FactSet Research Systems F1Q08 (Qtr End 11/30/07)Earnings Call Transcript

Dec.18.07 | About: FactSet Research (FDS)

FactSet Research Systems Inc. (NYSE:FDS)

F1Q08Earnings Call

December18, 2007, 11:00 a.m., ET

Executives

PhilipA. Hadley – Chairman, ChiefExecutive Officer

MichaelF. DiChristina – President, Chief Operating Officer

MichaelD. Frankenfield – Senior Vice President, Director of U.S. Investment ManagementServices

PeterWalsh – Senior Vice President, Chief Financial Officer

KieranKennedy – Senior Vice President, Director of Investment Banking and BrokerageServices

ScottL. Beyer – Senior Vice President, Director of International Operations

Analysts

PeterAppert – Goldman Sachs

JohnNeff – William Blair & Company

RandyHugen – Piper Jaffray

KevinDoherty – Banc of America Securities

GiasoneSalati – Execution

Operator

Welcome to the FactSetResearch Systems’ first quarter fiscal 2008 quarterly earnings conference call.At this time all participantsare in a listen-onlymode. During the question andanswer session please press *1 on your touchtone phone. Today’s conference isbeing recorded. If you have any objections you may disconnect at this time.

Now I willturn the call over toMr. Peter Walsh, Chief Financial Officer. Sir, you may begin.

Peter Walsh

Thank you,Operator. Welcome, everyone, to your earnings call for the firstquarter of fiscal 2008. Joining me are Phil Hadley,Chairman and CEO,Mike DiChristina, President and Chief Operating Officer, Mike Frankenfield,Director of the U.S. InvestmentManagement Business, Kieran Kennedy, Head of Investment Banking, and ScottBeyer, Director of our non-U.S. business.

Thisconference is being transcribed in real time byFactSet's CallStreet service and is being broadcast live via the Internet at FactSet.com.A replay ofthis call will also be available onour website.

Our call willcontain forward-looking statements reflecting management's current expectationsbased on currently available information. Actual results may differ materially.More information about factors that could affect FactSet’s business andfinancial results are in FactSet’sfilings with the SEC. Lastly,FactSet undertakes no obligation to publicly update any forward-lookingstatements as a result ofnew information, future events, or otherwise.

We’llorganize our call today around three topics. First, we’ll review first quarterresults. Second, I’ll move to guidancefor the upcomingquarter. Third, we’ll close with our management team addressing your questions.

Before webegin I’d like to take a moment tohighlight one item. As you know, the U.S. dollarweakened significantly during the firstquarter, particularly against the Euro. The decline in value had the followingeffects in Q1 whenholding currencies constant from the recentlycompleted fourth quarter of fiscal 2007. Foreign exchange increasedrevenues by $400,000 and operating expenses by $900,000. It decreasedincome from operations by $500,000 and our operating margin by 50 basis points.EPS declined one penny from foreign exchange.

To facilitatefactoring currency into your understanding of historical and future results on an annualbasis, FactSet currently has non-dollarexpenses of $110 million partially offset by non-dollar revenues of $44million. This translates to a net exposureof $66 million per year or $17million per quarter.

Now let’s move on to firstquarter results. Overall FactSet turned in a very strongfinancial performance during the last threemonths. We again delivered record revenues in earnings.ASV increased $21 million on a constantcurrency basis during the firstquarter, up 29% from the $16 million change in Q1 lastyear. This increase is double the averageincrease for this period in the last threeyears.

On ayear-over-year basis our subscriptions growth rate increased sequentiallyfrom Q4 to 22.2%. The catalystbehind our top-line performance was healthy increases in new usersand new clients and the sale ofadditional services to existing clients, especially to investment managementprofessionals. We achieved this growth despite an environmentwhere many large banks are carefullymanaging expenses. Earnings per share were$0.58, representing 23% growth from the year-agoquarter.

Let’s begin the highlightsof the quarter withfree cash flow. Free cash flow captures all the balancesheet and P&L movements. As a reminder, wedefine free cash flow as cashgenerated from operations which includes the cash costsfor taxes and changes in workingcapital less capital spending. Free cash flows generated during the firstquarter were $8 million, down from $15 million a year ago. The decrease wasa result of a $24 milliondecline in workingcapital partially offset by higher levels of net income.

