FactSet Research Systems Inc. (FDS) Q4 2009 Earnings Call Transcript

Peter G. Walsh - Chief Financial Officer Philip A. Hadley - Chief Executive Officer Michael D. Frankenfield – Director, Global Sales

Gregg Moskowitz - Auriga USA David Lewis - J.P. Morgan Jonathan Maietta - Needham & Company John Neff - William Blair & Company Shlomo Rosenbaum - Stifel Nicolaus Chris Kennedy for Glenn Greene – Oppenheimer & Co. Kevin Doherty - Banc of America Securities Peter Appert – Piper Jaffray

Welcome to the FactSet Research Systems fourth quarter fiscal 2009 quarterly earnings conference call. (Operator Instructions) Now I will turn the call over to Mr. Peter Walsh, Chief Financial Officer. Peter G. Walsh: Good morning and thanks to all of you for participating today. Welcome to FactSet’s fourth quarter earnings conference call. Joining me today are: Phil Hadley, Chairman and CEO; Mike DiChristina, President and Chief Operating Officer; and Mike Frankenfield, Director of Global Sales. This conference call is being transcribed in Real Time by FactSet’s Call Street service and is being broadcast live via the Internet at www.factset.com. A replay of this call will also be available on our Web site. Our call will contain forward-looking statements reflecting management’s current expectations based on currently available information. Actual results may differ materially. More information about factors that could affect FactSet’s business and financial results can be found in FactSet’s filings with the SEC. In an effort to provide additional information, our comments may include non-GAAP measures such as free cash flow. Any non-GAAP measures discussed today have been reconciled to the related GAAP measure in our earnings press release and our SEC filings. Lastly, FactSet undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events or otherwise. On our agenda today, we will cover three topics. First, we will review fourth quarter results. Then I will cover guidance for the upcoming first quarter of fiscal 2010. Finally, we will close with our management team addressing your questions. Before covering results, I would like to take a moment to highlight three items. One, FactSet's acquisition of a copy of the Thomson Fundamentals database was completed in Q4 last year. At that time we estimated that our investment would dilute earnings by $0.16 a share in fiscal 2009. We are proud that actual dilution was $0.09 in fiscal 2009, including $0.01 in the just concluded fourth quarter. More importantly, FactSet Fundamentals is now break-even on a run-rate basis. This will be the last quarter in which actual revenues and earnings of FactSet Fundamentals are included in our press release. Looking ahead, and consistent with our presentation of other products, we will continue to provide color and discuss FactSet Fundamentals when it's a driver of quarterly ASV change. Two, like last year, we added a supplementary schedule in today's press release that summarized revenues related to FactSet services are not included in our calculation of ASV. This revenue is not material, but historically it's been disclosed to aid in investors' ability to make more precise interpretations and forecasts of FactSet's revenue. Given the immaterial size of this revenue stream, and to simplify analysis, we plan to include the trailing 12 months of non-subscription revenue in future calculations of ASV. The effective date of this change will be November 30, 2009, and the trailing 12-month amount was $4.0 million as of August 31, 2009. Three, in conjunction with the management changes announced in August, Rachael Stern will be responsible for investor relations effective October 1. Please direct any follow-up questions on this quarter to me and as a part of the process I will also introduce you to Rachael. Rachael's contact information can be found in the Investor Relations section of our Web site. Moving on to fourth quarter results. Our performance was solid in Q4. ASV grew by $4.0 million, operating margins were 35%, EPS grew 10% year-over-year, and our business, again, generated more than $60.0 million of free cash flow. Each of our key metrics improved from the third quarter. ASV, clients, and users all grew in Q4. Our investment management business proved its resiliency and was the primary driver behind the positive sequential changes. It's premature to classify this as a recovery for our industry, but we see it as a step in the right direction. To accelerate future growth we have been both deliberate and aggressive on investing for the future. Over the past 12 months our head count increased 25%, even after normalizing for ending in a BPO relationship in Q3. Our philosophy of reinvesting in the business is not new and will continue. Our current headcount plan for 2010 reflects a double-digit employee growth rate. We believe that one of FactSet's