FactSet Research Systems Inc. (FDS) Q2 2012 Earnings Call Transcript

Welcome, and thank you for standing by. [Operator Instructions] And now I'll turn the meeting over to Ms. Rachel Stern, Senior Vice President, Strategic Resources and General Counsel. Ma'am, you may begin.

Thank you, operator. Good morning, and thanks to all of you for participating today. Welcome to FactSet's Second Quarter 2012 Earnings Conference Call. Joining me today are Phil Hadley, Chairman and CEO; Peter Walsh, Chief Operating Officer; and Mike Frankenfield, Global Director of Sales. This conference call is being transcribed in real time by FactSet's CallStreet service and is being broadcast live via the Internet at www.factset.com. A replay of this call will also be available on our website. 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 include non-GAAP financial measures. The non-GAAP measures we will discuss today have been reconciled to the related GAAP measures in our earnings press release and our SEC filings. Annual Subscription Value, or ASV, is a key metric for FactSet. Please recall that ASV is a snapshot view of client subscriptions and represents our forward-looking revenues for the next 12 months. Lastly, FactSet undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. I'd like to turn the discussion over now to Peter Walsh, Chief Operating Officer.

Thank you, Rachel, and good morning, everyone. Here's how I plan to spend our time today. First, I'll highlight a matter involving taxes; second, we'll review our second quarter results; third, I'll provide guidance for the third quarter; finally, we'll end with Q&A. In prior quarters, we had discussed the impact of the U.S. Federal R&D tax credit which expired on December 31, 2011. We expect that it will be reenacted, as it has been for the past 30 years. However, we're not permitted to factor it into our effective tax rate unless it's part of the currently enacted tax law. The expiration of the R&D credit increased our annual effective tax rate by 1.3% and reduced second quarter GAAP and non-GAAP EPS by $0.02 per share. Now, let's review our second quarter results. ASV was $803 million at February 29, 2012, up 11% over last year. This quarter, ASV rose $21.7 million. ASV growth was driven by expanding our market share in buy-side clients. We added 53 new clients on a net basis, our highest number since 2006. Users declined among sell-side clients, but overall, the user count still increased by 400 on a net new basis due to penetration on the buy-side. Q2 EPS was $1.02, exceeding Street consensus estimates and our guidance range. Non-GAAP diluted EPS grew 16% to $1.14 in the quarter. Free cash flow, which is defined as cash generated from operations less capital spending, was $39 million during the second quarter. High levels of net income and lower capital expenditures were offset by higher income tax payments and lower accrued compensation. Over the last 12 months, free cash flow grew to $209 million, up 12% and was 18% higher than net income which illustrates the high quality of our earnings. Accounts receivable increased by $1 million over the last 12 months, while ASV increased by $80 million. Our DSOs were 32 days at quarter end, compared to 36 days a year ago. As of February 29, our cash and investment balance was $200 million, down $7 million from November 30, 2011. Capital expenditures were $5 million and $45 million was spent on share repurchases during the second quarter. As of quarter end, $83 million still remained authorized for future share repurchases. During the second quarter, we paid a regular quarterly dividend of $0.27 per share for a total of $12 million. If you aggregate our dividends with share repurchases, we have returned $248 million to shareholders over the past 12 months. Let's now turn to the P&L. FactSet's revenues increased this quarter to $199 million, a rise of 12.2% compared to last year. Our operating income for the second quarter increased to $67 million, up 15% from $58 million in Q2 this -- 2011. Net income rose to $47 million compared to $45 million in the same quarter last year. Non-GAAP net income increased to $52 million, rising 12.3% compared to the year ago period. Non-GAAP EPS rose 16.3% to $1.14. In terms of geography, our U.S. operations generated $548 million in ASV. International operations accounted for $255 million in ASV or 32% of the total. U.S. revenues rose in Q2 to $136 million, an increase of 12.2% over the same period a year ago. Non-U.S. revenues also grew 12.2% to $63 million compared to last year's Q2. Europe and the Asia Pacific region revenues for the second quarter were $49 million and $14 million, respectively. And the growth rates of each of those regions was 11.3% and 15.7%, respectively, year-over-year. Let's look at some of the revenue drivers for this quarter. We added 53 net new clients this quarter, compared to 38 net new clients in the same quarter a year ago. We are proud of this accomplishment despite a tight spending environment, and one in which purchasing decisions often take longer than they used to. The addition of new clients is important as we expect that it lays the groundwork for future