FactSet Research Systems Inc.

Ladies and gentlemen, thank you for standing by and welcome to FACTS at Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to Rima Haider, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you, Chris. Good morning, everyone. Welcome to FACTSET's second quarter 2020 earnings call. Like many of you, we're also in various remote locations today. We may have some audio quality issues, and we really appreciate your patience in the event we have an audio interruption. 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 website 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. After our prepared remarks, we will open the call to questions from investors. To be fair to everyone, please limit yourself to one question plus one follow-up. Before we begin, before we discuss our results, I encourage all listeners to review the notice on slide two, which explains the risks of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures, For such measures, reconciliation of the most directly comparable gap measures are in the appendix to the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, FactSet's Chief Executive Officer, and Helen Chan, FactSet's Chief Financial Officer. I'd now like to turn the discussion over to Phil Snow.

Thanks, Rima, and good morning to everyone wherever you are today. I'd like to take a moment just to address the unprecedented times we're experiencing. And as ever, our foremost priority remains the health and safety of our employees, their families, and our clients. We're doing everything we can to support our stakeholders around the world, and our thoughts are with each of you during this extremely challenging period. FactSet has implemented its business continuity plans, and our incident management team is in place to ensure we respond to changes in our environment quickly and effectively. We're also working closely with clients to support them as they implement their own contingency plans, helping them access FACTA remotely. On the service side, we've bulked up our support desk resources to manage increased volumes and have extended additional web IDs to clients in need of immediate remote access to financial data. Our open, flexible platform is well-suited for this environment, and the investments we've made to date in technology allow us to serve our clients better. Additionally, part of our three-year plan is accelerating this digital transformation, and the efficiencies and values that digital transformation bring are even more amplified in a world where both we and our clients are working remotely. To that end, in the context of immense change in our industry and the markets at large, we're pleased to deliver a good second quarter and fiscal half-year with promising growth across our businesses. Let's now talk about ASV and our geographic breakdown. Organic ASV plus professional services grew at 4.3%, an increase in our growth rate compared to the first quarter, resulting from a stronger second quarter year over year. The Americas region performed well, with a particularly strong quarter from our analytics business. The Americas also benefited from the impact of our annual price increase, as well as continued improvement in our client retention and new business initiatives. This performance was offset by softer results in the APAC region, due to slower expansion and higher cancellation rates, which we can partly attribute to delays in expected decision-making amidst the Hong Kong protests and the onset of the coronavirus pandemic. As conditions improve, we see many opportunities to execute, particularly in the areas of analytics and CTS, and expect to see this region return to higher growth. Our sales in Europe improved year over year due to a lower cancellation rate compared to the second quarter of fiscal 19. Additionally, analytics and research both performed well in the Europe region. And we continue to capitalize on opportunities with wealth and institutional asset managers. Of course, we're being cautious amid greater uncertainty in all our regions as a result of the evolving impact of the coronavirus pandemic. Quick overview of our second quarter results. Q2 growth was driven by an especially strong performance from analytics. This strength was reflected across multiple aspects of the business, including performance and reporting, trading solutions, and risk management, where we continue to see demand for our multi-asset class offering. The analytics pipeline looks healthy with strong demand and performance reporting and fixed income. Wealth also performed well across all regions. I'm proud of our team for expanding the wealth opportunities we have, especially compared to prior years. We're growing both our product offering and client base, laying the groundwork for a healthy pipeline. Research had a solid quarter relative to the first quarter, driven by stronger client retention and cross-selling to existing clients. Our enhanced deep sector data strategy is helping to pave the way for additional corporate clients. Research also benefited from our annual price increase. Within contents and technology solutions, we've got a solid pipeline as we head into the second half of the year, driven by strength in our core and premium data feeds offering. We're also excited about clients consuming data through APIs and continuing to make our proprietary data sets available on the cloud. An example is our partnership with the cloud data platform Snowflake, who helps users centralize, integrate, and analyze facts and content alongside other hosted data feeds in an open and interoperable way. As we've said before, we're investing from a position of strength to meet universal client demand for increased efficiency and cost savings, particularly through our efforts in content and technology. This investment is more important today than ever, with clients stressing the need for flexible access to critical data in the current environment. Our continued spend on technology, transition to the cloud, and increased pace of API launches have proven vital these last few weeks, and we believe they will make us ever more resilient in the long term. Our content strategy is also progressing well and is proving equally important to clients. Detailed industry-specific data, what we refer to as our deep sector strategy, is sorely needed, and we're seeing strong demand for the sectors we've launched as well as those we plan to launch in the coming months. We believe this demand will increase our appeal to a wider client base, especially when combined with our growing private markets and street account offerings. I'm very pleased at FACTS' overall expansion of coverage is receiving such a positive response from clients, helping us address their needs for comprehensive content solutions. Now, before I turn the call over to Helen, I want to highlight that our pipeline at the end of this quarter appeared to be the healthiest in years. As we noted previously, we've been projecting a stronger second half for our fiscal 2020. And as we talk to you today, it's difficult to measure the potential impact of the coronavirus pandemic on our clients, employees, industry, and broader markets. And Helen's going to walk you through the details of how this may impact our business in a few moments. But first, I want to stress that our robust subscription-based business model and our strategy together with our best-in-class products, many of which are critical to clients, position us well to manage through this period. Moreover, we've continued to diversify our product and client base over the years. Our plans to invest in content and technology are more important in today's environment than ever, and I want to reiterate our commitment to our three-year investment plan. We've proven resilient in times of volatility with a strong balance sheet and have gone on to deliver consistent long-term growth and value to our shareholders, which we expect we will continue in the future. While we believe we have good momentum going into the second half, We fully recognize the scale of the challenge that the entire industry faces. Through it all, our job is to do what we do best, help our clients weather such unprecedented change. Let me now turn the call over to Helen, who will discuss the specifics of our second quarter performance and the second half outlook.

