FactSet Research Systems Inc (FDS) Q4 2024 Earnings Call Transcript Highlights: Strong …

• Annual Revenue: $2.2 billion.

• Adjusted Operating Margin: 37.8%.

• Adjusted EPS: $16.45, 12.3% growth.

• Organic ASV plus Professional Services Growth: $104 million, 4.8% year-over-year increase.

• Q4 Organic ASV Addition: $54 million.

• Q4 GAAP Revenue: $562 million, 5% increase.

• Q4 Organic Revenue: $563 million, 5% increase.

• Q4 GAAP Operating Expenses: $434 million, 3% increase.

• Q4 Adjusted Operating Margin: 35.8%, 240 basis points improvement.

• Q4 GAAP EPS: $2.32, 38.1% increase.

• Q4 Adjusted EPS: $3.74, 23.8% increase.

• Free Cash Flow: $137 million for Q4, $615 million for fiscal 2024.

• Client Retention Rate: 90%.

• Number of Clients: Over 8,200, with 296 new logos added.

• Number of Users: Increased by 26,000, 14% growth.

• Share Repurchase: 153,650 shares for $63 million in Q4, 537,800 shares for $235 million in fiscal 2024.

• Dividend: $1.04 per share, marking the 25th consecutive year of increases.

• Term Loan Repayment: $62.5 million in Q4, reducing gross leverage to 1.6 times.

• Fiscal 2025 Guidance: Organic ASV growth of $90 million to $140 million, adjusted operating margin of 36% to 37%, adjusted EPS of $16.80 to $17.40.

Release Date: September 19, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• FactSet Research Systems Inc (NYSE:FDS) reported annual revenue of $2.2 billion, adjusted operating margin of 37.8%, and adjusted EPS of $16.45, all above the high end of their most recent guidance.

• The company achieved organic ASV plus professional services growth of $104 million or 4.8%, which is above the midpoint of their guidance range.

• FactSet Research Systems Inc (NYSE:FDS) added over 23,000 adviser desktops in fiscal 2024, representing over 30% growth in seat count, bringing their total wealth users to over 100,000.

• The company secured significant wins in the wealth management sector, including competitive displacements and large enterprise deals.

• FactSet Research Systems Inc (NYSE:FDS) is making strategic investments in generative AI, with early signs of success and meaningful usage by clients, which is starting to drive incremental ASV and improve retention.

Story continues

Negative Points

• Growth in the EMEA region decelerated to 2%, with gains from wealth offset by headwinds to retention on the buy side due to constrained budgets of mid- to large-sized asset manager clients.

• The institutional buy side faced tighter budgets and vendor consolidation, leading to an organic ASV growth rate of only 3%, with higher erosion and a large asset manager cancellation putting pressure on retention.

• GAAP operating expenses increased by 3% year over year to $434 million, primarily due to a one-time $54 million charge related to a Massachusetts sales tax dispute.

• FactSet Research Systems Inc (NYSE:FDS) anticipates continued pressure on client budgets, which may affect the overall pace of erosion and growth in the upcoming fiscal year.

• The company is guiding to a more muted outlook in the first half of fiscal 2025, with improvement expected in the second half, reflecting ongoing market uncertainties.

Q & A Highlights

Q: You’ve had a significant period of margin expansion since 2021. Should we view 2025 as a normal year for margins? HAS: This is likely a reset year. We’ve expanded margins significantly, partly due to the CUSIP acquisition. We believe we’re investing well and are in a great position to continue to invest efficiently. (Phil Snow, CEO; Helen Shan, CFO)

Q: The 2025 ASV guide implies no improvement despite potentially better macro conditions. What are your macro and pricing assumptions? HAS: We expect some headwinds to continue but see green shoots. We had significant wins in Q4, and FactSet traditionally has a stronger second half. We believe clients will reset their budgets, and uncertainty will diminish. (Phil Snow, CEO; Goran Skoko, CRO)

Q: Can you provide more details on the large asset management cancellation and the overall asset management environment? HAS: The cancellation was due to cost pressures and consolidation. However, we had significant wins against competitors. The asset management environment is becoming more constructive, with ongoing demand for managed services. (Phil Snow, CEO; Helen Shan, CFO)

Q: How fast has CUSIP been growing, and what are your assumptions for 2025? HAS: CUSIP drove growth in the partners business line, which grew at 6%. The team executed well, and we are encouraged by the pace of new development. (Phil Snow, CEO)

Q: The ASV guide for 2025 seems conservative. Is this due to market conditions or internal factors? HAS: We see headwinds as we finish the year but are optimistic about the second half. Generative AI is a wildcard that could drive faster growth. We are focused on top-line growth and will share more at Investor Day. (Phil Snow, CEO)

Q: Have you sized the impact of generative AI investments on ASV and expenses for the next few years? HAS: We expect generative AI to contribute 30-50 basis points to ASV growth and about 50 basis points to expenses in 2025. The impact will be more pronounced in the second half of the year. (Helen Shan, CFO)

Q: How should we think about the current pricing environment and the pricing of FactSet Mercury or AI offerings? HAS: We have adjusted our rate cards and expect price realization above 80%. AI offerings will be priced based on usage or consumption, with some bundled approaches. (Helen Shan, CFO; Phil Snow, CEO)

Q: Your fiscal 2025 revenue growth guide is lower than 2024. What may be dampening revenue performance next year? HAS: Revenue is a lag to ASV growth. A stronger Q4 helps, but the first three quarters were lower. The second half of 2025 is expected to be stronger, reflecting more favorable conditions. (Helen Shan, CFO)

Q: How do you balance investment spend with driving top-line growth, and is there flexibility to ramp up investment if revenue exceeds expectations? HAS: We are investing about 150 basis points, half in generative AI. These investments are self-funded through productivity gains and discretionary spend reductions. We aim to balance growth with strong margins. (Helen Shan, CFO)

Q: How are your hedge fund clients and corporate sales performing? HAS: Hedge funds show fair churn but new growth, especially in Asia. Corporate sales have seen an uptick, with new logos contributing to growth. (Helen Shan, CFO)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.