Q3 2024 Earnings Summary
- FactSet's wealth management segment is experiencing strong demand, with an active pipeline of deals of various sizes. The company is optimistic about accelerating growth in this area, especially with the introduction of AI tools enhancing their offerings.
- FactSet is effectively managing expenses, with people costs down 10% year-over-year and real estate costs down 14%, leading to an increased adjusted operating margin guidance by 70 to 80 basis points for the rest of the year. This demonstrates strong operational efficiency and the ability to improve profitability even in challenging market conditions.
- Investments in generative AI and multiyear initiatives are expected to drive future growth. FactSet anticipates that AI will begin delivering incremental ASV in fiscal 2025, and ongoing projects like deep sector coverage and private markets are progressing well, positioning the company for future expansion and innovation.
- Future margin improvements may be limited due to reliance on one-time items: Linda Huber stated that out of the 540 basis points of adjusted operating margin improvement, about 280 basis points are one-time factors such as a lower bonus accrual and payroll tax adjustments that "will not be repeated". This suggests that future margins may be under pressure without further cost-cutting opportunities.
- Delayed sales cycles and higher client erosion impacting growth: Helen Shan mentioned that they are seeing deals continue to move, especially on buy-side analytics, due to elongated sales cycles. Additionally, there is higher erosion driven by client cost rationalization, affecting ASV growth.
- Potential need for increased investment may pressure margins: In response to questions about requiring more investments to drive growth, Phil Snow acknowledged that they are evaluating whether there are areas they would want to "invest more in", but cannot provide guidance yet. Increased investments may impact future margins.
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ASV Guidance and Growth Outlook
Q: Why is ASV guidance range wide, and growth slowing?
A: Management acknowledges the wider ASV guidance range due to longer decision cycles and market uncertainty. They are confident in achieving the midrange but have derisked the low end. The challenging environment, with delayed larger deals, has led to slower ASV growth. However, they see reasons for optimism with recent strategic wins and believe underlying demand remains steady. -
Impact of UBS-CS Merger
Q: What is the impact of the UBS-CS merger on revenue?
A: The majority of the impact from the UBS-Credit Suisse merger is reflected in this quarter's results, with a smaller effect expected in Q4. They were able to recapture some cancellations by selling back to UBS, mitigating the overall impact. Excluding this one-time event, ASV erosion would have been around 30 basis points lower. -
Competitive Environment and Pricing Pressure
Q: How is the competitive landscape and pricing pressure?
A: Management feels well-positioned competitively, especially on the buy side and in wealth management. While there is some price pressure on new logos, particularly when displacing competitors and matching client budgets, such instances are not widespread. Multiyear contracts allow them to recapture price over time, and overall pricing realization remains strong. -
Generative AI Impact on Costs and ASV
Q: How will AI affect costs and ASV growth?
A: They see opportunities for efficiency gains through AI in client service, quality assurance, content collection, and code writing. While these efficiencies could reduce costs, the decision to reinvest the savings into products is under consideration. AI is expected to drive incremental ASV in 2025, but they are evaluating the impact on expenses. -
Capital Markets Recovery and Sell-Side Customers
Q: When will sell-side ASV growth reaccelerate?
A: Management observes increased M&A activity and slightly better hiring trends, particularly among middle-market and boutique banks. Seasonal hiring is higher this quarter compared to last year, but they remain cautious and are not building a significant recovery into Q4 expectations. Historically, as banking fees and hiring improve, FactSet's ASV growth on the sell side may follow. -
Cost Management and Expense Levers
Q: What levers remain for cost management?
A: They have focused on managing costs effectively, reducing people costs by 10% and real estate costs by 14% year-over-year in Q3. They do not anticipate major additional cost-cutting actions, feeling satisfied with current expense levels. Adjustments to the bonus accrual have been made to align with ASV achievement, but further significant levers are limited. -
Private Markets Strategy
Q: What are your ambitions in private markets?
A: FactSet has been investing steadily in private markets since 2019, doubling their coverage to over 8 million entities and enhancing data quality. They acquired Cobalt and are collaborating with ecosystem partners. While recognizing increased competition in the space, they cannot comment on any potential acquisition transactions. -
Wealth Segment Demand
Q: How is demand in the wealth segment?
A: Management views the wealth segment as their healthiest market, with an active pipeline of deals of various sizes. They continue to develop new workflows and believe they are well-positioned to accelerate growth in wealth management. -
Recovery Expectations
Q: What is your outlook on the market recovery?
A: Predicting market recovery timing is challenging. They note that 2024 was a year of cost cuts, with budgets reflecting that. While there are signs of paused projects resuming and better hiring trends in banking, they are cautious and do not expect significant tailwinds until potentially next calendar year. They believe they can create their own tailwinds by leveraging their addressable market and product offerings. -
Deep Sector Offering
Q: Any updates on the deep sector offering?
A: They continue to expand their deep sector offering, now covering eight sectors with over 80 reports available within workstations. They have an active pipeline and see this as an important aspect of what most banks desire, especially during renewals. -
Technology Costs from AI
Q: How will AI tools impact technology costs?
A: The impact on technology costs is currently uncertain, as increased client usage of AI tools will result in higher compute expenses. They are monitoring usage and costs closely, and these factors will influence how they price these products to ensure the value delivered outweighs added expenses. -
Bonus Accruals
Q: What were the bonus accruals each quarter?
A: Bonus accruals were $30 million in Q1 (including a $3 million top-up), $20 million in Q2, and $18 million in Q3. They expect around $15–16 million in Q4, totaling approximately $83 million for the year, down from $105 million last year. Adjustments align the bonus accrual with ASV achievement and margin performance.