FactSet Research Systems Inc. (NYSE:FDS) Q3 2018 Earnings Conference Call Transcript 2018-06-26T15:00:00+0000 Executives Rima Hyder - FactSet Research Systems Inc., Philip Snow - FactSet Research Systems Inc., Maurizio Nicolelli - FactSet Research Systems Inc., Analysts George Tong - Goldman Sachs, Michael Reid - Cantor Fitzgerald & Co., Glenn Greene - Oppenheimer & Co. Inc., Hamzah Mazari - Macquarie Research, David Chu - Bank of America, Toni Kaplan - Morgan Stanley, Shlomo Rosenbaum - Stifel, Nicolaus & Company, Peter Heckmann - D.A. Davidson & Co., Alex Kramm - UBS Investment Bank, Bill Warmington - Wells Fargo Securities, Greg Bardi - Barclays Bank PLC, Peter Appert - Piper Jaffray Companies, Keith Housum - Northcoast Research Partners, Operator - Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the FactSet Third Quarter Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Rima Hyder, Vice President of Investor Relations, you may begin your conference. Rima Hyder - FactSet Research Systems Inc. Thank you, Stephanie and good morning, everyone. Welcome to FactSet's third quarter 2018 earnings conference call. Before we begin, I would like to point out that the slides we will reference during the course of this presentation can be accessed via the webcast on the Investor Relations section of our website at factset.com. The slides will be posted on our website at the conclusion of this call. A replay of today's call will be available via phone, and on our website. This conference call is being transcribed in real time by FactSet's CallStreet service, and is being broadcast live on factset.com. After our prepared remarks, we will open the call to questions to investors. (Operator Instructions) (Forward-Looking Cautionary Statements). Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix of the presentation, and in our earnings release issued this morning. Joining me today are Phil Snow, Chief Executive Officer; and Maurizio Nicolelli, Chief Financial Officer. And now I'd like to turn the discussion over to Phil Snow. Philip Snow - FactSet Research Systems Inc. Thanks, Rima. Good morning to everyone, and thank you for joining us on the call today. As we near the close of our fiscal year, we are pleased with our achievements, and remain committed to executing on our growth strategy and returning value to shareholders. In September, we'll celebrate 40 years as a company. And while a lot has changed, the one thing that has remained constant is the strong collaboration with our clients. We have developed some of the best-in-class solutions in our industry, and become an integral part of our clients daily investment process. This quarter, we saw strong revenue and EPS growth. And although we saw a dip in our organic ASV growth rate, we believe we have a solid Q4 pipeline that will allow us to close off fiscal 2018, within our guidance range. Turning to third quarter results. We grew organic revenue at 6%, and ASV at over 5%. Adjusted diluted EPS increased 18% to $2.18, boosted by the US tax reform, and our share repurchase program. Adjusted operating margin for the quarter was 31%, a slight decrease from last year and last quarter. However, we are very focused on achieving our medium-term goals of increasing operating margin by 100 basis points per year over the next two years. This quarter, we took actions to streamline parts of our organization, and to optimize costs. And we believe these actions, in combination with our continuing efforts to integrate our acquisitions, pave the path forward to margin expansion. We increased ASV by $9 million in the last 3 months. The increase was primarily driven by analytics, CTS, wealth, and our annual price increase, to our international clients. Our cross-selling efforts drove many of the wins this quarter. Analytics added more than 50% of the net increase in ASV this quarter. And we highlighted our risk offering at our Investor Day, as a key driver within analytics. This quarter was no different with a number of multi-asset class risk wins. CTS had another strong quarter, maintaining a high growth trajectory, year-over-year. And we're really excited about the Open:FactSet Marketplace, which launched in April. This new platform offers both core financial, and alternative data sets. Examples are ESG, satellite and sentiment data to address the growing demand for more integrated content, across our client base. And we're seeing particularly strong interest from the quants, within hedge funds as well as traditional asset managers. Our wealth management business also performed well this quarter, with workstation deployments across top-tier clients, displacing our main competitors. Much of our client count and workstation increase this quarter is coming from the wealth business. We've executed well, against our strategy of broadening our wealth solutions and capturing wins with large clients. We also saw cancellations this quarter, but at a decreased rate compared to the same quarter last year. Most of the cancellations were due to firm closures, and firm consolidations, a recurring theme in the industry. However, this