Thank you, Phil, and I'm really glad to be here with all of you today. I hope you and your families are healthy and safe. It's still stated our priority is the well-being of our employees and ensuring that we can provide uninterrupted service to our clients. At the same time, today is about updating all of you on our second quarter and also discussing our outlook for the second half, given what we know today about the macro environment. As we have discussed on previous calls, our performance is a tale of two paths. We are ahead year-on-year in our first half of 2020 in revenue, operating margin, and EPS. Our three-year investment plan also remains on track as we continue to ramp up hiring and spend in the areas of content and technology. I will now walk us through the specifics of the second quarter's results. Gap in organic revenue increased by 4% to $370 million and $371 million, respectively. Growth was driven primarily by wealth, CTS, and analytics. The result was further supported by our January 1st annual America's price increase, which totaled $12 million, a $2 million increase over the prior year. For our geographic segments over the last 12 months, America's revenue and international revenue both grew 4% organically. America's primarily benefited from increases in wealth and analytics. International revenue was largely driven by analytics and CTS. Gap operating expenses for the first half totaled $264 million, a 7% uptick over the prior year. This increase reflects the acceleration of spend related to our investment plan. With expenses growing faster than revenue, our gap margin decreased 190 basis points to 29%. Adjusted operating margin decreased by 140 basis points to 32% versus last year. As a percentage of revenue, the decrease in margins came largely from our cost of services, which was 110 basis points higher than last year on a GAAP basis. On an adjusted basis, the cost of sales was higher by 170 basis points. Increased costs for both GAAP and adjusted were driven by our planned spend and technology related to our three-year investment plan, partially offset by productivity gains and salary costs as we continue to shift hiring from high-cost to low-cost locations. SG&A expenses, expressed as a percentage of revenue, grew 80 basis points over the prior year period on a GAAP basis. On an adjusted basis, the expenses grew by 30 basis points year over year. On a GAAP basis, the increase in expenses is from higher professional fees related to the execution of the investment plan, offset by reduced travel and entertainment expenses and lower bad debt expense. On an adjusted basis, the increase was primarily due to higher office expenses and marketing. Moving on, our tax rate for the quarter was 14%. This rate includes tax benefits related to stock compensation exercises. Keep in mind that when we provided annual guidance for fiscal 2020, we did include a certain level of stock compensation exercises. Given the strong performance of our stock during the quarter, the exercises and the amount of benefit was higher than we had estimated. GAAP EPS increased 5% to $2.30 this quarter, versus $2.19 in the second quarter of 2019. An adjusted diluted EPS also grew 5% to $2.55, primarily due to a lower tax rate. Looking at the first half of the year, EPS growth was driven primarily by operating earnings boosted by a lower tax rate and lower interest expense. A reconciliation of our adjustments to GAAP EPS is disclosed at the end of our press release. Free cash flow, which we define as cash generated from operations, less capital spending, was $75 million for the quarter, a decrease of 15% over the same period last year. This reduction is primarily due to expected higher capital expenditures related to office space build-out for some of our locations where existing leases have neared expiration. The timing of CapEx spend related to technology and facilities is important to note, as when we review the first half of fiscal 2020, pre-cash flow grew by nearly 16%. For the second quarter, our ASV retention continued to be over 95%. Versus the prior year, we grew the total number of clients by 5% on a last 12 months basis, reflecting the addition of wealth and corporate clients and the retention of 89% of existing clients. These results and our overall healthy client base We select the activities in flight with our sales organization, who have targets and focus on retention, expansion, and new business. For the second quarter, we bought back 268,000 shares, or $74 million, at the average share price of $277. Our board of directors recently authorized an additional $220 million to our share repurchase program, bringing the total size back to $300 million. Over the last 12 months, we have returned over $375 million to our investors in the form of dividends and share repurchases. We remain committed to creating long-term value for our shareholders and plan to repurchase shares at a steady pace in line with last year. Turning to the outlook for the rest of our fiscal year, the environment we live and operate in has changed enormously in the past few months. One of the strengths of FactSet is our business model. which generates stable and recurring cash flows. Another strength is the criticality of our solutions for our clients, as reflected in our high retention rate. Lastly, we have a solid balance sheet with low debt leverage and ample liquidity. As a result, Faxon has proven to be resilient during periods of volatility and has the capacity to invest even through periods of disruption. These attributes should allow us to succeed through downturns and emerge stronger. As we look forward, uncertainty surrounding the magnitude duration and overall economic impact of the coronavirus pandemic makes it challenging to assess the potential effect on our ASV growth, both in the second half of the year and further into 2021. However, in determining the possible impact on fiscal year 2020, we considered a number of factors. First, the potential delay in decision-making causing longer sales cycles. This may also have a positive impact in the form of delayed cancellation. Second, implementation risk due to restrictions on being able to work on-site. While we can do virtual implementation for many of our products, our clients may not have the technology to enable us to execute successfully. And third, possible reduced seasonal hiring at investment banks, who are some of our largest clients over the summer months. It is possible that the negative effects of these factors could present a significant headwind on our ability to realize our strong ASV pipeline in this fiscal year ending in August. Based on what we know today, we believe the risk could be up to 25 million over the fiscal second half. With this risk, we now expect the increase in our organic ASV plus professional services to be in the range of 50 to 75 million dollars. It is important to note that our business is subscription in nature. ASV booked later in the fiscal year is realized as revenue on a proportionate basis. Given that we booked the highest amount of ASV in the fourth quarter, we expect the impact to 2020 revenues would be limited. It is important to emphasize that these numbers reflect our best estimates at this time. It is simply too early to know what the exact number will be, but we hope to gain more experience solicit insights from clients over time, and be able to better assess the implications for fiscal year 2020 and 2021. We believe that lowering our expenses would help to offset any reduced realized revenues. We remain committed to reducing expenses through the following actions. Further reduction of discretionary spend, such as travel and entertainment, building upon our prior success in prudent expense management and productivity. Tighter management of headcount spend with a focus on our most critical areas and hiring in lower cost locations. Reduction in variable third-party content costs in a manner consistent with client demand. These actions would also moderate depending on the economic conditions. For example, T&E and targeted third-party content costs would be variable in nature. We have also taken additional expenses related to business continuity and the pandemic into account as well. Reflected in our profitability improvements over the past 18 months, our team has proven our ability to manage expenses and increase efficiency. As noted, we are adjusting our guidance on the ASV range in light of our best estimates today, but leaving the rest of our guidance unchanged. Based on our results for the first half, in which revenue growth and operating margins were in line with our expectations, and our ability to mitigate the potential lower revenue impact with direct expense reduction in the second half, we are reaffirming the other metrics. In closing, we are often asked how we might perform during a future downturn in the economy. We point to the 2008-2009 time period in which we grew both the top and bottom line. As discussed, our business model is resilient and one of our greatest strengths. In addition, our product base has evolved in terms of its technology, interoperability, and, of course, its openness and flexibility, making us more critical to clients. We remain committed to our investment plan and will look for other opportunities to grow, support our clients during times of change, as well as deliver value to long-term shareholders. With that, we are now ready for questions. Over to you, Chris.

