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FactSet Research Systems (NYSE:FDS)

Q2 2013 Earnings Call

March 19, 2013 11:00 am ET

Executives

Rachel R. Stern - Senior Vice President, General Counsel and Secretary

Peter G. Walsh - Chief Operating Officer and Executive Vice President

Michael D. Frankenfield - Executive Vice President and Director of Global Sales

Philip A. Hadley - Chairman and Chief Executive Officer

Analysts

Alex Kramm - UBS Investment Bank, Research Division

Toni Kaplan - Morgan Stanley, Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Timothy McHugh - William Blair & Company L.L.C., Research Division

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Keith M. Housum - Northcoast Research

John H. Neff - Akre Capital Management, LLC

Operator

Welcome, and thank you for standing by. [Operator Instructions] Now, I will turn the meeting over to your host, Rachel Stern, Senior Vice President, Strategic Resources and General Counsel. Thank you. You may proceed.

Rachel R. Stern

Thank you, operator. Good morning, and thanks to all of you for participating today. Welcome to FactSet's Second Quarter 2013 Earnings Conference Call.

Joining me today are Phil Hadley, Chairman and CEO; Peter Walsh, Chief Operating Officer; and Mike Frankenfield, Director of Global Sales.

This conference call is being transcribed in realtime by FactSet's CallStreet service and is being broadcast live via the Internet at factset.com. A replay of this call will also be available on our website. Condensed highlights will be available shortly via StreetAccount.

Our call will contain forward-looking statements reflecting management's 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.

Consistent with previous quarters, we have included a table at the end of the press release that reconciles non-GAAP measures to GAAP. 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.

Peter G. Walsh

Thank you, Rachel, and good morning, everyone. Here's how I plan to spend our time today. First, I'll cover 2 items that impacted EPS this quarter; second, we'll review quarterly results; third, I'll provide guidance for our next quarter; fourth and finally, we'll end with your questions.

Let's begin by covering the 2 significant items that occurred in Q2. One, we recorded a noncash pretax charge of $15.7 million. Performance-based stock options were granted in connection with the acquisition of Market Metrics back in June 2010. Since then, the Market Metrics business accelerated to achieve stretch revenue targets, causing the performance options to vest.

Just as a reminder, when acquired, the Market Metrics business was $16 million in ASV. While we are very pleased about Market Metrics, its size relative to the rest of FactSet means its outperformance has had a limited impact on our overall growth rate at this juncture.

Two, in Q2, the Federal R&D tax credit was signed back into law and renewed retroactively to January 1, 2012. Although Congress has renewed this credit every year since 1981, it lapsed in 2012, and under U.S. GAAP, we're not permitted to recognize the benefit until it actually becomes law.

FactSet realized an income tax benefit of $4.9 million during the second quarter of fiscal '13. The R&D tax credit impacted fiscal 2013 by reducing our projected annual effective tax rate. You'll notice this reduction when I cover Q3 guidance later on in this call.

The EPS impact was a $0.25 decrease related to vesting of the performance-based stock options, partially offset by an $0.11 increase from the reinstatement of the Federal R&D tax credit. The net effect of both adjustments decreased EPS by $0.14 and was added back to EPS to arrive at adjusted EPS of $1.14. Adjusted EPS is comparable in methodology to the large majority of Street estimates. This math is also outlined clearly on Page 8 of today's press release.

Now let's take a look at our quarter. Q2 was another solid quarter for us in which we did a lot of heavy lifting. ASV grew by $17.3 million excluding currency and was $863 million at quarter end, representing a 6% organic increase year-over-year. ASV from U.S. operations grew to $593 million and ASV from international operations was $270 million or 31% of the total.

Looking at revenues, this quarter, buy-side revenues inched up to 82% and the remaining 18% was derived from sell-side clients, who perform M&A advisory and equity research.

Adjusted EPS increased to $1.14 this quarter, up 12% from a year ago. We are proud that this is our 11th consecutive quarter of double-digit EPS growth. Even in the face of volatile markets, we've been able to sustain healthy growth due to our strong business model and our ability to grow market share.

Free cash flow, which is defined as cash generated from operations less capital spending, was $43 million this quarter, up 11% from $39 million in the same quarter last year. Free cash flow grew this quarter because higher levels of noncash expenses were offset by lower net income and higher income tax payments. Over the past 12 months, free cash flow was 10% higher than net income, which we believe continues to underscore the high quality of our earnings.

