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Edited Transcript of FDS earnings conference call or presentation 25-Jun-19 3:00pm GMT

Q3 2019 FactSet Research Systems Inc Earnings Call

NORWALK Jul 9, 2019 (Thomson StreetEvents) -- Edited Transcript of FactSet Research Systems Inc earnings conference call or presentation Tuesday, June 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frederick Philip Snow

FactSet Research Systems Inc. - CEO & Director

* Helen L. Shan

FactSet Research Systems Inc. - Executive VP & CFO

* Rima Hyder

FactSet Research Systems Inc. - VP of IR

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Conference Call Participants

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* Alexander Kramm

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers

* Ashish Sabadra

Deutsche Bank AG, Research Division - Research Analyst

* Drew L. Kootman

Cantor Fitzgerald & Co., Research Division - Research Analyst

* David Chu

BofA Merrill Lynch, Research Division - VP

* George Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Keith Michael Housum

Northcoast Research Partners, LLC - MD & Equity Research Analyst

* Manav Shiv Patnaik

Barclays Bank PLC, Research Division - Director & Lead Research Analyst

* Mario J. Cortellacci

Macquarie Research - Analyst

* Patrick Joseph O'Shaughnessy

Raymond James & Associates, Inc., Research Division - Research Analyst

* Peter James Heckmann

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Peter Perry Appert

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Shlomo H. Rosenbaum

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Toni Michele Kaplan

Morgan Stanley, Research Division - Senior Analyst

* William Arthur Warmington

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the FactSet Q3 2019 Earnings Call. (Operator Instructions) Thank you.

Rima Hyder, Vice President, Investor Relations, you may begin your conference.

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Rima Hyder, FactSet Research Systems Inc. - VP of IR [2]

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Thank you, Christine, and good morning, everyone. Welcome to FactSet's Third Fiscal Quarter 2019 Earnings Conference Call.

Before we begin, I would like to point out that the slides we will reference during the course of this presentation can be accessed via the webcast on the Investor Relations section of our website at factset.com. The slides will be posted on our website at the conclusion of this call. A replay of today's call will be available via phone and on our website. After our prepared remarks, we will open the call to questions from investors. (Operator Instructions)

Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements.

Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release issued earlier today.

Joining me today are Phil Snow, Chief Executive Officer; and Helen Shan, Chief Financial Officer.

I'd now like to turn the discussion over to Phil Snow.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [3]

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Thanks, Rima, and good morning, everyone. I'm pleased to say that we're continuing our long record of steady growth in the second half of our fiscal year with growth across all our key metrics, including ASV, revenue, EPS and margin.

Cost pressures in the financial sector remain, but clients are looking to invest in technological solutions that drive efficiencies. And we continue to benefit from their response to our smarter and more connected data and analytics. This provides us with the ever-growing opportunity to take higher wallet share.

Now moving on to the third quarter results. This quarter, our sales team achieved comparable growth sales and expanded our footprint globally, adding net new clients and users. At the same time, we did see a higher-than-expected rate of cancellations due to industry-wide ongoing cost pressures. We think of our business in half year increments, and as we pointed out in our last call, we expect our second half to be more weighted towards the fourth quarter.

Turning to ASV. Analytics and wealth were the main drivers this quarter, along with the annual price increase for our international clients. Our ASV this quarter was impacted by a multiyear agreement with a corporate client that came to an end this year. Outside of this cancellation, ASV would have grown in line with our fiscal third quarter of 2019. Helen will discuss this in more detail, but we did benefit on the revenue side from this cancellation as it resulted in a onetime sale of data to the same client.

This cancellation impacted our CTS business ASV. Otherwise, CTS had a solid quarter.

Sales of standard data feeds accelerated through our data exploration product, which removes the friction from the trial and evaluation process, and this was the biggest contributor to CTS ASV.

Within analytics, our core equity portfolio analytics solutions and transactional revenue from our trading solutions were some of the biggest drivers of growth. The recent launch of our portfolio management platform and continued progress on our risk portfolio services and API solutions allow us to believe in the growth trajectory of this business.

However, while analytics was the largest contributor to growth, changes within our specialist sales force and unexpected cancellations led us to fall short of expectations. Additionally, we overestimated how quickly we could monetize some of our new products, and we've taken the necessary steps to address these challenges and believe that these adjustments will have a positive benefit on analytics overall.

Taking all of this into account, we now believe that we'll finish the year between $70 million to $75 million for ASV, plus professional services, maintaining our mid-single-digit growth target as we told you at Investor Day last year. We've increased guidance for other key metrics such as margin and EPS, and Helen will walk you through those in a few minutes.

Wealth had another strong quarter as they continue to expand, gain share and take competitive wins. With a strong pipeline and dynamic sales team that continues to target larger clients, we believe wealth is well positioned to finish this year strong and will continue to be a growth driver for us. And within research, the results came in better than expected with workstation wins and RMS sales. However, the business also experienced higher cancellations from continued pressure on the buy side.

Cancellations in general were higher this quarter across all our regions, mainly from firm closures, and consolidation continues to be a trend in our industry. We're proactively making changes to our sales processes, renegotiating client contracts and ensuring clients understand the full value of the FactSet products to help mitigate future losses.