And again, ladies and gentlemen, in order to ask a question, you do need to press star and then one on your telephone. Please stand by while we compile the Q&A roster. Your first question is from Tony Kaplan with Morgan Stanley. Your line is open.

Thank you so much. I'm glad to hear you're all well. Given that the quarter ended in February before a lot of the volatility started to increase, what are the trends that you're seeing in March across the different businesses – if you could just give us like a real-time trends that you're seeing through, you know, as late as you possibly could.

Sure. Hey, Tony, it's Phil. Hope you're doing fine. So we, I think as Helen mentioned, you know, during the script, you know, we felt very good about the pipeline going into the second half. And, you know, from what we can see today, you know, that pipeline is really hanging in there. So we are still closing deals. Obviously, we're talking very closely to our largest clients, some of the bigger deals in the pipeline, and we are anticipating some headwinds. But we're not seeing, you know, just an immediate response from the clients, right, in terms of either cutting back services or completely pushing out things that were in, you know, in the pipeline that were in books.

Got it. And you did mention the pipeline there, and then also that it's the strongest that you've had as you ended the quarter. And you mentioned a number of the areas, analytics being very healthy, also research and CTS. Just, I guess, which are the best, most increased parts of the pipeline? What are you really seeing people signing up for and demanding right now?

Yeah, sure. So let me zoom out a little bit. So I think the area where we're seeing some really great momentum is within, you know, the institutional asset management clients. So the core fact set clients, you know, when we talk about the buy side, there's lots of other firms that are included there, including, you know, our wealth clients and the hedge funds. But the core institutional asset management clients this year are doing much better for us than last year. And I attribute a lot of that to the work we've done around the portfolio lifecycle. the strength of the analytics products. So a lot of the work we did to integrate the acquisitions that you're all aware of from three years ago is really now beginning to bear fruit. So we can see that with our performance suite. We can see it with the advancements we've made in our risk offering. We're continuing to build momentum in fixed income now that the specialists are back in that business line. Our reporting suite, which was sort of a result of acquiring Vermillion, all of that stuff is doing great. And those are enterprise solutions in many cases, right? So they're not tied to the desktop. So I'm very excited about that. Obviously, that's a segment of our market that's been under a lot of pressure. But just to see sort of the turnaround there, particularly, you know, given the recent trends is very promising. You know, our open platform, you know, is resonating. So we have a very healthy pipeline for CTS going into the second half. And a lot of that is within these core institutional asset management clients now that are just A, either feeding systems, or B, just needing to look at lots of new data in interesting ways. So those are some of the highlights.

Thanks a lot. Stay safe and healthy.

Yeah, you too. Thanks.

Your next question comes from Manav Patnaik with Barclays. Your line is open.

Thank you. Good morning. Phil, I was hoping for a little bit of a compare, contrast, and fact set to the versus, you know, 08, 09 kind of timeframe? Because yes, I believe in 09, you guys did grow slightly positively, but it also decelerated from what was a really strong growth prior to that. So I was just curious how you would describe, you know, the resiliency, diversification, et cetera, today.

