The operator introduces the FactSet second fiscal quarter 2024 earnings call and hands it over to speaker Ali van Nes. Ali welcomes everyone and provides information on where to find the presentation slides and how to access a replay of the call. She also reminds listeners to review the legal notice and discusses the use of non-GAAP financial measures. CEO Phil Snow and CFO Linda Huber are present, and Chief Revenue Officer Helen Shan will join for the Q&A portion. Phil Snow begins the discussion.

In the second quarter, the company experienced a 5.4% increase in organic ASV and professional services. However, their results were mixed due to challenging industry factors and market uncertainty. The company added 75 new clients and saw a decrease in user count due to consolidation. Market conditions and client caution also affected the company's performance, leading to higher erosion and slower growth. As a result, the company implemented cost cuts, including headcount reductions, to maintain margins and EPS growth. They expect to finish the fiscal year at the lower end of their ASV growth guidance range.

The ASV growth in America, EMEA, and Asia Pacific has decelerated due to various factors such as wealth cancellation, banking erosion, and lower price realization. There has been a shift towards passive funds over active funds in terms of assets under management, leading to increased fee pressure for institutional asset management clients. To offset this, FactSet has expanded its capabilities and invested in managed services, leading to gains with asset owners. They are also leveraging their strength in the middle office to provide front-office solutions, as seen with a recent client in Asia.

FactSet has won business based on their open platform and is developing GenAI tools for portfolio managers and research analysts. They have seen a decrease in retention in banking and private equity, but have had success with corporates. The company is optimistic about the potential of generative AI in the industry and has received positive feedback on their new GenAI solutions. They are also seeing growth in their GenAI banker efficiency tools and have released a chatbot for earnings call transcript analysis.

The paragraph discusses the recent performance of the company, highlighting the impact of wealth partnerships on client engagement and the changes made to position the company for future growth. The upcoming FOCUS client event is also mentioned, with details on the theme and registration information. The second quarter results, including ASV growth, improved margins, and EPS, are then summarized by Linda Huber, with a reconciliation of adjusted metrics to GAAP figures provided in the press release.

In the quarter, GAAP revenue increased by 6% to $546 million, with growth seen in all geographic segments. Operating expenses also increased by 5%, mainly due to higher employee expenses and increased intangible asset amortization. However, GAAP operating margin improved by 50 basis points to 33%, and adjusted operating margin improved by 130 basis points to 38.3%. Technology costs continue to be the main area of expense growth, while employee expenses only saw a 1% increase due to cost reduction efforts. Real estate expenses decreased by 8% as the company took steps to reduce this expense. Overall, the company's thoughtful expense management is positioning it for future growth while allowing for continued investment in technology and strategic initiatives.

The company's lower personnel expenses, higher capitalization benefit, and lower compensation costs resulted in a decrease in SG&A expenses as a percentage of revenue. The tax rate increased due to higher taxable income, but GAAP EPS still increased by 8%. Adjusted EBITDA and EPS also increased due to revenue growth and margin expansion. Free cash flow decreased due to timing of payroll taxes and higher income taxes payable. Share repurchases were also mentioned.

The company repurchased shares and plans to continue doing so, while also reducing their term loan and managing costs. They report seeing signs of stabilization and pockets of recovery in their industry, with increased activity and pressure on headcount from clients. Their enterprise and platform solutions are showing strength.

The speaker is optimistic about the second half of the year and expects a stronger fourth quarter. They turn the discussion over to Helen, who explains that the pipeline is healthier in the second half and the company is seeing higher deal volume. The speaker then discusses investing more in managed services, which currently make up a small percentage of their revenues and may have lower margins. They emphasize the subscription part of FactSet as their main focus.

FactSet has seen an increase in demand for their enterprise solutions, particularly in analytics and off-platform services. This has led to a rise in outsourced solutions, exemplified by a large deal at the end of last year. While this may be a lower-margin business, FactSet believes it is a necessary part of their overall strategy and is seeing continued interest and momentum in this area. In terms of pricing, the company saw a $25 million increase in the Americas, in line with the previous year. However, price realization against their rate card has remained flat, with new business being more competitive.