As Imentioned in our lastcall, please factor into your free cash flow analysisthat FactSet pays variable employee compensation related to the previousfiscal year in the firstquarter. This cash outflow reduced working capital by $29 million.

In addition,please recall that FactSet also remits estimated tax payments for the first halfof the year during the secondquarter. In December wepaid $14 million representing our estimated tax payment for the justcompleted first quarter. The timing ofestimated tax payments is consistent with prior years, nevertheless it distortsfree cash flow in both the first andsecond quarters.

Accountsreceivable increased $3.4 million during the quarter to$63 million. Over the last 12months receivables have increased just 3% while subscriptions advanced 22% overthe comparableperiod. At November 30thour DSO stands at an impressive45 days. We do expectreceivables to increase during Q2. Like we did last year, FactSet invoices a smallportion of its clients annually in advance.When the annualinvoices are circulatedaccounts receivable and deferred revenues will increase by $11 million in Q2.

Our endingcash and marketable security balance was $171 million, a decrease of$15 million since August 31st. The source of the decrease wasthe previouslymentioned variable compensation payment and share repurchases. During Q1 weinvested $30 million to repurchase common stock and paid a quarterlydividend of $5.8 million. Currently there is $28 million in remainingshare repurchase authorization and shares outstanding at quarter endwere $48.2 million.

Capitalexpenditures in the firstquarter were $5.7 million net of landlord contributions for construction.Expenditures for computer equipment were $5.6 million and the remaindercovered office space expansion. Major expenditures included adding eight HP Integritymainframes to our data centres.

To recapwhere we stand on the technologytransition, 12 Integrity mainframes had been deployed in the last fivemonths and four additional machines will be purchased in early 2008. The full andsuccessful upgrade to HP Integritymainframes is scheduled to be completed in the secondquarter. As a result, oursystem capacity will have expanded by 40% and the system speedwill be 20% faster. The cost per Integritymainframes is 35% less than an Alphamainframe and the powerconsumption has been reducedby a third.Please also note that when we return to the normaluseful life of three years when depreciating Integrity mainframe.

Now moving tothe P&L.Revenue was $134.2 million, up 23.2% versus a year ago.Operating income advanced 20% to $42.5 million. Excluding currency, revenuesincreased 22% and operating income rose 23% over a year-agoquarter.

Net income rose 24% to $29.4million in the firstquarter. The growth rate of netincome was favourably impacted by other income in a lower taxrate. Other income advanced 37% to $2 million. Our effective tax rate declined 150basis points from Q1 last year to 34%.

Now let’stake a look at the revenuedrivers. Subscriptions increased $24.3 million during the quarter andtotalled $541.2 million at November 30th.Excluding FX, the subscriptionincrease was $21.1 million. On a constantcurrency basis, subscriptions have advanced $97.2 million over the last 12months, up 22%. As a reminder, wedefine subscriptions as theforward-looking revenues for the next 12months from all subscriptionservices currently being supplied to our clients.

Now let’swalk through our key operatingmetrics and trends we see happening at our clientbase. We’re especially pleased about our ability to expand FactSet’s user base at new andexisting clients. We welcomed 2,800 new users on a net basisand exited the quarter with37,800 users. Client count was 1,193 at quarter end;a healthy netincrease of 40 clients during the past threemonths.

Portfolioanalytics continues to be a source ofgrowth. This suite is comprehensive and included the applicationsfor portfolio attribution, risk, and quantity of analysis.

Demand forour quantitative services was strong. Clients have been receptive to our suiteof advance applications and a wealth offully integrated data.

The portfolioanalysis work station is the largestrevenue contributing member to the portfolioanalytics product suite. At November 30ththere were 565 clients representing approximately 5,070 users who subscribe tothis service.

As widelyreported, many of the sell-side [inaudible]banks are in a mode ofcarefully managing their expenses. This mindset was very much present before the dislocationof the credit market,although since then it has increased.

