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FactSet Research Systems, Inc. (NYSE:FDS)

F2Q12 Earnings Call

March 13, 2011 11:00 am ET

Executives

Rachel Stern – Senior Vice President Strategic Resources & General Counsel

Philip A. Hadley – Chairman of the Board & Chief Executive Officer

Peter G. Walsh – Chief Operating Officer & Executive Vice President

Michael D. Frankenfield – Executive Vice President & Director Global Sales

Analyst

Peter Heckmann – Avondale Partners, LLC.

Jennifer Wang – UBS

David Lewis – JP Morgan

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

Analyst for Peter Appert – Piper Jaffray

Glenn Greene – Oppenheimer & Co.

Robert Riggs – William Blair & Company, LLC.

Bill Warmington – Raymond James & Associates

John Neff – [Inaudible] Capital Management

Jason Rodnick – Raub Brock Capital Management

Operator

At this time all participants are in a listen only mode. (Operator Instructions) Now, I’ll turn the meeting over to Ms. Rachel Stern, Senior Vice President Strategic Resources & General Counsel.

Rachel Stern

Welcome to FactSet’s second quarter 2012 earnings conference call. Joining me today are: Phil Hadley, Chairman and CEO; Peter Walsh, Chief Operating Officer; and Mike Frankenfield, Global Director of Sales. This conference call is being transcribed in real time by FactSet call street service and is being broadcast live via the Internet at www.FactSet.com. A replay of this call will also be available on our website.

Our call will contain forward-looking statements reflecting managements’ current expectations based on currently available information. Actual results may differ materially. More information about factors that could affect FactSet’s business and financial results can be found in FactSet’s filings with the SEC.

In an effort to provide additional information, our comments include non-GAAP financial measures. The non-GAAP measures we will discuss today have been reconciled to the related GAAP measures in our earnings press release and our SEC filings. Annual subscription value or ASV is a key metric for FactSet. Please recall that ASV is a snapshot view of client subscriptions and represents our forward-looking revenues for the next 12 months.

Lastly, FactSet undertakes no obligation to update publically 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

Here’s how I plan to spend our time today. First, I’ll highlight a matter involving taxes. Second, we’ll review our second quarter results. Third, I’ll provide guidance for the third quarter. Finally, we’ll end with Q&A. In prior quarters we had discussed the impact of the US Federal R&D tax credit which expired on December 31, 2011.

We expect it will be reenacted as it has been for the past 30 years. However, we’re not permitted to factor it into our effective tax rate unless it’s part of the currently enacted tax law. The expiration of the R&D credit increased our annual effective tax rate by 1.3% and reduced second quarter GAAP and non-GAAP EPS by $0.02 per share.

Now, let’s review our second quarter results. ASV was 803,000,000 at February 29, 2012 up 11% over last year. This quarter ASV rose 21.7 million. ASV growth was driven by expanding our market share and [buy side clients. We added 53 new clients on a net basis, our highest number since 2006. Users declined among sell side clients but overall the user count still increased by 400 on a net new basis due to penetration on the buy side.

Q2 EPS was $1.02 exceeding street consensus estimate and our guidance range. Non-GAAP diluted EPS grew 16% to $1.14 in the quarter. Free cash flow which is defined as cash generated from operations less capital spending was $39 million during the second quarter. High levels of net income and lower capital expenditures were offset by higher income tax payments and lower accrued compensation. Over the last 12 months free cash flow grew to $209 million up 12% and was 18% higher than net income which illustrates the high quality of our earnings.

Accounts receivable increased by $1 million over the last 12 months while ASV increased by 80 million. Our DSOs were 32 days at quarter end compared to 36 days a year ago. As of February 29th our cash and investment balance was $200 million down $7 million from November 30, 2011. Capital expenditures were $5 million and $45 million was spent on share repurchases during the second quarter.

As of quarter end, $83 million still remained authorized for future share repurchases. During the second quarter we paid a regular quarterly dividend of $0.27 per share for a total of $12 million. If you aggregate our dividends with share repurchases, we have returned $248 million to shareholders over the past 12 months.

Let’s now turn to the P&L. FactSet’s revenue increased this quarter to $199 million, a rise of 12.2% compared to last year. Our operating income for the second quarter increased to $67 million up 16% from $58 million in Q2 2011. Net income rose to $47 million compared to $45 million in the same quarter last year. Non-GAAP net income increased to $52 million, rising 12.3% compared to the year ago period. Non-GAAP EPS rose 16.3% to $1.14.