Another significant change we made this past quarter was to move all the product sales specialists into our various business lines that we have instead of continuing to align them to general sales. This organizational change will give the heads of these businesses more line of sight into product and sales and allow for an even more specialized client experience with our sales teams.

In terms of geographic breakdown, we continue to have a growing global presence with diverse clients taking advantage of our open, flexible and configurable offerings.

Looking at our Americas and international businesses, Americas delivered a solid growth rate of 5% driven by analytics and CTS. And the EMEA and Asia Pac regions grew 4% and 11%, respectively, benefiting from the annual international price increase this quarter. Analytics and CTS both continue to be growth drivers in these regions.

In summary, this quarter is a great example of the FactSet team's ability to perform even amidst sector-wide challenges. We said last quarter that we remain cautious given client cost pressures, and this quarter saw increased cutbacks across the industry with clients increasingly tightening belts with an eye to future volatility, which resulted in the higher-than-usual cancellation rate.

Despite these obstacles, we demonstrated growth in Q3 across ASV, revenue, EPS and margin, and we remain confident in our long-term strategy and believe we're well placed to help clients navigate a changing environment.

Our open and flexible solutions are resonating in the market, which is seeing growing technology adoption as clients search for new ways to drive efficiency and create value. We believe our solutions will continue to serve as mission-critical for clients in their dynamic investment workflows.

We also continue to focus successfully on cost discipline and higher ASV and EPS growth and are taking steps to accelerate our sales pipeline. And we remain a strong steward of returning capital to shareholders with this quarter marking our 14th consecutive year the company has increased dividends.

Let me now turn the call over to Helen to talk in more detail about our performance this quarter.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [4]

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Thank you, Phil, and good morning, everyone. It's great to be here with all of you. We delivered strong operating results in the quarter with over 7% growth in both GAAP and organic revenue versus the previous year. This increase along with [operational] efficiencies led to a growth of over 20% in GAAP operating income, resulting in a solid expansion in our operating margin.

In addition, we grew adjusted diluted EPS by 20%. The onetime sale of data to a corporate client, as referred by Phil earlier, increased GAAP revenues by $5 million. Our quarterly results, in particular, revenue, operating income and cash, were positively impacted by this sale. For comparability purposes, we exclude this transaction from our results on an adjusted basis.

I will now walk us through the specifics of our third quarter.

GAAP and organic revenue increased 7% to $365 million and $366 million, respectively, versus the prior year. Growth was driven primarily by analytics, CTS and wealth. [As far as pure] ASV is more fully recognized as revenue in the third quarter.

For our geographic segments over the last 12 months, Americas revenue grew 8% and international revenue grew over 6% organically. Americas benefited from an increase in wealth, analytics and CTS. International revenue was largely driven by analytics and CTS. ASV plus professional services increased to $1.45 billion at the end of our third quarter at a growth rate of 5.6% year-over-year and up $4.5 million since the end of our second quarter. The growth was driven primarily by analytics and wealth and reflects our annual price increase in our international segment. The positive impact to ASV from pricing was approximately $5 million, in line with the prior year.

GAAP operating expenses for the third quarter totaled $247 million, nearly flat versus last year. As a result, our GAAP margin increased 470 basis points to 32%. Adjusted operating margin increased to 34%, a 310 basis point improvement from the third quarter of 2018, a level we have not seen in 5 years. This improvement continues to be driven in part by increasingly disciplined expense management and lower employee cost.

Similar to the second quarter of 2019, movements in foreign exchange rates were also a positive driver this quarter but to a lesser extent. The dollar strengthened against several of the currencies to which we have the greatest exposure, including the pound, the euro and the Indian rupee, providing a favorable impact to our margins of approximately 80 basis points.

As a percentage of revenue, the expense improvement came largely from our cost of services, which was 360 basis points lower than last year on a GAAP basis. On an adjusted basis, the improvement was 250 basis points. And margins were impacted positively by faster growth in revenue versus cost of services year-over-year. Contributing factors include decreases in both employee compensation and contractor fees. This benefit was partially offset by an increase in computer-related expenses as we continue to upgrade our technology stack.

SG&A expenses, expressed as a percentage of revenue, experienced an improvement of 110 basis points over the prior year period on a GAAP basis. On an adjusted basis, this improvement was approximately 60 basis points. This result is driven primarily by expense reductions in travel and entertainment, marketing as well as employee compensation.

Given our solid results, we are increasing our guidance range for both GAAP and adjusted operating margins.

Our tax rate for the quarter was 18.6%, impacted primarily by out-of-period and onetime tax adjustments. Excluding these discrete items, our tax rate would be 14.2%. Our tax rate has trended lower this quarter from a higher level of stock option exercises, and thus we are lowering our guidance for the fiscal 2019 annual tax rate. I will discuss that further in a few minutes.

GAAP EPS increased 24% to $2.37 this quarter versus $1.91 in the third quarter of 2018. This increase is attributable to higher revenue, improved margins and a lower effective tax rate. Adjusted diluted EPS grew 20% to $2.62. A reconciliation of our adjustments to GAAP EPS is disclosed at the end of our press release.