Whencalibrating expenses it’s important to recognize the fivefollowing facts: One, 77% of FactSet’s revenues relate to buy-site clients andonly 23% to sell-site firms. Two, our sell-site revenues are well diversifiedbetween equity research professionals and investment bankers. Three,performance with most investment banking groups has been verystrong. Four, our products do not address the need ofprofessionals involved in creating ortrading credit-related instruments. As such, revenue exposure is very low in the area of the bank that isenduring the greatestlevel of turmoil. Five, there is a potential tosee liquidityshift out of the creditmarkets into the equitymarkets which plays to our core product strength.

Now taking a look at geographicperformance. Our U.S. business produced revenues of $93.9 million, up 22%excluding non-subscription revenues. On theinternational front revenues increased 24% to $40.3 million. On a constantcurrency basis, and excluding non-subscription revenues, the increase was22%.

Quarterrevenues from Europe were $32.3 million, up 21%.

Lookingbeyond our two largest geographic markets we were particularly pleased with ASVgrowth emanating from Asia Pacific. Ourbusiness there experienced its best quarter ever following money flows intothat region. Revenues from our Pacific Rim operations advanced 34% to $8million.

Subscriptionsby non-U.S.-based clients now are $167.5million or 31% of the client-widetotal. Client retention continued to remain above 95%, once again confirming the breadth anddepth of a productsuite that is deployed by a stellarclient base.

Moving toexpenses for the quarter.Operating expenses were $91.7 million. Q1’s operating margin was a healthy 31.7%,albeit a decline fromQ4 and towards the low end of ourguidance.

On a normalizedbasis, operating margins in Q1 havedeclined sequentially from the previousfourth quarter in each of the last fiveyears. As we covered on last quarter’s call, we did anticipate the key component tothe change. Quarterlyrevenues decreased sequentially from the sale ofworkstations to summer interns in Q4. However,we did not factor into our guidance that operating margins would be reduced by50 basis points from the sizeable change in foreign exchange rate over the last 90days. Excluding currency, our operating margin would have been 32.2%.

Cost of sales as a percentageof revenues was up 140 basis points over prior year. Higher compensation anddata costs were partially negated by lower amortization of intangible andcomputer related expenses. Increased compensation was driven by more employeesand data costs were up from higher levels of proprietary content collection.

Ourcomputer-related expenses declined from consulting fees incurred only in the prior periodrelated to our transition to HP’s new Integrity mainframe machine. The decrease in amortizationexpenses caused by a decline in acquisitionactivity compared to previous years.

SG&Aexpense expressed as a percentageof revenues declined 55 basis points year over year. This decrease was drivenby lower compensation costs and marketing expenses partially offset by higherT&E.

Lowercompensation was the effect ofleveraging staff during enhanced internal information systems. Marketingexpenses declined by replacing a third-partyevent company with in-house employees.

T&E washigher due to more employees travelling and a meaningfulincrease in the average cost per trip.

FactSet’stotal head count reached 1,743, up 5% during the quarter andup 22% over the last 12months.

Our effectivetax rate for the quarter was34%, a decline of150 basis points over the prior yearquarter. This decline was driven by tax planning steps implemented over the last 12months.

EPS advanced23% year over year to $0.58 per share.Sequentially, EPS rose one pennyfrom Q4 after adjusting for the one-time taxbenefit in Q4 and the seasonalbenefit from intern workstations.

Let’s now move to ouroutlook for the secondquarter of fiscal 2008. The projectedrevenue range for Q2 is $137 million to $141 million. Operating margins are expected torange between 30.5% and 32.5%. This operating margin guidance holds currenciesconstant from Q1 and assumes no change in the expectedoutcome of performance-based stock options.

The effectivetax rate should rangebetween 34% and 35%.

Finally, aspreviously noted, other income was $2 million during the firstquarter. In November of2007 we moved all our cash tosecurities backed by U.S. Government agencies. The effect ofthis in Q2 should be a reduce in other incomeby approximately $300,000 as our yield will decline by 85 basis points if wemaintain this position.

The guidance forcapital expenditures net of landlord contributions in fiscal 2008remains at $38 millionto $44 million.

