FactSet Research Systems Inc. (NYSE:FDS) Q3 2023 Earnings Call Transcript

FactSet Research Systems Inc. (NYSE:FDS) Q3 2023 Earnings Call Transcript June 22, 2023

FactSet Research Systems Inc. beats earnings expectations. Reported EPS is $3.79, expectations were $3.61.

Operator: Good day and thank you for standing by. Welcome to the FactSet Research Third Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Kendra Brown, Senior Vice President, Investor Relations. Please go ahead.

Kendra Brown: Thank you and good morning, everyone. Welcome to FactSet’s third fiscal quarter 2023 earnings call. Before we begin, the slides we will reference during the presentation can be accessed via the webcast on the Investor Relations section of our website at factset.com and is currently available on our website. 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, reconciliations 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 Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q&A portion of today’s call. I will now turn the discussion over to Phil Snow.

Phil Snow: Thank you, Kendra and good morning everyone. Thanks for joining us today. I am pleased to share our third quarter results. Our organic ASV plus professional services grew 8% year-over-year. This was driven by double-digit ASV growth in analytics, where we saw strength with asset managers, asset owners and hedge funds and the successful execution of our international price increase. These gains were offset by headwinds to workstation growth among wealth, banking and corporate clients and deceleration in expansion among partners. Our investments in content and technology have strengthened our competitive position, allowing us to navigate market volatility successfully. In the third quarter, we saw broad-based growth across all firm types with double-digit ASV growth from our wealth management, banking, hedge fund, corporate and private equity and venture capital clients.

In Analytics & Trading, we saw continued strength in the middle office as our suite of portfolio reporting, fixed income, performance and risk solutions accelerated growth year-over-year. Content & Technology Solutions also had double-digit ASV growth with demand for company data and data management solutions driving ASV this quarter. And in Research & Advisory, we see continued opportunities to capture additional desktops in banking and wealth. Workflow-driven capabilities also contributed to growth with our research management solutions suite accelerating year-over-year. We ended the quarter with adjusted diluted EPS of $3.79 and an adjusted operating margin of 36%. As we enter our fourth quarter, we are focused on operational efficiencies and disciplined expense management to support margin expansion, grow EPS and provide capital to invest in our strategic priorities.

As part of this effort, we are working to reduce the run-rate of our expense base by about 3%. Savings will come primarily from rightsizing our workforce, which we expect also will decrease by about 3% and further reducing our real estate costs. As discussed last quarter, we are seeing a modest deceleration in ASV growth. And while the markets have remained largely resilient amid macroeconomic turbulence, our clients do remain cautious. Clients have also been executing their own downturn playbooks, resulting in delayed decisions and restricted spending. We also see continued staffing adjustments with firms on both the buy and sell side reducing head count, often targeting mid and senior level professionals. And while we have a stronger pipeline than last year, with a good mix of deals that should drive expansion in new business, client decision-making is taking longer.

We are also monitoring developments in the banking sector. Early sentiment is mixed on fiscal 2024 class sizes. And while some clients are slowing hiring, others are adding junior bankers in preparation for a market upturn. Overall, our top 200 clients, including many of the leading global investment banks, make up two-thirds of our book. And the vast majority of these clients have multiyear contracts, including minimums and 90-day cancellation windows. Given these points and our high ASV retention rate, which is consistently greater than 95%, we believe we have effective downside protection. With this outlook for the remainder of the fiscal year, we are reaffirming guidance for organic ASV growth and revenue, but guiding to the lower end of our previously disclosed ranges.

In addition, we are increasing our guidance for adjusted operating margin and adjusted diluted EPS. Linda will provide further details on this later in the call. We are confident in our strategy and ability to execute. And like our clients, we are ensuring that we are well positioned as the market stabilize and the capital market cycle turns. We have a long-term view of our business and are committed to investing for growth and becoming a more efficient organization. As part of this approach, starting September 1, we are reorganizing by firm type to better align our operations with those of our clients. Analytics & Trading will become our buy-side organization, focusing on asset managers, asset owners and hedge fund workflows. Research & Advisory will become dealmakers in wealth, focusing on banking and sell-side research, wealth management, corporate and private equity and venture capital workflows.

And finally, we are combining our Content and Content & Technology solutions groups to create one data solutions organization. This will create end-to-end management of our data from collection and acquisition to client delivery. We will provide more details on our progress and the performance of our firm types as we refine the structure over fiscal 2024. Technology is rapidly evolving. As an early adopter of cloud technology, we digitally transformed our platform and created flexible workflow-centric solutions. Now with the focus on generative AI, our open platform and connected content will strengthen our partnership with our clients. While generative AI is not new, FactSet has been using AI and machine language in our products for many years and the recent advances in large language models or LLMs present new opportunities.

Our strategy is to build a generative AI foundation and capabilities, empowering our workforce to transform our end-user experience rapidly. We are investing in generative AI technology to drive next-generation workflow solutions. We will also continue to invest in the scaling of our content refinery. We have committed additional resources to LLM initiatives as part of our investment process and FactSetters are excited about these investments as we equip all products and engineering teams to use generative AI in their development work. Our early work in generative AI has focused on improving client support, automating content collection and transforming our products with improved search and copilot solutions. Here are a few examples. During our recent hackathon, almost one-third of FactSetters projects used LLMs to solve business problems or to improve the client experience.

Teams worked on enhancing banker efficiency, pitch automation and discoverability using our modernized connected data. Earlier this month, we used ChatGPT to produce CallStreet earnings call transcript summaries, reducing summation time by more than 90%. This process is currently available for all S&P 500 companies and we plan to dramatically expand the coverage later this fiscal year. We are also testing AI-powered agent assist tools that understand FactSet proprietary codes. This use case is compelling. Questions about FactSet coding comprise half of our daily client call volume. And finally, we see significant opportunities to accelerate content automation using generative AI. We have several promising efforts underway to extract information that has previously been difficult to retrieve.

Our differentiator remains our content, including our real-time and deep sector data for which we have also increased investment. FactSet has an incredibly strong moat of 40 years of proprietary content and data cleanly sourced, auditable and stitched together with our concordance and symbology. It is not easily replicable and is incredibly valuable to FactSet and our clients. Turning to our performance, we saw continued acceleration across all our regions. Americas’ organic ASV growth accelerated year-over-year to 8%, growing through wins with premier asset managers and asset owners. These gains were partially offset by workstation headwinds with wealth, banking and corporate clients. EMEA was the biggest contributor to growth this quarter, with organic ASV growth accelerating to 7.4%.

Growth was strongest in banking given improved retention with banking clients and improved retention and new business with hedge funds. Higher retention was also a key driver in the region as the ASV uplift from our price increase offset increased erosion. In contrast, expansion slowed as cost pressures created higher budget scrutiny, lengthening the sales cycle. Finally, Asia-Pacific delivered organic ASV growth of 10.5%. Performance was driven by wealth management, hedge funds and private equity and venture capital clients with improved retention and ASV uplift from higher realized price increases. Australia was the strongest contributor to growth with wins among asset managers and asset owners. However, sector consolidation and net negative seasonal banking hiring contributed to a small deceleration.

We also saw acceleration in Japan and India driven by banking with a positive increase in workstation purchases for seasonal hires. In summary, we continue to execute well in challenging markets. As we head into the close of our fiscal year, our pipeline remains solid and we are unwavering regarding execution excellence and cost discipline. As we combine relentless client focus with exciting new technologies, I am confident in our ability to drive growth. I will now turn it over to Linda to take you through the specifics of our third quarter.

Linda Huber: Thank you, Phil and hello to everyone. As you have seen from our press release this morning, we delivered solid operating results in the third quarter with continued growth for organic ASV, GAAP revenue and adjusted diluted EPS year-over-year. I will now share some additional details on our third quarter performance. As Kendra noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. We grew organic ASV plus professional services by 8% year-over-year. While we are seeing lower expansion and higher erosion due to the macroeconomic environment, our performance reflects excellent execution by our sales team. Pricing realization continues to improve with our international price increase, adding $17 million in ASV this quarter, up $4.5 million from last year.