Free cash flow, which we define as cash generated from operations less capital spending, was $148 million for the quarter, an increase of 24% over the same period last year. This is the strongest free cash flow we have seen in the history of FactSet. The strength was primarily due to higher net income and improved working capital, including increased cash collections, partially offset by higher capital expenditures. Our CapEx has trended higher this year due to our new office space build-out for some of our locations and increased investments in technology.

Looking at our share repurchase program for the second quarter, we repurchased 175,000 shares for $48 million at an average share price of $272.

Additionally, this week, our Board of Directors approved an increase of $210 million to the existing share repurchase program, bringing a total of $300 million now available for share repurchases. Over the last 12 months, we have returned $327 million to our investors in the form of dividends and share repurchases. We remain committed to buying back our shares at a steady pace and continue to balance the capital allocation between business investment and shareholder returns.

Moving to our annual outlook for the year. We are increasing and narrowing our guidance range for most of our metrics except ASV plus professional services. ASV plus professional services for the year is now expected to be between $70 million and $75 million.

We are tightening our GAAP revenue range to $1.42 billion and $1.44 billion. Our GAAP operating margin, benefiting from this quarter's noncore sale transaction, will now be between 30% and 30.5%. We're also increasing our adjusted operating margin guidance to 32.5% and 33%. We are pleased with the cost discipline measures that we have taken to be able to implement in order to achieve these results.

As I explained earlier, our tax rate has trended lower this year due to onetime items and a higher-than-expected impact from stock option exercises. We are lowering our annual effective tax rate for the full year. It is now expected to be between 16% and 16.5%.

And finally, we are increasing and tightening our ranges for earnings per share. GAAP diluted EPS range is $8.90 and $9. Adjusted diluted EPS range is between $9.80 and $9.90. The midpoint of this guidance represents a 15% growth over the prior year on an adjusted basis.

We are proud of our operating results this quarter. Our dedication to cost discipline and process improvement continues to yield growth, and we are on track to finish the year on a strong note for revenue, margin and EPS.

As we continue to make prudent investments to drive business growth aligned with our long-term strategy, we expect that FactSet will remain resilient despite sector and industry headwinds. And, of course, we look forward to continuing our proven track record of returning value to our shareholders.

With that, we are now ready for your questions. Christine?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Manav Patnaik from Barclays.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [2]

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The first question, I guess, was when you had first initiated guidance around the ASV, I mean you had almost sounded like it was conservative and you had a bunch of these renewals and all in the back half that could have been added to that. So I was just curious, like what was the real change that you're kind of referring to today? Like was it just a lack of visibility or did something materially change along the way in terms of that shift?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [3]

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Manav, it's Phil. Thanks for the question. So yes, it is difficult for us typically to look one year ahead. We, I think, have stated multiple times, it's a little bit easier for us to see kind of 3 to 6 months out. So based on what we saw in terms of the market and what we thought each of our businesses could do over the year, that was our guidance at the beginning of the year.

I would say to summarize, research, CTS and wealth are all pretty much coming in as or above expected from the beginning of the year, but the biggest area where we're seeing kind of a difference is our analytics business.

So our analytics business, as you know, grew at 10% at the end of last year, and I would say that is the one where we're seeing the biggest difference versus our original projection. Now it still is a growth driver. It's going to add, we believe, the most absolute ASV out of any of the different business lines this year, but it's just not growing as quickly as we anticipated it would.

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Manav Shiv Patnaik, Barclays Bank PLC, Research Division - Director & Lead Research Analyst [4]

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Okay. And then maybe if I could just follow up on that point then. Can you just elaborate more? Is that because of competition? Or, I guess just anything there on why it's slowing down. It sounds like temporarily, but just why is that happening?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [5]

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Yes. So there are a few things when we look into it. One is the fixed income piece of that business is not growing as quickly as it did last year. Part of that, we believe, has to do with some of the specialist organization that I spoke about. So our specialists were in the sales organization for a few years for analytics. And we've gotten away from having a completely specialized fixed income team, and it was more of a multi-asset class team.

But I think what we've learned over the last few years is it's good to have that additional specialization within the group. So we've shifted about 1/3 of the client-facing sales force back into our business lines so that the leaders of those businesses now can work more closely with the sales specialists who are still going to work very closely with the general sales population. But we do think that, that was a piece of it. It certainly wasn't all of it.

Another one is I think we overestimated a little bit how much revenue or ASV we would get from some of the newer products. So part of that was our APIs that we opened up. It was hard to predict. We now have 4 or 5 APIs out in the market for analytics. We are selling them, but we're just not getting as much as we thought we would at the beginning. But we're very confident in that strategy, and we believe, over time, we'll get material ASV and growth from opening up the analytics suite outside of the call workstations. So if I were to highlight 2 things, those would be the 2.

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Operator [6]

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Your next question comes from the line of Bill Warmington from Wells Fargo.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [7]

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So I wanted to ask for some more detail on the Q3 expense speed. And just -- you ran through a number of the numbers. If you could summarize them for me in terms of how much came from the -- from FX, from acquisition integration, from core expense reduction.

And then I'm trying to get also a sense from -- of how sustainable it is.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [8]

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Sure. Thanks for that question. When we think about what we accomplished in Q3, it's really a continuation of execution on our operational plan. So for the quarter, I would say about 220 basis points were from operational efficiencies. And I would classify that really into a little less than half was from expense management of discretionary items, T&E as well as marketing. And the balance is driven by productivity improvements. And that continues to reflect the mix change between high- and low-cost countries in terms of the percentage of employees.