strengths has been our ability to invest during the recent market downturn. Our aim is not just to grow but to execute in the marketplace to cause a return to our historical double-digit revenue growth rate. We believe our investments will help accelerate this outcome. Let's begin the highlight of the quarter with free cash flow. Free cash flow captures all the balance sheet and P&L movement. As a reminder, we define free cash flow as cash generated from operations, which includes the cash cost for taxes and changes in working capital, less capital spending. During the last year, free cash flow rose to $184.0 million, up 71% over the last 12 months. Free cash flow over the last year exceeded net income by 27%. We believe this is illustrated by the high quality of our earnings. For the fourth quarter, free cash flow doubled to $60.0 million compared to the year-ago period. Drivers of free cash flow during Q4 were increased levels of net income and non-cash expenses, positive working capital changes and lower capex. The improvement in working capital was driven by an 11% decrease in accounts receivable during the quarter. Over the last 12 months accounts receivables have decreased 16% while ASV increased 1%, a 17% spread. DSO at quarter end is now a record low 37 days, down from 44 days a year ago. Our ending cash and marketable security balance was $216.0 million at quarter end, up 13% sequentially, and a 51% increase over the last year. During Q4 we invested $33.0 million to repurchase common stock, paid a quarterly dividend of $9.0 million, and incurred capital expenditures of $5.0 million. There is $102.0 million in remaining share repurchase authorization. Now moving to the P&L. Revenues were $155.5 million, up 1% versus a year ago. Operating income advanced 8% to $54.0 million. Net income also rose 8% to $36.0 million. EPS was $0.74 a share, a year-over-year increase of 10%. Let's look at the revenue drivers during Q4. ASV increased $4.0 million organically. The increase during the quarter was the result of improved performance from both the U.S. and non-U.S. investment management businesses. At August 31, 2009, ASV was $619.0 million, up 1% from a year ago. As a reminder, we define annual subscription value, or ASV, as forward-looking revenues for the next 12 months from all subscription services currently being supplied to our clients. Let's highlight some trends we see in our client base. Compared to Q3 there was an improvement in all key metrics. ASV, users, clients, all showed progress on a sequential quarterly basis. Our buy side business stabilized during the quarter and was the catalyst behind the ASV growth in Q4. The sell side business improved from Q3 but we have not seen a step up in spending by investment banks. At quarter end the buy side accounted for 82% of our total ASV. As you know, FactSet enables clients to change services on a monthly basis. This quarter represented a stabilization of cancellation rates since the credit crisis emerged last fall. Annual client retention rate was greater than 95% of ASV in 87% of clients. Professionals using FactSet increased to 37,300, up 200 users, the best quarterly performance of our fiscal year. Q4 was also the best quarter in the fiscal year in terms of tracking new clients and top-line performance from our suite of portfolio products. The client count rose by 12 to 2,045 as of August 31, 2009. The increase in new clients is a function of FactSet's ability to consolidate applications and data into the single platform. Improved performance around the PA suite is evidenced by the reduction in the cancellation rate of the quantitative and risk products and growth in the number of PA 2.0 subscribers. PA 2.0 users rose by 40 during the quarter while the number of clients remain the same. We were also pleased with the adoption rate of FactSet content by both new and existing clients. Client use of proprietary content decreased the loss in earning solution from our investment in FactSet Fundamentals. The investment in FactSet Fundamentals diluted earnings by only $0.01 a share, an improvement for the second consecutive quarter. The quarter's operating loss decreased 58%, $700,000, from $1.6 million last quarter. FactSet Fundamentals is now break-even on a run-rate basis. Demand for FactSet Estimates also continues to ramp up nicely. Estimates is a data set desired by a high percentage of existing and prospective users. The quality of our offering has improved from expanded coverage in textual research. We believe this expansion has made our product more competitive in the marketplace. Usage of FactSet Global Real Time News and Quotes continues to be strong. This deployment is wrapping up nicely with user growth of 27% off a difficult comparable last year. Real Time users have increased during every month of this just-completed fiscal year. Since our Real Time offering is relied upon on a daily basis, this statistic is significant and means to us the overall engagement level of product existing users is increasing. As we see it, the fact that Real Time users increased during a shrinking environment also tells us the marketplace recognizes the compelling value proposition of our Real Time offering. Turning to geographic performance, the U.S. business produced revenues of $106.0 million, the same as the year-ago quarter. Revenues from overseas increased 3% to $50.0 million. By region, quarterly revenues from our European and Pacific Rim operations were $39.0 million and $11.0 million respectively. ASV by non-U.S.