The operator introduces the Third Quarter FactSet Earnings Call and explains the format of the call. Ali van Nes, Head of IR, then begins the call and provides instructions for accessing slides and a replay of the call. She also reminds listeners to review legal notices and discusses the use of non-GAAP financial measures. CEO Philip Snow and CFO Linda Huber are also present, and Chief Revenue Officer Helen Shan will join for the Q&A portion. Ali van Nes then hands the discussion over to Phil Snow.

Philip Snow, CEO of FactSet, begins by thanking everyone for joining the call and acknowledging the observance of the Juneteenth holiday. He then discusses the company's third quarter results, with organic ASV and professional services growth of 5%, adjusted diluted EPS of $4.37, and an adjusted operating margin of 39.4%. He mentions the impact of clients' tightened budgets and longer sales cycles, but highlights the company's history of revenue and EPS growth. Snow also discusses the company's focus on harnessing the power of gen AI and showcasing new products at their client symposium. He concludes by mentioning the company's client and user count, as well as their expected annual organic ASV and professional services growth for the fiscal year.

In the third quarter, the company's performance was affected by market headwinds and the cancellation from the Credit Suisse and UBS merger. This accounted for most of the decrease in annualized subscription value (ASV). The Americas region had a 5.7% organic ASV growth rate, while the EMEA region had a 4.4% growth rate and the Asia Pacific region had a 6.1% growth rate. The company had notable wins with a large asset manager in the U.S. and a global asset manager, demonstrating their ability to provide tailored solutions and manage complex portfolios. The banking segment was impacted by cautious hiring and market conditions.

FactSet is committed to enhancing its wealth management offerings and has recently invested in Aidentified to accelerate new client acquisitions. With over 40 years of curated data and a strong presence in both the buy and sell side, FactSet is well-positioned to lead in the rapidly evolving technology landscape. Their combination of data, knowledge of client workflows, and generative AI tools are producing unique insights and efficiencies for clients. FactSet is focused on helping clients stand out from their peers and has already released new products that showcase their accuracy and expertise, such as their portfolio commentary product.

FactSet has launched a new portfolio manager hub that integrates all aspects of a portfolio manager's workflow, including a back chatbot called Portfolio Assistant. This has received positive responses from clients and has allowed them to extend their presence in the buy-side middle office. On the sell-side, FactSet Mercury has improved the research workflow for junior bankers and is expected to save them 10 hours per week. FactSet also has a multi-year strategic investment plan focused on expanding market data and improving client workflow for both fundamental and quantitative research.

The company's offerings for the sell side, particularly in banking automation, have gained traction with top global banks and boutique firms. The wealth franchise is also growing with new opportunities in the pipeline. The company's generative AI initiative is expected to deliver incremental ASV in fiscal 2025 and has already driven demand. The company has announced new off-platform AI solutions for technologists and expects to see ASV growth from tech-savvy financial firms and hedge funds. Despite slower ASV growth in the third quarter, the company has improved margins and EPS and is increasing guidance for the fiscal year. Organic ASV grew 5%, adjusted operating margin improved 340 basis points to 39.4%, and adjusted diluted EPS rose 15% to $4.37.

The company's GAAP revenue increased by 4% to $553 million, driven by growth in all geographic segments. Operating expenses decreased by 2%, resulting in an increase in operating margin by 420 basis points. Technology costs increased by 26%, while employee expenses decreased by 8.6%. Third-party content costs increased by 9%, and real estate expenses decreased by 14%. The company has been actively managing expenses to position itself for future growth and has seen a 340 basis point improvement in adjusted operating margin.

The company's adjusted operating margin improved due to a reduction in bonus accrual, cost rationalization efforts, and lower expenses. The cost of services decreased due to lower compensation expenses, but was partially offset by increased intangible amortization and cloud-related costs. SG&A expenses also decreased due to lower compensation expenses, reduced bad debt expense, and lower facilities costs. The tax rate for the quarter increased slightly, but GAAP EPS still increased due to higher revenues, margin expansion, and a lower share count. Adjusted EPS also increased due to revenue growth, margin expansion, and a reduced share count, but was partially offset by higher interest expense.