So let me give you a little bit additional color on that. If you look at the number of employees in Q3 this year versus last year, we saw a reduction in our -- in the number of employees in our high-cost countries by 4% and an increase in our low-cost countries by 6%. And so that really accounts for that mix change. And I'll address the long-term view on that.

And then the rest, Bill, was on FX. So where -- the favorable FX provides about 80 basis points for us, so that is around 1/4 of the beat that we have in terms of the improvement in the margin. And that's in line to how we did it last quarter, except for last quarter, it was over 50%. So more of the improvement this quarter came from operational efficiencies.

As it relates to the sustainability, another good question, let me try to address that. If you think about the drivers of where we're getting the benefit, it really is starting with the way that we operate. We established business units -- lines of business a couple of years ago. And this year, we now have cost centers and we have budgets, and we have now put the accountability broader and deeper into the organization.

So we have folks in our leadership team who have the accountability, have the discretion to be able to manage their head count and expenses, and they're doing that. They're managing their spend, and they're making more informed decisions.

The other, again, is the mix between high- and low-cost countries. The percentage mix has changed. So if I look at this year to last year, we now have 2% higher of our employees in low-cost countries. And so if I think about those 2 things, plus some of the integration that we were -- the expense reductions that we expected, which quite frankly, it's now quite integrated with the rest of our businesses but we do know of certain contracts, whether it's in technology or in content, that we've been able to rationalize, and those have come through in '19 as well.

So while we continue to look for ways to invest back in for long-term growth, we do believe that a lot of what we have accomplished, we should be able to sustain.

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William Arthur Warmington, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Analyst [9]

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Okay. And for my follow-up, I just wanted to ask about the -- well, you moved your terminal business to the cloud a couple years ago, and that enabled you to lower the cost of delivery and to pursue and win some higher seat count opportunities like wealth management. And when you -- when do you move your underlying FactSet infrastructure to the cloud? And what does that mean for near and midterm margin targets?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [10]

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So just to clarify, I mean we have our own sort of private cloud. The web product that we deployed to the large wealth deal we did and others, that's still in our private cloud.

What we have up in the public cloud now is more of the open FactSet architecture, which is a part of what CTS is doing. And we do use the public cloud for a few other things, particularly on the analytics side when we need additional capacity for some very heavy-duty calculations.

So I think we are, Bill, on a migration to the public cloud. We can't give you an exact time frame. We're considering all of that as part of our multiyear strategy. But I think what we have learned is that's the direction we need to go. It's the direction the world is going, and it's going to allow us to develop product a whole lot faster, and it's also going to remove a lot of friction from the sales process.

So we saw that with CTS. Having the CTS offering up in the public cloud and having the data discovery module has lowered the amount of time it takes to begin trialing our products by orders of magnitude. It takes sort of a day now to go up and begin looking at all of the content we have and to make a decision versus what it might have taken previously, which was weeks, for both us and the client to begin setting up a trial and getting it all set up. So that's a great business model. We think we can leverage it for lots of pieces of our business.

The Analytics APIs that I mentioned on the previous question, a lot of those were available now if you go into our developer portal. So that's another example of where we're removing friction and exposing our product in new and interesting ways to the clients.

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Operator [11]

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Your next question comes from the line of Shlomo Rosenbaum from Stifel.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [12]

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Phil, I'm just trying to understand the dynamics between revenue and ASV right now. I'm seeing like the revenue -- kind of organic revenue growth kind of inch up, but I'm seeing the ASV growth kind of inch down. And usually, those things move in tandem. And if I'm seeing the ASV inch down, usually, revenue should follow the other direction.

And it doesn't seem like you are -- you're saying that that's what you think is going to happen. It sounds like you're confident on what's going on. I was hoping you can kind of give us a little bit more background on that.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [13]

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So what I'll do is I'll describe the onetime deal or transaction that I mentioned for Q3, and then Helen can follow up, I think, a little bit on your question as well.

So as I mentioned in my script, we did have a onetime, pretty large cancellation in Q3, it was about $4.5 million in ASV, to a corporate client. So this had been a 10-year -- over a 10-year contract, where FactSet was distributing one of our core content sets that we collected, and the client decided to go in another direction. And I would say that's very comparable to FactSet. Over time, we've taken a lot of third-party content internally, but you've seen us turn into a content company and sort of go in another direction for some content.

So there's always the buy/build/partner decision when it comes to content. So that obviously negatively impacted our ASV for this quarter. I might have misspoke a little bit in my script. I think what I meant to say was in the absence of that $4.5 million transaction, our growth rate would have been pretty consistent with the last quarter and on an absolute ASV basis, pretty consistent with Q3 of last year. We did get a onetime payment of $5 million at the end of this contract, which Helen mentioned, that was booked as revenue. But I'll let Helen explain that in a little bit more detail.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [14]

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Sure. So I think the number that you are looking at there for revenue, that's a GAAP number of over 7%. And so that includes this $5 million onetime benefit from the sale. So if you strip that out, we're more at a 5.7% increase, and that is more aligned, I think, to what you're trying to get at in terms of the [alignment] between ASV and revenue.

