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    Factset Research Systems Inc (FDS)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$487.90Last close (Mar 20, 2024)
    Post-Earnings Price$474.26Open (Mar 21, 2024)
    Price Change
    $-13.64(-2.80%)

    What went well

    • FactSet has a healthier and accelerating pipeline for the second half, with higher deal volume and a strong presence in data solutions, middle office, and Quant solutions. Many deals are in the later stages of the funnel, giving more confidence for future growth.
    • FactSet is in a strong competitive position, with clients wanting to work more with them, benefiting from competitors' platforms being less flexible and less able to scale. There are significant opportunities in wealth management, with large opportunities in the pipeline, and expansion into private equity, corporates, and hedge funds, supported by investment in deep sector content and generative AI technologies.
    • FactSet is leveraging generative AI to improve internal efficiencies in areas like software development and content collection, which is expected to result in cost savings and margin improvements starting in FY '25. This positions the company well for future growth.

    What went wrong

    • Client count growth is slowing, with management noting that client count growth, driven by new business, has come down. There is increased competitive pressure leading to lower price realization in new business, reflecting a more competitive environment. Clients are seeking alternatives, making large decisions tougher.
    • Anticipated lower organic ASV growth and GAAP revenue to land at the lower end of guidance, due to the impact of the Credit Suisse-UBS merger and a large wealth cancellation, leading to a more conservative outlook. Management is not assuming a bounce back in banking, impacting future growth prospects.
    • Expected margin compression in the second half, as adjusted operating margin is projected to decrease from 38.3% in Q2 to around 35% in H2, due to expenses ramping up, including higher technology costs. Shift into lower-margin businesses like managed services could also impact profitability.

    Q&A Summary

    1. Lowered Revenue Guidance
      Q: Why is revenue guidance at lower end?
      A: Management anticipates lower ASV growth and GAAP revenue at the lower end of guidance due to the impact of the UBS-Credit Suisse merger and a large wealth cancellation. These events are being reflected in the guidance, and they are taking a more conservative view of the environment.

    2. Q3 Softness and Q4 Optimism
      Q: Outlook for Q3 and Q4?
      A: Management expects a weaker Q3 but is cautiously optimistic about Q4, citing a healthier pipeline with a higher number of six- and seven-figure deals, up about 5% year-over-year, providing greater visibility and confidence for the fourth quarter.

    3. Expense Ramp and Margin Outlook
      Q: How will expenses and margins trend this year?
      A: Expenses are expected to ramp up in the back half of the year, mainly due to increased technology costs associated with cloud expenses and generative AI initiatives. Margins will decrease from 38.3% in Q2 to about 35% in the second half, aiming for the midpoint of guidance at 36.5%.

    4. Pricing Pressure
      Q: Are you seeing pricing pressure?
      A: Management notes that price realization in new business is lower than last year, reflecting a more competitive environment. Overall price realization against the rate card is about flat to last year, varying across firm types.

    5. Competitive Environment
      Q: How is competition affecting you?
      A: The competitive environment has intensified, with more total cost of ownership conversations and greater C-suite involvement. Clients are seeking new alternatives, and pricing pressure is greater, especially in smaller deals within banking and PVC. FactSet believes it is in a strong position competitively, particularly on the buy side and in wealth management.

    6. Generative AI Opportunities
      Q: How will generative AI impact your business?
      A: FactSet sees significant opportunities with generative AI in increasing developer efficiency, content collection, and client support. Efficiency gains are expected primarily in FY'25, contributing to cost avoidance as they bend the cost curve.

    7. Capital Markets Recovery Impact
      Q: What is your outlook on capital markets recovery?
      A: Management acknowledges recent dovish signals from the Fed, with the possibility of rate cuts later in the year. While they see positive signs like recent IPO activity, there is a lag before improvements impact their business, so they remain cautious in their near-term outlook.

    8. Managed Services Expansion
      Q: Tell us about investment in managed services.
      A: FactSet is investing more in managed services, a smaller part of the business that is typically lower-margin. They see opportunities as clients outsource solutions, which, combined with their subscription offerings, presents a good overall opportunity.

    9. Client Count Growth
      Q: Why is client count growth slowing?
      A: Client count growth is driven by new business, and the slowdown reflects the current competitive environment. Management is not overly concerned and notes that user count growth remains strong.

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