The company's EBITDA increased to $240 million, with free cash flow also increasing by 13%. They repurchased shares and paid dividends, returning $430.1 million to shareholders in the last 12 months. They also paid down a significant amount of their term loan and have a plan to repay it in full by the second quarter of fiscal 2025. Due to delayed market recovery, their organic growth forecast has been adjusted, but their margin and EPS growth expectations have increased.

The company has revised its GAAP operating margin and adjusted operating margin guidance, with expected increases from prior guidance. Adjusted EPS is also expected to be higher than previously estimated. The effective tax rate remains unchanged. The company is managing costs while investing in strategic initiatives and is well positioned for growth. During the question and answer session, the company addressed guidance for ASV, stating that the range is wide due to the challenging environment but the midpoint assumes flat sequential growth. The company has more visibility for Q4 and feels confident about the range, with the low end at 4 and the mid-range at 4.75.

The company's biggest quarter is coming up, with many potential deals and opportunities. However, it is uncertain if all of these deals will be secured. The company is optimistic due to recent strategic wins and the potential for cost-saving solutions. There have been longer decision cycles for some deals in Q4, but the company is confident in their de-risked position. The CEO mentions three areas of investment that they are focused on to drive growth, similar to a previous situation a few years ago.

During a Q&A session, Philip Snow, CEO of FactSet, was asked about the company's investments and whether they would need more in the future. Snow expressed optimism due to ongoing initiatives and recent investments in generative AI and the data platform. He mentioned that they will evaluate potential investments in the upcoming months. Another question was raised about the recovery of capital markets activity and Snow mentioned that there has been an increase in M&A activity and hiring, which was also confirmed by Helen, but did not provide a specific timeline for when sell-side ASV growth would reaccelerate.

The speaker discusses the potential impact of banking fees on hiring trends and FactSet's ASV on the sell side. They note that historically, banking fees and hiring have been correlated, and there are reasons to be optimistic about future hiring. However, they also mention that large investment banks are being more conservative in their hiring, while middle market banks and boutiques are seeing higher numbers. In terms of run rate, the impact of the UBS CS transaction is mostly reflected in the current quarter, with a small amount remaining in the next quarter. The speaker also addresses the margin improvement, clarifying that it is adjusted operating margin and detailing the one-time and ongoing factors contributing to it.

The paragraph discusses the various factors that contributed to a 540 basis point improvement in the company's performance in the third quarter. This includes a lower bonus accrual, lower salaries, lower payroll taxes, lower facilities expenses, and higher capitalization. However, there were also some negative factors, such as higher technology costs and third-party data expenses. Overall, the company has seen a 340 basis point improvement, with about half of it being sustainable. The competitive environment is also mentioned, with the company facing competition from two key competitors in the institutional buy side market, where the focus is on total cost of ownership.

FactSet feels well positioned in the market with their portfolio analytics and front office tools. They recently launched PM Hub, which connects their middle office solutions with the front office. This gives them a competitive edge in the buy side, where firms are feeling cost pressure and cutting costs. In the wealth space, they have strong portfolio solutions and are focused on building additional workflows. In the banking, private equity, corporate, and hedge fund space, there is more competition, but FactSet's work with deep sector, private markets, and generative AI gives them a strong position. There is some price pressure on new logos, but they are almost always in multi-year contracts, allowing them to recapture price and improve price realization over time.

The speaker, Surinder Thind of Jefferies, asks about the integration of gen AI and its impact on technology costs for the company. CEO Philip Snow explains that as clients use more of these tools, it will cost more in terms of compute, but the company is focused on delivering value and will adjust pricing accordingly. The next question comes from Ashish Sabadra of RBC, who asks for clarification on the CS UBS headwind and the difference between revenue and ASV growth in the fourth quarter. CFO Helen Shan responds that the impact was the net effect and there may have been cross-sell opportunities, and explains the difference between revenue and ASV growth.