Accounts receivable this quarter increased by $14 million over the prior year, with ASV in the same period up $60 million. Our DSOs were 36 days at quarter end compared to 34 days at the end of last quarter. The increase in our DSOs is not a worry and is a result of timing. Please recall that during the second quarter, we typically issue invoices for services to be provided over the next 12 months. This year, those annual invoices aggregated to $9 million and our accounts receivable rose as expected, and in the same pattern as over the last 5 years.

FactSet's cash and investment balance was $166 million at quarter end, down $59 million from Q1. This quarter, we spent $3 million in capital expenditures. More significantly, we repurchased 1.2 million shares of FactSet's stock for a total of $109 million, leaving $55 million authorized for future share repurchases at February 28. At quarter end, there were 43.6 million shares outstanding. We also paid a regular quarterly dividend of $14 million. With dividends paid and share repurchases combined, we have returned $286 million to shareholders over the past 12 months.

Let's now turn to the P&L. This quarter, FactSet's revenues grew to $213 million, a year-over-year gain of 7%. The growth rate can be broken down into 6% organic and 1% from an acquisition. Adjusted operating income rose to $72 million, up 7% compared to the prior year. We adjusted GAAP operating income to exclude the non-cash pretax charge of $15.7 million discussed earlier, related to the vesting of performance options.

Adjusted net income rose 8% to $50.6 million during the quarter. Net income has also been adjusted to reflect the impact of the performance options and the reinstatement of the Federal R&D tax credit.

U.S. revenues rose to $146 million in the second quarter, up 7% from the same period last year. Our second quarter revenues include the StreetAccount acquisition, which added 2% to the U.S. growth rate.

Total non-U.S. revenues rose 7% to $67 million this quarter and accounted for 32% of total revenues. Second quarter revenues from Europe and the Asia-Pac regions were $52 million and $15 million respectively, with growth rates in each regions of 6% and 9% year-over-year.

Let's look at some of the revenue drivers for this quarter. We added 35 net new clients this quarter, representing our 13th consecutive quarter of net client growth, reaching a total of 2,436 clients. New client acquisition is important for us because it helps to lay the groundwork for future sales, consistent with our long-standing strategy of increasing sales of workstations, applications and content at existing clients.

Our net user count declined this quarter by 150 to a total of 49,500 at quarter end. User additions in the buy-side were more than offset by reductions in the sell-side. We believe that although headcount at our sell-side clients is still under pressure, we continue to make gains on the buy-side, which constitutes the bulk of our revenues. Please also note that average ASV per buy-side user is significantly higher than a sell-side user, creating a positive undertone to this shift.

Our annual client retention this year was greater than 95% of ASV and our retention rate in terms of the number of clients increased to 93%. These statistics demonstrate high client engagement levels.

Our Portfolio Analytics suite of products continues to be well received within our client base. The PA suite includes 10 separate products and covers a range of workflows around portfolios. Within the suite, Equity PA performed very well and our Fixed Income business grew at a very attractive rate. A slight positive is that we discontinued the Derivative Solutions product during the quarter. We have been phasing out the user interface for several years as we've integrated its back-end technology into our Fixed Income in PA product that during this period, has been a small drag on ASV. There's no further exposure looking ahead.

We've also made inroads at wealth management clients over the past quarter. There are solid rates of client and user acquisitions occurring both in Europe and in the U.S. Our success speaks to our ability to integrate portfolios, a broad range of high-quality content and the easy-to-use set of company analysis reports. Our Company Analysis suite was enhanced again during the quarter with the release of Company Guide. Company Guide is the next-generation application for company analysis on FactSet. It's quick, easy and graphically rich. Reports are linked seamlessly between your FactSet desktop and iPad.

In addition to on-platform sales, we've also seen strong growth in our Market Metrics business. Of course, the vesting of the performance option grants is a clear indication that the business has exceeded internal growth milestones. Market Metrics continues to be successful with its local market share study, as well as on mutual funds, variable annuity and life insurance analytical products and applications for wholesalers in the U.S., and also now in Europe.

We've also seen growth from our proprietary content. Our StreetAccount product is receiving high client praise. We continue to expand it in unique ways to make our user base more efficient. We've also been successful in licensing proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates. Types of data license and feed form includes ownership, call transcripts, M&A, corporate hierarchy data as well. Data feeds are consumed by a range of clients, including existing large FactSet clients and some outside of our core client base that do not manage money or provide sell-side services.