Yeah. So it's, you know, it's a good thing to think about. And of course we've done, you know, I've gone back and reflected on that a decade ago. So I think, You know, each one of these black swan events are different. And sometimes it's hard to draw parallels. But I think there are some things that are different now. You know, back then, I think, you know, in some ways, a lot of the markets were broken, right? And we saw Lehman and Bayer just completely go out of business. And those were large clients for us. So a lot of what you saw there was just clients disappearing, right? Big clients. I don't think, you know, that's going to happen again. the same way this time. You don't know. But I think that's one point of comparison. You know, back then also, our clients had a lot more flexibility, you know, within the contract. So, you know, they were able to sort of unwind a little bit more quickly than they would be able to now if they wanted to. But I think sort of overshadowing that in a more important point is just the breadth of our product suite now and the fact that we really have evolved from just being on the desktop to being more of a workflow solution. So back in 08 and 09, with the exception of our feed business, which was pretty small back then, almost everything on FactSet was tied to people in terms of the workstation. And of course, we had PA, which was great, but it was sort of an add-on typically then to the workstation and less of a workflow solution. So I think this is a point of comparison. I know that was a severe sort of downturn in the markets and we went down pretty quickly and then bounced up, you know, sort of a year later. But I think it's different in a positive way for us this time. Got it.

And then, Helen, you know, you walk through a lot of cost areas where you have some flexibility. I was just curious on the you know, the three-year investment plan, does that continue at all costs, or is there a point where you think about even slowing that down?

Yeah, thank you for your question. At this juncture, I mean, what we do typically is to review every quarter where we stand, how our milestones are, what's happened in the environment that makes us rethink any of the changes that we would make. At this point right now, We're looking at prioritizing spend, and we'll make adjustments if we needed. So for us, we're investing for growth in the long term, and the year one was really meant about investing as opposed to seeing the returns early on. So at this point, there's no plan for any change.

All right, got it. Thank you, guys.

You got it. Take care.

Your next question is from Hamza Mazari with Jefferies. Your line is open.

Good morning. Hope everybody is well as well. Just the first question, if you could talk about whether you think switching costs are a barrier to entry in your business, you know, particularly when contracts come up for renewal, is there greater price sensitivity in a slowdown and do people, do switching costs kind of prevent help your retention, I guess, is another way to look at it? Or is it pretty easy for people to switch because, you know, competitors come in and they just redo, you know, codes to their product instead?

Hey, Hamza, it's Phil. So, you know, I think switching costs and, you know, changes, you know, there's a lot of work that goes into that for clients. So, you know, I think Helen mentioned this in the script, but in the same way that Clients may be slowing down their decisions in terms of things that we have actively in the pipeline in cases where, you know, we're working with either an internal solution or a competitor in some sort of bake-off. It's going to slow the decision-making round around that. I think it's probably more of the change right now for clients than the switching costs. You know, what I will highlight, which we're seeing, you know, a lot of positive feedback from our clients on right now, is we can deploy FaxEd very quickly. And our web-based product now is proving to be a real winner in this market. So we are actively reaching out to our clients like we always do, saying, how can we help? We are offering, you know, web IDs for FactSet for clients where they need it, where someone may not even be a user today, and we're deploying that. So I think, you know, we're nimble. We're agile. We're doing what FactSet does best, which is support clients, particularly through periods like this. And the fact that we can sort of get those out there very quickly is getting a very, very positive response from clients.

Great. And just a follow-up question. Any update as to, you know, simplification of your pricing model and moving to sort of more enterprise-wide contracts? Any update there? Thank you.

Helen, do you want to take that one?

Sure, I will. Thanks for your questions. So right now, in terms of our ability to continue to capture the value that we provide clients, we will, on our larger clients, look for enterprise. But that is not something that is really by case-by-case or really for our strategic client group clients. So at this point, we do do pricing on a workflow basis, and we've had good success with it. So I would see us continuing down that path.

Thank you. Your next question is from Alex Graham with UBS. Your line is open.

Hey, good morning, everyone. Just want to come back to ASV that you still need to do before the end of the year to get to the midpoint. I think it's about $40 million and how the kind of expectation is what's supposed to come in terms of what's in the pipeline. And I guess what I'm saying there is how much of the growth of the ASV is dependent on, you know, things that are already signed, kind of bigger enterprise implementations versus maybe some of the ASV growth that's supposed to come from more users at some of the existing clients, you know, and maybe also how cancellations are already factored into the updated ASV. Thank you, Holmes.