In terms of geography, our US operations generated $548 million in ASV. International operations accounted for $255 million in ASV or 32% of the total. US revenues rose in Q2 to $136 million, an increase of 12.2% over the same period a year ago. Non-US revenues also grew 12.2% to $63 million compared to last year’s Q2. Europe and the Asia Pacific revenues for the second quarter were $49 million and $14 million respectively and the growth rates for each of those regions was 11.3% and 15.7% respectively year-over-year.

Let’s look at some of the revenue drivers for this quarter. We added 53 net new clients this quarter compared to 38 net new clients in the same quarter a year ago. We are proud of this accomplishment despite a tight spending environment and one in which purchasing decisions often take longer than they used to. The addition of new clients is important as we expect that it lays the ground work for future sales consistent with our long standing strategy of increasing sales of workstations, applications and content at existing clients.

Annual client retention this year was greater than 95% of ASV and our retention rate in terms of numbers of actual clients was 92% versus 90% a year ago. These statistics which have increased from last year remind us that our clients continue to be engaged from our services and derive value from them. Our net user count increased by 400 users this quarter to 47,300 from additions at buy side firms.

Although head count at our sell side clients is still under pressure, we continue to make gains as demonstrated by this increase in users. One new product that we hope will attract users is the addition of Street Account to our news line up. We’re excited to be able to offer distilled company news and market summaries from Street Account over the FactSet platform that will complement our strong partnership with Dow Jones and other vendors we already carry.

We’re making solid gains at existing clients with continuing growth from our portfolio analytic suite of products including growing demand for our fixed income in PA product. We’ve seen growth come also from our proprietary content. We’ve been successful in licensing proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates. The type of data license and fee form includes ownership, transcript, M&A, corporate [hierarchy] data as well.

Data fees are consumed by a range of clients including existing large FactSet clients and some who do not manage money or provide sell side services. We are beginning to see some of our fruits of our investments in making our content set as broad and comprehensive as our clients require.

Lastly, as we’ve been doing for the past several years, we issued our annual price increase during the second quarter. This price increase impacted the majority of our US investment management clients. This year, the price increase accounted for $10 million of Q2’s ASV growth compared to $9 million last year.

Let’s take a look at the expense side now. Operating expenses for the quarter were $132 million, up 11% from the same quarter a year ago. Operating margins were 33.7% up from 32.7% in Q2 last year. Cost of services as a percentage of revenues was consistent with the prior year as higher compensation expense associated with new hires in consulting, engineering, and content was offset by lower depreciation and third party data costs.

SG&A expenses as a percentage of revenues decreased 95 basis points compared to the same period last year due to lower stock based compensation and monetization of state tax credits. This quarter our headcount increased by 66 employees to over 5,500 employees at quarter end, growth of 16% over the last year. Most of the employees related to our regular January classes of new engineers and consultants.

The effective tax rate for Q2 was 30.9% compared to 22.3% a year ago. Excluding the $4.9 million income tax benefit from reenactment of the R&D tax credit, the effective tax rate in Q2 last year was 30.7%. The expiration of the R&D tax credit increased the 2012 effective tax rate by 1.3%.

Now, let’s turn to our guidance for the third quarter of fiscal 2012. Revenues are expected to range between $200 and $204 million which represents year-over-year growth of 9% and 11% at each end of the range. Operating margins are expected to range between 33.5% and 34%. The effective tax rate is expected to range between 31% and 32%. GAAP diluted EPS should range between $1.03 and $1.05 per share. Non-GAAP EPS should range between $1.14 and $1.16 which represents year-over-year growth of 12% and 14% at each end of the range. Both GAAP diluted EPS and non-GAAP diluted EPS include a $0.02 reduction to reflect the expiration of the US Federal R&D tax credit on December 31, 2011.

For those of you who have been following our company’s story for some time, you’ll know that we review our success over the long term. But of course, we’re still pleased to recognize shorter term wins. This past quarter has been a great but hard won success for us. Despite difficult market conditions, we continue to grow. Our revenues, ASV, net client, and user count were all higher this quarter. We’ve been building our business carefully by investing in our platform, our content, and our people.

We believe those investments are giving our clients a powerful research tool. Coupled with industry leading customer service by a knowledgeable consulting staff, FactSet’s products have become a part of our clients’ work flow that is difficult to replace. We expect to help our clients continue to grow over the long term, even through these challenging economic times. We love that our market opportunity is 15 times our current size by our estimates meaning that a growing market is not necessary for our success.

We’re confident as we continue to focus on the long term, we’ll achieve our long term goals with wins along the way. Thank you for your participation in today’s call. We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Peter Heckmann – Avondale Partners, LLC.

Peter Heckmann – Avondale Partners, LLC.