-based clients grew to $200.0 million, representing 32% of the company-wide photo. Moving to expenses for the quarter, operating expenses were $101.0 million, down 2% from the year-ago quarter. The source of this decline was favorable currency movement and a successful cost-savings plan. As we covered on last quarter's call, our annual expense base has been reduced by $16.0 million, or $4.0 million per quarter, due to a strong U.S. dollar compared to last year. This didn't change from Q3 because we hedged the majority of currency exposure for Q4 early in the calendar year. Looking ahead, the Euro and pound had gained on the U.S. dollar over the past six months. We are currently insulated through mid-January 2010 from hedging 90% of our Euro and pound exposure last spring. Assuming no further hedging activity, when the hedge expires in early 2010, quarterly operating income would decrease by $1.2 million, based on today's rates. Our operating margin was 35%. The margin increase is temporary and primarily the result of work stations sold to summer interns in the fourth quarter. Fiscal 2009 operating margin was 34% and we believe the better metric to gauge the profitability of the business in future quarters. Turning to the specifics of the quarter. Cost of sales as a percentage of revenues increased by 90 basis points over last year. Higher compensation and computer maintenance was partially offset by lower data costs. Higher compensation is a result of expanding the number of employees, particularly outside the U.S. Computer maintenance begins one year after mainframe servers are deployed and increased due to capacity expansion during fiscal 2008. The decline in data costs was the result of adding a BPO relationship during Q3 and lower royalty payments because of increased content use of FactSet proprietary content. SG&A expenses expressed as a percentage of revenues declined 3.1% year-over-year. This decrease is driven by lower compensation in T&E, offset by higher occupancy costs. Lower compensation is driven by favorable currency rates and T&E declined due to a prudent approach to interoffice travel. Occupancy costs increased because of the expansion of our office space, primarily in offshore locations. Our employee count was 3,000 as of August 31, 2009, an increase of 400 employees during the quarter. The rise in headcount was driven by expansion of FactSet's proprietary content operation. The majority of the new employees are members of FactSet Fundamentals collection team. Lower interest rates caused interest income to decline by 89% and earnings per share to decrease by $0.01. The average annualized return on cash and cash equivalents was just 20 basis points during the quarter. Our effective tax rate for the quarter was 33.4%. This rate is consistent with Q3 and down 80 basis points compared to the fourth quarter of last year. EPS was $0.74 in Q4, a growth rate of 10% year-over-year. Let's move to our outlook for the first quarter of fiscal 2010. The projected revenue range for Q1 is $152.0 million to $157.0 million. EPS should range between $0.73 and $0.75. A 2010 guidance for capital expenditures, net of landlord contributions, is $20.0 million to $26.0 million. To sum it up, both the fourth quarter and fiscal 2009 demonstrate the strength of FactSet's business model. In our view, our stability was evident by sequential quarterly growth in ASV, users, and clients during Q4. Against the most difficult operating environment on record, we delivered double-digit EPS growth in every quarter during this completed fiscal year. At the same time, we continue to invest for the future. Our headcount grew 25% over the last year and our plan is for double-digit increase in fiscal 2010. Last week we announced the release of the company's newest product platform. We believe this release will expand our competitive position through a strong improvement in the user's experience be it new functionality, greater ease of use, and an appealing new interface. We have a lot of work ahead but we are excited and focused on a forward opportunity that we believe is enormous relative to our current size. Thank you and we are now ready for your questions.