Lastly, as we've been doing for the past several years, we issued our annual price increase during the second quarter. The price increase impacted the majority of our U.S. Investment Management business. The price change this year increased ASV by $9 million compared to $10 million a year ago.

Let's take a look at the expense side now. Operating expenses were $157 million, up 7% when excluding the non-cash charge from vesting our performance options. The adjusted operating margins were 33.7%, consistent with last quarter and a year ago. Cost of services as a percentage of revenues increased 230 basis points over the same period last year. This increase resulted from higher compensation expense from new hires in software engineering, consultant and content collection, as well as new employees from StreetAccount, partially offset by lower computer maintenance costs and a decrease in depreciation from computer hardware becoming fully depreciated.

During the quarter, our SG&A expenses, as a percentage of revenues, rose by 550 basis points compared to the same period last year due to higher stock option expense. Our headcount grew to 6,048 this quarter, up approximately 30 employees during the quarter, an increase of 10% over the last 12 months. Please note that, like last year, we expect our headcount growth to decline in the upcoming third quarter. The third quarter is not a heavy hiring quarter for us in our offshore content collection centers because it will be peak filing season. During that period, we concentrate on processing filings and do not hire, train and integrate many new employees. We also do not have a new consulting or software engineering class starting in Q3. Those classes begin in the summer, after university graduations in the spring. Like previous years, we expect Q4 to be a strong quarter for new hires.

The effective tax rate this quarter was 21.2% compared to 30.9% a year ago. The lower tax rate was the result of the reinstatement of the Federal R&D tax credit. Excluding the $4.9 million of income tax benefits, our effective tax rate was 29.9%. The R&D tax credit lowered our tax rate by 2% and will add $0.03 to EPS each quarter looking ahead.

Now let's turn to our guidance for the second quarter -- for the third quarter of fiscal 2013. Revenues are expected to range between $213 million and $216 million. The midpoint of this range would mean revenue growth of 5% in Q3. We are anticipating continued weakness in sell-side ASV and no immediate uptick in buy-side purchasing behavior.

Operating margins are expected to range between 33% and 34%. GAAP diluted EPS should range between $1.14 and $1.16. The midpoint of the range represents 10% growth over last year's third quarter.

Our annual effective tax rate should range between 29.5% and 30.5%. We continue to expect that capital expenditures for the full 2013 fiscal year should range between $20 million and $28 million, net of landlord contributions.

To provide a little extra color on our revenue guidance, I'd also like to take a moment to look at general views of the market over the past quarter. Despite optimism expressed by the global equity markets, we're still facing the effects of significant job cuts at many of the largest global investment banks. Some estimates put the number of headcount reductions at 11,000 jobs at bulge bracket banks since November 2012. Those cuts have been driven by increasing regulation, lower trading volumes and the continuation of the economic crisis in some parts of the world.

Although we're impacted by user reductions, it's important to note that many of the areas hardest hit are not those typically serviced by FactSet. Our market on the sell-side, which accounts for only 18% of our revenues, is still in a very difficult and contracting environment. The good news is that our primary user groups are not enduring new structural changes. Though they're still tightening, equity research has been under tight expense [ph] management for many years, and M&A deal flow has always had some cyclicality, but is essentially the same business model as before the global financial crisis.

The bad news is that when large sell-side firms struggle, even in departments we do not cover, it impacts near-term ASV for all vendors in our industry.

The news is somewhat brighter for the buy-side. Coming off double digit equity returns in almost all global markets in 2012, equity returns in 2013 have been solid thus far. AUM for our clients and prospects have also been augmented by year-to-date inflows, too. These inflows are from idle cash and not from fixed income strategies. So there is potential for more AUM inflows, if managers decide to allocate away from fixed income and back to equity. Despite this change in the macro environment, we still do not see evidence yet that buy-side firms have begun to expand their employee base.

To wrap it up, our business model continues to show its resilience. Again this quarter, we have shown that, even in a tough environment for 18% of our clients, we continue to grow our market share. We have put up another double-digit quarter of EPS growth and our 3-year average return on equity has increased to 33%.

We've been recognized for the 5th time in 6 years in FORTUNE's 100 Best Companies to Work For at our highest ranking to date. We're pleased to receive this acknowledgment and we've been awarded similar accolades in the U.K. and France in the recent past. Our employees are FactSet's most valuable assets and the recognition in new surveys are based on their feedback. We're proud of that and it's strategically important to be known as a great place to work.