sales, consistent with our long-standing strategy of increasing sales of workstations, applications and content at existing clients. Annual client retention this year was greater than 95% of ASV, and our retention rate in terms of numbers of actual clients was 92% versus 90% a year ago. These statistics, which have increased since last year, remind us that our clients continue to be engaged with our services and derive value from them. Our net user count increased by 400 users this quarter to 47,300 from additions at buy-side firms. Although headcount at our sell-side clients is still under pressure, we continue to make gains as demonstrated by this increase in users. One new product that we hope will attract users is the addition of StreetAccount to our new lineup. We're excited to be able to offer distilled company news and market summaries from StreetAccount over the FactSet platform that will complement our strong partnership with Dow Jones and under -- other vendors we already carry. We're making solid gains at existing clients with continuing growth from our Portfolio Analytics suite of products, including growing demand for our fixed income PA product. We've seen growth come also from our proprietary content. We've been successful in licensing proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates. The type of data license in feed form includes ownership, transcript, M&A, corporate hierarchies data as well. Data feeds are consumed by a range of clients, including existing large FactSet clients and some who do not manage money or provide sell-side services. We are beginning to see some of the fruits of our investment in making our content sets as broad and comprehensive as our clients require. Lastly, as we've been doing for the past several years, we issued our annual price increase during the second quarter. This price increase impacted the majority of our U.S. Investment Management clients. This year, the price increase accounted for $10 million of Q2's ASV growth compared to $9 million last year. Let's take a look at the expense side now. Operating expenses for the quarter were $132 million, up 11% from the same quarter a year ago. Operating margins were 33.7%, up from 32.7% in Q2 last year. Cost of services as a percentage of revenues was consistent with the prior year, as higher compensation expense associated with new hires in consulting, engineering and content was offset by lower depreciation and third-party data costs. SG&A expenses as a percentage of revenues decreased 95 basis points compared to the same period last year, due to lower stock-based compensation and monetization of state tax credits. This quarter, our headcount increased by 66 employees to over 5,500 employees at quarter end, growth of 16% over the last year. Most of the employees, related to our regular January classes of new engineers and consultants. The effective tax rate for Q2 was 30.9% compared to 22.3% a year ago. Excluding the $4.9 million income tax benefit from reenactment of the R&D tax credit, the effective tax rate in Q2 last year was 30.7%. The expiration of the R&D tax credit increased the 2012 effective tax rate by 1.3%. Now let's turn to our guidance for the third quarter of fiscal 2012. Revenues are expected to range between $200 million and $204 million, which represents year-over-year growth of 9% and 11% at each end of the range. Operating margins are expected to range between 33.5% and 34%. The effective tax rate is expected to range between 31% and 32%. GAAP diluted EPS should range between $1.03 and $1.05 per share. Non-GAAP diluted EPS should range between $1.14 and $1.16, which represents year-over (sic) [year-over-year] growth of 12% and 14% at each end of the range. Both GAAP diluted EPS and non-GAAP diluted EPS include a $0.02 reduction to reflect the expiration of the U.S. Federal R&D tax credit on December 31, 2011. For those of you who have been following our company story for some time, you'll know that we view our success over the long term. But of course, we're still pleased to recognize shorter-term wins. This past quarter has been a great but hard-won success for us. Despite difficult market conditions, we continue to grow. Our revenues, ASV, net client and user count were all higher this quarter. We've been building our business carefully by investing in our platform, our content and our people. We believe those investments are giving our clients a powerful research tool. Coupled with industry-leading customer service by a knowledgeable consulting staff, FactSet's products have become a part of our clients' workflow that is difficult to replace. We expect to help our clients continue to grow over the long term, even those -- even through these challenging economic times. We love that our market opportunity is 15x our current size by our estimates, meaning that a growing market is not necessary for our success. We're confident as we continue to focus on the long term, we'll achieve our long-term goals with wins along the way. Thank you for your participation in today's call. We are now ready for your questions.

[Operator Instructions] And our first question comes from Peter Heckmann with Avondale Partners.