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Shlomo H. Rosenbaum, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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Okay. And then just -- if you don't mind, just on a follow-up. In terms of what you're seeing in terms of pipeline, what you're selling, you mentioned certain things are not selling as well as they were before. Some of that -- it sounds a little bit more kind of belt-tightening type stuff or I guess just an environment not quite as good as you thought it would be. But on the other hand, the tone of what you're saying just seems still pretty confident.

Should we see kind of a pickup from here? In other words, is your pipeline building that you would expect that we're still bouncing off the bottom in terms of the growth rates? Or -- because I think you said that kind of 5% to 7% organic growth was more -- at the last Analyst Day, is the way to think about things and just wondering if you could comment in that context.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [16]

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Yes. It's a great question, and again, Shlomo, it's hard to see into the future that far. When I look out at Q4, the pipeline is very comparable to what we saw this time last year. So I think we feel good about the adjusted guidance that we gave you sort of based on what we can see today. And obviously, we're busy thinking about the next fiscal year already, and I'm looking at all of our businesses.

We have so much great product coming to market within each of our business lines, and we've got larger deals in the pipeline than FactSet historically has had. Some of those are pretty binary, right, sort of like the BAML deal. You either get it or you don't. So that can actually obviously materially affect our growth rate. But I do feel that we have a very good opportunity to continue the pace we have and accelerate from here.

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Operator [17]

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Your next question comes from the line of Toni Kaplan from Morgan Stanley.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [18]

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Phil, you mentioned the sort of unexpected cancellations. Could you give us a bit more color on are there any commonalities across client type? Are they sort of newer clients or long-term clients, the size of the clients? Or if there's any way to sort of group them as opposed -- just -- that would be helpful.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [19]

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So Toni, your question is about the clients that canceled completely?

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [20]

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Yes.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [21]

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Yes. So I think we showed that we were net around 50 positive clients for the quarter. I would say most of the positive additions there were on the wealth and corporate side, which is pretty consistent. We're adding a lot of new names in wealth and in corporations. I think what we saw was a bit of a tick down in the institutional asset management space and a little bit of a tick down in terms of hedge funds.

Hedge funds, though, were positive versus Q3 last year, so I think we continue to do very well in existing hedge funds with our CTS feeds, in particular. But I think we are seeing -- I think it's not unexpected, right? The most challenged part of the market is the institutional asset management space. So we're seeing very good growth in the asset owner space, which is smaller for us but relatively newer compared to history. But if I were to summarize it, I think it's the institutional asset managers or the traditional asset managers that are seeing the pressure where we're seeing the cancellations.

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [22]

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Okay. Great. And I know, Helen, you talked about the margin sustainability to an earlier question. But I just wanted to get an update on -- originally, at the Investor Day last year, there was sort of that target of 100 basis points of margin expansion over the next few years. And this year, I think you've had -- you've outperformed that. And so just trying to get a sense of have you accelerated the pace, or just given that FX has been a big contributor. Or should we still be looking at the 100 basis points next year as well?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [23]

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Sure. No, thanks for your question. Listen, we're pleased about how we've been executing our operational plan and our ability to meet and actually beat our commitment for FY '19. As we stated on the last call, we're not looking to manage to a margin but really grow revenues and earnings.

We're going through our strategic planning process right now, and so we're planning to determine how do we best invest to sustain for long-term growth. And this is going to include spending in areas such as in content and in our infrastructure, including technology and our technology stack and our people.

We're not necessarily -- we did get a benefit from FX for this year, and -- but we're not necessarily assuming that going forward. But we'll come back to you when we've got new information as it relates to our margins going forward.

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Operator [24]

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Your next question comes from the line of Peter Heckmann from Davidson.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [25]

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This may just be a follow-up. But is the wide range of potential growth rate in the fourth quarter really just a product of the decimalization of your guidance? Or are there some other uncertainties that you're trying to convey?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [26]

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I'm not sure I follow your question because we've narrowed our guidance across the board.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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But -- so if we take out the first 3 quarters, the fourth quarter is implying kind of 1% to 7% revenue growth?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [28]

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Well, that's because -- I think you're talking about revenues because -- the numbers are so large, $1.42 billion to $1.44 billion, you try and back into. I wouldn't necessarily look at trying to look at that -- I mean that's -- it was much wider before.

If you look at our original guidance, that was widest because the numbers -- I think it's the law of numbers here that, that might be a little bit confusing. I don't see that you should necessarily look to a difference in there. We're not trying to convey a material difference in our growth rate.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

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Okay. Okay. And then just as a follow-up, can you just talk about the tax item that occurred and was added back to non-GAAP EPS?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [30]

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Yes. Sure. Happy to do that. So yes, these were related to a number of things, including adjustment to our provision from last year, R&D tax credit, some -- an impact from U.S. tax reform, the toll charge true-up. So it's really a number of things, again, out of this period and, in some cases, from last year. So that helps drive that delta. But also, as we mentioned, overall, the higher exercise of options by employees, where we get the tax benefit of that, it was higher than we would have expected, and that's a material reason as well.