Overall, the firstquarter was a great startto our fiscal year. Revenues and earnings per share wereup more than 20%. While we continue to grow our businessat a pace manycompanies would envy, we recognize our opportunities in front of us.With a $10 billiongrowth opportunity our mandate is clear: To invest for the future in the form of morepeople, content, and new products to win businessfrom a blue chipinstitutional client base.

While we likeour competitive position in the market placeand are pleased withour progress, we have an ambitiousagenda and there’s a lot of workahead.

Thank you foryour participation in today’s calland we’re now ready for your questions.

Question-and-Answer Session

Operator

Thank you.(Operator Instructions). Our first question will be from PeterAppert. Your line is open. Please state your company name.

Peter Appert – Goldman Sachs

Thanks. It’sPeter Appert, Goldman. So, Peter, can you give us any additional colour in terms ofwhat you’re seeing currently in the businesstrends, sales trends buy-side versus sell-side?

Peter Walsh

I’ll passthat on. Thank you, Peter, I’m going to pass that on to Phil.

Philip A. Hadley

Hi, Peter.Good morning.

Peter Appert – Goldman Sachs

Good morning.

Philip A. Hadley

I think thatif you take our business, obviously we’re a very diversebusiness in both U.S.and non-U.S. The buy-sidebusiness has historicallyalways been very stable and very rational in purchasedecisions. The sell-sidebusiness changeddramatically I would say three orfour years ago, in the last cycle, in that theybecame very precise in how theymange products like ours and other players in the space aswell. I would say that the good part ofour business is that we’re not in the part ofthose firms that are directlyaffected, for the most part. So our fixedincome exposure and even the product linewe have in fixed incomeisn’t a sell-sideproduct.

And we’reprobably only affected to the extent thatthere’s just generic earnings pressure in some firms.Other firms, like yours, has done quitewell through this cycle. So I guess asyou look at it, and Ilook at our wholebusiness, we’re fortunate to have a very diversebusiness of which I’ve never in my careerever had every single piece in every singleregion of our business doing, on fire. But I feel very comfortable that becauseof our diverse product line and relationship with the clients and theopportunities we have that help them with costs savings and greaterfunctionality that we’re well positioned at this pointand very optimistic about our future.

Peter Appert – Goldman Sachs

How about,Phil, physically, would the sell-sidecomponent of the business –and I don’t know what the metric weshould look at is, if itssubscribers or password count – is it running upon a year-to-yearbasis?

Philip A. Hadley

Yes. In fact, we hada very strongpassword count on the sell-side in the firstquarter.

Peter Appert – Goldman Sachs

Okay. Great.

Philip A. Hadley

A big portion of the password countgrowth in the quarterhappened to be sell-sideclients.

Peter Appert – Goldman Sachs

Okay. The pace ofbuy-back activity, you’ve been pretty aggressive. What should we be anticipatingover the course of the next 12months in that regard?

Peter Walsh

Thanks,Peter. It’s Peter. Yeah, we purchased, we deployed 105 million over the last 20,over the last 12months that we repurchased shares. For a company thathas $171 millioncash, no debt, and is generating more than $100 million of free cash flow a year, unlesswe become more aquisitional we’ll deploy our cash either in the form of dividendsor repurchases in order toavoid a drag onreturn of capital.

Peter Appert – Goldman Sachs

Okay. And onthat front, that actually brings me to the nextquestion, which is, you haven’t actually been particularly active from anacquisitional standpoint in the last year orso having beenfairly active in the prior year.Should I read into that just lack of opportunity or are returns notthere in terms ofthings you’d like to buy, or you’re feeling comfortable with your internaldevelopment prospects?

Peter Walsh

I thinkinternally we’ve always had a very organicapproach to the marketplace.We’ve been opportunistic as opportunities have presented themselves. They kindof came in bunches, andas you’ve pointed out, there haven’t been any opportunities recently. Not thatwe wouldn’t, it’s just that there haven’t been any that have been interestingto us.

Peter Appert – Goldman Sachs

M-hm. Andstill on that front, the fixed incomeproduct has been a particularfocus to accelerate or jump start the growth ofthat offering. Would acquisitions be part of the thoughtprocess?