Okay, I just wanted to see if you feel like there's been a change in the underlying growth of the industry. And clearly, there's been some turmoil in both domestic and international markets, and probably, global securities industry headcount has flatlined here for the last 6 months or so. But when you think about the growth of the industry, do you think it's positive, low single-digit growth over the next 3 to 5 years?

It's Phil Hadley. I'd love to know what our growth rate would be or what the industry's going to grow over the next 3 to 5 years. Unfortunately, I live in a world where I kind of have to just react to what the market is currently doing. And I would certainly characterize, if you took our first quarter, we were coming off an incredibly volatile equity market, both in Europe and in the U.S., at the end of the summer and into our first quarter. And obviously, the market has kind of stabilized and sort of is heading in the right direction. Our clients tend to react differently as a group. The sell-side goes into shutdown mode immediately and it takes some time to recover. The buy-side kind of gets cautious and takes a wait-and-see attitude. So I think obviously what starts to happen is, that the market starts to fix itself and our client base gets a little bit more confident. All I can comment on really is just kind of how it feels relative to prior periods, and it feels a little better than it did in the first quarter. Certainly, not a raging bull market, but one that's got a little bit more health to it than it did 90 days ago.

Okay. And then, I've noticed a new branding program that I think looks particularly nice on the iPad. Can you -- is that something new? Can you talk about how you're trying to brand FactSet and whether that's -- you're spending a little bit extra money in that area?

It's Mike Frankenfield. We have a fairly conservative marketing budget relative to our size. We spend most of our resources on our direct sales model. That's the way we feel we can best connect with our clients and prospects in the marketplace. Having said that, we're always looking to optimize our spend on the marketing side and we have allocated some money towards updating, freshening our brand, and I'm pleased that you've seen it come flying through your iPad. [indiscernible] Peter, when I saw it that -- one night I'm sitting there flipping through, that reading the Wall Street Journal and up pops this piece, it put a big smile on my face.

Definitely. Have you noticed any change in the competitive environment? There's been a little bit of media coverage more recently of the 2 larger competitors in data, maybe increasing their spend on development, rolling out some new products and platforms. Do you feel like that is contributing to the slowdown to the decision cycle?

It's Mike. Yes, the competition changes very slowly quarter-to-quarter, and you certainly hear about press releases but what you actually see happening in clients, it happens over much, much longer cycles. We operate under the assumption that our competitors are going to continuously improve their product and get better. And with that assumption, we know that we have to work hard to stay ahead of them. So we focus on what we can control and we execute to deliver the best products we can. And I would say that, when I look at internal metrics that I measure within our firm, I'm very pleased with what I'm seeing relative to our competition.

Our next question comes from Jennifer Huang with UBS.

I was just wondering on the pricing increase, is that all in the ASV as of the end of the second quarter?

Yes, Jennifer, it's 100% in the ASV as of February 29.

How have clients reacted to -- maybe you can just characterize the reaction to the pricing increase? Was it just, okay, we'll pick it with annual [indiscernible] look like?

It's Mike. The price increase in the second quarter affected our U.S. Investment Management clients. We increased the price of our base workstation from $6,000 to $6,600 per year. Not every client was affected as large clients have their own separate contracts, and price increases for those clients come over the course of the year based on when those contracts were signed. And this year, I'd say that the price increase was a relative non-event for clients. We've added a lot of great value to our workstation. And I think clients recognize that we're working hard to improve our offering, and it more than justifies the small increase that we placed on our clients.

Okay, great. And maybe I could just sneak one more in on just the environment that you're seeing out of Europe and Asia, maybe if you could characterize how they may have changed over the past couple of months?

We continue to see a good progress in our Asian operations, in the Middle East, India. Those areas are all growing faster than our overall growth rates. And Europe, continues to be a steady performer. There hasn't been any significant negative fallout from some of the turmoil in that region and our sales force there continues to plug along and deliver great results.

Dave Lewis with JPMorgan.

The first question on the client growth, obviously very strong this quarter. Is there anything else besides simply greater, strong execution on your part and on targeting changing sales strategy, targeting different markets and changing the incentive comp there?