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Operator [31]

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Your next question comes from the line of Alex Kramm from UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [32]

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Phil, in your prepared remarks, when you were addressing the tough environment out there, you were talking about taking steps with your clients to make sure cancellations will decline, et cetera. It sounded to me like you're taking some pricing steps maybe on the negative side to maybe lock in some clients. Can you just flesh it out a little bit to know what's going on there?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [33]

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Sure. So I think really, what we're doing there, Alex, is continuing to elevate the level of conversation we have, particularly with our larger clients. So given the breadth of our offerings now and the challenges our clients face, there's a very good opportunity to sit down with them, educate them about everything we can do from a content and technology and workflow standpoint and look to get into multiyear agreements, where we can grow and succeed together.

So I think that's a little bit more of what we're referring to. Of course, in a competitive environment, price does come into it. But I think we're looking to have conversations with clients before their contracts come to an end to talk about lengthening the contract and restructuring things in a way which is a win-win.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [34]

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Okay. That's helpful. And then just for the 4Q guidance on ASV or the implied 4Q guidance, maybe we're splitting hairs here, but if I look at the sequential quarter-over-quarter increase that you need at the midpoint, I think it's still a decent step-up. And I know the fourth quarter is usually a pretty good quarter, and I think somebody asked that before in terms of the pipeline.

Can you just describe -- like are there a couple of big wins that you have in the pipeline that need to happen to get to this? Or is this a very diverse set of wins that you're looking for? I guess I'm trying to ask like are you really looking for a couple big ones here to make the year? Or is it just business as usual that should get you there?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [35]

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That's a good question. It's the second. It's the business as usual. So I took a very close look at the pipeline. Q4 is a massive quarter for us. But in there is a very strong, diverse portfolio of opportunities both by geography and by business line. So there are no massive deals either on the positive or negative side that I believe will impact the quarter in a binary fashion. I think it's really just a question of the sales team executing at a very high level, which they will do, to close a large number of deals in a relatively short period of time. But that's what we do every Q4.

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Operator [36]

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Your next question comes from the line of Joseph Foresi from Cantor Fitzgerald.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [37]

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This is Drew Kootman on for Joe. I just wanted to ask about how -- the impact of wealth management this year and what you see moving forward.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [38]

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Yes. So obviously, we had that fantastic deal that we signed last year and executed on this year, and we captured the majority of the revenue in the first half.

What we've been doing for the rest of the fiscal year, really, is just building the pipeline. So we've got a lot of interest from a lot of clients given the visibility of that deal. We've had some very successful trials that we've been running, and I would expect the majority of the impact to start hitting next fiscal year, not in Q4 of this year.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [39]

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Great. And then just as a follow-up, looking at the Americas, it looks like it continues to be strong. So maybe you could just touch on the demand there and what you're seeing from there.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [40]

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Yes. So the Americas team is performing very well. In a lot of ways, it's our most mature business just in terms of the products that we have for this market and the size of the sales team.

I think Americas is really going to benefit highly from some of the new products that we've been releasing. A great example is our portfolio management platform. So we've been hard at work the last 2 or 3 years integrating the acquisitions we did for what we've been calling the portfolio life cycle.

And this quarter is the quarter that we released our portfolio management platform, which we believe will have a good impact for us in the front office of the buy side. And the Americas sales team now, I think, is really getting geared up to go out there and begin to educate clients about this offering.

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Operator [41]

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Your next question comes from the line of Ashish Sabadra from Deutsche Bank.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [42]

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Phil, maybe just a quick follow-up. You talked about increased competitive pressure. You've also -- which is weighing on cancellations, but you're also seeing some of your clients having cost pressure. And then there are changes within your sales force as well. So question there is with all these headwinds, is there any potential risk to converting the pipeline in the fourth quarter given the fourth quarter is such a strong -- in terms of ASV and pipeline conversion?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [43]

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I've got a lot of confidence in our sales force, and we have a great product. Clients like working with us. They trust FactSet. So I think we're very well positioned to execute on Q4. There's nothing, as I look out over the next few months, that makes me feel any different than I felt at this time last year.

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Ashish Sabadra, Deutsche Bank AG, Research Division - Research Analyst [44]

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Okay. That's helpful. And maybe, Helen, a quick question. The onetime revenue of roughly $5 million, which we saw in the third quarter, is it fair to assume that it flowed directly to the bottom line in the sense there wasn't really any cost associated with it? And so what was the -- sorry, go ahead.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [45]

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Yes. So you are correct on that. So that's why you're seeing that difference between GAAP -- more significant difference between GAAP and adjusted this quarter. So you are right, that just flowed straight through.

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Operator [46]

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Your next question comes from the line of David Chu from Bank of America.

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David Chu, BofA Merrill Lynch, Research Division - VP [47]

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Can you just discuss what you're seeing from the sell side? It looks like ASV moderated quite a bit after 5 straight quarters of acceleration.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [48]

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Yes. So the sell side is pretty lumpy. We've had a very good run in terms of increasing our footprint on the sell side. Q4 is a little hard for us to gauge. That's when a lot of the banks do their hiring, and that's actually one of the hardest things to predict in terms of the Q4 pipeline, sometimes is how many new hires the banks will have, and that can be a lot of people multiplied by the price of the FactSet workstation.

So we typically get more visibility on this as the quarter comes to a close. But we're very pleased with the work we've done on the sell side, and we're doing a lot within our product, particularly on the content side, that I think is going to be exciting for our sell-side clients as we move into next fiscal year.