I just wanted to see if you feel like there’s been a change in the underlying growth of the industry? Clearly, there’s been some turmoil in both domestic and international markets and probably global securities industry headcount has flat lined here for the last six months or so, but when you think about the growth of the industry do you think it’s positive low single digit growth over the next three to five years?

Philip A. Hadley

I’d love to know what our growth rate would be or what the industry is going to grow over the next three to five years unfortunately, I live in a world where I kind of just have to react to what the market is currently doing. I would certainly characterize if you took our first quarter we were coming off an incredibly volatile equity market both in Europe and the US at the end of the summer and into our first quarter and obviously our market has kind of stabilized and started to head in the right direction.

Our clients tend to react differently as a group, the sell side goes into shut down mode immediately and it takes them some time to recover. The buy side gets cautious and takes a wait and see attitude. I think obviously what starts to happen is the markets start to fix itself and our client base gets a little bit more confident. All I can comment on is really just how it feels relative to prior periods and it feels a little better than it did in the first quarter. Certainly not a raging bull market but one that has a little bit more help to it than it did 90 days ago.

Peter Heckmann – Avondale Partners, LLC.

Then I noticed a new branding program that I think looks particularly nice on the iPad. Is that something new? Can you talk how you’re trying to brand that and whether that you’re spending a little bit of extra money in that area.

Michael D. Frankenfield

We have a fairly conservative marketing budget relative to our size. We spend most of our resources on our direct sales model, that’s the way we feel we can best connect with our clients and prospects in the market place. Having said that, we’re always looking to optimize our spend on the marketing side and we have allocated some money towards updating freshening our brand and I’m pleased that you’ve seen it come through on your iPad.

Philip A. Hadley

I saw it one night when I was flipping through when I was reading the Wall Street Journal and up pops it and put a big smile on my face.

Peter Heckmann – Avondale Partners, LLC.

Have you noticed any change in the competitive environment? There’s been a little bit of media coverage more recently of the two larger competitors [inaudible] data maybe increasing their spend on the development, rolling out some new products and platform. Do you feel like that is contributing to the slowdown in the decision cycles?

Michael D. Frankenfield

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

Operator

Your next question comes from Jennifer Wang – UBS.

Jennifer Wang – UBS

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

Peter G. Walsh

Yes, it’s 100% in the ASV as of February 29th.

Jennifer Wang – UBS

How have clients reacted to – maybe if you can just characterize their reaction to the pricing increase? Was it okay [inaudible] what does that look like?

Michael D. Frankenfield

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

Jennifer Wang – UBS

Maybe I could sneak just one more in on the environment you’re seeing out of Europe and Asia? Maybe if you could characterize how they may have changed over the past couple of months?

Michael D. Frankenfield

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

Operator

Your next question comes from David Lewis – JP Morgan.

David Lewis – JP Morgan

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

Michael D. Frankenfield

I really think one of the biggest contributors to our progress in terms of new clients is the progress we’ve made with our proprietary content. Having our own content eliminates a lot of friction in the sales process, makes it easier for FactSet to obtain decision from clients, but more importantly the content is really good. The content is unique whether you’re looking at earnings estimates, or debt capital structure, or other types of data and I think clients are finding great value in what we’re producing because it is unique.

There’s no question also we have a sales initiative focused on targeting new client acquisition. We’ve dedicated resources internally solely focusing on that task and I bet that also is playing a role in helping us increase our count.

David Lewis – JP Morgan

Is that a recent change Mike?

Michael D. Frankenfield

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

David Lewis – JP Morgan

Can you comment on the growth and revenues at your core buy side customer base that’s not tied to headcount growth? Clearly, you’ve cited on this call and in recent calls – are you able to integrate services, or in some cases potentially replacing headcount or can you talk about data fees and other services that aren’t tied or increasingly less tied to headcount growth?

Philip A. Hadley

We take our total ASV – revenues really break down into three categories one is base fees which you can certainly argue is less fee dependent, might be fee revenue would fall into that same category. The second big category would be applications people would subscribe to, our portfolio suite would be the primary example of that. A component of that is base fee oriented, some of it is work station oriented. Then the third piece is just pure work station revenue that is headcount based.

Put it in those big buckets but we don’t decompose publically exactly what those big buckets are and quite honestly it becomes an accounting exercise to try and decide whether the value is in the base, or the fees, or the application so it’s one we don’t spend time internally really decomposing down to a number I could even disclose if I had it.

Operator

Your next question comes from Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

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

Michael D. Frankenfield

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

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

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

Peter G. Walsh

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

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

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

Peter G. Walsh

No, that’s the ASV on that date.