Internationally, 7% more clients were subject to the annual price increase than in the prior year. Fiscal year-to-date, our 2023 price increase has yielded $18 million more ASV than last year. GAAP revenue increased by 8.4% to $530 million for the third quarter. Organic revenue, which excludes any impact from acquisitions and dispositions over the last 12 months and foreign exchange movements, increased 8.5% to $530 million. Growth was primarily driven by Analytics & Trading and Content & Technology solutions. For our geographic segments, on an organic basis, revenue growth for the Americas was 9%, benefiting from increases in Content & Technology solutions and Analytics & Trading. EMEA revenue grew at 7.5% primarily driven by Content & Technology solutions and Analytics & Trading.

And finally, Asia-Pacific revenue growth came in at 7.9% due to increases in Research & Advisory and Content & Technology solutions. While GAAP operating expenses decreased 8.6% year-over-year to $358 million, adjusted operating expenses grew 9.4%. The drivers were as follows. First, people. Our cost rose 10% year-over-year in the third quarter primarily due to increased salaries for existing employees. As a percentage of revenue, this was 68 basis points higher year-over-year driven by higher salary growth as a percentage of revenue, partially offset by higher labor capitalization and lower bonus expense. For fiscal 2023, we still expect the bonus pool to be in the range of $100 million to $105 million. Head count increased by 12.9% year-over-year with most new positions in our Centers of Excellence.

Overall, 65% of our employees are located in our Centers of Excellence. Next, facilities expense remained relatively flat, increasing by only 1.6% year-over-year as more employees return to in-office work. Our continuing efforts to right-size our real estate footprint mostly offset this increase. As a percentage of revenue, facilities expense was 24 basis points lower year-over-year. Moving on, technology expenses increased by 22.5% driven by third-party software costs and higher amortization of internal-use software, partially offset by lower cloud-related expenses and lower depreciation. As a percentage of revenue, growth was 90 basis points higher year-over-year. In partnership with our Chief Technology Officer, Kate Step, we have realized increased capitalization through improved time tracking and other efforts.

Technology costs currently equal 7.8% of our revenue and will likely continue to increase as we invest for growth. As part of our medium-term outlook, we anticipate technology costs being 8.5% to 9.5% of revenue. And finally, our team continues to do an excellent job of controlling third-party content costs with expenses increasing by only 1.9% year-over-year despite the inflationary environment. As a percentage of revenue, growth in third-party content cost was 31 basis points lower year-over-year. Given the pressure on our top line, it is imperative that we focus on cost management. Using our downturn playbook, we took proactive steps to control our expenses, protect margins and preserve EPS. We are now going to further identify areas where we can reduce costs.

As part of the efforts Phil spoke about earlier, we plan to take an approximately $45 million restructuring charge in the fourth quarter. This charge includes approximately $15 million to $20 million for continued real estate rightsizing as discussed in last quarter’s call. Compared to the previous year, our third fiscal quarter GAAP operating margin increased by 1,260 basis points to 32.5% mainly driven by the prior year’s $49 million impairment charge and expenses related to the acquisition of CGS. Excluding both non-recurring transactions, GAAP operating margin was around 30 basis points higher than the prior year. Adjusted operating margin decreased by 60 basis points to 36%. This was largely driven by higher personnel costs and technology expenses partially offset by lower third-party content costs and lower facilities expense.

You will find an expense walk from revenue to adjusted operating income in the appendix of today’s earnings presentation. As a percentage of revenue, our cost of sales was 7 basis points higher than last year on a GAAP basis and 283 basis points higher on an adjusted basis largely due to personnel costs, expenses related to CGS and technology costs. As a percentage of revenue, our impairment expense was 994 basis points lower than last year on a GAAP basis as we lapped the prior year’s impairment charge. On a GAAP basis, SG&A was 269 basis points lower year-over-year as a percentage of revenue and 46 basis points lower on an adjusted basis primarily due to decreases in professional services, partially offset by increased personnel costs.

Turning now to tax. Our tax rate for the quarter was 16.9% compared to last year’s rate of 12.2%. Our higher tax rate is primarily due to lower stock option exercises. Our current expectation is that we will end fiscal 2023 with an effective tax rate of 14% to 15%. While we continue to experience variability, which includes increases in foreign tax rates, we are researching strategies to help reduce the overall rate. GAAP EPS increased 79.3% to $3.46 this quarter versus $1.93 in the prior year driven by the lapping of the prior year’s non-recurring items, partially offset by a higher effective tax rate. Adjusted diluted EPS grew 1% to $3.79 primarily due to revenue growth offset by a higher effective tax rate and lower operating margin.

Adjusted EBITDA increased to $205 million, up 15.6% year-over-year due to higher operating income. And finally, free cash flow, which we define as cash generated from operations less capital spending, was $193 million for the quarter, an increase of 9% over the same period last year. This was primarily driven by cash generated from working capital changes and the timing of income tax payments. Our ASV retention for the third quarter remained greater than 95%. We grew our total number of clients by 451 compared to the prior year driven by corporate and wealth clients and partners. With client retention of 92% year-over-year, our sales and client support teams are to be commended for continuing to execute well despite market conditions. We remain committed to returning long-term value to shareholders.

As previously discussed, we resumed share repurchases in the third quarter. We repurchased 165,950 shares for a total of $67.1 million at an average share price of $404.29. Under our current plan, which we anticipate completing in the fourth quarter, $114.2 million was available for share repurchases as of May 31, 2023. And additionally, this week, our Board of Directors approved a new share repurchase authorization plan of $300 million that will take effect on September 1. Over the last 12 months, combining our dividends and share repurchases, we have returned $202.1 million to our shareholders and recently increased our dividend by 10%. This marks the 24th consecutive year of dividend increases. And finally, our guidance for fiscal 2023. While there are signs that the macro environment will start to recover over the next few months, the markets remain uncertain.

Last quarter, we updated our guidance to reflect organic ASV growth of $145 million to $175 million, a slight deceleration from the guidance provided at the beginning of the fiscal year. This range reflects ASV growth of $135 million to $165 million from the core business and $10 million in ASV growth from CUSIP Global Services. We also updated our revenue guidance from $2.08 billion to $2.1 billion, which was a slight deceleration from the previous guidance. As discussed earlier, we are reaffirming our guidance for those metrics, but at the lower end of the ranges. For GAAP operating margin, we expect our one-time restructuring charges to decrease our guidance range to 29% to 30%, a 50 basis point decrease from the previous guidance. GAAP diluted EPS is expected to be in the range of $12.24 to $12.65.

For adjusted metrics, we expect our financial discipline and cost management focus to drive an adjusted operating margin of 35% to 36%. This represents a 100 basis point increase from the previously communicated guidance range and meets our 2022 Investor Day outlook 2 years ahead of our 2025 target. Finally, we are increasing the range of adjusted diluted EPS by $0.25 at the midpoint to $14.75 to $15.15 for fiscal 2023. In closing, we are encouraged by our performance this quarter and our ability to execute on a solid pipeline as we finish the fiscal year. We are confident in our ability to balance macro headwinds with margin expansion and expense management to continue investing in our people and products. As the pace of innovation accelerates, our deep content moat and open digital platform will strengthen our partnership with our clients and allow us to capture additional market share.

We are committed to sustainable growth and excited about the opportunities before us. And with that, we are now ready for your questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays. Your line is now open.

Brendan Popson: Good morning. This is Brendan on for Manav. Just first off, I want to ask on the ASV guidance. And obviously, the high end is still there, but you are talking about it closer to the lower end. Is the higher end still possible? Did you leave it that way because there is a couple of deals in the pipeline? You are not sure if you’re going to close, so that’s not to count on that or can you just walk through the logic of the way you’ve kind of framed the guidance update?

Helen Shan: Sure. This is Helen. Thanks for your question. I am happy to kind of give you some further color on that. H1 was solid for us, but we had already seen end markets begin to soften, which is why we reduced the guidance last call of the $15 million, two-thirds coming from banking, as we said, a third coming from delayed decisions or reduced spend. Over the last 90 days, this past quarter, we’ve seen those trends continue, first, in banking. For example, middle-market firms, which had been doing quite a bit of hiring picking up from other universal banks that were letting folks go, we saw that begin to slow down. And we did see some universal banks have some larger reduction as well. Now given our 90-day notice period, client decisions that were made in Q1 of the calendar year or early spring get reflected more in this quarter, which is why you’re seeing some of that net reduction.