Thank you, and we're now ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Alex Kramm of UBS.

Alex Kramm - UBS Investment Bank, Research Division

So maybe we can just start on the pricing environment for a second. I think you made the comment here that it was a little bit of a lower increase than last year, not by much, but maybe you can just kind of outline where you saw good pricing, where you saw maybe a little bit of pricing pressure, where the discussion -- or how the discussions went, if there was a lot of pushback. Maybe just talk to that for a second.

Michael D. Frankenfield

Alex, it's Mike Frankenfield. The price this quarter was to the U.S. Investment Management segment of our client base, it was $9 million. We thought that was a good accomplishment. It really continues to demonstrate the value that we're delivering to clients and how they think about our product. It was a little bit less than last year. There are a couple of reasons for that. One reason is, is that, with our largest clients, we continue to create fixed term agreements with them, where price increases built into those agreements happens at different times of the year. So as we increase the number of these agreements, there are fewer clients that are directly affected by the price increase that we just did. Secondly, there were some clients that continued to struggle with their business model. So there's no question we made some accommodation, probably a few more accommodations than we did last year. However, it was not a significantly meaningful number. The price increase this year affected multiple product lines, including our core workstation, data feeds, really all of the areas where we felt we were delivering the most value and where we had the greatest [indiscernible] So overall, it has pleased us, how it went.

Alex Kramm - UBS Investment Bank, Research Division

Very good. And then I guess maybe to be -- to continue on that, when you say areas of weakness, when you talk about the buy-side a little bit, when we talk to, in particular, some of the smaller long only [ph] shops, it seems like, for those guys, I don't want to say every dollar counts, but they certainly seem to be looking more and more at their technology spend. So anything maybe, additional you can provide here like, when you think about the different kinds of organizations, where you see more pressure in terms of even just clients -- to get clients to sign up or even client losses?

Philip A. Hadley

Alex, this is Phil. Actually, because of the investment we've made in content in the last decade, it's really allowed us to provide some big solutions that doesn't require third-party data spend like it once did. And as you can see, even in a choppy environment, we're able to add net clients to the client base and many of those are coming from the smaller firms where they can find a complete solution [indiscernible] portfolio manager and with some trading workflows in a very cost-effective solution.

Alex Kramm - UBS Investment Bank, Research Division

All right, okay, great. And then maybe just lastly, it seems like in Europe, after, I think, a couple of quarters or a quarter of actually, ASV declining this quarter, I think, rebounded. So maybe just the outlook on what you're seeing over there. Do you think we have the worst behind us or too early to get more optimistic?

Philip A. Hadley

To generalize Europe into one market is probably not the right way to look at it. I think our experience is that the U.K. tends to track what's going in the U.S. and is very much in sync. The rest of Europe tends to move on different cycles, depending on what part of Europe you're in. I think in general, it feels very similar to the U.S. market, if you're grouping the whole thing together. Southern Europe, that was obviously under a lot of pressure, isn't as material a piece of business for the financial markets as Northern Europe, Germany, France and the U.K.

Operator

Our next question is from Toni Kaplan of Morgan Stanley.

Toni Kaplan - Morgan Stanley, Research Division

Can you give us some more color on the user count decline? Was that related to a specific sell-side loss or a sell-side cut back?

Michael D. Frankenfield

The declines on the sell-side were broad based, not affected by any single client. We're beginning to move into the point of the year where the analyst class begin to leave the investment banks to go back to business school. So we're going to continue to see some softness in the headcount numbers on the sell-side until the new summer classes get hired, and those will start in the May, June timeframe.

Toni Kaplan - Morgan Stanley, Research Division

Okay. And now that you've owned StreetAccount for a few months, can you comment on how the cross-selling has been going so far?

Michael D. Frankenfield

StreetAccount is having a rapid uptick throughout the client base. It's available in the core workstation, it's also available on a stand-alone basis. We've organized resources to focus on selling the product into users that have a core workstation, as well as selling them on a stand-alone basis. So we continue to make progress with that product and we're pleased with what we see.

Operator

Next question is from Peter Appert of Piper Jaffrey.

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Phil, you guys have enjoyed great success in terms of growing your market share over the last -- long period of time. Is it possible to quantify what the revenue growth from share gain is versus organic increases in client spend in the most recent period?