(Operator Instructions) Your first question comes from Gregg Moskowitz - Auriga USA. Gregg Moskowitz - Auriga USA: I was wondering if you could talk to user count. It's the first time that we've seen user count growth sequentially since the November 2008 quarter. Do you think we're at a potential point of stabilization? Or how should we be thinking about that? Michael D. Frankenfield: I think it's early in the cycle to really definitively say that headcount has been stabilized. As we look back over what happened when we first went into this downturn, the first thing that happened was our cancellation rate went up and then only later did the rate of adds begin to decline. Now that we think things are beginning to stabilize, the evidence we have of that is that our cancellation rates have stabilized and it is our expectation that the adds will then follow on a forward-going basis. But your typical money manager, even though equity returns are positive, I still think we have a lot of time to go throughout the end of this year before we can definitively say that the markets have stabilize and we're ready to move forward. Gregg Moskowitz - Auriga USA: In terms of ASV, obviously up 1% sequentially and year-over-year, and you had referenced, I believe, both international and domestic, investment management business kind of showing some improvement there. From a sell-side perspective, how did ASV do overall, kind of on those similar metrics? Michael D. Frankenfield: The IV business remains a challenging market. The sell-side firms are strong managers of their costs. They have a very, very organized procurement process. It's global. They track their spending very, very closely. And they probably adjust their workforce more quickly and are more nimble in the way they adjust the size of their business than the buy side. So we've seen a big headcount reduction on the sell side. It's very difficult to predict the trends going forward, but like the buy side, with the equity markets being up, we have also seen a recent increase in capital market transactions, M&A, filings for IPOs, but many of those deals, while announced, haven't actually closed so it still remains to be seen what happens with that business going forward. Gregg Moskowitz - Auriga USA: How are you planning to manage operating margins over the next 6 to 12 months or so? Peter G. Walsh: Our [approach to] operating margins consistently remain the same. It's just [inaudible] FactSet with flat operating margin. It's best to utilize the fiscal 2009 operating margin as a guide for the future and we will balance our investments for the future based on whatever our ASV growth rate is going forward.

Your next question comes from David Lewis - J.P. Morgan. David Lewis - J.P. Morgan: Can you talk about what pricing expectations are for this coming fiscal year? Should we expect a similar modest 3% increase to the buy side, in line with the previous two years? Michael D. Frankenfield: We are currently evaluating our strategy when it comes to price for this upcoming fiscal year, or this next calendar year, and we have not made a decision yet. We do know that we have pricing power in the marketplace and the question will be whether we decide to go ahead with a traditional price increase or if we adopt a different strategy. David Lewis - J.P. Morgan: With regard to Fundamentals, you have made great strides in all the proprietary content, but could you provide more color on what the win rate has been there, currently versus your competitors? And related to that, how is it priced differently and when you're not winning what is the feedback you're getting in response from some customers? Philip A. Hadley: I think you can tell from the color that Peter gave you in the dialogue that the Fundamental product is doing very well in the system, as to be expected. Fundamental is definitely a core content for us. For it be successful it is certainly a gaining share on the system. We have known for a long time what features are in the marketplace that we want to put into that product and have continued to invest heavily in that product. I would say that on a competitive basis there is no such thing as a 100% win rate, but within the context of the FactSet system and the value that we can create, it's been very, very successful. David Lewis - J.P. Morgan: The ASV average, ASV was roughly equal this quarter versus last quarter. What should we read into that other the fact that users have now turned and have increased, so lower rate users have, I think, caused that metric to stabilize. The average revenue per user per quarter, it's stable this quarter versus last quarter. Anything more to that than just the sequential improvement in users? Philip A. Hadley: I think that certainly the stabilization of client growth and the user count is a positive indicator in the marketplace. I think that Mike was giving in a little bit earlier color that to try and predict the future at this point is a little vague based on we come from a place we've never been before. But we are certainly optimistic about how we can execute against our plan. As Peter highlighted, we've got, Fundamentals is a great opportunity for us along with other FactSet content. An addition for us, a new interface for a FactSet work station is a very exciting opportunity for us to deliver to the marketplace.