I really think one of the biggest contributors to our partners in terms of new clients is the progress we've made with our proprietary content. Having our own content eliminates a lot of friction in the sales process, makes it easier for FactSet to obtain decisions from clients. But more importantly, the content is really good. The content is unique, whether you're looking at earnings estimates or debt capital structure or other types of data. And I think clients are finding great value in what we're producing because it is unique. There's no question also, we have a sales initiative focused on targeting new client acquisition. We dedicated resources internally, solely focusing on that task, and that also is playing a role in helping us increase our count.

Is that a recent change, Mike?

It's been evolutionary. It takes a long time for us to move our sales force from one role to another. So in selective markets, as we have the right HR opportunity, we move people into those roles.

That's great, and I'll just ask one more and hop off here. Can you comment on the growth in revenues at your core buy-side customer base that's not tied to headcount growth? I mean, clearly, you cited that in this call and in recent calls. Is it getting into -- are you being able to integrate services that are -- in some cases, potentially, replacing headcount? Or can you talk about data feeds and the other services that aren't tied or increasingly less tied to headcount growth?

Dave, I'm going to take a stab at it. If you take our total ASV, revenues really break down into 3 categories. One is base fees, which you could good certainly argue is less feed-dependent, likely feed revenue will fall in that same category. The second big category would be applications that people would subscribe to our Portfolios suite would be the primary example of that. A component of that is kind of base-fee-oriented. Some of it is workstation oriented. And then the third piece is just pure workstation revenue that is headcount based. I'd put it in those big buckets but we don't decompose publicly exactly what those buckets are. And quite honestly, it becomes an accounting exercise to try and decide whether the value is in the base or in the feeds or in the applications so it's one we don't spent time internally, really decomposing down to a number that I could even deliver if I had it.

Shlomo Rosenbaum with Stifel, your line is open.

Just focusing a little bit on the ASV breakdown that you guys broke up, between buy-side and sell-side historically, kind of tweaked it. Based on the numbers, it looks like the buy-side has been kind of steady for 12.5% year-over-year growth in each of the last 3 quarters and it's really sell-side that's causing all the noise. I mean, you guys have commented a little bit about that. But can you give any more color on that? Is that really fairly accurate that it's been kind of a steady flat but healthy growth on the buy-side, and then all the news, noise really is just sell-side?

I can comment kind of in 2 dimensions, one over the long term. That's always been true in our business, that when the sell-side's hot, it's really hot, and when it's not, it's horrendous. And fortunately for us, as you can see from the chart, a big chunk of our business is the buy-side and they are far more stable in how purchase product. I think in the last 2 quarters we specifically said the feed count, negative -- the negative part of the feed count is coming from the sell-side. So it would certainly support your thesis.

Okay. Again, when I think about the sell-side relationship between revenue and ASV, I know there's a 90-day kind of notice period that clients have to give before they could take somebody off of FactSet. The ASV number that we had at the end of the quarter, does that reflect any, all the notifications that you guys received intra-quarter about any headcount reductions? Or is there kind of a lag effect there?

It's Peter. The ASV at the end of the quarter represents ASV on that date. So if we have any notifications of any service expansions or reductions in the next 90 days or any other period after that date, they won't be reflected in the number at February 29.

But if you got a notification on -- on February 28 that someone's going to cut off in the next -- within the next quarter, or let's say, it was the beginning of February, is that reflected in the ASV number already that's adjusted downward?

No, it's -- that's the ASV on that date.

But the converse, as Peter pointed out, if somebody had -- has signed a contract that's going to start 60 days from now, that's also not reflected in the number as well.

Got you. Okay, that's fair. That's fair, and okay, that's good. Then there's -- I'm just hearing a little bit more chatter in the marketplace from the 2 areas in competition that we talk about from time to time. There's the Bloomberg Port product, and then just in general, what's going on with Thomson Reuters. And there's a focus, certainly being conveyed publicly from management at Thomson Reuters, to try and reignite growth. How long do you estimate that it would take, even if there would be a big focus over there, for that to make a change in the marketplace to the extent that that would filter up, that you guys would notice it?

It's very difficult for me to comment what would be going on inside of other firms. I think we can really just live the world that we see and we experience in the marketplace. As Mike said, and I'll reiterate, our natural assumption is our competitors are going to get better. This is a sophomore industry, and it's -- if you don't keep moving forward, you're going to be done very quickly. So I think as a business, we constantly focus on our opportunity, which is to double our business, and we believe to double our business, we have to do 2 things. We have to make sure we double the value we can deliver to our clients, which is defined by whatever the clients perceive the value is in the marketplace, which means that we have to deliver a great deal of content that is going to change their workflows and make their investment process better and write the software to make that data come alive. And at the same time, there's the, just the brute force, sales force part of it where we've got a worldwide sales force and we have to teach and train and make sure that those people understand that we're the best product in the marketplace, and that they should move from whatever they're currently doing to FactSet.

