI reshapes financial institutions, FactSet is becoming mission-critical AI infrastructure. We are transforming our business model to win in an AI intensive future. We look forward to sharing our strategy and medium-term business plan at our upcoming Investor Day. I'd like to now welcome Josh Warren to FactSet. Congratulations, Josh, on your first earnings call as CFO of FactSet. He will now discuss our Q3 performance in more detail.

Thank you, Sanoke. It's great to be here with everyone this morning. Before getting into the financials, I want to take this opportunity to thank all the FactSetters who have made me feel so welcome since I joined in April. I would also like to specifically recognize Helen Shan, whose leadership over the last 8 years as CFO and Chief Revenue Officer, has put FactSet on firm footing as we embark on a new chapter. This week marks the 30th anniversary of FactSet's IPO, and I'm excited to join the firm at this moment. As AI and agents reshape how information is sourced synthesized and acted upon, FactSet is positioned for durable structural growth that can deliver excellent outcomes for our clients, employees and shareholders. In our results, I'll highlight 3 things. First, our client franchise, its quality, breadth and durability reinforce our financial profile. Next, our operating leverage. And finally, our flexible balance sheet and disciplined capital allocation, which support our go-forward strategy. Expanding our client relationships drove this quarter's results, which I would like to [indiscernible]. As of the close of fiscal Q3, at the end of May, our ASV exceeded $2.48 billion, representing 7.1% organic growth, an acceleration by more than 250 basis points over the comparable growth rate in 2025. Revenue was $622.9 million, representing 6.4% growth over the previous year. Our adjusted operating income was $211.8 million, representing a 34% margin, down approximately 300 basis points relative to the comparable quarter in 2025 due to targeted investments to improve operating leverage, marketing and performance-related compensation linked to ASV momentum. And adjusted EPS grew 6.1% to $4.53. FactSet serves clients across over 80 countries, including 95 of the top 100 asset managers, more than 85% of the top 50 global investment banks and the world's top wealth managers, corporations, exchanges, central banks and sovereign wealth funds. This breadth gives FactSet meaningful exposure to all major geographies and client types in the financial services industry, so we are not dependent on any single market or segment while providing a substantial opportunity to expand wallet share within our current clients. With an average client relationship spending more than 16 years and 9 of our top 10 clients measured by ASV having been with us for more than 2 decades, we grow with our clients and our longest-standing relationships have some of the most exciting opportunities for growth. ASV retention rates above 95% reflect the strength of our client relationships, those relationships fuel our ASV bookings growth that provides a line of sight into future revenue. As of last year, ASV no longer includes onetime nonrecurring revenue such as professional services. Our approach is to embed flexibility within enterprise agreements and importantly, secure minimum commitments. These minimums give us a baseline so that we can support new consumption patterns and be rewarded for the value we deliver while preserving the forward visibility that we expect will remain central to our financial model as we deliver more AI solutions to our clients. Today, most of our recurring revenue comes from fixed subscription and license revenue. A growing portion of our recurring revenue streams are driven by initiatives that are activity based, including workflows that are increasingly mission-critical for clients. We are seeing more client interest in consumption-oriented pricing, particularly for emerging AI-enabled offerings, while modest in size today compared to our total ASV, we expect these revenue streams to become an increasingly important driver of our growth over time. These revenue streams introduce a dynamic and growth-oriented dimension to ASV forecasting and subsequent revenue flow-through that complements the traditional subscription base. As our delivery model evolves alongside our clients, we expect to review our approach to reporting to preserve transparency and alignment with our go-forward strategy. Our organic ASV is a like-for-like comparison that excludes the impact of foreign exchange, discontinued business lines and acquisitions that closed within the last 12 months. For the third quarter, organic ASV accelerated to 7.1% year-over-year, an increase of $35 million during the quarter, FactSet's highest ASV growth rate since Q1 2024. Growth was evident across all regions and client types as the world's leading financial services firms continue to choose FactSet as a trusted partner. Turning to our performance by geography. Organic ASV accelerated in each region compared to the prior year. Americas grew 7%, EMEA grew 5%, and Asia Pacific, our fastest-growing region, grew 10%. Now turning to our results by client type. The institutional buy side consisting of global asset managers, asset owners and hedge funds accelerated to 6% organic ASV growth. This represents slightly less than half of our overall ASV. Wealth remains our fastest-growing category and delivered 10% organic ASV growth. Organic ASV for deal makers grew 9%. This category represents a broad range of