Your next question comes from Jonathan Maietta - Needham & Company. Jonathan Maietta - Needham & Company: Mike Frankenfield, I was wondering if you could comment on just kind of what you're seeing in the sales pipeline. It sounds like you're probably seeing more in the way of deals moving through the pipeline, whereas maybe three months ago or so things were kind of frozen in the pipeline. Is that kind of an accurate characterization? Michael D. Frankenfield: I think that's an accurate characterization. Our traditional product pipeline is very strong and we have new opportunities now with FactSet content, fixed income, and the deployment of the new FactSet, which is very exciting for clients, and quite frankly, very exciting for the sales force. So there is a lot of good sales activity going on. Jonathan Maietta - Needham & Company: Peter, I couldn't quite hear you in your prepared remarks. Did you say after the hedge expires in mid-January you would expect op income to increase by about $1.2 million each quarter? Peter G. Walsh: The way to analyze FactSet's FX exposure is that we are insulated through January 2010. If you use today's rates, our quarterly operating income would decrease by $1.2 million. If you were going to calibrate our overall FX exposure as it relates to the pound and the Euro, for every 1% change the pound and the Euro would have against the dollar, our operating income would change by $800,000 in annual terms and $200,000 in quarterly terms. Jonathan Maietta - Needham & Company: Tax rate, is this Q4 rate a good proxy for fiscal 2010? Peter G. Walsh: Yes, it is.

Your next question comes from John Neff - William Blair & Company. John Neff - William Blair & Company: Fundamentals' revenue was up $200,000 sequentially, the operating loss was down $900,000 sequentially. I was wondering if you could explain that dynamic and also remind us of when the TSA payments expire. Peter G. Walsh: As Phil mentioned, Fundamentals is a product that's selling well for us, both to existing and new users. When existing users convert to FactSet Fundamentals it is a positive impact on operating income and can come from either higher revenues or lower expenses. Many clients who switch to FactSet Fundamentals, it causes us to reduce our payments to vendors that we pay out for client use of their content over our platform. So for fiscal 2009 this reduced our annual expense base by $7.0 million. Obviously this was a significant contributor to making FactSet break even on a run-rate basis. John Neff - William Blair & Company: $7.0 million in lower third-party royalty fees? Peter G. Walsh: Right. In annual terms. John Neff - William Blair & Company: The 412 employees that you hired this quarter, can you give us a sense for were they hired relatively evenly, early or late in the quarter, how many of those are sort of content-oriented hires versus sales and product development, and sort of digesting that, the ASV per employee down this quarter to about $209,000. Historically it's been around $300,000—is that a metric you even consider as you're managing the business, and if so, do you envision an eventual return to that kind of level? Peter G. Walsh: As it related to employee headcount, the overall large majority of our hiring related to offshore employees to support our content operations, particularly FactSet Fundamentals. The hiring happened evenly over the quarter. We do focus historically on revenue per employee. We just have to adjust our historical trends because of the build out of an investment in proprietary content collection, particularly offshore. We just have to adjust that metric to pick up our investment in high-level growth offshore. John Neff - William Blair & Company: An update on the fixed income product. I know you turned some customers in recent months. Just curious how those were progressing. And how is that offering benefiting, if at all, from the new platform? Michael D. Frankenfield: We're very pleased with our progress in fixed income. The problems we're trying to solve are very complicated and they're well suited to what we do well. The problems are complicated because there are a large number of fixed income instruments and it's very difficult to model their valuation. For anyone to be successful delivering valued clients, you are going to need a strong combination of computing power, data expertise, and data integration. And we feel those are our core competencies. We are very encouraged by the early success we've had in some of the larger institutions that are our clients and it is our expectation to continue to refine our process, to build a scalable offering that we'll be able to deploy widely to all of our clients. John Neff - William Blair & Company: Peter, if you could comment on, if I heard you correctly, why the change in the treatment of non-subscription revenue now on a trailing 12-month basis being included in ASV. And I think you mentioned it was $4.0 million trailing in the fourth quarter, was that part of the reported ASV this quarter? Peter G. Walsh: The $4.0 million was not included in the ASV change for the quarter. The reason for our change there is just really due to the size and to make things more simplistic. The $4.0 million number is less than 1% of total ASV and by adding it into our methodology for future ASV calculations, starting on November 30, we just feel like it's a simpler, more straight-forward presentation.