Sure. So I think, you know, the one area which I think is pretty obvious, Alex, where we could see some pressure and it's hard to predict is the summer banking hires at the large banks. So, you know, we've not heard yet that any of that's getting canceled. But sort of going into the second half, that's when we, you know, we have some predictions sort of based on prior years and how we think things are trending. So, you know, that's usually, you know, a pretty decent uptick in Q4. And if the banks decide to you know, slow down hiring or cancel classes, that will affect us. So, you know, we've modeled a lot of that in already. We're actually, we've given ourselves a pretty big haircut there in terms of what we're thinking. And like any firm, you know, we've got things at different stages of the pipeline, you know, all the way through almost signed to, you know, sort of, you know, 50-50. So, you know, there's a lot of very good deals out there. You know, our sales cycle is a little bit longer than it used to be, just given we've got some of these enterprise products. So, you know, these are important mission-critical solutions for clients. So, you know, what we're not expecting, right, is for these opportunities just to go away. I think, if anything, you know, we're expecting them and the decisions to get stretched out as clients, you know, try to get on short footing and figure out sort of what they think the impact of all of this is going to be for them. Just in terms of what's in the pipeline, You know, I think it's pretty evenly split between, you know, the Americas and Europe and Asia-Pac. Asia-Pac has a very strong second half, you know, pipeline. And it'll be very interesting to see how Asia-Pac does, particularly in Q3, given that it looks like they're the region that, you know, hopefully has this under control. They look like they could come back to work sooner than other regions. So I think that'll be an important thing for us to keep an eye on. And again, the pipeline is very much weighted towards, on a net basis, towards analytics and CPS, which are the, again, more of the enterprise or workflow solutions products.

Let me just add a little to that.

Yeah, please. Thanks.

Yeah, that's helpful, Alex. So everything that Phil said is spot on. And as we thought about the pipeline and our view on the risk, as we said, it's delaying decision-making. which is about, let's call it, half of where we think the risk would come from. Longer implementation, which is, let's call it, another quarter-ish. And then the balance could be due to user growth, meaning that we had a reduction there. So in those first two buckets, as Phil was alluding to, that is a little more long-timing. And so we did do a lot of thinking. And so as you can appreciate, we're a little more art than science but in thinking through not only where they are along the funnel, but also the sentiment. And so that's how we came about this. And hopefully that gives you a little bit of a perspective of how we thought about the pipeline and what would be at risk.

That's actually a great call. Thank you. Maybe just one quick additional one in terms of the timing for, in terms of even measuring you next quarter, maybe you've said this already, but if I think about the typical, I guess, cadence, I think, you know, the next quarter is, I think historically you've done about 10 to 15 million ASV ads and then it's like 30, 40 plus in the fourth quarter. So, you know, is your working assumption right now that 3Q could be almost non-existent given everybody's displaced and then hopefully you have a big catch up in the fourth quarter or how do you think about the trajectory in general? And maybe you've said this already. Thanks.

Yeah, I don't know about non-existence. So we had, I think our Q3 last year was sort of in the four to five range. And, you know, we're, Q3 is still looking, you know, much better than it did at this time last year. So it's just really a question of how much can we close right in the next three months. So, you know, like I said, we've not seen, you know, it's been two or three weeks, right, since the news has gotten out there and we're just anxiously awaiting data just to kind of give us a lot more sort of, you know, a lot more accuracy in terms of either way. But right now we're still, you know, we still look good on a relative basis to last year. And, you know, and I think sort of how you highlighted Q3 and Q4, Alex, it's not that different. We have, you know, a very strong Q4 lined up as well. But sort of the relative weightings that you mentioned are pretty consistent with prior years.

Your next question is from Ashish Sabhadra with Deutsche Bank. Your line is open.

Thanks for taking my question. So just a question on the... Helen, you mentioned, I believe, $25 million of ASV risk, but the guidance at the midpoint was only taken down by $12.5 million. So I was just wondering if you could put some context around how much the guidance was lowered versus how much of ASV is at risk, and then also put that in context of how much ASV is going to be generated in the back half. So would it be fair to assume that the remaining 40 less 25 is already, you have good visibility on that front? So if you could help respond to that one.

Yeah, as I, thank you for your question. As you can imagine, we, I did mention this is a little more art than science, right? So we really took a look at the sentiment on deals and then adjusted our range accordingly. So We said up to 25 million, if you take 12 and a half, that's a little bit of how you move from a midpoint perspective. So I'm not sure it's, we were trying to be much more precise than that. I think as you think about the cadence of how the ASV is meant to come in, I would look at our last couple of years where you have seen the bulk come in in Q4 as a percentage. And I would say that was, as Phil mentioned, we're filling, at least for Q3 through March, we've not seen major impact, and so we're feeling ahead. But that being said, the cadence and the percentages, I would look towards how we've performed in the last two years.

That's helpful. And maybe a quick question, maybe a clarifying question on the pipeline. How should we think about some of the pipeline being delayed, which is potentially also a risk of getting canceled? just given how quickly we saw this market going down 25% in such a short period of time. I was just wondering how up-to-date that pipeline is, given how quickly things changed.

Yeah, so I think Helen already spoke a little bit to the methodology that we used there. So, you know, the pipeline is updated in real time. So, you know, and of course, we're all looking at that every day. And we're encouraging the salespeople, obviously, to make sure that their probabilities are accurate and updated. So it's a pretty good peak on a daily basis. And just in terms of cancels versus the probability of close or extension, I think we're expecting less pure cancels and more just delayed decision-making.

No, Nashish, if you think about, we're only a few weeks in here, right, at least here in the western part of the world. But our ability to significantly operate remotely, we've had no disruptions in our top 20 deals. There's been no delay as of now. We are fully operational. We've added resources to our help desk. We've had really good engagement. So, again, this is just real-time. You're getting real-time data from us, and that's our best view at this juncture.