clients, including investment banks, sell-side research teams, corporates and private capital firms. Today, this represents nearly 40% of clients and less than 20% of ASV. Though smaller in size, our strategically important market infrastructure category saw organic ASV grow 7%. Demonstrating strength across the platform, third quarter revenues grew 6.4% year-over-year or 7% on a like-for-like basis. Adjusted operating margin was 34% for the quarter as compared to 35% in Q2 and nearly 37% a year ago. This reflects a series of deliberate investments that we expect to deliver growth and operating leverage over time. Compensation-related expenses typically account for approximately 60% of our total cost base. Our Q3 margin reflects a 7% year-over-year increase in compensation-related expenses that were driven by performance incentives linked to the ASV acceleration delivered, not additional headcount. Because revenue from new ASV bookings is recognized over time, periods of faster ASV acceleration can temporarily compress margins in any quarter since the incremental ASV is not yet reflected in revenue. We will remain long-term focused and optimized for profitable growth. Despite the increased overall compensation expense during Q3, FactSet reduced its overall headcount by approximately 1% after holding it roughly flat during the first half of the year. While compensation-related expenses accounted for approximately 40% of the increase in operating expenses, the majority of the year-over-year growth came from non-compensation items tied to growth and productivity initiatives. More than 1/3 of that non-compensation expense increase was technology spending, including to strengthen our core infrastructure and on-token costs. We increased our marketing spending and have a variety of professional services engagements underway to drive future operating leverage. Margin this quarter was also negatively impacted by nonoperational items, such as our FX hedging program, which went from a gain in Q3 2025 to a loss in Q3 2026 creating an overall drag of approximately 60 basis points. Our earnings per share increased 6% year-over-year to $4.53. This was driven by higher revenue and a lower share count, partially offset by increased expenses and a higher effective tax rate. While we continue to drive ASV growth, we're focused on capitalizing on our scale to deliver long-term, sustainable and profitable growth. To that end, we've launched a range of strategic projects aimed at running FactSet with greater discipline and efficiency. Sanoke outlined multiple productivity initiatives, but from an operational standpoint, I'll highlight 2 items we initiated during Q3 and completed in the past few weeks. We recently rightsized certain engineering teams as we standardize how we build and run software and take advantage of AI-assisted coding. Additionally, we entered into an arrangement with rep risk to support our clients' needs as we discontinued the Signals attribution service FactSet provided following the 2020 acquisition of True Value Labs. We are continuing to review our product portfolio against appropriate hurdle rates. And while we expect to make additional efficiency improvements, our focus and our investments will remain on serving our clients with excellence. Consistent long-term free cash flow generation is a hallmark of our business model and a metric we actively manage towards. Our free cash flow grew to $254 million for the third quarter of fiscal 2026 compared with $228 million for the prior period, an increase of 11%. Our disciplined framework prioritizes organic investments in high-growth projects, followed by strategic inorganic activity and finally, returning excess capital to shareholders. During Q3, we accelerated our repurchase activity, buying back approximately 926,000 shares for $203 million. Fiscal year-to-date, we've deployed over $500 million to repurchase shares. Additionally, we increased our quarterly dividend for the 27th consecutive year. In total, during fiscal 2026 year-to-date, we have returned over $625 million to shareholders through a combination of dividends and repurchases, approximately double the amount of return over the same period last year demonstrating our continued commitment to delivering shareholder value. Overall, we are committed to maintaining our investment-grade rating, which Fitch reaffirmed with a stable outlook this quarter. We continue to assess opportunities about optimizing our debt maturity profile to align with our strategy. Our balance sheet continues to strengthen with a conservative level of gross debt leverage at 1.5x and net debt leverage of 1.2x providing capacity and flexibility to support growth. Turning to our outlook. We remain confident in the guidance ranges that were previously set for ASV, revenue, operating margin and EPS. On revenue and EPS in particular, we are tracking toward the high end of those ranges based on our business trajectory. We are pleased with our accelerating ASV growth, and our focus remains firmly on delivering long-term value for our clients and shareholders. During my first 10 weeks here, I've seen that when clients are thinking through and making big decisions about the data powering their platforms, they turn to FactSet as a partner. Our open architecture and partnership-oriented approach positions us to deliver excellence to our clients and compounding growth for our shareholders. With that, I'll hand it to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Ashish Sabadra with RBC Capital Markets.