Your next question comes from Shlomo Rosenbaum - Stifel Nicolaus. Shlomo Rosenbaum - Stifel Nicolaus: Could you go into why the RDSO dipped so much in the quarter? Is there someone who had an unusual payment? Is this going to snap back in the next quarter more into the 40s? Peter G. Walsh: AR is an area that we are continually focused on. As it relates to the quarter, it declined by 11% in the fourth quarter. That's a significant movement. It wouldn't surprise me at all to see our AR increase during Q1. Our real focus is to make sure our rate of AR growth is less than our rate of ASV growth. We have been consistently delivering on that year-in and year-out. AR is an area where it takes consistency to have a superlative record over the long term. Shlomo Rosenbaum - Stifel Nicolaus: So you have like a normalized level that you expect? Do you think you're breaking new ground here in general, or is it sort of a one-time thing? Peter G. Walsh: What our expectations are is our AR should never grow more than our ASV growth rate. So I wouldn't say that we've broken new ground but it's something that we continually work on and we focus on because [inaudible]. Shlomo Rosenbaum - Stifel Nicolaus: Can you go over the FactSet Fundamentals metrics again? The revenues and the losses over there. Peter G. Walsh: I think if you look at FactSet Fundamentals, the revenue for the quarter was $1.5 million, a loss of $700,000, a dilution in EPS of $0.01. Over the last 12 months, its dilution to EPS was $0.09 versus an estimate when we made the acquisition of $0.15. FactSet Fundamentals is now break-even on a go-forward basis. Shlomo Rosenbaum - Stifel Nicolaus: What was the growth in your fixed income product? You know we talked about that a lot over the last two quarters. Are you giving specific growth rates for that? Philip A. Hadley: That's something we [inaudible]. Shlomo Rosenbaum - Stifel Nicolaus: Client retention just seemed to dip a little bit sequentially, 88% to 87%. Is there anything to read into that? Peter G. Walsh: I think the only thing to read into that is that this is a calculation that we used the last trailing four quarters to calculate, so when you see the dip, Q3 versus Q4, that you're pointing out, Q3 last year included the fourth quarter of 2008, which was one quarter prior to the credit crisis. So when you replace that quarter with a comparable adapted to the credit crisis, that's why I adjusted. Shlomo Rosenbaum - Stifel Nicolaus: Could you break out the international operating margin between Europe and Asia? Peter G. Walsh: The operating margin is something that we really manage FactSet on a worldwide basis. The reason why we don't have any further detail is because we would have to go through a massive comp out on Asia based on the way FactSet is operated and run. In order to get an accurate operating margin. We just feel like the informational benefit, even internally, is very low versus all the effort to allocate costs to try to refine that calculation to where it would have value. Shlomo Rosenbaum - Stifel Nicolaus: What about the numbers that are going to show up in the 10-K? Peter G. Walsh: We do break those down in the 10-K, as we do in the segments, and if you look at that in the bottom of the segment disclosure, we always have a paragraph that has some cost sharing which basically explains to the reader that we haven't gone to the exercise of allocating costs but are centralizing the U.S. that benefit the entire world. Shlomo Rosenbaum - Stifel Nicolaus: And the gross margin down sequentially, that was primarily hiring, is that the way we should understand that? Peter G. Walsh: Again, we manage FactSet on an overall basis, but if you're looking at that, it's hiring and higher computer maintenance costs, because computer maintenance costs kick in a year after we purchase a mainframe system, and we purchased several of them in 2008.