Well, let me just ask the question a different way. I understand with the moves that you're making, but I'm saying if someone wants to make a change in the marketplace in terms of being more competitive, either on pricing or throwing product at the clients, how long does that take, given the sales cycles and what you know about the industry, for that to filter, that you notice that coming up in competitive situations?

Theoretically, you can change price anytime you want. So that could happen very quickly. The thing that's not easy to change is value. Value is something you have to build in the product. We do live in a marketplace that really places a premium on information that helps them make a difference, so it becomes very important that you're the best at what you do, and you can give lots of stuff away that's not worth much. It doesn't really move the needle. It's really about producing better products.

Peter Appert with Piper Jaffray.

This is George Tong for Peter Appert. The first question revolves around competitive dynamics. FactSet's been consistently taking market share from the competition and I just wanted to get some color on, in your view, what's driving a customer to leave the competition and adopt FactSet, and what you see in terms of future market share evolution?

It's Mike. There are several reasons why FactSet is successful in the marketplace, and whether it's our software offering or our content that's looking a little bit about the improvements we've made to our content and some of the unique offerings we have. We still deliver very powerful software that is both intuitive and very flexible, which is able of solving a wide range of client problems. And then, we cover all of that or enhance all of that with a world-class client support team. And I think our client service and our philosophy of client service is a big differentiating factor for us in the marketplace.

Got it. Very helpful. Others have touched on this prior, but in terms of Bloomberg and Thomson, both of them having launched updates to their product platforms, how is FactSet's own platform evolving and expanding? I'm sure we'll hear more of this during the Investor Day, but I just wanted to get some color on how much of that evolution is offensive versus defensive, and how the customer upsell opportunity increases as you grow your product portfolio?

Several years ago, we launched a major facelift to our product called, at the time, the new FactSet. It replaced a legacy application we called DIRECTIONS. We know that when we release software, we -- it takes us a long time to ultimately perfect it, and we're still in the process of perfecting the new FactSet. We have a weekly build where new enhancements get introduced into our system. And every week, we're making progress to make our application better. We're continuing to explore new platforms to deliver our information across, whether it's mobile devices, iPads, et cetera, and I think we'll continue to invest in those areas as the users in our community have demand for executing our information that way.

Great, and then last question, I just wanted to see if you guys had some anecdotal evidence, perhaps, from your salespeople with feet on the Street, that we're seeing an inflection point in terms of buy-side headcount?

I kind of made the macro comment that I thought the marketplace felt a little bit better this quarter than it did in the first quarter, not surprising, giving what's going on in the equity markets. As to specific headcount plans, I think it's probably too early to make a comment on what we seek. I'll ask Mike to add to that.

Yes, I would agree.

Glenn Greene, with Oppenheimer.

I guess the first question, looking at a, sort of ASV growth, the 11% growth versus the user growth, it looks like in the 5%, 6% range, so clearly outpacing. I was maybe wondering, Peter, if you could sort of help us, sort of parse, how much of that greater growth from ASV is coming from mix versus pricing, or perhaps selling more sort of added -- value-added content into that user base? So any way to sort of directionally think about that?

It's -- Glenn, it's coming from all of the above. It's -- yes, we've been very successful in terms of not only expanding users but expanding our add-on applications, particularly in our Portfolio suite, and we've been also successful in expanding our distribution points outside of the platform. And we talked a little bit about that in the comments about our proprietary feed business and also been selling more FactSet content. So it's coming from all the above, and I think that's the -- one of the beauties of our model is that we're not reliant on a single source to be successful.

So any way to think of, like I mean, is there a couple of points of that from pricing, a couple of points for mix or -- and also trying -- just trying to get a sense for how sustainable it is going forward?

It -- this quarter's no different than previous quarters, so we certainly think that it's sustainable. The price increase, we certainly quantified as $10 million this quarter, so you can derive the points from that number.