Really strong momentum on ASV and it seems like pretty broad-based. But as we look at the guidance, the guidance implies a moderation in the fourth quarter, so just wanted to better understand, is that just purely conservatism, tougher comps? Or are there any puts and takes that you could flag?

Thanks, Ashish. As you've noted, I think it's been a really strong quarter. And in fact, the momentum continues into Q4. Just a month into the quarter, we see that momentum has continued. We continue to see a strong diverse pipeline of clients. It's across -- it's broad-based. It's across regions and it's across all of the different client types that continues to maintain that growth trajectory that we've seen. It is a tough compare. Just to remind everybody, Q4 of last year was our largest quarter ever, and it is a tough compare. But as we stand today, at the end of June, early July, we are ahead of last year in terms of our bookings. And we also see a pipeline that is as robust as we saw at this time last year. And as you can imagine, AI is a tailwind for us. So that is also helping us. Now in terms of reaffirming guidance, we don't change guidance quarter-to-quarter and there is a lot to execute ahead of us. There are multiple 7-figure deals outstanding. So it will be all down to execution in the next 8 weeks, and there could be a timing issue there. And the second thing is a lot of tons of mid-market deals, which we are actually quite excited about because they are faster to close. And AI is very dynamic. So with that, I think we are reaffirming the guidance and reasserting that we are very confident in our delivery.

Our next question comes from the line of Faiza Alwy with Deutsche Bank.

I wanted to talk a little bit more about your AI monetization strategy. So thanks for a lot of the detail that you provided that 90% of your top 50 clients use 4-plus AI products and faster -- 50% faster ASV growth. So just give us some context around that and just the monetization around that? Is it because there's a direct price for the usage of AI? Is it access to more data sets? And then you also talked about a lot of your clients consolidating their AI workflow with you? And are you agnostic as it relates to whether they're using your MCPs? Or whether they're using your specific tools that are inside FactSet workstation. So sorry, long-winded question, but just with a little more context there.

Thank you, Faiza, and lots of questions in there. And we'll take a little bit of time to answer that because there is a lot of color in here that we can share. Maybe I'll start first with the short-term picture on AI monetization and then sort of transition to how we see this in the longer term. At the moment, I think we are maximizing our AI monetization with a lens of maximizing enterprise value. So it's all leading to the growth acceleration in ASV, our increased retention as well as expansion in our existing clients. So just to give you a little bit of color, just in this quarter, we saw over 10% of the ASV growth came directly from AI SKUs. And obviously, there was a much bigger impact than that in the broader ASV growth as well. Just to give you a couple of client examples. We had like one of the top 10 banks literally double their data subscriptions with us because of AI. And these are multiyear contracts. A top hedge fund grew 6x with us, again, because of our MCP delivery. And at this point, over 20% of our top 100 clients are using MCP on a paid basis, right? So these are just some short-term statistics giving you the -- sort of the momentum that we are seeing. But when we think more longer term, and as you referenced, I think we see multiple, multiple opportunities, and we see AI as a massive tailwind. To start with, there's been lots of questions about what are our moats. And we're really now starting to see this in evidence, right? It's no longer the theory. We have a strong moat in our connected data and in our embedded workflows and we see this as a leapfrog moment for us on a stable subscription base. Our whole data solutions business that historically delivered standard data feeds, APIs and also sharing on environments like Snowflake and Databricks is perfectly set up for this, right? With ASV coming through on AI, we see us shipping faster, and we are able to flex all of this into commercial agreements that are not just seat linked, but are true enterprise agreements that has a stable, large subscription base and a flexible construct on top of that, which allows us to capture the upside in the future from a consumption basis. So that's a little bit of color on the short term and the medium term and happy to take any further questions on this. But hopefully, you can see the momentum is picking up.

Our next question comes from the line of Alex Kramm with UBS.

All right. I guess, I need to switch over to margins for a second here. I think previously, you made some comments in your guidance, and I don't think you made them today, but that you're actually hoping to get somewhat closer to the midpoint of your adjusted operating margin guide. So just wondering with some of the things we've done, some of the things that are a little bit more onetime like that FX hedge. Is that still what you're shooting for? Or what are the kind of upsides and downsides to that? And then I know you're not going to give guidance for next year, but maybe you can just remind us, I think there are a few things this year that are somewhat one-timers, professional services, some infrastructure investments that you had tax for this year. So maybe just remind us what are those onetime-ish items comes out as we head into 2027 and dimensionalize those, please?