It gives us some greater visibility. And we also saw some erosion pickup on the buy side as well with clients looking for cost reduction. But the positive piece of it, as Linda indicated earlier, we’re still above 95% ASV retention. And we’re seeing that diversification of spend in banking, for example, as we sold more in analytics and fees as many of the firms there are looking to do more technology and off-platform solutions. So that’s a positive. The second is timing. Client reviews are taking longer with more authorization on spend. We saw more deals move from Q3 into Q4 but also into FY – early FY ‘24. Part of the reason really is budget constraints. Clients want to pursue even cost-saving projects, but they don’t have all the IT resources they need or some of that requires some initial upfront spend to accommodate.

So for us, many of the opportunities that we see in the pipeline are open, but we can see and expect some of that to be delayed. But a clear trend is that clients are looking for more help in taking on some of their non-core activities. And that’s going to provide momentum for us both in managed services as well as data management solutions. And then the last is reduced spend and some reduced hiring. In Q3, we had the same number of six-figure expansion and new logo wins in the previous year, but the average size was a little bit less, 4% lower. And so – and the expansion that we’ve seen in the past from hiring has slowed down as well. And the same pieces are impacting our new business as well. But the positive sign is that we’re not losing out on the opportunities.

The number of deals falling out is the same as in previous years, and we’ve had great strength in the middle-office solutions with performance and risk. So we’re just trying to give our best thinking at this point. We’ve got confidence in all of the client interactions and value discussions, but we want to be realistic as it relates to markets timing and ability to monetize. So it’s about timing as opposed to our faith in the pipeline itself.

Brendan Popson: Great. And then just – a quick follow-up, Linda, on the margin, obviously, last year, you were caught a bit by surprise, the Q3 to Q4 decline. Can you just help us with – we see updated guidance, but just help us with how you’re thinking about that sequentially? It looks like the midpoint would be almost – not quite 500 bps, but almost, which is what it was last year. So if you could just help us with how to think about that?

Linda Huber: Yes, Brendan, happy to give you some further color on that. So obviously, given the top line situation we had to focus a little bit harder on costs. And we’ve had very good support from the organization to work on this. So you’re right, sequentially, the margin will be considerably higher than it was before. And our guidance of 35% to 36% adjusted is what we have said would be the exit rate for 2025. So we’re well ahead of schedule. In terms of what we’re doing, there are really two concepts here. One is we’re looking to take a charge in the fourth quarter to reduce our run rate going into 2024. And then we’ve also taken some actions to reduce expenses already in ‘23. So let me talk about what we’ve done in 2023 first.

So the first thing that we did was we pulled back and pretty much almost slowed and then stopped hiring as we came through the second quarter. So that reduced the pace of salary ramp. And we kind of expect that over the course of the year, that will give us $15 million back. On third-party content, we have done really well. We’ve held costs there very nicely. That’s come in about $10 million lower than we had expected. The technology team has done its part. We’ve increased capitalization quite a bit as you’ve seen. And that has flattered the salary line, and it’s shown up a bit more in the tech line. But still, the tech team has managed to save about $7 million. And then the facilities charges we took last year have come through a bit stronger than we had expected.

So that saved about – that will save about $5 million so all that comes up to kind of $37 million, $38 million that by the end of this year we will be able to save. And then to position ourselves for next year, we talked about a charge we’re going to take in the fourth quarter. These decisions are very, very difficult to make, and we’ve spent a lot of time thinking about them and trying to make sure that we’re doing the right thing at the right time. So we’re expecting, as we said, we’ll be taking a charge of about $45 million. Please give us kind of $5 million of variability on either end of that because we’re not done yet. We are expecting that we’ll bring the workforce down by about 3% or less. Real estate will provide another $15 million to $20 million as we talked about before.

We will also look to do a few other things which will be helpful. So a total of about a $45 million charge, which will help the run rate as we go into ‘24 to get everything right-sized. Again, these are very difficult decisions, and we really appreciate the support of the entire organization to try to get the cost basis correct as we deal with the air pocket situation in the top line. So I hope that, Brendan is helpful to you.

Brendan Popson: It is. Thank you.

Operator: Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.

George Tong: Hi, Thanks. Good morning. I wanted to follow up on the margin question. Based on your updated full year guide for margins, fiscal 4Q margins are tracking to contract year-over-year to approximately 30%. Can you talk about the reasons behind the year-over-year margin contraction?

Linda Huber: Yes, George, I think you’re light by about close to 200 basis points. I think we’re going to be closer to something more like in the 32% range for the fourth quarter. This is the result of we do have more people and higher salary run rate cost than we did at this time last year. We also have a 12.9% increase in the number of employees that we have, though two-thirds of those are in lower-cost locations. So it’s basically that. It’s the increase in both employee primarily salary run rate costs and technology costs. But again, we’ve taken some pretty dramatic actions here to bring the annual adjusted operating margin up 100 bps to 35% to 36%. The fourth quarter is traditionally our heaviest expense quarter, as you know.

And we’re expecting our bonus expense there will be somewhere around another $25 million. It’s been pretty consistent over the first three quarters of this year. So as you know, the margin – I’m sorry, the bonus adjusts depending on how our performance goes. So we expect it to be flattish this year as opposed to last year where we had a big uptick in the bonus accrual in the fourth quarter. So I hope that, that helps you. And I think we have made it clear we have a pretty intense focus on expense control.

George Tong: Got it. That’s helpful. And then your – you mentioned that the 35% to 36% is a pull-forward of what was originally targeted to be 2025 – fiscal 2025 margins. Have you provided an updated outlook for what EBITDA margins could be in fiscal 2025? And what would be a reasonable pace of annual margin expansion over the next 2 years?

Linda Huber: George, it’s an excellent question and one that we’re spending considerable time on ourselves. I don’t think I want to jump to 2025 when we haven’t even finalized plans yet for 2024 or even given guidance on 2024. So let’s say that we had spoken about, on average, 50 to 75 basis points of margin expansion. We’ve worked hard. We’ve moved faster. We get a lot of comments on these calls about what we’re doing with the margin. And I think we’ve proved that we’re working pretty effectively on it. So let’s see how we go. We will have made very good progress this year. And if you have – if you’re willing to be a bit patient with us, we will talk some more about this as we go into 2024 guidance next in our next quarter earnings call. So a bit of patience, and we will see where we get to.

George Tong: Great. Thanks very much.

Operator: Thank you. Our next question comes from the line of Alex Kramm with UBS. Your line is now open.

Alex Kramm: Hey, good morning, everyone. Two questions on ASV. I’ll do them one by one. The first one is a little bit more near-term. Can you just – when it comes to the fourth quarter and the outlook, there was a question before, but when you think about the guidance here, if I assume the low end, can you actually just tell me what that means for the fourth quarter, what’s implied? There were a lot of restated numbers. I think you’ve done $84 million in organic so far this year. So that would imply, I think, $61 million by my math, but not sure if that’s the right number. And if that is the right number, it’s a slight reduction from last year, but given this environment and slowdown in hiring classes, it seems like it could be worse. So just maybe put that 4Q implied in the context of the environment.

Helen Shan: Hi, Alex, it’s Helen. I’ll take a shot at your question here. You may be including – please keep in mind that CUSIP is included in our numbers. So I can’t quite tie to what you’ve just said. That might be a good question for Kendra later on. But I’ll just talk about perhaps the Q4 pipeline overall, if that can be helpful to you. So when we think about the pipeline, as I mentioned before, it’s a pretty solid pipeline equally weighted across our three workflow solutions. so in analytics, research as well as CTS. Most of the pipeline in the America’s in CTS. And so at this point, given our notification period, we have a pretty good visibility into cancels. So we’ve taken that into account. So the rest is up to execution.