Peter Walsh

I think we’dlook at anythingthat we think would be accretive toour business strategy in the long run, but Idon’t look at that particularproduct line with some greater needs than other areas of opportunity that wehave. So I’m verycomfortable with the pieces wehave to deliver thefunctionality to the marketplacewe’re currently approaching.

Peter Appert – Goldman Sachs

Okay. Last questionand then I’ll let someone else speak. Again, you’ve been pretty aggressive in terms ofheadcount expansion the last coupleof years. Does the headcountgrowth slow just in the context ofsort of dicier macro-economic conditions?

Peter Walsh

I think the headcountgrowth is one where we’re always deploying capital with headcount or withtechnology or in lots ofareas of our firm and it reflects the level ofinvestment we have to do to grow ourbusiness.

Peter Appert – Goldman Sachs

Okay, so you haven’tscaled back at this point in the context ofexpectations that growth decelerates given the marketenvironment.

Peter Walsh

Our headcountgrowth year over year first quarter was?

Unidentified Male Speaker

Twenty-threepercent.

Peter Walsh

Yeah. So it’s right in line withrevenue.

Peter Appert – Goldman Sachs

Right. Okay.Great. Thanks very much.

Operator

Thank you.Our next question will come from Randy Hugen. Your line is open. Please stateyou company name.

Randy Hugen – Piper Jaffray

PiperJaffray. Thanks. How do you think the company willfare if we see anotherdownturn in the equitymarkets? You guys managed to grow revenues by12% to 13% in 2002 through2004. If we enter a similarmarket environment in 2008 how do you think the company willperform?

Peter Walsh

Just toanswer the question in two parts.One, I’d have a hard timebelieving that we would enter that kind of cycle that we’d be that deep,just based on where we are and how the markets are currentlyaffected. And secondly, I think we’d be in a strongerposition this cycle than we were even last cycle based on the press of ourproduct line.

Randy Hugen – Piper Jaffray

Okay. Andthen how long does it typicallytake for a change in marketdemand to really flow through yourmodel and have an impact on the business?

Peter Walsh

I think ourbusiness is a prettyreal-time business and we’re a subscriptionmodel, so clients canadjust their subscriptions up or down based on their current needs. So if you thinkthe market’salready been affected then you need to factor that in in our currentperformance and our current performance is still pretty strong.

Randy Hugen – Piper Jaffray

Yup. Okay.And could you give us an update on theThomson-Reuters merger, how it’s impacting your business, how it’s affectingdemand for your products? And then also maybe some insights into if the company’sforced to divest in businessesis there anything out there that might be of interestto you?

Peter Walsh

So, the mergerhasn’t occurred yet.

Randy Hugen – Piper Jaffray

Yes.

Peter Walsh

Obviouslyit’s with the regulators at this point.And I don’t think it’s really affected the marketplaceyet either. So the marketdynamics of the mergedidentity and how they’ll play out, their subscriptions with their clients isyet to come. We certainly are, obviously pay attention toit. It’s certainly in ourindustry. But we couldn’t comment and wouldn’t comment on any MNA activity thatwe have related to any of the assets thatwould be availablewith that merger with any specific MNA activity in the marketplace.

Randy Hugen – Piper Jaffray

All right. Fairenough. And then the currentstate of the creditmarket, does that change youroutlook for growth in the fixed incomeproducts realizing that it’s a very smallcomponent now? And then also, does it change youroutlook for your level of investments there?

Peter Walsh

No. No. Ourproduct line is, in fact we justreleased our, or did a road show in Europe onour fixed-income TA product for the non-U.S.marketplace and feel very bullish about where we think we can go with thatproduct. Keeping in mind from an analyst perspectivethat it’s immaterial coming off an immaterialbase. So it would be years beforeit would be a true revenuedriver. But the way our productline is set up is really, it’s not on a part of the marketthat’s affected.

Randy Hugen – Piper Jaffray

All right.Thanks.

Operator

Thank you.Our next question is from Kevin Doherty. Your line is open. Please state yourcompany name.