Philip A. Hadley

It's a great question, Peter. There's no definitive way. It's just an opinion and my instinct. But I would say, certainly in the last 2 years, there's probably 0 increase in that -- in the industry in spend and maybe even contracting to some degree. So if you were to look at our revenue growth, that it's really, for the most part, coming at an expense of the competitor. I would put that on a net-net. So you're netting new firm creation against firms that are going out of business, kind of neutralize each other. And the rest of it is the competitors in the space fighting for the spend that currently exists.

Peter P. Appert - Piper Jaffray Companies, Research Division

Sure. Okay. And you've addressed this, I know, in prior quarters, but is it possible to give us any incremental color on what you see going on from a competitive standpoint currently?

Philip A. Hadley

Our business is not one that changes much quarter-to-quarter, certainly not even really, year-to-year. The players in this space, Bloomberg, Thomson Reuters and S&P, have been in the business for decades at this point. I think the more important thing really, is just to understand what's going on in the client base, of which, fortunately, for everyone in this call, they live it just like we do, maybe even with better information as to what's going on in your firms. Obviously, I don't think it's any news to anybody that the sell-side large firms are still figuring out how to structure their firms. We're fortunate that we're in equity research, which the business model has certainly changed over the last decade, but is still steady in whatever form it currently takes. And investment banking has always been a bit cyclical. But as a function in capital markets, it's always there and it has good times and weaker times. On the buy-side, I think the thing that strikes me at this point, and I'm confident it will come back, is it doesn't feel like the big firms are quite hiring yet. Once they start hiring, I think that's both good for us in seat count, but it also is a signal that they're investing in their business and feel confident about the future. That's a big generalization. Obviously, some firms are in better shape than others but it's what it feels like at the moment.

Peter P. Appert - Piper Jaffray Companies, Research Division

And that would be contingent on just assets under management growing more quickly?

Philip A. Hadley

Yes, yes. And there's a strong correlation with that and it tends to have a lag effect.

Peter P. Appert - Piper Jaffray Companies, Research Division

So Phil, over the next couple of years, what should we think about in terms of what the big growth drivers for FactSet could be, in terms of how you maybe quantify the opportunities in terms of product sets or data sets or new offerings? Any help on that?

Philip A. Hadley

Well, I think that one great piece of FactSet is it's not a one-trick pony. It's a business that expands in all kinds of different dimensions. So there's buy-side, sell-side, U.S., non-U.S. and even for us, a newer areas is the off-platform or the Data Feeds business. So all of those, in FactSet's world, have huge opportunities. We're still small in the space relative to the big players. So whether it's users or clients, they're still a huge opportunity for us. And then product lines within those clients, there's still lots of opportunity. It requires really strong execution in a tight market, but I feel confident that we're gaining share relative to the players in the space. So on a competitor-adjusted basis, I think we're in a strong position.

Peter P. Appert - Piper Jaffray Companies, Research Division

So just last housekeeping thing. One, the data licensing, how big is that currently? How big do you think it could be? And then second on the tax rate, the 29.5% to 30.5%, just so I understand exactly how the guidance works, is the assumption then, that for the third and fourth quarter, the tax rate will be at that, call it roughly 30% level?

Philip A. Hadley

Up [ph] for the tax question but what was the...

Peter P. Appert - Piper Jaffray Companies, Research Division

The license data, how big is that market, how big do you think it could be?

Philip A. Hadley

It's not something we quantify at this point, but it's definitely a very positive side effect of being in the content business, in that you have control of the content and the methods at which it was delivered. Before, we really only had the ability to deliver FactSet in the content of -- in the platform because that's really what people had licensed. And it really is valuable to us because it allows us to serve other workflows. The quantitative workflow, for example, is one that is a constantly evolving workflow and, given the changing computing power, a great deal of that quant workflow happens locally as opposed to on FactSet, and to be able to offer both solutions, depending on what flavor of client is interested in these, it's very valuable.

Peter G. Walsh

Peter, regarding your tax rate question, the way to interpret the guidance is to look at the midpoint of the range, and that is our best estimate of the effective tax rate for Q3.

Operator

Our next question is from Glenn Greene of Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I just want to go back to the pricing for a couple of clarifications. Do you ever raise pricing on the international part of your base? And if you don't, is there a reason for that? And then I got a follow-up related to the timing of the price increase.