quarter versus last year, we saw a reduction in cancellations from firm consolidations. For the last two quarters, we've seen a reduction in cancellations, but we still believe that the cost pressures in the industry, have not abated. We performed well this quarter with our client retention rate increasing to 90%. Turning to our geographic breakdown. Our Americas organic ASV growth was 4%, driven by analytics and CTS products, primarily sold to institutional asset managers. Outside of the Americas, ASV grew organically by 7%, with Asia Pac growing over 13%, and Europe growing at 5%. In Asia Pac, we gained new clients, and increased sales to existing clients, particularly in Singapore, and Australia. Analytics, both fixed income and equity products, and CTS were the main contributors. We also opened a new office in Shanghai, which strengthens our position in the growing Chinese market. EMEA had a stronger Q3, than last year. In addition to the price increase, we had major wins in Europe, with analytics, CTS and an increase in workstation sales. The UK and Nordics regions performed particularly well this quarter. We had a good win in Europe, with an integrated BISAM portfolio analysis solution, a great example of our portfolio life cycle strategy, to cross sell, and up-sell, our broader suite of products. In conclusion, we believe, we remain on track to achieve our annual and medium-term goals as laid out at Investor Day. We've got good visibility, as we start our final quarter for fiscal 2018 and feel positive about our pipeline. Our integration efforts continue to enhance our product offering and the up-selling and cross-selling of these products helped secure some important wins this quarter. And we continue to return value to our shareholders, through our balanced capital allocation framework. We increased our quarterly dividend for the 13th year in a row, raising it by 14%. And we bought back $122 million in shares this quarter, increasing the pace of our buyback program, as we improved our cash collections. Let me now turn the call over to Maurizio, to talk in more detail about our financial results. Maurizio Nicolelli - FactSet Research Systems Inc. Thank you, Phil, and good morning to everyone on the call. As Phil said, we believe we are on track to close out our fiscal 2018, in our guidance range. We made good progress versus our goals this past quarter. Also, this quarter's results were -- are impacted by certain one-time charges, related to restructuring actions, that we undertook this past quarter. Let's now go through our third quarter results. GAAP revenues in the third quarter, increased 9% to $340 million, and 6% to $333 million, on an organic basis versus the third quarter of 2017. Looking at our segment revenue. US revenues grew 5% organically, and international revenues increased 7%, on an organic basis. This growth comes primarily as a result of higher sales from our international price increase, analytics, data feed products, and an increase in workstation sales. ASV increased to $1.36 billion, at the end of our third quarter. Organic ASV increased 5% year-over-year, and $9 million since the end of our second quarter. This increase was primarily driven by higher analytics, CTS, and wealth management sales. Additionally, this quarter, we also implemented our annual international price increase, which added $4.5 million to ASV. This increase was comparable with our increase last year. Let us now take a look at our operating expenses. Operating expenses for the third quarter totaled $247 million, an increase of 10% year-over-year, primarily driven by restructuring charges and certain onetime administrative expenses. Our GAAP operating margin decreased 70 basis points year-over-year to 27.4%, primarily due to the previously mentioned restructuring charges, a negative impact from foreign currency, higher data costs, and incremental legal fees. Adjusted operating margin of 31% was lower than last year's margin of 31.9%. Without the negative impact of FX this quarter, adjusted operating margin would have been 31.4%. Third quarter cost of services expressed as a percentage of revenues, increased by 170 basis points, compared to the year-ago period. The increase was driven by the restructuring costs, additional employee compensation, and higher data costs. Higher employee costs were due to merit increases in the last 12 months, increased hiring, and the impact of foreign currency. SG&A expenses expressed as a percentage of revenues were down 100 basis points compared with the third quarter of fiscal 2017. The decrease was primarily the result of FX hedging gains, our revenue growth rate outpacing the growth of employee compensation, which was flat; and holding other SG&A expenses such as rent, office, and professional fees constant. These decreases were partially offset by current-year restructuring costs. Our client and workstation counts were both up this quarter versus our fiscal second quarter of 2018. In the past three months, we added 80 new clients, and 850 new users in both cases, primarily as a result of our wealth management solutions. We