Kevin Doherty – Banc of America Securities

Banc ofAmerica Securities. Good morning, guys. I just have a follow upquestion about the user groups.It’s really the first time in a few yearswhere it’s been a bit above20%. A couplequestions there. How sustainable is that basic growth going forward? Youmentioned that you didn’t really see much impactfrom constant voyeurs, but were there any large customer wins or migrations in the quarter?

Peter Walsh

So, when youlook at our revenuegrowth as a business the full ASV is the mostimportant number because obviously we can grow that throughsame-store sales of products to current clients, which is really the biggestdriver, plus incremental clients, the 40 newclients, plus the user count change. So as you pointout, it is lumpy. In thisparticular case it is a largedeployment at a couple firmsis the materialcomponent of that number. So is it sustainable?I think when you think about sustainability you always want to look at ASV as the driver in ourbusiness.

Kevin Doherty – Banc of America Securities

Okay. And Iguess as a follow up,when I look at the revenue forsubscriber numbers that had been tracking a littlehigher. It looks likeit’s probably only up about 1% year over year. Were there any customer, maybeproduct mix-shift in the quarter, anypricing changes?

Peter Walsh

I think the way you haveto look at our productis that new clients and new fees always come on at lower than the average. So if we’revery successful at adding newclients in a quarter ornew fees in a quarter it will put pressureon the average.Because they’re not coming on at the average,they’re coming in below the average. So looking at our, at those fewmetrics, you want to look at them asgaining share on clients, gaining share on users and then step away from thatand look at it from the macro leveland saying are they gettingreal revenue on the marketplace.

Kevin Doherty – Banc of America Securities

Okay. That’sfair. Maybe just to tie in, mighthave a possibilityimpact as well because I know you took down your margin range a bit andespecially at the well in there. Are there anyunusual expenses that you expect to incur next quarter or maybe, you know,maybe a possibilitydrag from all the new usersyou just got on this quarter?

Peter Walsh

Thanks,Kevin. First off, when you look at our marginsI think it’s important to know that our operating margin has declinedsubstantially from Q4 to Q1 in each of the past fiveyears. And you know, I outlined some of the reasons forthat decline during the call. The reasons whyour margin declined, our margin (inaudible) declined by 50 basis points on bothends of the range are just purelyrelated to currency. Because we think it’s obviously most appropriate to use the current exchange rate when you’re forecastingyour immediate expenses. There is no unusual items that we’re forecasting tooccur in Q2 relativeto year-ago periods or the immediateprevious periods.

Kevin Doherty – Banc of America Securities

Well, I guessthat range would have excluded currency and I believe your range last quarterwould have been the same. Wasthere anything incremental?

Peter Walsh

Our rangelast quarter didn’t, included currency. We didn’t factor in the decline in the, duringour fiscal first quarter.

Kevin Doherty – Banc of America Securities

But that’sjust wrong (inaudible).

Peter Walsh

I’m sorry?

Kevin Doherty – Banc of America Securities

But that’sjust wrong for now this quarter. Got it.

Peter Walsh

Okay.

Kevin Doherty – Banc of America Securities

Yeah.

Peter Walsh

Thank you.

Operator

Thank you.Our next question is from John Neff. Your line is open. Please state yourcompany.

John Neff – William Blair & Company

Good morning,guys. I was just wondering if you could give us any kind of an update oncolour in terms ofhedge funds, clients, the percentageof overall wins or deployments. I know in the past it’sbeen a tailwind,but not a real driverof your growth. Can you just give us an update orany colour on what that represents (inaudible) percentage of clients or users?

Peter Walsh

I think we’vestated consistently over the years, it’snot a materialnumber in the aggregate ofour client base. Though if you took the hedge fundsthat our clients (inaudible) that they tend to be larger, morediverse funds in theirinvestment strategy. So nothing significantlyhas changed in this quarterversus any prior quarter.

John Neff – William Blair & Company

And then,specifically on the gross marginline, you mentioned some of those factors there. One of them that wasinteresting was the moreproprietary data episode. Could you give us a little morecolour on those and how should we think about the trend or the outlook sortof remainder of the year at the gross marginline?