Michael D. Frankenfield

We do increase price in the international segment. That typically happens in Q3. Historically, it's been relatively small and we haven't called it out.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just the timing of the price increase. Does it happen, such that it happens toward the end of the quarter, where it really doesn't have an impact on the revenue but does impact the ASV, meaning you'll get the benefit in the third quarter from a revenue perspective?

Michael D. Frankenfield

It's effective January 1.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. So you got a partial quarter benefit to the revenue?

Michael D. Frankenfield

Yes.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then you talked about the wealth management initiative, more so last quarter, I think. And I had heard before that you sort of had some prepared comments on it again this quarter. I was wondering if you could give us a little bit more granularity, give us some frame of reference, maybe how fast it's growing, order of magnitude, what it is in terms of the user base, is it sort of less than 5% of users, just some directional commentary on how meaningful this part of the business could be?

Michael D. Frankenfield

Within the wealth segment, we're really focused on the users that are directing their activity towards ultra-high net worth, high net worth, to managers that are managing $0.5 billion and up typically. We are not worrying [ph] in our product, at this point, towards going after the very, very large historical retail broker networks that are 15,000 in number, et cetera. We're really looking for, within those networks, to identify the key power users, the users that are really acting like institutional investors. So we don't expect it to have a significant impact on overall user count, but each one of these that signs up is almost like setting up a brand-new client, with all of those positive traits that come with getting a new client. They have lots of future demand for products, so we're allocating resources to that segment.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just one thing, just a data point. The 82% buy-side mix, is that pretty consistent domestic versus international, or any differences in terms of the mix?

Michael D. Frankenfield

The mix has been very, very consistent over time.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Meaning it's similar internationally as it is domestic?

Michael D. Frankenfield

Yes.

Operator

Next question is from Tim McHugh of William Blair.

Timothy McHugh - William Blair & Company L.L.C., Research Division

First, I just wanted to ask about the stepped up pace of buybacks this quarter. Does that signal any change in terms of your capital deployment strategy or is it just timing in terms of when you got to it throughout the year?

Peter G. Walsh

It's Peter. If you study our buyback over time, you can see that it has a broad range of how much we deploy quarter-to-quarter. We definitely don't view it as a program. It's ranged from $14 million to $109 million over the last 2 or 3 years. So we have certainly viewed the opportunity to buy back shares as being 1, very accretive and 2, opportunistic at the price that we acquired it in Q2.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then I guess, secondly, the comment about the sell-side. Did the environment feel like it actually got worse this past quarter, or is it more just it hasn't gotten any better and continues to be a negative factor?

Philip A. Hadley

I don't think anything, at least from my opinion, has really changed. You see we have agreements with clients. Sometimes we've had several positive things on the sell-side, where we're gaining share. And then you certainly have big firms that have good [ph] agreements where they've got more products than they need and you know that eventually, when the time comes around, that they're going to buy less products. So it's really just a combination of positives and negatives that push through. But overall, it's a negative.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then my last one question [indiscernible]. The last question. Just as you talked about a drag from integrating the Derivatives product into the fixed income product. Can you give us a sense for how much that has been in the last year?

Peter G. Walsh

When we acquired Derivative Solutions back in 2005, if you recall, I think the ASVs that we acquired was $11 million. We've been -- we haven't been selling the product for a long -- for many years and so the drag is rather small, but it's been occurring over the last several years. And more importantly, we integrated all the back-end calculations into our FIPA product and it's been a very, very important part of why we've been growing our Fixed Income business at very attractive rates.

Operator

Your next question is from Shlomo Rosenbaum of Stifel.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

I'm just trying to get the story behind the guidance. If you take ASV, divide it by 4, you'd end up on the upper end of the guidance range. So I'm just wondering why the lower end is kind of flat. Is that an assumption that we have continuing pressure on the sell-side? Can you just walk us through some of the assumptions behind the guidance?

Peter G. Walsh

Sure. Shlomo, it's Peter. ASV is a terrific metric for about a little more than 99% of our revenues. So your calculation and methodology is really sound. There's roughly $6 million of our revenues that do not incur evenly over the quarters and Q3 happens to be the 1 quarter where it's at its lowest point. Q4 is at its highest point because of interns -- workstations sold to summer interns at banks and that's what accounts for the difference.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And in your opinion, how long do you think the equity markets need to be elevated before your larger clients are going to start hiring? Is there some kind of historical precedent that, after a 25% gain or something like that, you start to see it move 6 months later? I mean, what have you guys seen?