now have close to 5,000 clients and over 89,000 workstation users. Moving on to the tax rate. Our quarterly effective tax rate was 16.5%, compared with 23.2%, a year ago, primarily due to the US tax reform that we discussed last quarter. GAAP EPS increased 15% to $1.91 this quarter versus $1.66, in the third quarter of 2017. The increase was primarily attributable, to the lower tax rate from the US tax reform. Excluding intangible asset amortization, the deferred revenue fair value adjustment, and other nonrecurring items, adjusted EPS grew 18% to $2.18 this quarter. Free cash flow, which we define as cash generated from operations less capital spending, for our third quarter was $120 million, an increase of approximately $35 million or 42% over the same period last year. The increase was due to a significant improvement in cash collections, a lower effective tax rate, timing of prepayments, and reduced capital expenditures. Our DSO decreased to 39 days, at the end of our third quarter versus 42 days a year ago. Moving on to our share repurchase program. We repurchased 620,000 shares for $122 million, during the third quarter under our existing share repurchase program. We were opportunistic in buying back shares and were able to accelerate our pace of buybacks, with the increase in our free cash flow. And as Phil already mentioned, we increased our dividend once again this quarter, by 14% to $0.64 per share per quarter. We remain committed to returning capital to shareholders and maintain a balanced capital allocation framework. Now, let's turn to our guidance for fiscal 2018. The only changes to our fiscal 2018 guidance, are minor adjustments to GAAP, and adjusted diluted EPS. GAAP diluted EPS is now expected to be in the range of $6.92 and $7.17. Adjusted diluted EPS is expected to be in the range of $8.37 and $8.62. The midpoint of the adjusted EPS range represents 16% growth over the prior year. Our ranges were refined during the quarter based on our latest expectations for how we expect to close the full fiscal 2018 year. We have also enhanced our disclosure, by providing a reconciliation of GAAP to non-GAAP EPS, in the back of the press release. With one quarter to go, we expect to execute on our annual goals for fiscal 2018. Sales teams are gearing up for our fourth quarter, which is our busiest quarter in terms of sales activities. Our fourth quarter pipeline reflects this increased activity. With our broad suite of products, client retention is up this quarter and we believe we can continue to gain more clients and more market share. Thank you for your participation in today's call. We're now ready for your questions. Q & A Operator - (Operator Instructions) Your first question comes from George Tong with Goldman Sachs. Please go ahead. George Tong - Goldman Sachs Organic ASV growth in the quarter decelerated to 5.3% despite easier comps in the year-ago period. Can you provide some context behind the deceleration and discuss how the pipeline is evolving? Philip Snow - FactSet Research Systems Inc. Sure. Hi George, it's Phil Snow. So Q3 over Q3, we added approximately the same amount of ASV as we did last year. And just to remind everyone, we really think of our sales cycle in halves. Traditionally, the Q2 and Q4 quarters have been much bigger for FactSet over the years, and this is -- this year is no different. So as Maurizio just mentioned, we're gearing up for our fourth quarter. We believe we have a pretty strong pipeline, for Q4. We have good visibility into the pipeline and we have some launch deals that we're really excited about. George Tong - Goldman Sachs And then as a follow-up, ASV per customer modestly contracted in the quarter. Can you elaborate on the factors that contributed to the decline and when you expect cross-selling initiatives to help drive positive growth in ASV per customer? Philip Snow - FactSet Research Systems Inc. So that's really not something we track. We have a broad range of customers that pay us anything from a few thousand dollars a year per StreetAccount user to a lot more than that. We did add 80 clients, net, for the quarter. Many of those clients were smaller wealth shops as well as corporate clients, so the slight decrease might have been attributed to that. So typically, we're going to be adding new clients on the long tail essentially, so that's, I think, what you're seeing this quarter. Operator - Joseph Foresi, Cantor Fitzgerald. Michael Reid - Cantor Fitzgerald & Co. Hi, this is Mike Reid on for Joe. The first one, I guess with the Shanghai office opening, can you talk a little bit more about the environment in China and maybe some of the drivers and challenges there? Philip Snow - FactSet Research Systems Inc. Yes. So the China market's really an exciting new market for us. We've been servicing it out of Hong Kong for some time. But there are many greater advantages to being in China. One of them, we believe, is that we're going to be able to set up infrastructure in a way where the speed of the product within Mainland China is going to be faster than it has been historically and that's obviously a