Our sales force, as mentioned by Linda, is doing a great job in trying to be diligent and working with clients to close the transaction. So the variables right now are on timing, on decisions. The mix of larger transactions, which tend to take more time – I mean nearly 70% of our pipeline is in six or seven figures. And bank hiring remains unclear because we’re seeing both increased and decreased hiring classes across the larger banks. So the quality of the pipeline – and we have ample coverage to meet our ASV range, but there are dependencies on external factors that make this outcome a little bit more difficult than maybe in previous years to predict. So that’s why we give a sense of the range of where we stand at this point.

Alex Kramm: Alright. I’ll follow-up on the exact number for the 4Q implied later then. In terms of my second question, this is maybe a little bit of an early look into 2024. But let me put it in context a little bit. If I go back to your investment phase, so basically before you – I think 2017 to 2019 or so, the ASV growth in average was something around 5%. And I would say when I go and look at that environment, it was a fine environment, not great. And then obviously, you went into a great environment in last couple of years. But now I think we’re seeing layoffs. We’re seeing, even on the buy side, staff reduction. So I would say the environment we’re entering here is markedly worse than what we saw prior to your investments.

So again, if I put that in the context of the 5%-or-so growth that you did in that period, like is that a good starting point to think about what’s about to hit here or how would you describe the outlook, I guess, a little bit more quantitatively?

Phil Snow: Hey, Alex, it’s Phil. Thanks for the question. So we’re really optimistic about the future. I mean, obviously, there is been a series of things that have happened that have caused clients to slow down their decision making and sort of think more about their businesses during this period. But we’re hoping that with the debt ceiling now getting resolved that we’re sort of at the bottom of that uncertainty. And we’ve done so much to evolve our product over the last few years that we feel we have a completely different mix coming out of this. First of all, the opening up of the platform, that is providing a significant impact to our business and our ability to interact with our clients, co-develop with them, help them with their own digital transformations.

And now with this sort of once-in-a-decade event with generative AI really catching hold, we feel like we’re in pole position to take advantage of that. So that’s one thing. And then the investment that we made in deep sector and private markets, which we’re still in the early days of, we believe that’s going to help us significantly on the sell side, Even if the head count numbers are down, it’s going to really help us with retention and expansion. And these investments are also going to allow us to do more in corporate, private equity and other firm type. So overall, we’re very optimistic. We feel that we made the right bets there. And with this new wave of technology, we feel like we’re an even better place to disrupt the market.

Alex Kramm: Okay. Fair enough.

Helen Shan: Wealth has been the big driver for us as well. So I think we’re really a different company than we were pre – back in 2017. Wealth has been a huge driver of growth for us and all the investments that we’ve made, as mentioned by Phil. So I do, Alex, think we’re fundamentally much broader, much more diversified than we were back then.

Alex Kramm: Alright. Thanks, again, Helen.

Operator: Thank you. Our next question comes from the line of Heather Balsky with Bank of America. Your line is now open.

Heather Balsky: Hi, thank you. I wanted to ask a couple of questions on the margin. So the first question is – and I know someone else previously kind of asked about how you’re thinking about margins going forward. But I’m curious in terms of some of the pullback on costs, how much of that is permanent? And how much do you think comes back as sales and ASV start to reaccelerate? And then I have a follow-up.

Linda Huber: Heather, I think that’s a difficult question for us to think about or for us to answer right now. Maybe if we ask you to stay tuned as we go into FY ‘24 guidance that would be important. I think the statement that is important here is we are committed to margin expansion, doing that at a reasonable pace with the appropriate balance, ring-fencing the investments that we’re making in the company, that’s very, very important to us. So I think we will continue to keep a very focused eye on the margin, keep the cost at an appropriate level. And we have the wind at our backs with some of the things going on with large language models, which should help with efficiency in our content collection. So I think we will look to honor that 50 to 75 basis points of margin expansion on average over the next few years, but not every single year will look the same. And maybe I’ll ask Phil if he has anything else he would like to add.

Phil Snow: Well, I just – I think we have a long-term view of our business. So through all of this, we want – the top line is very important to us and a year or so ago, we talked about maintaining a high single-digit growth rate over the next few years. So there is certainly that – we keep that in mind. I think, along with what Linda has been talking about, about sustainable margin expansion. So we feel we can chew gum and walk at the same time, particularly with all of the advancements we’ve made in technology.

Heather Balsky: That’s really helpful. And then as a follow-up, it’s interesting to hear about how you’re thinking about investing in AI. And you just mentioned that there is some efficiencies you think you can get from there. I’m curious, essentially with it all being very new, how should we think in terms of investment versus savings? And I realize it’s early days, but are there any plans to kind of ramp investment spend around that so you can realize the longer-term benefits? Do you think you can kind of realize both? I’m just curious how that dynamic works?

Phil Snow: Yes. Let me spend quite a bit of time on this. So it’s an excellent question. So the first thing I want to do to frame this for everybody listening is that FactSet is probably one of less than five companies on the planet that has the decades of data that’s important to this industry stitched together in a clean way. So that is so important. And I would argue that the value of even what was called commoditized data before has gone up. So we have that. That is a moat that we will continue to build on. And I talked earlier about the merging of our data – we’ve created data solutions out of two groups at FactSet, but that is something that’s so valuable to FactSet, the content refinery. We’ve done a lot already to re-architect our data hub and how we collect data, but this is going to supercharge those efforts essentially.

So that is the foundation, something that’s critically important. FactSet is also masterful. It’s stitching data together. So you’re going to have to have well-coded data, quality data. You’re going to have to have the trust of the clients in this market. You don’t want to have products that are creating hallucinations or things that aren’t true, right, for our clients. So FactSet has all of those components. We’re going to be focused on three things. First of all, the product, we want to create that wow factor for our clients and the ability to come in and essentially surface anything or ask questions. And a lot of the examples that are out there today in the market, we’ve been doing those few years. You can already go into FactSet into our search bar and type in sort of basic questions and get those answers back very accurately.

We’re focused on the next level of that. So that’s important. We have a lot of people thinking about that. Content collection, which Linda just mentioned, this is something that we’ve been doing for decades. We’ve gotten more and more efficient at it over the years, and we continue to invest in that. So this could actually provide a great opportunity for more efficiency, but it could also create an opportunity to put more – even more data in the platform. So that is something we have to consider carefully. And the third bucket is really the support of our clients. I mentioned in my opening comments that about 50% of the help desk questions we get are around FactSet FQL language or FDS codes, which I’m sure many of you are using and have used in the models that use to build FactSet and other things.

So these are three areas of significant impact. The whole company is rallied around this. It’s one of those things that really just gets everyone motivated. So it’s a little less about like how many millions of dollars are we going to set aside to invest in this. It’s how do we get the whole company thinking about this and making sure that this is part of the fabric of what they do every day. So we’re so energized by this, and we feel there is a massive opportunity for us moving forward in both the product side and potentially the efficiency side.

Heather Balsky: Great. Thanks for help.

Phil Snow: Yes. You are welcome.

Operator: Thank you. Our next question comes from the line of Stephanie Moore with Jefferies. Your line is now open.

Hans Hoffman: Hi, good morning. This is Hans on for Stephanie. Could you just update us on the pipeline in the wealth channel? And could you give us an update or an idea of the mix of the customer size in the pipeline? Is it mostly kind of large contracts that you could potentially win there? Or is there sort of a lot of smaller wealth advisers that can move the needle for you?

Helen Shan: Hi, it’s Helen. I’ll take that. Thanks for that question. Many of the wealth firms right now are looking to modernize their platforms. We’ve seen that most recently with RBC, Bank of Montreal, Rockefeller, Raymond James. And so to that end, we’ve really helped develop our brand in the wealth space. And then the open and flexible technology solutions is really separating us from the competition, especially as it relates to adviser dashboard and the other FactSet components that really lock into a client’s CRM or other platforms. So as a result, we’re having a lot of robust efficiency conversations with both existing and prospects. And so the pipeline is quite strong. In fact, I would say it’s as high as we’ve seen in recent years.