Philip A. Hadley

Shlomo, if you could answer that question, I would really like to find out how. I guess we've been through several cycles and I think the part that's very clear to me is everyone is different. And this one just feels different than the others. So I think your clients and how they respond, you'll find out as quickly as we do when you feel like things are different.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So just no rule of thumb over there and that's just kind of just...

Philip A. Hadley

Well, I mean, I think their revenue volumes are based on assets under management. And assets under management, in particular asset classes, benefit FactSet. So certainly, assets under management and equity mutual funds would be a positive for FactSet. Obviously, equity markets have done well. Some participants have done way better than others. But I think that, that's probably the metric I would look at, and most likely would be the one that would start to create headcount and investment in that space.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And can you give us some more color on the Fixed Income PA? How much of your growth on the buy side is attributable to the fact that you guys are making inroads in some of those clients?

Philip A. Hadley

We certainly don't break out the exact amounts. I think our practice really is to call out things that are drivers in our growth and it certainly qualifies for that. So it's material in what's happening at FactSet.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And has it been accelerating, decelerating? Any other color you can give us around Fixed Income?

Philip A. Hadley

I think the only thing I would say is that we've had Fixed Income on FactSet for probably 10 years. It's reached the point of material. For a long time, it was, maybe on a growth rate basis, it was doing well but because it has a much larger base at this point, it definitely is a factor in our success.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just from a market positioning, are you seeing any difference in the marketplace? With Thomson trying to kind of retool the Eikon product and reposition that, has there been any change in their going after the market in any different way than they have historically?

Philip A. Hadley

I think, at least from reading through all the sales notes that happen on a quarter-to-quarter basis, that I haven't seen anything that's significantly different involving Eikon. In fact, we haven't seen it very much in the marketplace. And the one sales note I saw this quarter was, it was a positive for FactSet against it. So I think that Thomson has an incredibly broad product line of lots of different products. So when one talks about computing at Thomson, you really have to get down to which product are you talking about. And Eikon is a huge product line with lots of pieces underneath it as well.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And just if I'm thinking about the R&D tax credit, the impact is about 2% right now, like if you didn't have it, would actually -- would be about a 32% tax rate, is that fair?

Peter G. Walsh

I think that is fair, Shlomo, yes.

Operator

Our next question is from Keith Housum of Northcoast Research.

Keith M. Housum - Northcoast Research

If we can just drill down a little bit deeper into the wealth manager segment, are you guys going in there displacing a current provider or are these really a matter of convincing them that they need a tool such as FactSet in order to do their job comprehensively?

Michael D. Frankenfield

It's is a little bit of both, Keith. There's certainly -- all of these users have an existing system or multiple systems to help them manage their clients and manage their assets. Effective strategy is to try and show them incremental value that we can deliver, above and beyond what their current solution is. Sometimes that results in a displacement, sometimes that results in incremental purchase.

Keith M. Housum - Northcoast Research

Got it, got it. And in terms of the growth from the wealth management group that you're trying to expand versus Fixed Income. Would you say one's growing faster than the other?

Michael D. Frankenfield

Both have really positive growth metrics, so we're excited about both of them.

Keith M. Housum - Northcoast Research

Okay. And then finally, just a little bit of detail. On the share repurchase you guys made, what was the average share repurchase price? Do you guys have that handy?

Peter G. Walsh

Yes. It was $89.95.

Operator

Our next question is from John Neff of Akre Capital.

John H. Neff - Akre Capital Management, LLC

Do you guys have a view or a target, at least directionally, about ASV per employee over the long term?

Philip A. Hadley

No. I think, we certainly -- there's 2 ways to look at them. You can certainly look at employee count but really, what we're looking at on our side is compensation spend. Clearly, our employees are the most valuable assets in this business. So any time we can invest in more employees or invest in our own employees, that's where we try and spend our money. In general, obviously, employee expense, based on the fact it's 2/3 of our expense, really has to come close to tracking revenue. So really, that's the way we look at it.

John H. Neff - Akre Capital Management, LLC

Okay. And then the next gen project, I was just curious if you could comment on any impact on CapEx going forward in terms of either the amount or the pattern. It used to be that CapEx would spike every 3 years or so, would you expect it will be smoother going forward?