big deal for clients. So where we're having success in China and a lot of the Asia Pac region is with our more advanced analytics products. That's really where we're competing. We've got a great team out there. I was actually out there to help open the office a week or two ago and got to meet some clients in China. So at least from where we sit, it's really a greenfield opportunity and one that we're excited about. Michael Reid - Cantor Fitzgerald & Co. And then kind of ASV growth by segment, was that fairly similar to some of the gross numbers you showed for FY '17 at Investor Day or has that improved or slowed in any areas? Philip Snow - FactSet Research Systems Inc. It's -- yes, it takes time to move these numbers. I would say it was very similar. The CTS growth rate continues to do very well, close to the 20% that we looked at. I would say that there's really good momentum behind analytics and wealth. And the research and PMT segment is still growing in low-single digits and where we're seeing the majority of the market pressure. Operator - Glenn Greene, Oppenheimer. Glenn Greene - Oppenheimer & Co. Inc. Just wanted to follow up with that prior question. So on the research and portfolio management side, you still are seeing kind of modest growth? I was just trying to triangulate the sort of deceleration in aggregate ASV with the sort of the newer solutions. It sounded like they were all doing well, but the overall deceleration in ASV sort of maybe inferred that the core research workstation business maybe decelerated a bit. Philip Snow - FactSet Research Systems Inc. Yes, we're definitely seeing more pressure there. We continue to broaden our footprint, but the success that we're having really is, as we talked about historically, moving from workstation to work flow, with a really big emphasis on our analytics and our platform solutions. Glenn Greene - Oppenheimer & Co. Inc. And then Maurizio, on the margin side, you just sound like you're very confident still getting the 100 basis points a year of margin expansion. Margins sort of disappointed a little bit this quarter, and it sounds like you're taking, I guess, some incremental restructuring actions. Maybe you could help us sort of quantify the potential benefit from those restructuring actions and, probably more importantly, why you're still confident in getting the 100 basis points a year? Maurizio Nicolelli - FactSet Research Systems Inc. Yes. So this quarter, you saw a slight decrease, about 40 basis points, from Q2. And so that's a little bit from us reinvesting in certain areas of our product, which we discussed last quarter. Going forward, we're confident about bringing back the margin, or increasing the margin. It's really driven by the restructuring that we put in place in Q4, which will help us with number of other items to really bring back the margin -- to bring it back 100 basis points higher going forward into fiscal 2019. Glenn Greene - Oppenheimer & Co. Inc. So there weren't any incremental restructuring actions. These are the prior ones that you had announced back in the fourth quarter. Maurizio Nicolelli - FactSet Research Systems Inc. No, we -- we've recently put through a restructuring effort to optimize some of our costs, which is really headcount at the end of the day. And we put that through in early June, and so we'll start to see that benefit in Q4, and then we'll see the full benefit come through in fiscal '19. Operator - Hamzah Mazari, Macquarie. Hamzah Mazari - Macquarie Research The first question is just around active to passive flows and sort of the impact to your business. I don't know if you could update us on what you're seeing there and then how you're positioned longer term? Philip Snow - FactSet Research Systems Inc. Yes. Hamzah, it's Phil. So I don't think we're seeing anything that different in terms of the flows and some of the pressure that's putting on our clients from a cost basis. One thing that we're excited about, which, really, I think fits with FactSet very well, is the resurgence of quants in the market. So a lot of the active managers, I think, are becoming more quantitative in their approach. The pendulum has swung back in that direction. We have a strong suite of products within analytics that service the quants. And with the launch of the Open:FactSet Marketplace, as I mentioned in my comments, we're seeing a lot of initial interest from the quants with the data sets that we're putting up. That's not the only segment of the market we're going after, but that's the one we're beginning with. Hamzah Mazari - Macquarie Research And just a follow-up for Maurizio. I know you announced sort of moving on at the end of December. Any thoughts there and then sort of how you're thinking about the search process? And I enjoyed working with you, Maurizio. Philip Snow - FactSet Research Systems Inc. So Hamzah, it's Phil Snow. So we're -- we've been actively, obviously, looking for a replacement for Maurizio. He's done a fantastic job for FactSet over the years. I'm sure he's excited about his next chapter and we are making good progress with the search. And we'll