Michael D. Frankenfield

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

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

I am just hearing a little bit more chatter in the marketplace from the two areas in competition that we talk about from time-to-time, there’s the [Bloomberg Port] product and then just in general what’s going on with Thomson Reuters. There’s a focus certainly being conveyed publically from management at Thomson Reuters to try and reignite growth. How long do you estimate that it would take, even if there would be a big focus over there for that to make a change in the marketplace to the extent that it would filter up that you guys would notice it?

Philip A. Hadley

It’s very difficult for me to comment what would be going on inside of other firms. I think we can really just live the world we see and we experience in the marketplace. As Mike said and I’ll reiterate, our natural assumption is that our competitors is going to get better. This is a software industry and if you don’t keep moving forward you’re going to be done very quickly.

I think as a business we constantly focus on our opportunity which is to double our business and we believe to double our business we have to do two things, we have to make sure we double the value we can deliver to our clients which is defined by whatever the clients perceive the value is in the marketplace which means we have to deliver a great deal of content which is going to change their work flows and make their investment process better and write the software to make that data come alive. At the same time there’s the brute force sales force part of it where we have a worldwide sales force and we have to teach, and train, and make sure those people understand that we’re the best product in the marketplace and that they should move from whatever they’re currently doing to FactSet.

Shlomo Rosenbaum – Stifel Nicolaus & Company, Inc.

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

Philip A. Hadley

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

Operator

Your next question comes from Analyst for Peter Appert – Piper Jaffray.

Analyst for Peter Appert – Piper Jaffray

The first question revolves around competitive dynamics. FactSet has been consistently taking market share from the competition and I just wanted to get some color in your view, what’s driving a customer to leave the competition and adopt FactSet and what you see in terms of future market share evolution?

Michael D. Frankenfield

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

Analyst for Peter Appert – Piper Jaffray

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

Michael D. Frankenfield

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

Analyst for Peter Appert – Piper Jaffray

Last question, I wanted to see if you guys had some anecdotal evidence perhaps from your sales people with feet on the street that we’re seeing an inflection point in terms of buy side headcount?

Philip A. Hadley

I kind of made the macro comment that I thought the marketplace felt a little bit better this quarter than it did in the first quarter which is not surprising given what’s going on in the equity markets. As to specific headcount plans, I think it’s probably too early to make a comment on what we see.

Michael D. Frankenfield

I would agree.

Operator

Your next question comes from Glenn Greene – Oppenheimer & Co.

Glenn Greene – Oppenheimer & Co.

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

Peter G. Walsh

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

Glenn Greene – Oppenheimer & Co.

Is there any way to think is there a couple of points from pricing, a couple points from mix, and also trying to get a sense of how sustainable it is going forward?

Peter G. Walsh

This quarter is no different than previous quarters so we certainly think that it’s sustainable. The price increase, we certainly quantify it as $10 million this quarter so you can derive the points from that number.

Glenn Greene – Oppenheimer & Co.

It’s been a while but I was wondering if you could give us an update on PA adoption, sort of the proportion of your user base that might be using it?

Michael D. Frankenfield

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

Peter G. Walsh

I would say we stop disclosing that metric really for two reasons one, it was directionally correct but magnitude it wasn’t really telling the story of what was going on and we didn’t feel like we had a better metric to produce. I think the second thing that has happened to our system as it continues to evolve is PA evolves into all kinds of different dimensions on our system and many of our clients use shares in their new FactSet work station which is a PA like functionality and then it starts to get grey as to where product work flow sort of starts and ends and what level of product they have. The general comment is clearly from each quarter when we talk about what’s driving our business, our portfolio suite is still a factor.

Glenn Greene – Oppenheimer & Co.

Then just finally your fixed income sort of product capability functionality, where would you say you are at this point? Obviously, it’s a very small piece of your revenue but you would think over time a big opportunity, maybe just some color on where you sort of think you are there?

Philip A. Hadley

The great thing about fixed income is it’s a huge marketplace. There may be 50,000 equities that the institutional market trades but there are millions, and millions every day produced of new fixed income [in to that]. For us it’s an exciting opportunity. We continue to invest very heavily into it and it’s become an integral part of our portfolio suite and we continue to expand the content we have in that space, the user count we have in that space, and the applications we use to display the information. As far as where we are in the opportunity in the marketplace, I would classify it still as very early.

Operator

Your next question comes from Robert Riggs – William Blair & Company, LLC.

Robert Riggs – William Blair & Company, LLC.

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

Peter G. Walsh

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

Robert Riggs – William Blair & Company, LLC.

Could you just provide us an update when it comes to kind of the trading solutions you’re looking to build out as well?

Philip A. Hadley

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

Robert Riggs – William Blair & Company, LLC.