Yes, as you noted, we came in this quarter, the 34% adjusted operating margin that reflects a combination of things. It reflects the strong investments that we've been making throughout the year. And as we've said in prior quarters, those are second half weighted. So you saw the effect of that in the quarter and the performance incentives we are accruing given the ASV outperformance. We're very happy with the pace of the investments. We are seeing really strong progress, both on the growth-oriented investments and in the foundational investments, both of which we see starting to deliver operating leverage. And as you know, we don't manage through a quarterly margin, and we don't guide to a quarterly margin, but we see significant acceleration in AI and continued opportunities for investment, and we'll continue to entertain high ROI investment opportunities as they come along. So with all that said, what I would clearly say is we see a clear line of sight now on margin improvement coming in the future quarters. That includes some of the things you mentioned, right? We are still clearly for this year, focusing on the midpoint of the guide, right? We still have confidence in that. And we are seeing line of sight from all of these initiatives that we think will lead to margin improvement in the coming quarters. I'll ask Josh to build on that and give a little bit more color on the puts and takes for this quarter and going forward.

Sure. Thanks, Alex. Really appreciate the question. Nice to hear from you. Just to Sanoke's point, just on the puts and takes. The biggest single item and really, frankly, the main dynamic in the quarter is timing, specifically around pay-for-performance arrangements, not headcount growth. Compensation-related expenses was the single biggest related -- single biggest item in terms of our increased expenses. When we start to look at the other items, right, technology spending is our second biggest category. That's a combination of things, including our increased focus on our core infrastructure programs related to cybersecurity, ITDR and also our token spending. Our token spending has increased year-over-year, and Sanoke mentioned some of the return that we're seeing on our token spending. With regard to the other category, there's -- as you may observe, there's a series of other initiatives that we have in flight. We increased our marketing spending, we have professional services arrangements, but what I would say, looking forward, taking all of that into -- kind of into the [indiscernible] as the past, looking forward, we see a clear path to expanding our margins. And part of what we're looking forward to is continuing the momentum that we see in the business. And that momentum, ultimately, we feel will position us well both on the top line and on our margins.

Our next question comes from the line of Kelsey Zhu with Autonomous.

Welcome to the call, Josh. A lot of infoservices companies have talked about this trend of AI implementation, driving accelerated data demand. I was wondering if you can talk a little bit more about FactSet's strategy to monetize on this trend, both near term and long term. And in relation to this, how should we think about the incremental revenue opportunities brought by MCP, especially in the past, you called out some expansion of new user persona. And I was wondering if you can tell us a little bit more about that.

Sure, Kelsey. I mean, some of it I just covered, I think, in my discussion around AI. But just to repeat that, right, the short-term monetization we see is an acceleration in our ASV growth. Clearly, MCP is a real accelerant. We see whenever there are deals that involve an MCP component, more often than not. And I would say 90% of the time, we've seen contract value improvements. So at the moment, it's playing out in the overall broad ASV acceleration. As we go along, we are going to see more and more discrete [ ASKs ]. And as I said, more than 10% of the ASV even this quarter came from that. Now again, it's too early to kind of draw a trend line from that. but that was from virtually 0 last year, and it's certainly growing. Now in terms of your question around user personas, yes, that continues. I think even today of our MCP trials as well as our MCP paid implementations, around 20% of the users of our endpoints are net new users whether they might be in existing clients or at new clients, but they are net new users. And these are new workflows and new workloads that are coming on, thanks to our ability to deliver -- deliver data to new AI workloads. And just to remind everybody, we are also available on all the different frontier lab marketplaces as first-class data connectors and that enables this easy discovery, connectivity and also growing users. Now the last thing I would add is an important and a key indicator for us is how does this translate into broader growth in our product suite and product penetration. And from what we've seen so far in the last 6 months, whenever there is AI consumption through MCP, it is actually leading to an upsizing of our existing products, whether they are workstations, whether they are other APIs, whether there are other standard data feeds, there is a multiplier effect on the existing business as well. And if you recollect a couple of quarters ago, I spoke about the AI flywheel effect. It is still very, very early stages, but we are starting to see that in action.

Our next question comes from the line of Manav Patnaik with Barclays.