But this goes back to the same dynamics I’ve talked about before that, especially on larger deals, the ability for a client to make a decision and to execute is taking more time and seeing your attention. We’ve got several large ones, great opportunities, but they need to have the capacity on their end to execute. So as I mentioned, we feel very, very good about that, but that, that may take a bit of time. So to your question around the rest of the book and the sizes, it’s really a mix. You’ve got lots of small ones coming through last year. I would tell you that we had a lot more new logos in wealth, especially as they are hiring more teams. This year, that’s been a lot softer. So we’ve seen some net pullback there. But we remain very positive on our ability to continue to gain share in the wealth space.

And it really is both on the large deal front but as well as on the smaller transactions. And we continue to grow at high single-digit and low double-digit levels.

Hans Hoffman: Got it. That’s helpful. And then just in terms of revenue growth, could you maybe parse out in terms of how much is coming from price, cross-sell and new logo wins? Is it still kind of roughly one-third between those three buckets? Or is there maybe any one of those kind of driving growth here?

Helen Shan: Sure. It’s very much still similar. I would say for new logos, it is a little bit less than we’ve had in the past. We’ve usually talked about two-thirds coming from existing, one-third coming from new. I would say it’s a little bit lower because of the market. Our price increase this year has been a terrific driver. So that’s a bit of a bigger piece of our existing. And we’ve had great acceptance in terms of the clients understand the new value that we’ve added over the course of the year, and we’ve not had much pushback as it relates to our ability to capture that amount.

Hans Hoffman: Got it. That’s helpful. Thank you.

Operator: Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.

Toni Kaplan: Thanks so much. Wanted to go back to the topic of data. And so I guess there is two questions that I wanted to ask. So Phil, you mentioned the value of the data going up, and we’ve definitely appreciated that as well. I guess, one, do you see that potentially impacting the cost of the data that you’re getting going forward? And two, wanted to also understand maybe some additional color on initiatives in terms of creating the proprietary data. Just what are you getting that is not from public filings? Anything like that would be super helpful. Thank you.

Phil Snow: Sure. I think Linda mentioned earlier, we do get quite a bit of data from third parties, but we’ve done a good job of managing that. And as we move forward, I think – given the tools that we have totally, I think there is more that we might be able to do that – where we’re self-reliant on that. So maybe sources that historically, we relied on third parties for that we didn’t have the capacity to get or just focused on, it presents that opportunity. So there is going to be a balance there for sure. But I think we collect so much of the data ourselves, and there is a ton of value in that, that we feel like there is a good balance. And because of our platform, third parties are going to continue to need to pipe their data through platforms like FactSet, where clients want a consolidated, well-integrated approach where they get the analytics and support on top of it that they expect.

So that balance for us, I feel very good about. I think net-net, we will be positive on that one. In terms of data that we get from non-public source or from sources that are more difficult to collect from, there is a lot of stuff that’s easy to collect like the SEC filings obviously. But there is a lot of stuff that you can get from local municipalities that’s in badly formatted Word documents or PDF files or other places that stuff is available. It’s just historically been very manual and very difficult for companies to collect at scale. So those are the types of things that we can now scrape together in a much easier way. A lot of that you could attribute to sort of deep sector-type data. So that would be a good example for me. It’s just continuing to go deeper in the current industries that we’re looking at for deep sector and more and making sure, more importantly, that all of those data points are stitched together.

So it’s one thing to collect the data, but the other thing is how do you tie it together so that analysts like yourself can make sense out of the data and you have to spend less time on lining that up yourself.

Toni Kaplan: Super helpful. And I know that it’s a little bit early to start talking about price increases for next year. But I did want to just ask, you’ve been working a lot on price optimization and bundling and a strategy around that. Just trying to understand that if we go into a period where it’s just more challenging than it has been, I guess, how do you see price playing out in sort of a worse environment? Are you able to still optimize price well because of the strategies you have in place? Or does potentially next year, if things stay like they are now, is pricing a little bit less of a driver in that type of environment? Thanks.

Helen Shan: Sure. I’ll take that one. And it’s a timely one given what the UK just decided this morning as well. So yes, you’re right. With inflation coming down, that would impact our ability to raise our prices next year. But we are continuing to have that higher price realization from packaging, from bundling. We are selling very much from a firm-type perspective, which allows us to really bring a much more fulsome solution to the client. So the average size, what we’re trying to aim for, Toni, is also a larger per transaction, and that will be one of the things that we look at from a KPI perspective. I will say, for existing clients, even this quarter, we continue to improve our price realization nearly 120 basis points.

Now on new business, we’ve seen that come down, and it’s not surprising as you think about the environment that we’re in and more competitive situations. So we’re being smart about that. We might drop a bit in terms of the pricing for new business, but then we try to lock in for longer contracts. So that’s the push and pull on that. But it’s still a little bit early to talk about ‘24, and we will see where things land later on in the fall.

Toni Kaplan: Thank so much.

Operator: Thank you. Our next question comes from the line of Kevin McVeigh with Credit Suisse AG. Your line is now open.

Kevin McVeigh: Great. Thanks so much. I don’t know if this would be Linda or Phil, but Linda, I know you mentioned some green shoots potentially forming. Can you maybe help us reconcile that to the 3% head count reduction? Is that a function of just more efficiencies or just reallocation? I wanted to start there, if possible.

Linda Huber: Yes. I’ll take a start and then Phil may have some more to say about this. So I think we have to adjust the business for the top line that we have now, Kevin. And I think there is sort of a lagged effect here on some of the decisions that banks made earlier in the year. So it’s possible that this is the darkest point here before the dawn. We don’t know. We hope that that’s the case. So we need to rightsize the employee base and make sure that we’re putting the right resources against the right products, for example. We’re being very careful in how we’re selectively pruning the employee base. Less than 3% is a reasonable change but not one that should have a huge impact on how we run the business. You’ve heard from some of the heads of the global banks that they are seeing some green shoots, that capital markets activity is picking up, that M&A activity is picking up.

So it’s hard to keep the capital markets down for more than a year at a time. We will be looking forward to FY ‘24 and seeing what’s going on there. But it’s possible that we’ve come through the most difficult time. As we said in the prepared remarks, we’re seeing different situations from different companies. Some are preparing for what may be an upturn next year. Others are still in consolidation mode. So people are sort of all over the place, and we’re managing our business prudently to make sure that we’re dealing well with now and we’re very ready for what comes next. Maybe Phil might want to add to that.

Phil Snow: And maybe I’ll just add, too, some thoughts on the core buy-side business at FactSet. So I know at the end of our press release, it shows our growth rates for buy side and sell side, and it shows the buy side going down, I think, 80 bps. So part of that really just has to do with the fact that we’ve now included CUSIP in those numbers. So I think you can attribute about 75% of that change to just CUSIP being included, which is a mid-single-digit grower. But when we report the buy side, it includes, at least today, institutional asset management, asset owners, hedge funds as well as partners, corporates, wealth and private – not private equity, that’s on the sell side. But the IAM hedge fund and asset owner firm types all did better this Q3 than last Q3.

So despite this environment, we’re doing really well with the buy side. And the middle-office solutions that we have in analytics are best-in-class now. And we feel like all the work we’re doing to improve the front-office experience on the buy side is going to begin to pay off pretty soon. So we feel really good about that. So despite this environment, when you look at our user count, it went up this quarter. It didn’t go up as much as last Q3. But every firm type that we have, we had an increase in users. So we do feel like we’re sort of through the worst of it, but it does take clients a little bit of time to sort of feel that themselves and begin to speed up decision-making again. So I don’t think it’s going to snap back immediately.

But we do feel as we sort of work our way out of this that we feel good about our prospects going into next year.

Kevin McVeigh: That makes a lot of sense. And then just, Linda, as a segue there has been a ton of M&A in your sector, right? Nasdaq just acquired Adenza, Deutsche Börse in the process of acquiring SimCorp, really underscores everything that you folks have been bringing in the market for a decade now. Any thoughts as to where you focus it within that ecosystem? And then you had some decent detail on next-gen workflows, and I’ve never thought of you folks historically as much on the back office. I guess, maybe any thoughts on M&A as you potentially consider it internally or potentially externally? I know that’s probably a tough question, but what you’re seeing in the market is really endorsing what you folks have been doing for a decade. So, just any thoughts around that?