have, hopefully, an update for you on that shortly. Maurizio Nicolelli - FactSet Research Systems Inc. And it's been a pleasure working with you also. Hamzah Mazari - Macquarie Research David Chu, Bank of America. David Chu - Bank of America So, in the past few quarters, there was mention about margins improving sequentially over the course of fiscal '18. It sounds like ex the FX, margins were flat quarter-over-quarter in 3Q. So, what's changed here? I know that -- I mean, I would assume that you're adding back or excluding the restructuring charges to get to adjusted EBIT. So just some color on what's changed over the last few quarters? Philip Snow - FactSet Research Systems Inc. David, it's Phil Snow. So one of the things that we talked about on our last call was taking some of the benefit we got from an improved tax rate to invest in a couple of areas for the company. So that's short term. We've had a lot of success with our risk offering over the last few quarters, and these are our multi-asset class risk solutions that are typically sold at the enterprise level for our clients. And that requires quite a bit of effort from an implementation standpoint. So, we made an investment there, in the analytics group, to staff so that we could go ahead and close that business effectively, and continue to do so. And we did effectively look at a few market segments of FactSet across our employee base globally where we felt there were some pressures from a salary standpoint, and we made some adjustments in a few cities. So that was a short-term effort. I think that's what you're seeing. What Maurizio talked about in terms of our optimization efforts, you're going to begin to see the effect of that, we believe, in Q4 and moving into FY '19. David Chu - Bank of America And so should we expect like margin expansion to accelerate over the course of fiscal '19? Or would it be somewhat like even over the course of the year? Maurizio Nicolelli - FactSet Research Systems Inc. David, I think you should foresee a gradual increase to margin to get to 100 basis points higher going forward. David Chu - Bank of America And just lastly, why is your EPS guide so wide when we only have one quarter to go? Maurizio Nicolelli - FactSet Research Systems Inc. There's still some variability there within our EPS guidance and we really wanted to home in to a certain extent with the last quarter coming up. And we also have additional disclosures in the back of the press release to go from non-GAAP to GAAP, which enabled us to be a little bit more precise in our guidance going forward. Operator - Toni Kaplan, Morgan Stanley. Toni Kaplan - Morgan Stanley Phil, you mentioned a strong 4Q pipeline. Just wanted to get a sense of the main drivers there. How are the summer classes for the banks versus last year? And like buy-side was a little bit weaker this year, but is there something that you're seeing there that might be better in fourth quarter? Or was there something maybe very specifically timing-related this quarter? If there's anything in regards to the pipeline, it would be helpful. Philip Snow - FactSet Research Systems Inc. Sure. So yes, the hiring classes for the bank is always a big piece of Q4, so we're -- we can never get perfect visibility into that, but I think we're feeling pretty good about it. And again, the sales team, I think, has become better and better about really managing the pipeline on a weighted basis, and it gives us more confidence in the number that we see in there. So I think the drivers are not going to change that much. You're going to see CTS. You're going to see analytics. We expect the wealth business to continue to do well. It's, I think, a similar story to this quarter, just much more heavily weighted in Q4 than Q3 as usual. Toni Kaplan - Morgan Stanley And I know that recently, you said you haven't really seen impacts from MiFID II in terms of your international price increases. But I just wanted to get an update on how MIFID II is playing out, if you are seeing any sort of impacts in the business. That would be helpful. Philip Snow - FactSet Research Systems Inc. We're not right now, so we did significantly better in EMEA, this Q3 than the same quarter last year, and our price increase went through really very smoothly. So we're not seeing anything yet that's really affecting us from previous years. Sure. Operator - Shlomo Rosenbaum, Stifel. Shlomo Rosenbaum - Stifel, Nicolaus & Company Phil, I just want to ask you a question in terms of kind of the metrics versus what's really going on inside the company. It looks like the ASV growth kind of slowed sequentially, but you talked to a strong pipeline. Internally, based on your gut and the stuff that you can't necessarily share with The Street, are you feeling that the business is picking up momentum, losing momentum or kind of the same as what it was last quarter? Philip Snow - FactSet Research Systems Inc. The way I will answer that is I think, we feel really good about the product offering that we have for the marketplace. We've done some good acquisitions. The integration of those acquisitions is really