We're not getting calls from clients. We're not getting a lot of inbound calls, you know, around councils or anything like that. So it's, you know, something will be coming, I'm sure. You know, sort of clients evaluate the situation, but I think it's different than, you know, the from 08-09, sort of going back to the question that Munaf had.

Thanks a lot, Phil.

Sure. Yep. Thank you. Your next question is from Bill Warmington with Wells Fargo. Your line is open. Bill Warmington with Wells Fargo. Your line is open.

Sorry about that, trying to unmute my phone. Good morning, everyone. So, first question I had for you was, you know, it sounds like the coronavirus had a pretty significant impact on APAC performance. Why wouldn't the Americas have a similar impact?

You know, there will be some impact there, Bill, but the, you know, Asia-Pac is a much smaller region, and, you know, it's... it's a little bit more difficult to sort of draw complete analogies there. So, you know, within APAC, there are other things going on potentially. Other than that, I think that's just one of the factors that may have slowed it down. We had, you know, we've had some change over there and sort of leadership change sometimes leads to, you know, a little bit of a slowdown as sort of the new leader comes in and implements their strategy. But we still view Asia PAC as, you know, a really big opportunity for us. and one that we want to overweight in terms of relative investments. So I think, you know, going back to Alex's question about the pipeline and what's in there, I think seeing how quickly, you know, AsiaPAC comes back and really executes on the second half pipeline will be important. And sometimes, you know, years look a little bit different. So for that particular region, it could have been that the opportunities were just much more heavily weighted towards the second half. than the first half of this particular fiscal year.

And just to add to that, there was a fair amount of political unrest that was happening, in particular in Hong Kong. So there are, I think, multiple factors that need to be taken into consideration.

Got it. Okay, and then I wanted to ask for clarification on the subscriptions. What is the cancellation policy for clients? How much notice is required to... to cancel seats or reduce usage.

So we have a lot more clients.

Go ahead, Tom.

Go ahead, Phil. Sorry.

That's fine. So, you know, one of the things I think that's changed over the years, Bill, is that we have a lot more clients on multi-year contracts with minimums than we did probably back in 08 and 09. And, you know, most clients are on annual contracts now that aren't on those that have, you know, You know, they have to give more advance notice in terms of their cancellation. But it varies client by client.

Got it. All right. And then I also had to point out, did you come up with that name, Phil Snowflake? Is that yours?

No, I didn't. But thank you. But I do have a brother whose name is John Snow, which provides endless hours of amusement for everybody.

All right. Well, thank you very much. Okay.

Thanks. Your next question comes from Shlomo Rosenbaum with Steeple. Your line is open.

Hi.

Thank you.

Just a quick question in terms of the tech spend. Is there anything you're seeing with the turmoil going on that's making you think about reprioritizing just what you're spending on in the tech spend or spending more money for make advantage of certain things. I'm just wondering, you know, how does that work, or is it really too soon to make any changes, given everything is kind of happening at a pretty quick pace?

So, yeah, thanks, Lillo. So, yeah, we're, you know, part of our multi-year plan, obviously, is to invest heavily in technology, open up more APIs, move to the public cloud, and, you know, have a more personalized experience for clients. So, we're on track there in terms of our investment and executing very well against it. And as you point out, this might be a time to step on the gas in terms of what we do there. So Helen and I are looking carefully at the budgets. Obviously, we want to get as much visibility as we can on sort of what the next six to 12 months look like. But I do think there's an argument here to be made for going faster there, just for obvious reasons.

And can you also talk a little bit about just the – You know, with everyone working remotely and probably overloading the calls to your support staff, are you bringing on additional support staff? Kind of how are you handling that internally for right now?

Yes. So we're beefing up our support desk for clients. We do see some increased volume, right? We're seeing facts that use more than ever. So as you can imagine, people need access to our stuff. And we're seeing very good usage across the system and obviously a lot more volumes in terms of trading. So we're performing exceptionally well from a system standpoint. And we've, you know, we've over time sort of distributed our support anyway. So we've got a lot of folks in India and the Philippines that help particularly over chat. You know, they're very skilled. We've been at it for years, particularly in Manila. And we're able to handle that increased volume. And I believe there are even some you know, people that have been faxed at a longer time sort of pitching in a little bit on the analytics side if, you know, we're getting a lot of complicated questions coming in for some of our workflow products. So everyone's pitching in. There's a great spirit at the company, and this is where we shine, I think, just in terms of being there, you know, to support our clients. So we're doing everything we can in this environment to make sure that we're performing even better than usual. Okay, great. Thanks.

And I think just to add a little to that is the – if anything, what this period of time is telling us is our ability, how important it is for this transformation for us, the digital technology investment. So I think that's a positive. And then secondly, the spend that we've done on infrastructure has been allowing us to be able to work remotely and to have more of our enterprise applications on the cloud. Again, a positive. So I think the current situation reinforces some of the decisions we've made.

Thank you.

Thank you.

Your next question comes from Peter Heckman with Davidson. Your line is open.

Hey, good morning. I faded out there for a minute. I don't think this has been addressed. But, Helen, could you talk about, given the recent strength of the U.S. dollar, what type of benefit you had in the quarter on expenses relative to the content creation centers in India and the Philippines? and I guess what type of benefit you would expect in the back half, given some of the hedges that you have in place.