Phil Snow: Yes. So I mean, obviously, you highlighted two of the deals that recently came to market. So I don’t – I think what Nasdaq is doing, that’s – we don’t compete with Nasdaq. And I think the business that they acquired, we don’t – we won’t really play in that workflow. But we feel very good about our strategy, our consolidated platform, our prospects. We feel like we have the scale to continue to take market share aggressively. Linda and her team have done an awesome job of sort of getting CUSIP integrated with the rest of FactSet and paying down our debt into the range that we committed to. So we do feel that we’re very well poised here if we wanted to do something. And to sort of build on Linda’s comments, we’re beginning to see some activity, right?

So some interesting things are beginning to bubble up. We’re in a position to do them if we want to. And we’ve been consistent in saying that the areas that make sense for FactSet are wealth, private markets those are at least a couple. We haven’t changed our view there. It’s just a question of when those assets that we’re interested in are becoming available and if we can get them at a price that makes sense for the company. But it is something we’re focused on, and it’s a muscle that we’ve continued to develop. Anything you want to add there, Linda?

Linda Huber: No. I just, Kevin, wanted to point out, we levered up in order to do the CUSIP deal to 3.9x gross leverage. We’re back down inside the 2.5, which would be sort of a more normal range for the investment-grade ratings that we have from Moody’s and Fitch. Now we’re down to 2.2x gross leverage. We’re slowing down on repaying our term loan, sort of moving to $60 millionish a quarter of paying back that term loan. So we have room even within leverage levels for our current rating. And then we have a very good track record with the rating agencies that we took our leverage considerably higher and then we brought it down. We committed to doing that and we executed on it. So we feel that we could take that path again if there is something that Phil feels is strategically important to us and hits our hurdles of having appropriate growth rates and appropriate margins.

So the finance team’s job is to be prepared and provide capacity, and we think we have that. So I think we will continue to lean forward in our fox holes, and we will see what happens next.

Kevin McVeigh: Thank you.

Operator: Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.

Shlomo Rosenbaum: Hi, thank you very much for taking my questions. Just from a high level, I just want to make sure I am understanding what happened in bridging the commentary from last quarter to this quarter? Last quarter, the discussion was that small to midsized clients were slowing decision-making, but the larger clients were really kind of on the same path that you guys had expected. Is what’s happening now that your – the larger clients are also kind of slowing down on that decision-making? And then also in the banking clients, it seemed to be last quarter, you thought that, that was something that was very much tied to what you would have seen if there would have been contagion from Silicon Valley Bank and then First Republic.

And we didn’t really see that, but is it a matter of kind of the markets just being choppy so that the clients are still kind of hard to read in terms of where it’s going to net out for hiring? I just want to make sure I am understanding that that’s really what’s going on behind it. And then I have a follow-up question about cost takeout.

Helen Shan: Thanks Shlomo. This is Helen. I will try to get to all those points. If I miss anything, please call me back in. So, I think last quarter, what we indicated was that we were seeing slower decision-making across the other firm types, so not focusing on small or mid, but just separate from banking. So, I think that, that is what we are continuing to see as this last 90 days. So, it wasn’t based off of size. It was more of an overall other than the banking firm type we were trying to pull out separately. If I think about banking overall, I would say that the impact of the layoffs is probably a little bit more than we had expected, really due to the market. You are right, we don’t necessarily see the contagion from SVB necessarily.

They were not huge clients of ours per se. Obviously, Credit Suisse is one. And so I think there is more of the general deal level, which as Linda alluded to, if that picks up, then we will likely ride with that. But until their confidence comes back, we are seeing a more muted hiring. Now, it does depend. Some of the firms are actually same as last year and some firms have come down. So, that’s a little bit why the mix is a little bit harder to tell. So, that’s the difference that we have seen, Shlomo. Since the last 90 days, we have continued to see some pullback on banking. And the rest is more, as I said, let’s call it, 50% of the total, 30% is really due to delayed deals, and the rest is reduced size and some additional erosion.

Shlomo Rosenbaum: Okay. And then just I am not used to seeing FactSet doing more kind of general reductions in force. Usually, the company, at least in the prior downturns, I didn’t see that very much. Can you talk about a little bit where you are taking the costs out? I mean how are you being surgical enough to make sure that you are not impacting the potential to grow the business?

Phil Snow: Hey Shlomo, it’s Phil. Thanks for the question. So, I will frame it for you this way. So, we have – I talked in my opening comments about a bit of a reorganization that we are going through. And we have started a bit of that. The rest of it will happen by September 1st. But part of this rationale is really getting better aligned by firm type, so some products move around within the business lines. All of the quota-carrying staff moved under Helen now. So previously, we had our sales specialists for the different product lines in the business line. So, they have now been organized by workflow. And then thirdly, we brought together the content and CTS teams because we were creating sort of an extra layer on top of the content to deliver it.

But because we have made so much progress in how we collect the data and send it internally to our engineers, that makes sense to make one team. So, that’s one thing. The second thing is, this year during our investment process, we went through the product portfolio and decided to de-prioritize some product lines that historically we have been very reluctant to do. So, it was a bit of a sort of reemphasizing what’s important to us, what do we need to do less of and what should we be investing more in. And then as we have sort of evolved as a company, we looked at some roles that historically had made sense for us to have, but maybe we need a less of those now. So, it is less about just pure cost reduction even though it’s obviously important for us to manage the margin and deliver operating income as we have described.

But what I would say was the combination of those things. So, I feel very good about this and obviously we have grown our headcount significantly in the last year, right. We have grown our headcount by at least 1,000 people. So, we talked about reducing our workforce by less than 3%. So, I think this is just is sort of good annual managing of the business as we set ourselves up for the next year.

Shlomo Rosenbaum: Thank you.

Linda Huber: It’s Linda. You had asked a question in your written work and we want to make sure we get all the questions answered. You had asked about what’s going on with other income, and the answer to that is about $3.3 million on that line. We had some old CTS receivables which had been written off, but that money came through, so that shows up in other income just so you are clear as to where that’s come from and thank you for noting the reduction in – of five days in days sales outstanding going from 46 to 41. So, Thanks for that and I think we will move on.

Operator: Thank you. Our next question comes from the line of Owen Lau with Oppenheimer. Your line is now open.

Owen Lau: Yes. Thank you for taking my question. So, going back to AI on both revenue and expense line item. On revenue, could you please talk about how Gen AI can potentially impact your revenue model? So, is it more like this is an add-on service that allows you to better negotiate for pricing or you can separately charge for AI-enhanced products? And then on the cost side, I mean there is a lot of excitement about the cost-saving opportunity. But could you please give us a sense of how much labor costs you can, let’s say, save if you have a full AI implementation today? Thank you.

Phil Snow: Sure. Hi, it’s Phil. Thanks Owen. So, the way we are thinking about it at least today, right, is we are just going to significantly improve the search capabilities on FactSet. That’s sort of one thing that we are focused on. We think there is other sort of research that we can produce from the content we have today that will be valuable to clients. So, we are still evaluating this. But my guess is, right, that we are going to just continue to improve that experience of the FactSet user that’s using like some version of our product, which will allow us to take more market share from our clients and improve retention. So, I think that’s how I would think about it for now. And on the cost-savings side, yes, it’s easy to sort of put numbers in a spreadsheet and say, okay, we will get rid of half of this type of user.

But it’s obviously, not that simple an equation. So, data and technology keeps moving, it always has. You always need to produce more value than you did the previous year. So, the question for us is that balance between, okay, what are the cost efficiencies we can gain versus how much of that do we want to reinvest in the product. So, we are going to maintain that long-term view. And I think even if we felt we could take out significant costs, we believe, again, that the top line is important and reinvesting that in more functionality and more data is a good thing. So, we are at the beginning of this. It’s moving very quickly. We are moving very quickly. And as I mentioned in my opening comments, we think that the big buckets of opportunity are within products, within content collection and with support.

But we just – we don’t know exactly where it’s going yet, other than we feel really good about our position.