beginning to produce product, that we feel is going to have an impact moving forward. The Open:FactSet Marketplace that we released, we think, is going to help accelerate the CTS growth even further. So I think there's a lot of excitement within the sales team about what we have to offer and our ability to grow faster, but there are still market pressures out there. The backdrop is not changing. It's challenging. Clients do have cost pressures and that's the environment we're selling into. But just in terms of what we have to offer and the problems we can solve for our clients, I feel as good as I've ever felt at FactSet and that was something that we stated at Investor Day. Shlomo Rosenbaum - Stifel, Nicolaus & Company And then this one's for Maurizio. What can you talk to about the $4 million of accelerated vesting? What was that all about? Maurizio Nicolelli - FactSet Research Systems Inc. The $4 million of accelerated vesting. Shlomo Rosenbaum - Stifel, Nicolaus & Company To get back to the adjusted EPS. So if you look through some of the numbers over there, like there was accelerated vesting that was had in May. Maurizio Nicolelli - FactSet Research Systems Inc. So the $4 million you're talking about is the total charges in the back of the press release. It's $4.4 million. And the majority of that is the restructuring charge that we took, that was more than half of that was restructuring. Shlomo Rosenbaum - Stifel, Nicolaus & Company So I'm looking at the adjusted net income and, I guess, this other nonrecurring items at $4.7 million that you're referring to. Maurizio Nicolelli - FactSet Research Systems Inc. Correct, correct, and the majority of that. Shlomo Rosenbaum - Stifel, Nicolaus & Company The stock-based compensation acceleration is a minority part of it? Maurizio Nicolelli - FactSet Research Systems Inc. Correct, correct. Shlomo Rosenbaum - Stifel, Nicolaus & Company And can you just disclose like what the acceleration was about? Was there something -- is that normal that we don't usually pay attention to it? Maurizio Nicolelli - FactSet Research Systems Inc. It's normal as a part of our restructuring charge and it's something that we've had in the past also, which is part of the overall number. Shlomo Rosenbaum - Stifel, Nicolaus & Company So that's triggered by the restructuring charge? Maurizio Nicolelli - FactSet Research Systems Inc. Correct. Operator - Peter Heckmann, Davidson. Peter Heckmann - D.A. Davidson & Co. I was looking at some of the new regs coming out of the SEC, specifically the new N-PORT, N-CEN regs. And it looks like Investment Management report a significant amount of additional data around risks and portfolio concentration as well as position holdings. Do you see that as any benefit potentially to FactSet or conversely, would there be some additional costs that you need to extend to get to full functionality? Philip Snow - FactSet Research Systems Inc. Hi, Peter. It's Phil Snow. So we have more of an emphasis on regulatory solutions than we've had historically. We have a very talented group that's looking at all of these regulations that are coming out. And we have a very good product for Solvency II, and I think N-PORT is one that we're also very focused on. So regulation is going to put pressure on our clients from a cost standpoint and something they're going to have to spend money on, but we think that's an opportunity for us to deliver good solutions to our clients to help them with that. Peter Heckmann - D.A. Davidson & Co. And then just a quick follow-up. There's been some discussion about some of the tax provisions that they're serving to claw back some of the corporate tax cuts, especially those companies that have significant international operations. Can you just talk about a preliminary range as you think about the effective tax rate for next year? Maurizio Nicolelli - FactSet Research Systems Inc. We still will be providing that guidance come September for fiscal 2019. The only thing I can tell you is that on the tax reform bill, we only got two-third's of the benefit this year because it was enacted on January 1. There's a little bit more benefit to FactSet, in fiscal '19, but we'll come out with that full year guidance in September. Operator - Alex Kramm, UBS. Alex Kramm - UBS Investment Bank Just a couple of things to follow up on that were discussed earlier. On the restructuring program, maybe you can give a little bit more color on a couple of things like, first of all, like why now and why did you feel like you needed to do something right now. And then also, I think you guys generally are regarded as having best-in-class sales. So you're now doing restructuring at this time. Like is this -- should I be worried about the sales effort and the service? Or you don't feel like it's going to inhibit growth in any way? Philip Snow - FactSet Research Systems Inc. Hi Alex, it's Phil Snow. So I wouldn't be worried about that. We were really just looking, I think, internally, at some of our lower-ROI investments, and just making sure that we had our best resources focused on the highest return on investment