The speaker addresses a question about the Credit Suisse and UBS merger and explains that they were able to capture some cancellation back in selling to UBS. The CFO adds that revenue lags ASV and there was a one-time acceleration of CUSIP revenues in the third quarter of last year, making the third quarter of 2024 look lower in comparison. They also mention strong performance from CUSIP in the third quarter and decline to give guidance on the fourth quarter. The next question asks for clarity on the assumptions behind the updated ASV guide, to which the speaker responds that it reflects elongated sales cycles and not structural losses. The speaker also mentions that international pricing typically occurs in fiscal 3Q.

Helen Shan, responding to a question from George about pricing in the prior year, stated that international pricing increased to 16 in Q3, reflecting an increase in the number of clients. She also mentioned that deals are continuing to move, especially on the buy side, but are not lost. She emphasized that the underlying demand for their products remains steady, but they have had some one-time cancels. The next question, from Andrew Nicholas, asked about Phil's statement that AI will drive incremental ASV in 2025.

The speaker is responding to a question about internal cost savings and efficiency measures. They mention that they are evaluating these opportunities and may choose to reinvest the savings in products. The next question asks about the fourth quarter guidance and whether excluding the impact of the UBS CS license, the company would show growth in revenue. The speaker clarifies that the slowdown in revenue growth is due to various factors and they have been pulling levers to control expenses.

The speaker discusses the impact of one-time items on their business and mentions a large cancel that has affected their revenue. They believe that their underlying business is not the issue, but rather external factors. The speaker also mentions a decrease in people and real estate costs, offset by an increase in technology costs and third-party data. They state that their bonus accrual reduction has helped their margin in the third quarter.

The company is carefully managing its performance and does not anticipate any major cost-cutting actions. They are satisfied with their current position and have adjusted their operating margin guidance. It is difficult to predict when the market will improve, but it seems that projects that were previously paused are starting to resume. However, the company does not expect significant growth until next year.

During a conference call, Phil and Helen discuss their predictions for the rest of the year. Phil believes that the current market conditions will continue until the end of the calendar year, while Helen agrees and adds that the delay in larger projects and cost consolidations from clients will also contribute to the softness in banking. Linda answers a housekeeping question about the company's bonus accruals for the first three quarters of the year, stating that they were $30 million, $20 million, and $18 million respectively, with an estimated $15-16 million for the fourth quarter. She also mentions that the company has had to adjust their bonus calculations based on ASV achievement and margin.

The question from Russell Quelch of Redburn focuses on the private market space and how the company plans to compete against other competitors targeting growth in this area. Philip Snow, the CEO, mentions their investments in private markets since 2019 and their acquisition of Cobalt. He also mentions that private credit is an important area they are looking into, but cannot comment on any potential transactions. The next question from Heather Balsky of Bank of America asks about ASV growth and if the company has seen more price or volume growth. Philip Snow also mentions that the current market conditions may continue until the end of the year.

Helen Shan, speaking on behalf of her company, discusses the current state of the market and how it has affected their business. She notes that while the number of transactions has increased, the size of these deals has decreased, leading to a lower average price. She also mentions that the recovery is uncertain and varies by firm type, with technology being the main driver of spending decisions.

The speaker believes that the success of the company will depend on market conditions, but they are also focused on creating their own opportunities. They have a large addressable market and are expanding into new sectors, such as banking, which is helping them gain market share. They have a strong pipeline and are one of the few companies offering this type of service in the banking industry.

The speaker, Philip Snow, responds to a question about the demand for wealth services compared to other markets. He believes that the wealth segment is the healthiest for their company and that they have a strong pipeline and new workflows to support growth. He is optimistic about their ability to capitalize on industry trends and looks forward to the next conference in September. The operator then ends the call.

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