Owen Lau: Got it. And then on the deep sector work, a few of you mentioned a little bit on that. Can you give us a little bit more color on the timing to launch more products. I know you have some beta products there. And then would that 3% labor reduction impact the pace of this deep sector work or no? Thanks.

Phil Snow: No, absolutely not. Deep sector is one of our major product initiatives. It’s gotten significant investment over the last few years. It’s getting more through this year’s investment process. And we are including it in – today in our products. So, if you are a FactSet user today, you will just see more and more functionality and more data appear, depending on what company you are looking at and what sector that’s in. We are also creating feeds of this. So, the discrete product sales would be more feeds if you wanted to use that as part of your quantum research product. But it is having a nice impact for us, particularly in banking now with retention. And a lot of these – a lot of why you win or lose in banking is these large multiyear deals with the bigger banks, and we feel that we are in a better position than ever as those come up for renewal.

Owen Lau: Alright. Got it. Thanks.

Operator: Thank you.

Phil Snow: You’re welcome.

Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Your line is now open.

Craig Huber: Great. Thank you. Can you talk a little bit further about the investment firms out there that your clients and talk about the pipeline, the tone of business and maybe separate it between the hedge funds, the mid-sized investment firms in the global investment manager out there. Is there much difference between that going right now? I know you touched on this before. I just want to hear a little bit further about the tone of business and the pipelines across the three separated out, please.

Helen Shan: Sure, happy to do that. So, when we take a look at the investment management firms, I break them out into a couple of different pieces. Like you said, there is hedge funds. We call it – in our buy side, we have asset owners as well as investment management firms. The larger ones who have begun and really are committed to their digital transformation are the ones that we have the most success with because they are ready to go and they really are working with us, whether it’s through blueprinting things that we have done with them or to really help put in some of the solutions for them. So, that pipeline has remained strong. And so when I talk about the fact that they are clients that are ready to make – move forward, but maybe are constrained either by bandwidth or by initial dollars, that’s – those are the ones, Craig, that I am more referring to.

I think some of the smaller firms, if they haven’t really started that or gotten committed to that journey, then those are the ones that are pulling back right now and not necessarily spending where they would have done it last year. As it relates to hedge funds, we have actually done quite well with them. They continue to form new bids and actually are buyers of our data. And it doesn’t even – when we talk about funds, it doesn’t even have to be hedge funds. It can be for any of the asset managers. If they close a fund and open a new one, a new fund, we are able to capture that as well. So, that’s really the state of what we are seeing in the markets.

Craig Huber: Thank you for that. My final question, CUSIP, I heard you say somebody say briefly, you said growing mid-single digits. Is that what it actually grew year-over-year in the quarter we just finished here? And what’s sort of your outlook for that business? And how has the integration gone from your perspective so far?

Phil Snow: Well, so the integration has gone swimmingly well, and we believe that we are going to hit all of the metrics that we set out to meet on the numbers side by the end of the year. Issuance is a bit down. I think you probably saw that in quarter – in this quarter. But if you believe that the markets are going to come back, hopefully, we see an upswing there. But all of the commentary we made previously about this business, which we don’t break out completely separately, none of that has changed.

Craig Huber: Great. Thank you.

Phil Snow: You’re welcome.

Operator: Thank you. Our next question comes from the line of John Mazzoni with Wells Fargo. Your line is now open.

John Mazzoni: Hey. This is John filling in for Seth. Just a quick one, could you just remind us what percentage of the international book was captured during this round of price increases? I believe you said 7% more year-over-year. But what was that base?

Helen Shan: Hi. This is Helen. So, the number – I am trying to get to your 7%, but we are up $17 million in price increases, which is $4.5 million higher than the previous year. And of course, this is on top of the $31 million that we captured in Americas in the last quarter.

John Mazzoni: Okay. And then maybe just on a different note, if kind of the environment continues to be a bit sluggish. Could you just remind us around the different levers have been pulled? And really, if what area we are in, in terms of innings, in terms of the downturn playbook, and what those buckets could look like if we would potentially see another year or 2 years of kind of sluggish economic growth and potentially lower headcounts? Thanks.

Linda Huber: Yes, it’s Linda. I think we had talked about the headlines being we are looking to take approximately a $45 million restructuring charge in the fourth quarter. And we are – we started with the easier to move buckets, maybe not easier, but the ones that probably have less implication for the employee base. So, we started with real estate. We have taken a total now of close to – when we get down in the fourth quarter, close to $80 million of real estate downsizing. So, that one has been worked through pretty well. When we talk about third-party data, an increase in costs of only 1.9% in a highly inflationary environment, that one has gone very well also. And on the technology budget, you know that we are keeping some capabilities on-premises, which saves $20 million over 5 years.

And we have greatly increased capitalization through accurate time tracking. So, we have dealt with the tech budget as well, and we continue to do so, focusing on third-party software purchases and also on cloud usage, which is not for clients to make sure we have got all that right. So, then we get to people, and that’s where it gets tricky. We took the steps of taking hiring just to essential hiring, then to hiring freezes. And only now are we looking to do somewhat of a reduction in the number of employees that we have. But as Phil said, we had increased the headcount by 1,000 people over the course of the last year. So, trimming by 3% seems to be a reasonable choice. Now, if the situation gets worse, we will have to think further about this.

The big buckets are the technology spend and the people expense. So, we will continue to look at those. But I think we have done a pretty good job in pulling back on all our costs. That’s why you see margin guidance going up 100 bps. So, a lot of good work being done across the organization to make sure we are right-sized and we have the right resources in the right places. Hope that helps.

John Mazzoni: It does. Great color. Thank you.

Operator: Thank you. Our next question comes from the line of Faiza Alwy with Deutsche Bank. Your line is now open.

Faiza Alwy: Yes. Hi. Thank you. So, I know we have covered a lot of ground. I just had a couple of quick clarification questions. One is a follow-up on Alex’ question regarding the ASV base, if you don’t mind just confirming for us that the base for fiscal ‘23 for that $145 million increase is $2027.4 [ph] million, I think that would be very helpful for everyone.

Helen Shan: Alright. The base, meaning the total amount of ASV that we have right now?

Faiza Alwy: The total amount of ASV that you had at the end of fiscal ‘22 that you are going to grow off of by $145 million.

Helen Shan: Got it. Kendra is going to come back to you specifically on that because we want to make sure that we are giving you apples-to-apples.

Faiza Alwy: Okay.

Phil Snow: If that’s unclear, yes, in all of your follow-up meetings, I think we can hope we will get to that.

Faiza Alwy: Okay. It sounds good. And then just a second, I guess it’s a clarification question, and I might be stating the obvious. But what I am hearing is that given the overall macro environment, demand environment, we might be below the medium-term targets as it relates to the top line or the ASV growth. But we expect to make up for it on margins such that we are able to maintain the 11% to 13% EPS growth outlook that you had talked about at Investor Day last year. Is that the right way to think about fiscal ‘24? And if so, are there any parameters that you can put around it?

Linda Huber: Yes. Faiza, taking this question first, while my colleagues are looking for those numbers to make sure we have it right, it’s too early to talk about 2024, but we take very seriously the responsibility of rightsizing the cost base so that we could hit our margin targets and thus our EPS targets. I think it’s pretty important to note that despite these difficult conditions, we have taken up the margin guidance for this year, which is a pretty important change for us. And you are correct on the margin focus and also the EPS number. I will turn it back over to Helen for any follow-up on the top line.

Helen Shan: Yes. No, I just wanted to go back to your question to make sure that I understood it. So, if you are asking about the total ASV for FY ‘22, I think you said 2027.4, that is the number I would use.

Faiza Alwy: Okay. So, we should expect that number to be up by $145 million to get to the fiscal ‘23 ASV?

Helen Shan: Well, it depends on where we end the year. But yes, our ranges include CGS, and this would include CGS as well.

Faiza Alwy: Okay. If I can just follow-up on that because it does imply that the three-month growth in ASV from 3Q into 4Q sort of accelerates given where you ended 3Q. So, I am curious, like is that just timing, or is there something else that we didn’t talk about on the call that’s going to help the acceleration?