opportunities for the company. So, a lot of what you saw was across all groups at FactSet, so it wasn't like we were singling out sales by any means. So, it's really just an optimization. You've seen -- you'll see some of the benefit of that, coming through next quarter, we believe. But we have a very talented sales force. What I would say on the sales side is that we're -- a couple of things that we've been doing is really focusing on some of our larger accounts. We've had a big effort to focus on those this year, and we expect to see some real improvement in the larger accounts coming through next year. And we're really looking at our sales force and making sure that we've got a higher proportion of our investment going to the products like analytics and CTS that are growing faster. So that's a bit of an evolution, but we think, over time, that's really going to help out. Alex Kramm - UBS Investment Bank And then just coming back to the pipeline, just so I hear you correctly. So last year, I think in the fourth quarter, you did $32 million of organic sales. So when you compare the pipeline to that now, is that -- I mean, how would you characterize it? Because I think you said that 3Q was going to align with last year. So would you say 4Q pipeline is going to align with what you saw last year? Or any incremental color will be great? Philip Snow - FactSet Research Systems Inc. Yes. There's going to be a range there. So it is our biggest quarter by a long shot, and we have some larger deals in this. So a lot of it -- how we do relative to last year is really going to be a function of those bigger deals closing in Q4. Operator - Bill Warmington, Wells Fargo. Bill Warmington - Wells Fargo Securities So first question on wealth management. I mean, in the past, your push into wealth management has been focused mostly on the high end of the market, typically $500 million in AUM and above. But now as you complete your migration from a large mainframe environment to more of a distributed server architecture, it would seem to open up an opportunity to really go down-market after the small and midsized wealth manager. So my question is: What's your strategy for going down-market? And what's the timing of that likely to be? Philip Snow - FactSet Research Systems Inc. Bill, it's Phil. So when we did the acquisition of IDMS in Frankfurt, that really opened up a broader segment of the wealth market to us. The other thing that is opening up great opportunity for us is the FactSet web products. So we released the product and we've made a lot of enhancements recently to that product specifically for the wealth market. So it's being received exceptionally well. We're getting a lot of feedback from our clients about what they want to see in there. And you're absolutely right. Now that we've gone through a more distributed architecture, it allows us to deploy a lot more desks at a lower price point and have it be much more profitable for the company. So, this is a segment that we're very excited about and we wouldn't have broken it out separately if we didn't think it was something that we could capitalize on moving forward. Bill Warmington - Wells Fargo Securities Yes. And then on the FactSet Marketplace, just wanted to ask about the revenue model there and specifically whether it's incremental revenue from the client or whether that's included in the subscription. And then, the value proposition for the data provider and then whether you've -- or what kind of initial update you've seen from clients? Philip Snow - FactSet Research Systems Inc. So we released the Open:FactSet Marketplace this quarter with a number of alternative data providers. The business model, really, is a royalty-based model, so the value proposition for the data provider is they get to put their content up into the FactSet ecosystem, where they get access to institutional clients. We also do a really good job of concording data. That's one of our core competencies as a company. So tying their data sets to our data sets and to other data sets there, that's a real pain point for clients. So we're taking that pain point away. And those two things are why so many alternative data providers and data providers are interested in being part of the FactSet ecosystem. So what you'll see over time is that we'll get royalties from these alternative data providers as they put their data up onto the FactSet system. So we've got an enormously positive response from the market. There's lots of providers that want to be in the ecosystem. I would not expect to see a meaningful uptick, in revenue for a little bit of time because it's going to take time to get these things out into the marketplace and to trial them. So we weren't expecting a large impact this fiscal year, but we do expect some positive impact to our growth rate from the Open:FactSet Marketplace as CTS accelerates next year. Operator - Manav Patnaik, Barclays. Greg Bardi - Barclays Bank PLC Hi, this is Greg, actually, calling on for Manav. Just wanted to ask about the AI space. You're seeing S&P make a pretty proactive move with Kensho and even companies