Your next question comes from Analyst for Chris Kennedy for Glenn Greene – Oppenheimer & Co. Chris Kennedy for Glenn Greene – Oppenheimer & Co.: Any update on the competitive environment, what you're seeing from Thomson as they kind of integrate themselves? Michael D. Frankenfield: The competitive landscape hasn't changed materially. Our industry is really dominated by a few significant players and our opportunity is very significant relative to their size. I think the challenge for all of the suppliers in this industry is that the client is more cost-conscious and that's putting a burden on everyone to deliver more value. We continue to be increasing the value of FactSet through our proprietary content and our new FactSet initiatives and I think that's improving our competitive position relative to the other players in the industry. Chris Kennedy for Glenn Greene – Oppenheimer & Co.: Can you give us some type of preview on the upcoming management transition? Peter G. Walsh: First off, it's important to note that I'm very fortunate to follow Mike. His record at FactSet speaks for itself. He built FactSet from the ground up. And I will be working with a well-organized and experienced group of very competent players, in both content and engineering. Looking ahead, I've worked with Phil and Mike and we've collaborated on a very aggressive and achievable agenda. My teams will continue to focus on improving the utility of FactSet for existing users, developing applications to solve problems for large institutions, and expanding our investment in proprietary content. Given our [inaudible] to work side by side with clients, there is certainly a long list of opportunities we will focus on that impact our existing users. And I feel like we're fortunate that we don't have to reinvent ourselves or assume the risk of trying to create success in a new marketplace.

Your next question comes from Kevin Doherty - Banc of America Securities. Kevin Doherty - Banc of America Securities: Looking back over the last year, the revenue base is pretty stable from quarter to quarter but yet you ended the year down with about 3,000 fewer users. So I wanted to see if you could put that in perspective, how you are able to keep the revenue flat. And if you are seeing some of this continued stabilization in the subscriber count, why shouldn't we expect the revenues to move a little higher? Philip A. Hadley: For those of you who aren't familiar with our revenue model, we get revenue from multiple dimensions. There is a base client relationship where the core product that two users get that's a substantially higher number on a per-seat basis. And then we also sell content and applications above that as revenue dimension. And the third is seats. The seat count for us is only one dimension of our revenue. We don't break out exactly how much it is, but obviously you can tell that there are other ways for us to grow than just to grow seats. So that would be the explanation of how you're able to grow revenue without growing seats. As to the trends, I think it's definitely one of those where if you took the color of Peter, Mike, and I, you kind of get the feel for it. It's a greater forward view for us than it has been historically. I think probably that's true of everyone on this call. But at the same time, the fact that seats have stabilized and the client count has stabilized certainly puts us in a better position than we were a few quarters ago. Kevin Doherty - Banc of America Securities: And as we think about the stabilization out there right now, how much would you say is more broad-based industry-wide versus some of the share gains that you've seen over the last few quarters, specific to FactSet? Philip A. Hadley: It's hard to break out. It certainly is a contracting industry, I think. Data on a whole industry is hard to figure out but you definitely get the feeling that at least for several quarters there, client spend was not going in a positive direction for anyone. At the same time, I think our future opportunity is ripe because we're still really a small player in this industry, with potential upside, and our goal is to just focus on the things that we know we can control and good things will happen. Kevin Doherty - Banc of America Securities: And you talked a little bit about the new software platform, is there going to be an incremental revenue opportunity from that? Meaning is that going to be a premium product or is that something that would more or less be included under existing contracts? Michael D. Frankenfield: The new FactSet is an exciting initiative for FactSet. Clients have told us for a long time that we have great functionality but that they would deploy more FactSet if it were easier to use. And that's really the goal of the new FactSet. And the early feedback from clients indicates that we are solving the ease of use question. It will take a long time for us to roll that out. We have 38,000 users and those users are used to using our existing products. And our job is to improve client workflow so it will take a while for these users to adopt the new FactSet into their workflow. If you really think about it as sort of an evolutionary process, the success of the initiative will be back-end loaded, towards the end of the year. But we're very, very excited about it. The new FactSet consolidates three platforms that are in the marketplace today, Directions, Marquee, and IV Central. And it combines the three applications into a single application that can be personalized to meet a specific user's needs. It gives us a great benefit to leverage our internal development efforts and really focus on building one excellent product. And from the clients' perspective it's going to unlock a lot of hidden value and it gives clients a tremendous opportunity to explore FactSet and help them discover ways that FactSet can address their problems in ways they haven't done before. Kevin Doherty - Banc of America Securities: So is that a product where the client will actually make the initiative to upgrade to this? And again, will there be any incremental cost to the client, over time? Michael D. Frankenfield: We have built a roll out plan and based on multiple criteria, put each client into an individual slot, when we think will be the best time to upgrade them and the sales force will be working with clients on an individual basis to determine what's going to be the best time to receive the upgrade, as well as discuss any cost implications. Kevin Doherty - Banc of America Securities: Peter, you obviously talked about maintaining the strategy of flattish margins. If we're assuming no benefit from FX and if environment of roughly flattish revenue continues, do you think you can keep those margins flat without further cost savings and do you think some of the cost savings that you rolled out over the past year are pretty much behind you? Peter G. Walsh: As we look ahead, I think the beauty of our ASV model is the visibility that it provides us. And we will always adjust our investment levels up or down to correlate our investment levels to keep our margins flat. And most of those investments come in the form of headcount. So while we have based our headcount plans on conservative ASV environment, it's certainly more constructive that it has been in the past. Our cost savings initiatives, while successful, this will be the year where we get a full year value of the cost savings initiatives. We don't have any material new initiatives planned for fiscal 2010. And finally, our headcount plan has an offshore tilt, which is more cost efficient on a per person basis.