Helen Shan: I think probably this makes sense for you to follow-up with Kendra afterwards. I am not sure when you say accelerate. If you are asking whether our fourth quarter is larger than our third quarter, the answer is yes. Historically, it has always been larger, and it will be larger this time around as well.

Faiza Alwy: Okay. It sounds good. Thank you.

Operator: Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Your line is now open. Keith, your line is open, please check your mute button. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.

Andrew Nicholas: Hi. Good morning. Appreciate you taking my question. I just have one because you covered quite a bit, and it’s on the content collection side. It sounds like that’s one of the major opportunities you have identified in terms of cost savings and one of the maybe operational benefits tied to AI. I am just curious, and I apologize if this is too technical a question. I am not an engineer. But is – what is it about the shift from “regular AI” or historical AI to generative AI that is making that a more realistic or outsized opportunity? Is it making kind of the coding that goes into content collection cheaper or more efficient, or is it the technology’s ability to maybe understand language better? I am just trying to understand what has changed over the past six months that makes that a bigger deal today versus last year, as an example, especially considering you are a company that’s invested in machine learning and AI for several years, as you noted.

Phil Snow: Yes. So, I mean that’s a pretty technical question. So, there are – the things that you mentioned certainly will help there. We are exploring all of the different things that could make it more efficient. Today, the content collection process is a combination of machine and humans. So, we feel for a lot of things – just obviously, you are still going to need a human in the loop for good judgment and so on, quality assurance. So, it’s probably a little bit more of the tools themselves evolving to a way where we can get the information in front of the human in a more teed up way where it makes them just much more efficient. So, we use StreetAccount as the first example here. So, our StreetAccount new service, which many of you use, does an awesome job and it has historically of pulling together lots of different sources, getting it in front of a professional who then puts it into bullet points, which make it so easy for you to consume.

And what took one of these very skillful people 30 minutes to do previously for an S&P 500 company took them two minutes, right, in this last iteration. And that’s just like at the very beginning of trying something fairly simple. So, that’s a massive efficiency. We still need that person to look it over, make sure that they are adding the added value that they will always add to get there. But that’s just one very clear example. This is a rapidly evolving space. And we just – we are partnering with lots of firms here, and we are evaluating lots of different LLMs, including open-source. But we are very encouraged by the early signs that we have seen on both the content collection side as well as the coding side.

Andrew Nicholas: Very helpful. Thank you.

Operator: Thank you. Our next question comes from the line of Russell Quelch with Redburn. Your line is now open.

Russell Quelch: Yes. Thanks for having me on the call. So, in terms of generative AI, following on from what you just mentioned there, I guess we may be at the point where this starts getting reflected into relative valuations, and I think it likely comes through the multiple before the P&L. So, I was interested to hear, Phil, your comments that the FactSet is in pole position to be a beneficiary on this topic or in this area. And maybe a challenge to that view would be that generative AI is likely to primarily benefit proprietary data owners that have invested sort of label their data and have built their own LLMs in-house and popular, particularly if regulation stops financial service companies using open-source data and models.

So, given some peers are more tilt towards proprietary data and have built their own fully labeled data sets and proprietary LLMs for financial markets, can you maybe explain a bit more your comment on why you think you are in a pole position in this area, please?

Phil Snow: Sure. Thanks Russell. It really has to do with the data that we have on FactSet. So, we collect a ton of proprietary content ourselves. We also are very – are trusted to integrate third-party as well as client data. So, it’s that amalgamation and that library of all that data that’s well stitched together that investment professionals will need to use. And it’s the reason they have used platforms like FactSet over the years. So, we are in a – that’s what you need to really get going. I think if you are a firm that doesn’t have that data already, I am sure you could start today and maybe be more valuable in the future. But recreating all of that history for a fundamental analyst, a quant analyst, if you are looking at client portfolios, it doesn’t matter.

That is one of the key things that folks are going to need. So, it’s not going to matter how good your technology is unless you are pointing it at quality data. And there have been other instances in our industry of people trying to come up with cheaper alternatives of FactSet and other providers. And I don’t think many of those have been successful, frankly. So, I do think that given the data we have, given the relationships we have with our clients, given all the investment we have made in our platform to sort of be AI first and open the platform and redo the content refinery, all of those things for us – and having the relationships and the trust with our clients, all of those things add up to me to be a very powerful formula.

Russell Quelch: Yes, that’s interesting. Thanks Phil. And maybe just as a quick follow-up in terms of different topic, ASV. Is there a risk to the medium-term ASV guidance? And will you be revisiting the medium-term guidance at Q4 in addition to providing 2024 guidance?

Phil Snow: If you are talking about the medium-term guidance we gave out at Investor Day, I think it was last April, yes, we are obviously going to be taking a close look at FY ‘24, and we will give more color on that when we speak to you in three months.

Russell Quelch: Okay. Thank you very much.

Phil Snow: You’re welcome.

Operator: Thank you. Our last question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Jeff Silber: Thanks so much. I know it’s late. I will just ask one. You talked about the uncertain environment here. And I think, Linda, you said you might be optimistic that there might be darkest before the dawn. What are you looking for? And what should we be looking for to get some confidence that these guys are starting to open up a bit.

Phil Snow: Hi. It’s Phil. I will start and I will let my colleagues chime in if they want to. One of the things of these banking hiring classes, that will be very interesting to see. I think we have seen a bit of both already, but we don’t really get good color on that until we get further into Q4. So, if the larger banks decide to hire classes of the size they did previously or larger, that is a very good sign to us. Continuing to look at our premier clients, as Helen mentioned, we have done very well within some of the largest buy-side firms. For me, that’s one of the most important things that we can do. Some of the slowdown you have seen is just we have had less new logos from corporate clients, private equity, venture capital, those types of firms.

But for us, just seeing that confidence and engagement from the biggest banks and the biggest buy-side firms, that for me is most important. And we have terrific engagement on both sides now. So, clients really want to talk to us. And the fact that we now have opened up the platform, we have a lot to say in terms of data and technology. We are getting a level of engagement that previously we hadn’t. Something we did last quarter, which is worth mentioning, is we had something called Developer Day. So, we had over 200 clients log into a session of FactSet where they met with our engineers essentially and got educated about all the ways they can now code directly against FactSet and use us. And that’s something new for us and I think a very good sign of things to come.

Linda Huber: I would add that – it’s Linda, in the past short period of time, we have come through 500 basis points of rate increases from the Fed, the banking issues that were happening in March, credit contraction that’s resulting from some of those issues, and then the self-imposed debt ceiling issues that recently cleared. So, those are four macro factors that have been very disruptive to the capital markets that have absolutely nothing to do with the health of FactSet’s basic products and business. So, the capital markets are cyclical. And for those of you who are newer to the industry and perhaps earlier in your careers, this sort of capital market slowdown happens every few years. And generally, when the markets reopen, things rebuild very quickly.

The hiring and firing cycles at banks, Helen and I were talking about just the other day as two former investment bankers, they wax and wane. It’s just the way the industry works. So, I would caution against overreaction, but I will turn it over to Helen and see what she has to say.

Helen Shan: I will echo what Linda said. And I guess one other piece for you to consider, unfortunately, our banking book is built on multiyear contracts. And the bulk of the ASV, which is with the large global banks, have minimums. So, from a headcount perspective, in that specific situation, the cancel exposure is less than 3% of our total ASV. So, to the point that Linda is making, one of the things that we will be looking at is as hiring picks back up, we will see that pick up as well. Our focus during these periods of time is on retention. We want to keep what we have. And again, our high ASV retention, I think is a real – is emblematic of the long relationships, but also the work that we have been doing. And so when the – hopefully, the markets pick back up, there is greater confidence by clients, we will see that expansion and new pick up as well. So again, we are very comfortable with where we stand today.

Jeff Silber: Alright. It’s very helpful. Thanks so much.

Operator: Thank you. I would now like to turn the conference back over to Phil Snow for closing remarks.

Phil Snow: Thank you all for joining us today and all the great questions. We look forward to speaking with you again next quarter. In the meantime, feel free to contact Kendra Brown with additional questions. Operator, that ends today’s call.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.