Right. No, thank you for the question, and we didn't address that yet. So in terms of this quarter, foreign exchange was not an impact on our margins. It was fairly neutral. So from that perspective, there was no impact. But going forward, we typically hedge around, and it's a rolling, Exposure hedged about 50%. So looking where we are right now, we just looked at this last week, I think our exposure to the pound and the euro will potentially give us some benefits as it relates to where we locked in for the peso and the rupee, a little bit less so. But they're all at very good levels, so we're very comfortable with that.

Okay, great, great. And then just in terms of the events, just thinking about your sales force and how you're growing in wealth and analytics, how important is both field sales and attendance at kind of industry events for your new sales? And is that part of some of the uncertainty in terms of trimming the ASV growth guidance?

That's, I mean, that's never really been a part of what we do. So we don't spend a lot of money on marketing. You know, we do, we have a client symposium every year where our clients come and sort of meet with each other to learn sort of best practices and how people are using FaxUp. You know, that's probably every 18 months, once in a year, you know, once in America. And we started to do that in Asia. But our sales people, I think, usually grow up supporting our clients. They've got good relationships. They usually... you know, transition from technical support over to sales. And we just do a lot of sort of direct marketing to clients and working with them. So, you know, what's different for, you know, our sales force is they're used to traveling, being in front of clients and sitting down with clients. But I'm sure you're all discovering some new things working from home. I am. And I'm actually positively surprised by the efficiency and even the intimacy that you can get, you know, over video. You know, we use Teams, which has been really good. So I think we're going to learn new ways of working with our clients. And I think you're going to learn new ways of working. And I think it's a great opportunity for all of us to be more efficient. And like as Helen's pointed out, we're very well poised, I think, for a new world. So it's going to be different. You know, I hope we're all back to work in a month. You know, we may not be, obviously, and depending on the region. But when we all do go back to work, I think it's going to be different than what we used to. And I think different in a good way. Great.

Thanks for the feedback.

Your next question is from Kevin McVey with Credit Suisse. Your line is open.

Great. Thanks. Hello, Helen. I wonder if you could give us a sense of, you know, trends within Asia as kind of a cue for, I guess, more from a recovery perspective, anything you're seeing there that kind of helps us frame what we should expect in Europe and ultimately the U.S. Obviously still very early, but just any thoughts around that would be helpful.

Sure. So very strong pipeline in Asia for the second half, as I mentioned. And I think similar to what I mentioned for the whole company, which is heavily weighted towards analytics and CTS. We opened our office in Shanghai, I think it was just under two years ago now. So we've got a really crackerjack team in mainland China. And we've been driving very strong growth in mainland China, as well as Korea, which will be interesting. So I think looking at those two markets in particular, given that they were the hardest hit over there, will give us a good sense of what the comeback is going to look like.

Thank you. Sure. Your next question is from Andrew Nicholas with William Blair. Your line is open.

Hi. Thanks for taking my questions. I believe the majority of your price increases occur in the third quarter, at least for your international clients. So with that in mind, would it be possible to size the percentage of international ASV that comes up for renewal this year where a pricing conversation might be happening right now? And then if you could talk a little bit about any changes you've made or expect to make on the pricing front, given the current environment.

Hi. Thanks for your question. I'll take a shot at that one. So we typically do annual price increases, and you're right. As we saw in Q2, we're very pleased with the improvement that we were able to get, which reflects what our clients value from us. So I think that's a real positive, and it also reflects all the investment enhancements that we've made to it. As it relates to Q3 and the international clients, right now I would say if you look at what we did last year versus this year, we feel very good of where we stand. We're likely to be there or better. And as you know, right now this is an annual – we do it annually. So by the time we finish Q3, that will have done through that price increase sector at that point.

All right. Thank you. And – In a longer, more drawn-out recession-type scenario, which business lines would you expect to have the hardest time achieving your 2022 ASV growth targets? I guess trying to figure out which business lines you also would expect to be more resilient to the economic environment. Thanks.

Yeah, I think banking is probably the one that could get hardest hit for us, but I think that's less than 20% of our business now, and 10 years ago, I believe it was a bigger percentage than that. And then I think if, you know, underperforming asset managers, family offices, hedge funds, I think those are going to struggle in the long run anyway. But I think our core clients are healthy. You know, the middle market and large institutional asset managers. We've got a very healthy business with sovereigns and asset owners, which that's not going to go away. I think that's just a bigger opportunity for us moving forward. Insurance companies would be beginning to build up some good momentum in the private market space. So that's a smaller area for us, but we're seeing very good momentum there with the little investment we've made so far. So I think there's lots of opportunities for us to grow. But I do think it's that traditional very people-heavy space sort of sell-side business that could be the most effective in the protracted downturn. Great. Thank you.

Sure. Your next question is from Joseph Ferresi with Cantor Fitzgerald. Your line is open.

Hi. I wanted to ask just about the long-term. You've been shifting the portfolio kind of more towards private client stuff for quite some time and newer areas like that. And I guess my question is, when we come out the other end, do we think that that's going to accelerate? Are there any specific bets that you're making based on what's happening now that could give you some directional understanding of that? And then I have just one quick follow-up.