I just wanted to understand the partnership strategy and maybe just part of broader capital allocation as well. I mean, I understand all the Frontier lab partnerships with a bunch of these other ones that you've announced, which we are not too familiar with. I'm just trying to understand the pipeline of what that list looks like and whether these are step one and to potentially making some of these deals? Or is that not the way I should think about this?

Yes. Thanks, Manav. And you've spotted the sort of the diversity of partnerships that we've struck. It's a deliberate strategy, and it is consistent with how we've thought about our network and ecosystem historically. As you know, we've always been open architecture. And typically, any M&A we've done -- we've had a history of connecting it with other partners that we've actually worked with, and we have the experience, there is a clear understanding of the value creation potential, et cetera. In this cycle, we are very focused on 3 things, which connects back to what I described earlier in my prepared remarks on FactSet Intelligence. Across each of those 3 layers that we described, there is a lot to be done, both at our end, at our clients end and in terms of integrating the whole ecosystem. So at the data layer, there is a number of initiatives underway to help clients advance their data meshes and to build these enterprise knowledge graphs, which requires us to partner with firms like Snowflake and Databricks and the like. Similarly, some of the partnerships that you see at the top of that slide, which are the recent ones that we've announced, those help us really accelerate the agentic workflows that we are building that are very focused on user personas, whether it's on the buy side or in wealth management. And the Google partnership we announced cuts across the whole page really because we get a lot of benefits from it immediately. A, in the FactSet workstation, we can infuse Gemini everywhere. We can get the benefits of early releases of the most advanced frontier models. We get the ability to get cheaper tokens usage because we get the preferential pricing as part of this contract and we benefit from better infrastructure and joint product development and innovation. So the idea is that we are accelerating product development. We are being very prudent in our capital allocation, which Josh will get into in a second. And we are working very actively to ensure that we are staying at the cutting edge of the market and actually leading the market in many ways as our clients make this AI transition. Maybe, Josh, do you want to comment a bit more capital allocation.

What I would add to -- Sanoke, what I'd add to that is we're very focused on operational execution, but our capital allocation framework provides really a road map to value creation. So specifically, what that means is prioritizing the investments that offer the highest risk-adjusted returns. So we're very focused on investing in growth, investing in growth means building out the products and solutions that we deliver to our clients. And then beyond that, we consider all excess uses of free cash flow, whether it's return of capital to shareholders in the forms of buybacks or dividends or you asked about M&A or our partnership strategy in particular. And on that -- what I would say just to augment what Sanoke outlined, is we intend to be very surgical in terms of how we are approaching our acquisition philosophy. We are at the heart of a robust ecosystem of partners that we work with. But our approach is really going to be focused on the areas of highest and greatest impact. So what is really exciting for me in particular and for all of us at FactSet is because of FactSet's open architecture approach. And because we operate in this rich ecosystem, a lot of our inorganic activity, we expect to be derisked, right? We are already likely having a technology integration or a client integration with a particular partner that we would work with. So you should expect a pipeline that flows from a lot of the day-to-day execution activity that we are engaged in.

Our next question comes from the line of Shlomo Rosenbaum with Stifel.

I wanted to ask a little bit about the commentary about the 3Q '26 renewals extended the length of contracts by 30% on average. And I just want to get a little bit more color in terms of are you trading anything like price to get an extended term? And then also, just with the evolving kind of monetization model. Is there any risk of locking yourself into something that might not be ideal a couple of years down the line? And I'm actually -- it's interesting that clients are interested in going out that far, given that the models are evolving. And I was wondering what the feedback is from that. Do you think that you may have to open up these contracts later on if something kind of changes. If you could just give a little bit of color on that? And then just -- Josh, first of all, I guess, welcome to the company on the call. I just wanted to noting that not reporting client count, user account and employee count, is that something that you feel is just less relevant as you kind of assessed the company in terms of the metrics driving the business?

Yes, I'll go first, and thanks for the question. Thanks for the welcome. Maybe let's take your questions in reverse order. In terms of client count and user count, more than happy to share our user count is up 12% year-over-year, you should expect to see those numbers in our Q that we are filing likely aftermarket today. But what -- fundamentally, we're committed to transparency, and we're committed to giving you the metrics that matter. So an indication of user counts tends to be in the long tail and not really flows through to the revenue or profitability that impacts the return that we provide for FactSet. Sanoke, do you want to take the first part of the ...