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

Peter G. Walsh

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

Operator

Your next question comes from Bill Warmington – Raymond James & Associates.

Bill Warmington – Raymond James & Associates

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

Michael D. Frankenfield

I would say there was no particular timing to it. Seeing the big sell side firms face pressures due to the macro environment, they’ve been realizing their headcount and that’s been going on for a couple of quarters now. We expect like all things, it will stabilize and the volatility will reduce as we move into an improved economy and things will start to pick up.

Bill Warmington – Raymond James & Associates

You had commented a little bit on the characteristics of the new clients that were added in the quarter. Are you seeing a lot of new firm formation, or decent bid size, or larger clients?

Michael D. Frankenfield

There’s a little bit of firm formation but the majority of it is just hard work on the part of the sales force identifying opportunities. The sales cycle for products in our industry is long because it’s difficult to change a users work flow. It’s unusual that we would go into a sales situation and perform a demonstration and the client would immediately want to buy it. There needs to be an evaluation period and then these things just take time.

Really what you’re seeing is the result of a cumulative effort that has taken place over time and I feel like our strategy of improving our product, improving our content, and focusing sales effort on the problem is really paying dividends for us.

Bill Warmington – Raymond James & Associates

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

Michael D. Frankenfield

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

Bill Warmington – Raymond James & Associates

The last question for you is if you can talk a little bit about what’s driving the growth in international?

Michael D. Frankenfield

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

Operator

Your next question comes from John Neff – [Inaudible] Capital Management.

John Neff – [Inaudible] Capital Management

I had two questions, one just related to we’ve talked to Thomson Reuters and Bloomberg but with [McGraw Hill] sort of breaking out capital IQ results in a more granular way it looks like they were up 13% [inaudible]. I was curious if you could comment on capital IQ a bit and sort of along what the [inaudible] are. Are you seeing them sort of being [inaudible].

Philip A. Hadley

Again, it’s difficult for me to make comments on somebody else’s growth rates because I don’t know – S&P is a huge organization and there are lots of pieces that are now under the capital IQ umbrella so what specifically they’re growth is and how they’re doing it it’s difficult for me to tell. I’ll just revert back to Mike’s generic comment and that is I believe we’re gaining share in the marketplace and that we do very well and cap IQs is one of the opportunities that we have in the marketplace.

John Neff – [Inaudible] Capital Management

The second question I had was just the sequential jump in other income during the quarter, I was just wondering if you’re doing anything different with your cash or is that related to something on the balance sheet.

Peter G. Walsh

We are doing something a little bit differently this quarter. We invested $15 million in short term CDs in India. We did it because the interest rate is a little more than 9%. We thought the credit risk was reasonable and we don’t have a need to repatriate the cash, ultimately if we cash in we’ll just use it to fund our operations globally.

Operator

Your next question comes from Jason Rodnick – Raub Brock Capital Management.

Jason Rodnick – Raub Brock Capital Management

I have a quick follow up on the sell side, I was wondering if you were seeing the contraction stabilize there, accelerate, decelerate, and do you have any view as to when the cycle will turnaround?

Philip A. Hadley

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

Jason Rodnick – Raub Brock Capital Management

The last couple of quarters it’s been contracting are you seeing the same sort of potential declines, or slowing down, or is it jumping around a lot?

Philip A. Hadley

Specifically on the sell side, is that the question?

Jason Rodnick – Raub Brock Capital Management

Yes, the sell side.

Philip A. Hadley

I would just characterize it as normal choppiness at this point. After living through as many cycles as I’ve lived through in this business it’s not even as bad a cycle as three years ago or even seven years ago.

Operator

Your last question comes from Peter Heckmann – Avondale Partners, LLC.

Peter Heckmann – Avondale Partners, LLC.

I just wanted to have a quick follow up, now that we’ve seen headcount growth start to decelerate after you built the content collection operation, as well we’re seeing price increases continued to be levy in the tough market, and seeing client additions, should we begin to start to anticipate some incremental margin expansion or are we really still thinking those incremental dollars are going to continue to be reinvested in the platform?

Philip A. Hadley

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

Peter Heckmann – Avondale Partners, LLC.

Then given the cash generation do you have any thoughts about the dividend level?

Peter G. Walsh

We certainly have a high quality problem in terms of having too much cash. We’ve been allocating it aggressively to share buy backs and dividends. Historically, we’ve been increasing our dividend at a healthy double digit rate annually. We’ll certainly review that capital allocation process and we certainly would expect to be consistent with what we’ve done in the past.

Operator

I’m showing no further questions. Thank you for participating on today’s conference call. You may disconnect at this time.

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