Okay. And then it's been a while, but I was wondering if you could give us an update on PA adoption, sort of like, the proportion of your user base who might be using it?

Really, what we're focused on internally is obtaining greater adoption of all PA products across the clients that subscribe to it. The PA suite is made up of 6 or 7 different products, whether it's the traditional PA workstation, risk, fixed income, tools to publish results widely, so on and so forth. And our efforts, our focus is on getting our clients to buy all of those modules as well as acquiring new PA clients.

I would say we stopped disclosing that metric really for 2 reasons, one, it was directionally correct, but magnitude, it wasn't really telling the story of what was going on, and we didn't feel like we had a better metric to produce. And I think the second thing that's happened to our system as it continues to evolve is, PA evolves into all kinds of different dimensions on the system, and many of our clients use shares in their new FactSet workstation, which is a PA-like functionality and it starts to get gray as to where the product really -- workflow that starts and ends in what level of product they have. So the general comment is, clearly from each quarter, when we talk what's driving our business, our Portfolio suite is still a factor.

Okay, and then just finally, your fixed income sort of product capability functionality, where would you say you are at this point? And obviously, it's sort of a very small piece of your revenue, but you would think over time, a big opportunity? Maybe just some color on where you sort of think you are there?

So a great thing about fixed income is that it's a huge marketplace. There may be 50,000 equities that the institutional market trades, that there are millions and millions and millions every day produced as -- of new fixed income instruments. For us, it's an exciting opportunity. We continue to invest very heavily in it. And it's become an integral part of our Portfolio suite, and we continue to expand the content we have in that space, the user count we have in that space and the applications we use to disclose that information. As far as where we are in the opportunity in the marketplace, I think we'd classify it as it's still as very early.

Robert Riggs with William Blair.

Maybe just an extension on that last line of questioning. As it relates to the proprietary content, where are some maybe additional areas that you're really focused on right now in terms of building out your platform and content?

It's Peter. Our focus in content really continues to be on content that is used by many across our platform. So we have a strong, strong focus on fundamentals. We have a strong focus on earnings estimates. We've embellished our debt capital structure content and we continue to bear down on our call transcripts and our ownership data. And we found that by doing that, it's -- we have the opportunity to monetize it across many, many users.

And great, and then could you just provide us an update and when it comes to kind of the trade-in solutions that you're looking to build out as well?

We have a strategy that's focused primarily on buy-side traders. We continue to help connect all of the users within a buy-side firm, so being able to provide connectivity between a portfolio manager and a buy-side trader, loop in the analyst, it's all part of our goals. We're really -- you can think of it as just a -- an extension of our existing strategy, adding on incremental functionality and then sometimes incremental content.

Great, and maybe just to wrap up, in terms of headcount, is the right way to think about it still growing the distribution part of things more in line with revenue growth and maybe content a little faster than that? Is that the right way to think about that?

It's Peter. In terms of headcount, I think the beauty of our ASV model is it gives us a nice forward-looking metric in terms of the next 6 months of revenue. And will it -- we keep adjusting our headcount according to our growth. So if we grow faster than our expectations, we'll tune up headcount, and we'll do just the opposite if it's decelerating. Overall, we think headcount's going to mirror or more closely follow our ASV growth than it has been in the past. And I think, it'll -- the reason for that is, is that we'll level off in terms of our content collection employee growth. And I think it will be more evenly distributed between content, engineering, and sales and consulting.

Bill Warmington with Raymond James.

The -- a question for you on -- when you saw -- or if you did see the sell-side impact decrease during the quarter, whether it was bunched more in the first half of the quarter or whether it continued all the way through the end of February?

We've said there was no particular timing to it. We've seen the big sell-side firms, these pressures due to the macro environment. They've been rationalizing their headcount and it's been going on for a couple of quarters now. And we expect, like all things, it will stabilize and the volatility will reduce so, we'll move into an improved economy, and things will start to pick up.

Got you. And then if you could comment a little bit on the characteristics of the new clients that were added in the quarter, are you seeing a lot of new firm formation? Or do you see bid size or larger clients?