Your next question comes from Peter Appert – Piper Jaffray. Peter Appert – Piper Jaffray: Peter, can you remind what the seasonality around passwords is, and specifically how many fourth quarter passwords are there associated with the summer internist associate classes? Peter G. Walsh: Historically, seasonality for Q4 has been our strongest quarter, primarily due to college hiring by investment banks. I would say that that's probably not the case this year, just because their hiring plans were impacted by the credit crisis. As it relates to summer interns, we do not include summer interns in our user counts for any periods. And so that's why we have just—it does impact revenues. The summer intern revenue is this quarter about $900,000 and that's something that won't repeat itself in Q1. Peter Appert – Piper Jaffray: So based on that, do you think then that the fourth quarter will mark the bottom in terms of password count? Peter G. Walsh: I think what we really saw there in the quarter was a stabilization of the cancellation rate, which we see as a prerequisite to—in client demand, improving to buy new or subscribe to new services. There is a long way to go from the buy side perspective. You know, this thing of paper profits and the calendar year needs to turn before it translates into flexibility at a budget level. On the sell side, there are lots of recent articles, but it is very recent over the last couple of weeks about increasing capital markets activity, but as you know, banks don't get paid until deals closes. Or IPOs are launched. And there's still a long way to go there, too. Peter Appert – Piper Jaffray: And to follow on to the prior question, you have done a masterful job in managing the cost side of the equation in the past year, and I'm just wondering from your perspective, has there been any deferral of cost that you might have to play catch-up here in the next year in terms of marketing, T&E, etc.? Peter G. Walsh: From our cost-savings plan strategy was long in the offing, so when we started on cost savings we started last summer. The way we started was we engaged a management group that I call the operating committee. We asked that group to submit ideas on how to make FactSet more efficient and we got a more than 100 ideas and we narrowed them down to 45 we wanted to execute. The beauty is that it takes time to make yourself more efficient and because we gave ourselves time, we were able to execute successfully. The second benefit is that these are things that pay dividends not just last year but in the years going forward. So our approach hasn't been rationed in any way and we haven't been deferring on key investments that are important for FactSet to grow its top line. Peter Appert – Piper Jaffray: And for fiscal 2010, the double-digit increase in staff that you're tentatively thinking about, is that still primarily in data-oriented positions or relatively low-cost headcount? Peter G. Walsh: Yes, it is.

Your final question is a follow-up from John Neff - William Blair & Company. John Neff - William Blair & Company: The double-digit employee increase that you're anticipating this year and the comments you made about ASV providing the kind of visibility you need to plan for those investments, does that mean we should expect, or that you're expecting a double-digit growth in ASV and that employee count approximating what you expect in ASV growth. Peter G. Walsh: As you know, we give revenue guidance that goes out a quarter. Historically, when all our hiring was done onshore, there was a stronger correlation between ASV growth and the growth of our headcount. Just this year is a great example where that historical trend has been broken, where our headcount was up 25% but our ASV growth was up a percent. So as we continue to invest offshore that historical measure isn't as useful as it once was.

There are no further questions in the queue. Philip A. Hadley: Thank you, everybody.

This concludes today’s conference call.