The company has seen an increase in total new business ASV, with higher new logos but a slightly smaller average price. This growth rate is expected to continue in the future. The company's expenses are expected to ramp up in the second half of the year, resulting in a decrease in margins. However, the company is prepared to manage costs and meet its adjusted operating margin guidance. The next question is about the company's expense cadence for the rest of the year, and the CFO mentions that expenses will likely increase as the year progresses, with technology costs and actions taken to manage headcount and locations factored into the mix.

The speaker asks Phil to elaborate on his commentary about the third and fourth quarter outlook. Phil explains that the third quarter is usually slower, but they have a large number of potential deals in the pipeline. He mentions that there is a demand for large enterprise solutions, but hiring in the buy and sell side has decreased. However, this is factored into their business strategy and they currently have around 200,000 seats, with potential for much more.

The speaker discusses the increase in FactSet's number of seats and the potential for tying the front office to the middle and back offices. They mention a healthy pipeline and confidence in converting competitive displacements. They also mention the importance of the markets, especially in banking and wealth, but do not assume a sudden increase in those areas. The next question asks about budgets and potential cyclical sensitivity in different business lines and products.

Helen Shan, in response to a question about clients' budget priorities, mentions that larger firms are looking to invest in gen AI but are facing budget constraints. She also notes that the company's growth in the second half is driven by data solutions. In terms of competition, she says that the company has a strong pipeline of competitive displacements and that the total cost of ownership conversations are increasing.

The company has been having more conversations with high-level executives and there is a strong focus on finding new alternatives. There is pressure on pricing, but the company's price realization has remained flat. The CEO also mentions that the company is in a strong competitive position, especially in the buy side where clients are looking for cost savings. They are also seeing success in the wealth sector and have opportunities for growth in the future.

The speaker discusses the company's investment in content and technology, which they believe will lead to growth opportunities in various sectors. However, they also mention that they are anticipating lower ASV growth and GAAP revenue due to the impact of the CS-UBS merger and a large wealth cancellation. These factors have led to the company's updated guidance for the year.

The company is being cautious in their approach to the current economic environment and have factored in the Credit Suisse situation in their revenue outlook. They also discuss the recent changes in the capital markets, including the possibility of a rate cut in June and positive trends such as successful IPOs. They acknowledge that there may be a lag in how these changes will impact their business, but are optimistic about the fourth quarter.

The question is about the increase in cost for the back half of the year, which is estimated to be $60 million higher than the first half. The question asks for more information on this increase, as in previous years, the fourth quarter has seen a rise in costs compared to the second quarter.

In paragraph 19, Linda Huber, the speaker, confirms that the company is expecting a significant increase in costs in the second half of the year compared to the first half. This is mainly due to technology costs, specifically related to the company's gen AI efforts and increased demand for cloud services. Personnel costs will remain flat, with a reduced bonus accrual, and real estate and third-party data costs are also expected to remain relatively stable. The speaker explains that the increase in costs is necessary to fuel the company's gen AI efforts and meet the demands of their clients.

The management team at FactSet is exploring ways to increase internal efficiency through the use of generative AI. This includes equipping developers with tools to improve code production, automating workflows for content collection, and supporting clients with the use of AI. While the potential for efficiency gains is significant, the impact may be smaller in areas where the majority of employees are already located in low-cost centers.

The company is looking to apply new tools and efficiency gains in their rolling three-year plan. They expect to see cost avoidance and potential cost savings from these efforts, but it is still early to put a number on it. The focus for the next year will be on generating ASV with these efforts, and then in FY '25, they will turn their focus to internal cost savings. The company has been managing costs effectively, but gen AI is only a portion of that. The caller also asks about capitalized costs and the company expects them to be between $80 million and $85 million for the year.

The speaker discusses the company's price realization, which has remained flat compared to last year. They mention that while there is some competition in smaller deals, they are seeing success in asset owners due to their value packages. The competition varies depending on the industry.

Linda discusses the company's expense control and how they have been able to exceed expectations despite softer revenues. She mentions that they have taken steps to reduce costs, including real estate and bonus pool cuts. The company is now focused on investing in generative AI and product development to drive top-line growth. The Board of Directors has discussed potential personnel actions and plans to have a closer to flat personnel growth in the future. The company's offshore balance is currently at 68%.

The company is pleased with their current financial situation and has taken steps to control costs. They are confident in their ability to capitalize on market shifts and remain a strong partner for their clients. The call has ended.

This summary was generated with AI and may contain some inaccuracies.