There's a little bit of firm formation but the majority of it is just hard work on the part of the sales force, identify an opportunity. The sell cycle for products in our industry is long because it's difficult to change the user's workflow. And it's unusual that we would go into a sales situation and perform a demonstration and the client would immediately want to buy it. There needs to be an evaluation period, and then these things just take time. So really, what you're seeing is the result of a cumulative effort that's taken place over time. And I feel like our strategy of improving our product, improving our content and focusing sales efforts on the problem is really paying dividends for us.

Are you seeing a pickup in the momentum? It sounds like you are.

Yes, I think, well, we had good numbers this quarter and then we hope we can continue that progress.

And then last question for you, is if you could talk a little bit about what's driving the growth in international?

The international growth is really driven by the fact that we're a much smaller player in that arena and there's just a large number of firms, a large number of potential users. We've got -- there's strong appetite for information services as those regions continue to grow faster than the U.S. domestic economy. So the combination of our own efforts to sell into those markets and just the general macro environment of those economies.

John Neff with Akre Capital Management.

I just had a few questions. One, just related to -- we've talked about Thomson Reuters and Bloomberg, but with McGraw-Hill sort of breaking out Capital IQ results in a more granular way, looks like they [indiscernible] 13% of [indiscernible]. Curious if you could comment on Capital IQ a bit, sort of along what [indiscernible] are and are you seeing them being [indiscernible] and grow?

John, it's -- again, it's difficult for me to make comments on somebody else's growth rate because I really don't know. S&P is a huge organization, and there are lots of pieces that are now under the Capital IQ umbrella. So what specifically their growth is and how they're doing, it's difficult for me to tell. I'll just revert back to Mike's generic comment, and that is I believe that we're gaining share in the marketplace and that we do very well. And Cap IQ is one of the opportunities we have in the marketplace.

And then just another question I have was just the sequential jump in other income during the quarter, I was just wondering if you were doing anything different with your cash or that's related to something on the balance sheet?

It's Peter. Nice catch. We are doing something a little bit differently this quarter. We're investing -- we invested $15 million in short-term CDs in India. We did it because we -- the interest rate's a little more than 9%. We thought the credit risk was reasonable. And we don't have a need to repatriate the cash. So ultimately, if we cash in, we'll just use it to fund our operations locally.

Jason Rodnick with Raub Brock Capital Management.

I just have a quick follow-up on the sell-side. I was wondering if you've seen the contractions stabilize there, accelerate, decelerate? And do you have any view on when that will -- the cycle will turn around?

It's a great question. I really wish I knew how -- if you really take our sell-side client base -- it really breaks into 2 big pieces. There's the bulge clients, the largest firms, and then the rest. I would characterize the rest is actually a very healthy business that isn't nearly as volatile as it seems to be that the big firms are. And I would characterize the marketplace as one that they're much quicker to go into shutdown mode than they are to go into spend mode. If they can shut down in a week, it will take them, I don't know, months, if not a longer period of a good market where they'd say, "Oh, wait. It's time to take the thumbscrews off, and start hiring again." Exactly the timing of that, I -- other people in the industry probably have a better view of that than I might.

Okay, and then, so in the last couple of quarters, months of contracting, are you seeing the same sort of percentage declines or slowing down, or is it jumping around a lot?

We -- specifically on the sell-side, is that the question?

Yes, the sell-side.

I would just characterize it as normal choppiness at this point. After living through as many cycles as I've lived through in this business, not even as bad a cycle as 3 years ago or even 7 years ago.

And our last question comes from Peter Heckmann with Avondale Partners.

I just wanted to have a quick follow-up. Now that we've seen headcount growth start to decelerate after you built the content collection operations, as well, we're seeing price increases continued to be levied in the tough market and seeing client additions, should we begin to start to anticipate some incremental margin expansions? Or are we really still thinking that really those incremental dollars are going to be -- continued to be reinvested in the platform?

I can answer that question the same way I've answered that question for a long time, and that is for the best that we possibly can, we run margins to be flat. And we'll find a great place to invest it for our shareholders and produce a great long-term return for them.

And okay, and then given the cash generation, do you have any thoughts about the dividend level?

Peter, we certainly have a high quality problem in terms of having too much cash. We've been allocating it aggressively to share buybacks and to dividends. And historically, we've been increasing our dividend at healthy double-digit rates annually. So we'll certainly review that cap allocation process, and we certainly would expect to be consistent with what we've done in the past.

And I'm showing no further questions.

Thank you, everybody.

Thank you.

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