Yeah, sure, Joe. So private markets is still a small business for us. We've only just really committed to making a big investment there in September when we announced our three-year plan. So we've sold a lot of our traditional facts at workstation. You can see there's a lot of utility there for certain workflows, but we do view that as a greenfield opportunity. So as we invest this year and through the next three years, we certainly see that as a great opportunity for us, a greenfield opportunity. I think private markets have obviously done very well And I think they're still sitting on, you know, lots of dry gunpowder to use. So that's one area. And wealth, you know, wealth's important. That's relatively new for us. I think the wealth advisor of the future is going to continue to evolve. And all the investments we're making in technology to create, you know, a better workspace for them and sort of anticipate what the workflow is going to look like. We're very excited about that as a second area for us.

Got it. And I guess just to add some humor, maybe you could ask your brother if John Snow's alive.

I will. As far as I know, he is. Thank you. Very tasteful. Appreciate that.

Your next question is from George Tong with Goldman Sachs. Your line is open.

Hi, thanks. Good morning. You talked about delays in decision-making and longer sales cycles. Can you talk about how much elongation of the sales cycle is factored into guidance specifically today? if you had to estimate how much of the ASV guidance is shifted to fiscal 2021 versus lost?

Helen, do you want to talk about that? Yeah, sure.

Yeah, so let me kind of go back on what we were talking about earlier. So when we thought about the risk, I think about 50% was really attributed to delays. in terms of the amount of time. I mean, that's adding another layer of arts and science there. But we looked at also where it was in the pipeline in terms of the sentiment and how far along discussions were. So I think it's a little bit hard, George, to pinpoint more than what we identified. So I would say about half of it was based on delaying in timing.

Got it. That's helpful. You talked about various expense savings earlier. How do these expense savings alter your operating margin outlook over the next one to three years, especially when considering your continued commitment to reinvesting into content and technology?

Yeah, so as we discussed, we're not changing guidance. So as it relates to this year, we think that any of the impact from revenue, if this comes to fruition, we'll be able to offset with the expense actions that I talked about earlier. As it relates to the outlook for the three-year, there's nothing there new. I think we're way early in this process to be thinking about what the impact will be, and we'll continue to focus on FY20.

Got it. Thank you.

You're welcome. Thank you.

Your next question is from Keith Hoosen with North Coast Research. Your line is open. And our last question is from Keith Hoosen with North Coast Research. Your line is open.

You're on mute, Keith.

Please be disconnected. I will move on. Our last question is from Craig Huber with Huber Research Partners. Your line is open.

Yes, thank you. I have a quick housekeeping question first before I have my two main questions. Can you just give us, if you would please, the Europe and Asia revenues, ideally to one decimal, please? Quarter?

Sorry, can you repeat that? I might have missed that.

Sorry, if you could give us the revenue in the quarter from Europe and Asia to one decimal, please, rather than wait for the 10Q.

Are you talking about the growth rate?

No, no, just the actual revenue number to one decimal in the quarter. Reema can follow up with you after the call on that. She can give you that information.

I think that's right.

Okay, and then... Can you talk a little bit about your outlook for costs in the May and August quarters relative to this $258 million of expenses you had in the February quarter, excluding the one-time items? And how should we sort of think about your hiring plans, et cetera, for the next three and six months, please, given the environment?

As we discussed in terms of what we're managing from an expense perspective, you know, we have maintained our guidance. We will focus our hiring on the areas like the investment plan, so there's no change there. As you might guess, we'll be taking a hard look, so if there are new hires that are, I'll say, less essential in the near term, then we'll modulate accordingly. But at this juncture, there is no material veering from what our plan is as it's been for the balance of the year.

And then also I wanted to ask a wealth management question. You've talked a decent amount about it today, the outlook there for bringing on some more wealth management clients, these chunky deals and stuff. It seems like that's that like others have been pushed out here given the environment and stuff. Are you still quite optimistic here as you think out as you go through this period to add some more wealth management clients of size?

Yes, absolutely. So, you know, we've got a number of large active opportunities. Obviously we're in constant communication and with those firms and, you know, these are large deals, lots of users who like you are going to be working from home. So we're doing everything we can to sort of work with them. And, you know, those opportunities are still alive. It's just a question of, you know, making sure that we can hold to our clients and make sure they're comfortable, you know, transitioning during this period. So we expect to get them over time, but that is one of the areas that could potentially get slowed down.

This does conclude all the time we have for Q&A. I'll now turn things back over to Phil Snow for any closing remarks.

Great, thanks. So thanks, everyone, for joining us today. And, you know, I really hope you're all safe, your families, all the employees at your firms. You know, obviously this is a difficult time for everyone. I'm pleased with what we've accomplished during the first half of fiscal 20, and we're really encouraged by the solid foundation we have in place, which helps us remain resilient amidst any future disruptions. The reality is that these are early days in what could be a lengthy period of global change, and there are many unknowns as we head into the future. All of us are being tested and asked to support one another in new ways. And I'm proud but not at all surprised by the efforts fact-setters around the world have been making and will continue to make to support one another and thank our team for its continued efforts, commitment, and resilience. We really have a fantastic management team, All of our employees are really pitching in. I think we're really seeing, you know, our culture shine through here. And as ever, we'll use our unique strength to support clients, leveraging our increasingly open and flexible technology stack, best-in-class service to help them implement their own business continuity plans. We stand ready to meet challenges head-on and remain steadfastly focused on ensuring the health and safety of all of our stakeholders. If you have additional questions, please call Reema Haider, and we look forward to speaking to you next quarter. Operator, that ends today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.