Peter Walsh

Sure. We havea number ofdifferent sources of proprietary data collection and they span the gamut.Particularly during, when you compare theyear-over-year period, we’ve been investing certainly more in our callstreet product and we’ve been moving towards putting out every transcriptthrough a verydetailed Q&A process versus making available a rawtranscript and that’s increased our cost-related, our investment and ourcost-related (inaudible) results that obviously increase the value in the eyes of the end users.

We alsocontinue to expand our filings operations that are collectedthrough our global filings product and we continue to expand our operations in our offshore facility with respect to a variety ofcontent that particularly those that are desired byour investment banking clientele.

John Neff – William Blair & Company

Okay. Great.And then also, could you give us a little bitof colour on capex? In years past it seemed like it was prettymuch every three years you’d have kind of a capex spike.Now between last year and this year it seems to be sort ofsustaining at a relativelyelevated level compared to prior years. Is that a temporaryphenomenon? Is that due to all the real estateconsolidation that’s taking place?

Peter Walsh

Well, firstoff let me say that highercapex is a great signof growth and access. Client usage of our products is the driver forexpanding computer power. Revenue growth drives our headcount increase, whichtranslate to a need formore real estate.

Obviouslywhen you take our capex and you look at it in pieces, youknow, when you transition 100% of your mainframes from one version, you know, the Alphamachine to the Integritymachine it does have a temporaryincrease in capex. So over, from a time payingfrom August this year to sometime early in the calendar2008 we’ll have exchanged every mainframe.

That said,they cost less than the Alphaversion. So the cost formainframe is down 35% and the cost fortechnology has been moving in our favour.

The real estateprojects are definitelylumpy quarter to quarter and we had very little in this quarter.We do have plansfor several major real estate projects to accommodate our headcount growth overthe remaining nine months of the year.

John Neff – William Blair & Company

And then Asia Pacific, Iwas just curious, you mentioned some of the growth there,following the money flows.But why the correction in terms of,what’s been happening in terms of the investmentmandate? What I’m trying to get a sense for isare you adding Asia Pacificregional content that would also be helping yougain that traction? (Inaudible) change in the productbecause it’s not, clearly it’s people investing in Asia Pacificcompanies as opposed to money in, moving in there andthen investing back in the U.S.

Scott L. Beyer

Hi, John.It’s Scott Beyer. I’ll take that question. You’re right. I would put it down toprobably three different factors. The interest in the region andhow a lot of the investmentand investment focus moves into the (inaudible)managers that are located in that region.That’d be one as Peterdescribed earlier. There are a few otherthings that are a little bitlonger coming and that’s just having the right peopleand being right sized for the opportunitythere. We’re certainly coming on stream in thatrespect. And finally, the thing that has the longest leadto it is the product. In Asia we’ve beeninvesting for several years now and we’re just starting to see the fruits ofthat (inaudible).

John Neff – William Blair & Company

All right. Thankyou.

Operator

Thank you.Our next question will be from GiasoneSalati. Your line is open. Please state your company.

Giasone Salati – Execution

Hi. Goodafternoon. It’s Giasone Salati from Execution in London. I’vegot three questions, please. The first on ison pricing. I imagine this is the time of yearwhere all of yourclients are preparingtheir IT budgets for the followingyear. What kind of environment are you findingto push through pricing increases for the whole of2008?

Philip A. Hadley

This isPhilip Hadley again. I think at this pointFactSet’s philosophy has really beento do nothing morethan inflation. Depending on what markets and where you are in the world the timing couldbe different,but nothing more than aninflation-range price increase.

Giasone Salati – Execution

Let me try and get some more colouron that. How does that compare to the last fewyears and (inaudible) at the end of year2000? I would have expected that in, for the last coupleof years you could have pushed prices up a little bitmore than inflation. Is it that it’s low down in priceincrease or it’s just in line with(inaudible)?

Philip A. Hadley

You may be correct in that weprobably could have pushed price increases historically. I think as a firm we’rejust kind of coming around to being part of the product.Frankly we really haven’t pushed price increases, even back in 2000.