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David Chu, BofA Merrill Lynch, Research Division - VP [49]

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Okay. And then, Helen, just based on the guide, it looks like intangible asset amortization is really expected to fall off in the fourth quarter. Just wondering if I'm thinking about this correctly.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [50]

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Sorry. That you expect it to fall off, you said?

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David Chu, BofA Merrill Lynch, Research Division - VP [51]

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Yes. Because I mean it looked like there was about -- over $5 million this quarter, right, or around $5 million? And based on your annual outlook, does it -- it's expected to fall off quite a bit?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [52]

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Okay. So that's probably a question you want to follow up with Rima on. But there is nothing material change that we would see happening, so it might be something we just need to clarify with you.

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Operator [53]

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Your next question comes from the line of Peter Appert from Piper Jaffray.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [54]

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So just stock's been a big outperformer, obviously. And I'm wondering if that has any impact on your thought process in terms of the pace of buybacks going forward.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [55]

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Sure. Thanks for that. I'll take that one. I mean year-to-date, we've bought back stock around $150 million, but we're opportunistic how we enter into the market. Like you, we watch the share price every day. So we're pretty happy with the trajectory of how the stock performed over the quarter. But from our perspective, we weren't necessarily in the market there to chase that.

We've continued to be very good about returning cash to shareholders. We increased our dividend this past quarter, and we just increased our share repurchase program. So right now, we're looking for -- probably continue to target around $200 million for the fiscal year. But again, we're opportunistic, so we'll see how things go.

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Peter Perry Appert, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [56]

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Okay. And then, Phil, I'm wondering if you have any thoughts on the change in the competitive dynamic with Refinitiv now separated from Thomson Reuters, whether you're seeing that having any impact on the market or any changes in behavior related to that.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [57]

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No, Pete. I mean we've actually not seen much of a change in behavior there, so there are -- we do compete with Refinitiv. I would say that's primarily going to be on the wealth side, I would say, moving forward. But beyond that, we've not seen much of a change at all.

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Operator [58]

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Your next question comes from the line of George Tong from Goldman Sachs.

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George Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [59]

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You called out the cancellation by a large corporate client this quarter since they decided to go in another direction. Can you elaborate on why the client canceled? If it was due to pricing or product capabilities? And then talk about how cancellation rates more broadly are trending.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [60]

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Yes. So that's -- it's difficult to put yourselves in the mind of the other clients, but I think, as I mentioned earlier, if you're thinking about having content within your organization or on your platform and you've got a buy, build or a partner decision, it's something that FactSet faces every day. And I think in that case, they probably decided that either building it or partnering with someone else was the best solution for them, and that can be complicated in terms of their decision-making process.

When we're talking about cancellations of this type on FactSet, this was a little bit of an outlier for us, honestly. So we do have a very good business with corporates, but this was probably the largest one that we had. So I would not expect more of this size or frequency. Like I said, this was a 10-year contract. It was a very long contract. So there was nothing about our product, which we've continued to improve and is massively successful on our platform, that was the reason for the cancellation.

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George Tong, Goldman Sachs Group Inc., Research Division - Research Analyst [61]

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Got it. And you indicated that you overestimated how much revenue you would get from new products, and that contributed to some of the ASV guidance modification. Can you discuss what caused that overestimation, whether it's a function of evolving competitive dynamics more recently, whether it's due to pricing or if it's due to sales force efficiency?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [62]

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Great question. A lot goes into, I think, a business plan. When you release a new product, there's a lot of factors. So I think -- one of the things I'm excited about is the increased discipline that we have here internally in terms of what we're spending our money on, on our projections. I think we're going to get better and better at that over the time.

I'm very confident in the direction. Like I said, we've already begun to monetize Analytics APIs, but we've just learned a few things in the market in terms of the functionality the clients would want, how we want to price it and so on.

So that's really all the color I can give you on that one.

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Operator [63]

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Your next question comes from the line of Hamzah Mazari from Macquarie Capital.

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Mario J. Cortellacci, Macquarie Research - Analyst [64]

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This is Mario Cortellacci filling in for Hamzah. Could you just give us an update on what you're hearing from clients given the current environment? I just want to see if maybe you could compare what you're hearing in the U.S. versus Europe versus Asia and kind of compare those for us.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [65]

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So I think the themes are very consistent, Mario, globally. Clients are looking to drive efficiencies within their organization so that they can free up their resources to work on higher-value activities and really look for more alpha and so on. So a lot of our conversations really around how we can help them with those efficiencies. Part of that is just them consolidating their services onto FactSet.

Lots of clients are trying to make sense of all the data they have within their organizations as the pace of data explodes, and people need to look and sift through more of it. So we have lots of conversations with clients around how to help them organize their data, how to outsource stuff, things they want to do in the public cloud that we can help them with. It really -- it's not that complicated. I think clients just want to do some of the things more efficiently with firms like FactSet, so they can really focus on where they add value.

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Mario J. Cortellacci, Macquarie Research - Analyst [66]

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Got it. And just a quick follow-up. I mean we know that there's pressures from clients regarding cost, but I mean could you give us a sense of, I guess, where or when you can reach an equilibrium? Or do you have a working time frame that you guys use while planning for the future? Or how do you think about catalysts that could help you with pricing longer term?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [67]

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Can you restate the question?