like Moody's have taken minority stake. So just wondering how you're thinking about investments in the AI space. Philip Snow - FactSet Research Systems Inc. Greg, it's Phil. So we do have a team here that focuses on machine learning and AI. Traditionally, they have been very focused on our content collection efforts. I think there's still a lot more we can do there to use machine learning to automate more of our content collection and just get more data onto our system. And Gene Fernandez, who joined us back in November from JPMorgan, he's been taking a look at that group. I think we've made a couple of additional hires. So we're looking very closely at what internal processes we can leverage ML and AI for and what client workflows can we do the same with. So it's a work in progress, but something that we are focused on. Greg Bardi - Barclays Bank PLC And then maybe on what you're seeing in the marketplace during this period of transition for Thomson Reuters' F&R business as a way to close the Blackstone deal. Similar to other consolidation in the space, are you seeing opportunities during this period of transition? Or how should we think about that? Philip Snow - FactSet Research Systems Inc. No, I wouldn't say that the competitive environment has changed that much. So we've been competing against Thomson for a long time and there's really no change in terms of where we're seeing them in the marketplace and how we're doing. Greg Bardi - Barclays Bank PLC Okay, (inaudible), thank you. Operator - (Operator Instructions) Peter Appert, Piper Jaffray. Peter Appert - Piper Jaffray Companies So Phil or Maurizio, could you give us a number on the growth rates for the research PM business versus the newer initiatives in private wealth, CTS, analytics? Philip Snow - FactSet Research Systems Inc. So Peter, it's Phil. We're not -- I think at Investor Day, we said that we would break out those numbers once a year, so you can expect to get an update from us in Q4. But as I stated on the call, the growth rates have not changed materially from when we presented to you a few months ago. Peter Appert - Piper Jaffray Companies How about margin differential? Is there a significant differential in profitability in the various product offerings? Maurizio Nicolelli - FactSet Research Systems Inc. So Peter, it's Maurizio. There's going to be slight changes -- I mean, differences between the different offerings. There's so much of FactSet expense that is shared to all of those different groups that it becomes a little bit more of a theoretical exercise for us at the end of the day. But there are some differences there. They are up and down, but they're very comparable. Operator - Keith Housum, Northcoast Research. Keith Housum - Northcoast Research Partners Phil, a question for you about the pipeline. If I look back at the second quarter transcript, I think the -- you said the pipeline was the best it's ever been. It sounds like the pipeline is good again this quarter. Is the pipeline -- is that period to close, is that getting longer based on the market conditions? And I guess what gives you the confidence that this strong pipeline will be able to turnaround and close here in the fourth quarter? Philip Snow - FactSet Research Systems Inc. Yes. So I don't think anything's changed from Q2 in terms of the growth pipeline. So the number of opportunities we have in there is the largest it's ever been from an ASV standpoint. But I would say, as we move more to workflow and we move more to enterprise solutions, particularly within analytics, there is a little bit of a longer sales cycle there for selling a multi-asset class risk solution versus just going out and selling another FactSet with PA on top of it. So it really depends on the solution, but as we move to larger deals with our clients, the sales cycle for those things that are really going to impact the top line may be taking a little bit longer. Keith Housum - Northcoast Research Partners And Maurizio, just going back to your op margins again, and I apologize if you answered this already. But in terms of the acquisitions and the integrations there, would you say the integration is proceeding as planned? Or have there been any hiccups or not being able to capture the operating margins that you're hoping for? Maurizio Nicolelli - FactSet Research Systems Inc. I think, we're progressing on increasing our margins for both FDSG and BISAM, which really are the ones that we really need to execute on over a two year period since we purchased them. And we're one year in, but we have made a good amount of progress. But there's more to be done there, and that will really help us get to our 100 basis point increase, for fiscal '19. Operator - There are no further questions at this time. Phil Snow, I turn the call back over to you. Philip Snow - FactSet Research Systems Inc. Okay. Well, thanks again, everyone, for joining us on our call today. If you have additional questions, please call Rima Hyder. And we look forward to talking to you all next quarter. Operator - Thank you. This concludes today's conference call. You may now disconnect.