Giasone Salati – Execution

So can wequantify your price increases in at 3% for 2008?Is that fair?

Philip A. Hadley

In that range.

Giasone Salati – Execution

Okay. My nextquestion is on your cost basis. Couldyou have theunderstanding how much of that would be fixed-costbasis moving into what could be a veryvolatile environment in 2008 in terms ofrevenues?

Peter Walsh

Thanks,Giasone. Our primary operating costs are people. And60% of our total costs relates to people. The next biggestcost after thatis depreciation related to our computer equipment and real estate costs. It’s all by CG. Ithink we have great visibility in our businessand we can adjust our investment in people tohandle any up or down turn that may be in front of us.

Giasone Salati – Execution

And these are all staff? Theseare all employees?Or are theseworking as consultants?

Peter Walsh

The largemajority of our investment and compensation, I mean, the completelion’s share is staff. (Inaudible) staff.

Giasone Salati – Execution

Okay. Andanother question on Thomson-Reuters. I don’t know if you want to answer this,but what we hear in Europe in terms of the latestdevelopment on the regulatoryapproval of the merger isthat Thomson-Reuters might have suggested, might have proposed to sell a copy ofdatabases in analytics.Without maybe asking your comment on whether you think this is right or not,would FactSet be interested in all in buying anyof the databasesfrom Thompson-Reuters?

Peter Walsh

I think Ihave to revert back to the way Ianswered the question the first time,and that is as a matter ofpolicy we don’t know that on any opportunities we have in the marketplacethat mergers or acquisitions.

Giasone Salati – Execution

Okay. Let me thenconclude with a finalquestion. How many of your users will have (inaudible) along side with anyother source of financial information, any other terminal, from Bloomberger,Reuters, or other competitors? How many multiple terminal users do you have in yourcustomer base?

Peter Walsh

At the end of the quarter wehad 3,500 end users. It’s very difficult for us to know exactly what products(inaudible) vary dramatically by geography and client type. But I would guess,depending on how you define the product(inaudible) industry has mobileproducts of some mobile. As Newton quotes (inaudible) provider have multiplesources of financial analytics on every professional desktop.

Giasone Salati – Execution

Okay. Thankyou.

Operator

Thank you.Our next question is from John Neff. Your line is open. Please state yourcompany name.

John Neff – William Blair & Company

Hi. JohnNeff, William Blair. Phil, you mentioned something. I just want to get a little morecolour in response to a previousquestion about how (inaudible) would perform in another downturn. I think you said something to the effect likeyou didn’t expect a down turnbecause it’s deep into yourcustomer base. I’m just wondering if I heard you correctly, if you couldelaborate. Thank you.

Philip A. Hadley

I guess Iwould take two factors into account there. One just in the tenure thatI’ve been in the industry forthe last coupleof decades that that was an unusualevent that I thought was maybe aonce-in-a-lifetime event to that degree. The second was the factors in the last market,it was a very equitydriven ITO capital markets group environment with lots of M&A that got veryfrothy. So that was the site of the investmentfirms that got hammered. This particular cycle has nothing to do with thatside of the business andeverything to do with the credit sideof the business. So assumingthat eventually the credit sideof the businessgets things figured out, which the marketsalways do, sometimes it takes them a littlelonger than one might expect, I would expect things to stabilize and wouldn’texpect it to affectour side of the businessnearly as much as it did lasttime.

John Neff – William Blair & Company

Thank you.

Philip A. Hadley

I guess I’dthrow out one thing on the end of that andit’s important for everybody to realize that in ourparticular client base that we’re 77% buy-side and 23% sell-side. Even in the sell-sidethere’s quite a bit ofdiversity in where thatrevenue comes from. The lion’sshare, the bulk of it is from corporatefinance professionals. But we’re also in many othersegments of investment bank or commercial bank.

Peter Walsh

Thank you.Operator?

Operator

Thank you.I’m showing no further questions.

Peter Walsh

Great.Thanks. Thanks, everyone. We’ll see you nextquarter. Happy Holidays.

Operator

Thank you.That will conclude our conference call for today. You may now disconnect.

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