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Mario J. Cortellacci, Macquarie Research - Analyst [68]

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Sure, yes. I mean we -- so we know that there's costs from -- I'm sorry, there's cost pressures from clients. Just wanted to see if you ever thought about like an equilibrium regarding pricing or if there's a time frame that you use while planning for the future or maybe if you think about catalysts that could help you with pricing longer term.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [69]

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So pricing is something we're looking at. FactSet is very modular in terms of our pricing. And we may have overcomplicated things as we've evolved as an organization, so we're in the middle now of evaluating our business model. And as we open up our platform, we're considering new ways that we can get into enterprise agreements with our clients.

So that's a piece of work that's ongoing, and I would expect that you might hear more from us on that. But it wouldn't be for probably at least a couple of quarters.

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [70]

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But I guess one thing you might consider, obviously, the way to continue to capture price is putting more value for the client. As Phil was saying, that's what we're focused on. Clients want to pay for what they -- they'll continue to have pricing pressures. But the way to get to the ability for equilibrium, to use your words, is that we'll continue to add value, and clients will want to pay for that.

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Operator [71]

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Our next question comes from the line of Keith Housum from Northcoast Research.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [72]

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I was hoping to explore the professional fees, I don't know, that you guys have which includes an ASV. If you can provide a little bit of color? Obviously, that number's been increasing. But how long does it usually take for those professional fees to turn around and get recognized into revenue? And then perhaps, is the margin profile different from those fees than you would think of the rest of the ASV bucket?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [73]

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Sure. Let me try to talk that through, and then any follow-ups you have, you can definitely have with Rima. But the way that we take a look at professional fees is that we look at that over the last 12 months and add that in. We don't try to project out per se from an -- think about ASV as an annual subscription value. Professional fees are quarter by quarter. So from that perspective, it's really looking backwards on what we have already captured.

In terms of how that comes through from a revenue perspective, it goes through in the quarter that it gets realized.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [74]

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Got you. And how about the margin profile of that business?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [75]

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Well, it's more of a people incentive business, but honestly, it gets added on to some of our -- it's a mix, so some of it gets added on to our other existing business. So we don't really necessarily look at it as its own stand-alone business.

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Keith Michael Housum, Northcoast Research Partners, LLC - MD & Equity Research Analyst [76]

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Okay. Then just real quick in terms of the change in sales leadership over the quarter. Any change in the sales strategy in terms of how you guys go to market?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [77]

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So I think sales has executed exceptionally well over the last 2 years. I think the biggest change is moving the sales specialists into the business lines that we've created. I think the biggest impact we'll see there is within analytics and CTS. So about 1/3 of our client-facing sales force are the sales specialists that know these products in very high detail. They're very good at presales, and they also do the implementation.

So we think we will get great efficiency by moving the specialists into these groups. That's one change I think we're also going to be looking at the FactSet consultants and how they're coupled up with the sales force to make all of our client-facing staff a little bit more commercially focused, not just the general salespeople, and continuing to push out the regional model that we've begun over the last 2 years as well as expanding our focus on the C-suite.

So we have the strategic client group, which is our top 30 or so clients, but that's been very successful in elevating conversations. And we're looking at ways to expand that within the different regions.

So that's the summary. I think some of you will have an opportunity to meet Franck pretty soon as we meet with you between quarters. And I think he'd be very excited to talk to you about some of the changes he's planning to bring to the organization.

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Operator [78]

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Our last question comes from the line of Patrick O'Shaughnessy from Raymond James.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [79]

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So Symphony Communications raised another $165 million in capital during the year -- the quarter. Are you guys seeing any signs or any evidence of adoption of Symphony as a chat tool by your client base at this point?

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [80]

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So we have partnered with Symphony over time. We do see within our clients good, I think, adoption within the clients, but we've not yet seen a lot of [cross phone] communication. So I think it's there, but we don't see a lot of communication directly between the buy side and the sell side on Symphony. But I'm not -- I don't want to position myself as an expert in that area by any means.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [81]

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Okay. Fair enough. And then maybe one last quick question on the tax rate. So moving lower this year due to the stock benefits. Any implications as we kind of think about modeling tax rate going forward? Or are you kind of looking at that as a benefit isolated to fiscal 2019 at this point?

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Helen L. Shan, FactSet Research Systems Inc. - Executive VP & CFO [82]

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Right. So I wouldn't necessarily, at this point, change the view on that. That is such a -- I'll use the word unpredictable. Given the trajectory of our share price, if it continues, we would expect this to be a continued positive for us. So I would probably just stay within our range for now.

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Operator [83]

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There are no further questions at this time. Mr. Phil Snow, I turn the call back over to you.

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Frederick Philip Snow, FactSet Research Systems Inc. - CEO & Director [84]

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Well, thanks, everyone, for joining us on the call today. We're encouraged by the growth we achieved this year amidst challenging headwinds and see this as a proof point that our long-term strategy is working.

We expect to finish the year with strong revenue, margin and EPS and to continue to capture wallet share and deliver value to shareholders.

If you have additional questions, please call Rima Hyder, and we look forward to speaking with you next quarter.

Operator, that ends today's call.

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Operator [85]

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Thank you. This concludes today's conference call. You may now disconnect.