FactSet Research Systems Earnings Call Insights: Buy & Sell Side ASV, Gross Margins

FactSet Research Systems (NYSE:FDS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Buy & Sell Side ASV

Shlomo Rosenbaum – Stifel Nicolaus: Peter, just doing the math and kind of backing into buy side ASV versus sell side ASV. It looks to me that the buy side ASV growth improved sequentially, first I just want to confirm with you is that correct or not correct?

Peter G. Walsh – EVP and COO: I think that math is correct Shlomo.

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Shlomo Rosenbaum – Stifel Nicolaus: Since that is correct, would you take that as an indication that we are starting to see the beginnings of a turn on the buy side in terms of hiring, what would you attribute that to or is it more of a willingness for people to buy product than we had seen before and acknowledging it’s a challenging environment, but we are seeing a little bit of change there?

Philip A. Hadley – Chairman and CEO: I just want to make two points. One, I saw some research written this morning where people are using our buy side percentage and our sell side percentage and we are obviously putting out a pretty round number there, and I think the round number is definitely to sort things (slightly). But the answer to your question more specifically. I think we are definitely sitting times of hiring, but it’s not one of those things where it feels like a market of several years ago.

Shlomo Rosenbaum – Stifel Nicolaus: I understand that, but just to make sure what Peter said is accurate that you have seen a step up in – growth from buy side…

Philip A. Hadley – Chairman and CEO: Yes. And I would – let me make one more point. I think that the numbers right now would, at least from what I saw in some of the calculations we’ve made, the sell side seems slightly worse than it really is, and therefore making the buy side slightly better than it is. And I would also just clarify for the purposes of the metric that we produced that the sell side is really pure sell side for us and that the buy side is really buy side plus other.

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Shlomo Rosenbaum – Stifel Nicolaus: So you are saying including like any corporate memberships through NASDAQ or anything like that?

Philip A. Hadley – Chairman and CEO: Yes, including Peter mentioned some feed revenue. So it’s really buy side. Sell side is clean as in that sell side number and then the buy side is everything else.

Shlomo Rosenbaum – Stifel Nicolaus: Then just in terms of the net adds, the net adds were in the customers and users just seemed to kind of weak. Is this really a continuation sort of the cadence you had had on the buy side but really being offset more on the sell side more recently?

Philip A. Hadley – Chairman and CEO: Two odd quarters for us, just not the time where clients are hiring. Certainly our (fall) quarter – the first quarter for us and our third quarter fiscal quarter just tend to be choppy in nature and always have been historically. But I think as per Peter’s comment, certainly there’s still trimming happening on the sell side and slight hiring happening on the buy side. But they tend to be kind of balancing each other out at this point. As you said, the net client adds, we definitely saw quite a few firms shutdown this quarter, just light switch out or moved on, which I don’t know whether that’s just a sign of the cyclicality of this is a good time of the year to do that, but definitely one of the factors.

Gross Margins

Peter Appert – Piper Jaffray: Peter, you mentioned the issue in terms of gross margin in the current quarter but I’m noticing gross margins actually drifted a little bit lower over the last year or couple of years, so anything structural going on that would explain that? Might that have any implications in terms of how we should think about trend in margins looking forward?

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Peter G. Walsh – EVP and COO: I guess I’d like to point out two things in that. We are really managing FactSet at the operating margin level as opposed to dissecting it between cost of services and SG&A. But if I was going to look at the gross margin level, one thing that investors should factor out is the StreetAccount acquisition that we completed a year ago. So if you are comparing Q3 this year to Q3 last year, that reduced gross margins by about 130 basis points.

Peter Appert – Piper Jaffray: Beyond that, looking over the last couple of years even, it looks like the gross margin has shifted a little bit lower, anything you could say about that?

Peter G. Walsh – EVP and COO: That would just be scaling up our content operations where the number of content employees that FactSet has deployed has greatly changed over that timeframe.

Peter Appert – Piper Jaffray: Can you talk a little, Peter or Phil about what you’re seeing from a competitive perspective? The noise in the market suggests that the pressure from a discounting perspective continues to be pretty intense. Can you just give us some thoughts on that?

Michael D. Frankenfield – EVP and Director of Global Sales: Peter, it’s Mike. Our competitive situation continues to evolve slowly over time. FactSet continues to round out its product which in many ways allows us to enter new segments and create new types of competition for us. The pricing environment is relatively stable overall. There is definitely a lot of focus on cost and firms – one of the long-term trends amongst all of our clients has been the increase in focus on costs and the scale which these firms have brought professionals to help manage their expenses. So, that’s an environment where it’s just more important than ever for FactSet to demonstrate the value that we bring to the table, and continue to sell at the price points we are selling at today.

Peter Appert – Piper Jaffray: I’m not sure how to interpret that Mike, in terms of; does that mean level of discounting higher today than it was 12 months ago or the same as 12 months ago?

Michael D. Frankenfield – EVP and Director of Global Sales: I think it’s relatively consistent in the industry.

Peter Appert – Piper Jaffray: How about the – any thought on the ICON rollout and the competitive implications associated with that?

Michael D. Frankenfield – EVP and Director of Global Sales: We haven’t seen a significant amount of ICON in the marketplace. The indications are that most of the rollouts are happening in segments in the market where FactSet doesn’t have a strong presence, particularly in the trading and execution space. We do know that firms are being contacted and there is initiative across all the Thomson platforms to transition them away from their legacy platform to the new ICON platform, and FactSet is out there reminding clients that if client’s are in a transition period, we can offer them a seamless transition and offer them a very attractive alternative.

Peter Appert – Piper Jaffray: Are you seeing good response to that pitch?

Michael D. Frankenfield – EVP and Director of Global Sales: We are. We continue to (ramp up) our product and it’s something we focus on over a long period now and we’ll continue to focus on it.

Peter Appert – Piper Jaffray: And last thing, you’ve talked for a while about the fixed-income offering as a new product suite for you guys and I know it’s a relatively small piece of the pie, but can you quantify what portion of the business is specifically associated with fixed-income market?

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Michael D. Frankenfield – EVP and Director of Global Sales: It continues to be a material driver for us. I think if you wind the clock back a year and maybe two years it wasn’t material, but it’s now at a level where it is contributing and it’s an important part of our growth story going forward.

Peter Appert – Piper Jaffray: Material driver, so what does that mean?

Philip A. Hadley – Chairman and CEO: (indiscernible) to make those estimates and add value to your (clients).

Peter Appert – Piper Jaffray: Okay, material driver, I’ll work on that.

A Closer Look: FactSet Research Systems Earnings Cheat Sheet>>