Philip A. Hadley

It's a great question. So for those who aren't familiar, FactSet's historical platform, the core operating system, that the bulk of what we call FactSet workstation, ran on VMS, Hewlett-Packard's Integrity systems. We've been on a multi-year project to essentially transition away from that as our core computing center. It's an expensive process because it's not something that directly creates features for our clients. But probably to answer your question, we'll smooth out CapEx because the way a distributed system works is you're buying many smaller boxes as opposed to the big lumpy ones that you recall. So I think the answer to your question is CapEx will be smooth and not have a big 3-year chunk to it unless technology changes, which is always a possibility.

John H. Neff - Akre Capital Management, LLC

Okay. And then just a question related to your comment about the price increase and some of the changes there with some of the larger client contracts. Do those larger client contracts, do those involve term commitments or are those clients still free to add, subtract, cancel, et cetera, with good flexibility?

Michael D. Frankenfield

We try to preserve flexibility. That's a feature that our clients have indicated that they like about FactSet. It's one way we differentiate ourselves in the marketplace. So sometimes there may be minimums, sometimes there may be price commitments. It's really trying to get a meeting of the minds between FactSet and the client, to enable the client to do long-term planning.

John H. Neff - Akre Capital Management, LLC

Okay. And then last quick question, is the content licensing that you referenced, is that in ASV?

Philip A. Hadley

Yes.

Operator

[Operator Instructions] Our next question is from Alex Kramm of UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just a couple of quick follow-ups. First, on the buyback and the timing there, was that at all related to Market Metrics as well, given you had that, I guess, option dilution here in the quarter and you figured good time to offset it, or was it just basically market-driven given you know what the stock price has done?

Peter G. Walsh

Alex, it's Peter. Our buyback program isn't connected to other items that go through our P&L. It's really -- we're really studying how -- what can we do to have the most accretion in terms of FactSet and relative to dividends, buybacks and also acquisitions. So we were more opportunistic this quarter because we've been lighter on dividends and acquisitions, and we liked the opportunity to add a significant accretion at the price level that we saw during Q2.

Alex Kramm - UBS Investment Bank, Research Division

Okay, that's fair. Then maybe just staying on Market Metrics just for one more second. And I don't want to harp on it, but can you maybe help us a little bit with some of the metrics? I mean, I know you said $16 million when you acquired it. Maybe, where is it now? And then also, it this truly over now or will there be other, maybe, follow through cyclical [ph] income [ph] and hit the P&L? I guess what I'm trying to say is I think some people are struggling to see this as a truly onetime item. So maybe you can just help us kind of frame the discussion a little bit more.

Philip A. Hadley

So if you -- certainly in our 10-K and 10-Q, we call out all of our options programs exactly, in great detail, as to what exists and what's out there. This is not the first time we've had performance options vest. So you're correct in that it's not necessarily onetime in nature. The entire employee base has a performance option every year that we grant. Sometimes they vest 100%, sometimes they vest not at all. We definitely try and make our option program in the interest of what's best for FactSet. In particular, in Market Metrics' case, they did a spectacular job and reached the stretch goals that we have set upon acquisition. And we were very, very pleased, it's a great thing for the company and the shareholders. The way accounting works, it's not something that we could accrue along the way, based on the way this particular grant was set up. So it is what it is, when it comes to vesting in one particular period. As far as the materiality of Market Metrics, the fact -- I mean, Peter made a comment in the -- as to we're very excited about it. But coming off the $16 million base, it's not huge to FactSet. I think the only comment I'll make is that, since acquisition, it would have contributed less than 100 basis points to growth. So it's a piece of FactSet and it's certainly accretive to growth, but it's not a material piece of FactSet.

Alex Kramm - UBS Investment Bank, Research Division

Okay, great. That's helpful. And then just maybe lastly, and I apologize if I missed this, but the margin guidance for next quarter is a little bit wider than what, at least, you gave in the last quarter. So just wondering if you can sum up like what actually drives that, why you see a little bit of a wider range here, where the uncertainty is coming from.

Philip A. Hadley

We try and be as accurate as we can as to what we think is going to happen going forward. I want to reiterate that, what Peter was reiterating, we're really looking out for the best interests of the shareholders and I really look at the P&L all the way down to EPS. So if there are opportunities for us to invest in the business and take margin down slightly, but pick it up in tax and EPS, then that's what happens, because I believe it's best for the shareholders. I'm pleased with the fact that we're still at double-digit EPS growth and it's just a function of an incredible business model that FactSet gets to operate under.

Operator

Thank you. There are no further questions at this time, sir.

Philip A. Hadley

Thank you very much.

Peter G. Walsh

Thank you very much.

Operator

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.

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