Business context and reporting period
FactSet Research Systems Inc. filed this Form 10-Q for its first quarter of fiscal 2020, the three months ended November 30, 2019, compared with the three months ended November 30, 2018. FactSet provides subscription-based financial information, analytics, data and workflow solutions. It reports three geographic segments: the Americas, Europe and Asia Pacific.
Financial and operating performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $366.7 million | $351.6 million | +4.3% |
| Operating income | $113.2 million | $100.5 million | +12.6% |
| Operating margin | 30.9% | 28.6% | +2.3 percentage points |
| Net income | $94.0 million | $84.3 million | +11.5% |
| Diluted EPS | $2.43 | $2.17 | +12.0% |
| Cash from operations | $95.8 million | $46.3 million | — |
| Capital expenditures | $26.8 million | $9.5 million | — |
| Free cash flow | $69.0 million | $36.8 million | +87.6% |
Revenue growth was 4.2% on an organic basis. Growth was led by Asia Pacific (+8.9%), followed by the Americas (+4.1%) and Europe (+3.1%). Management cited demand for Wealth workstations, core and premium data feeds, and portfolio analytics and risk products. Operating expenses rose 0.9% overall: cost of services fell 1.1%, while selling, general and administrative expense increased 5.0%. Management attributed improved operating income mainly to revenue growth outpacing expenses and lower bad-debt expense.
At November 30, 2019, FactSet had $336.2 million of cash and cash equivalents and $26.1 million of investments. Outstanding revolving-facility borrowings were $575.0 million gross ($574.2 million net of unamortized issuance costs); $175.0 million remained available under the $750 million facility, which matures March 29, 2024. The facility bears floating-rate interest; the quarter-end weighted average rate was 2.59%. The company reported compliance with its debt covenants.
FactSet returned $111.7 million to stockholders during the quarter through $84.4 million of share repurchases and $27.3 million of dividends. The quarterly dividend was $0.72 per share. The share repurchase authorization had $154.2 million remaining at quarter-end.
Material changes versus the prior comparable period
- Operating margin expanded to 30.9% from 28.6%; management cited revenue growth, lower compensation costs as a percentage of revenue, and lower bad-debt expense, partly offset by higher computer-related and occupancy costs.
- Operating cash flow and free cash flow increased substantially, which management attributed in part to improved collections and payment timing, lower working capital needs, and higher net income. Days sales outstanding fell to 37 from 42 a year earlier.
- Capital expenditures increased to $26.8 million from $9.5 million, primarily reflecting the Norwalk headquarters build-out and technology investment.
- Basic and diluted weighted-average shares declined year over year, with repurchases contributing to diluted EPS growth.
- FactSet adopted the new lease accounting standard on September 1, 2019. It recognized $217.0 million of net right-of-use assets and $266.4 million of lease liabilities, primarily for real estate leases; management reported no material effect on quarterly income or cash-flow statements.
Outlook, management commentary and risks
Fiscal 2020 expectations, stated as of December 19, 2019: organic ASV plus professional services growth of $65 million to $85 million over fiscal 2019; GAAP revenue of $1.49 billion to $1.50 billion; GAAP operating margin of 28.5% to 29.5% and adjusted operating margin of 31.5% to 32.5%; annual effective tax rate of 17.0% to 17.5%; and GAAP diluted EPS of $8.70 to $9.00 and adjusted diluted EPS of $9.85 to $10.15. Management cautioned that actual results may differ and that GAAP margin and EPS guidance excludes certain potential non-recurring benefits or charges.
Organic ASV was $1.454 billion, up 4.0%; organic ASV plus professional services was $1.48 billion, up 4.1%. Annual client retention exceeded 95% measured by ASV. Management nevertheless reported higher cancellations than in the prior-year quarter, citing institutional asset-manager cost pressures, banking-client churn and industry consolidation. The reported effective tax rate was 13.6%, versus 12.1% a year earlier, reflecting higher income and fewer tax benefits; management’s full-year rate outlook was higher at 17.0%–17.5%.
Key risks discussed include market weakness and reduced client spending, a shift from active to passive investing, investment-bank downsizing and consolidation, Brexit-related uncertainty, foreign-exchange and floating-rate exposure, cyber and technology disruptions, and client retention. The filing also disclosed a Massachusetts sales/use-tax assessment notice concerning prior periods: FactSet appealed, recorded no liability because the outcome could not be reasonably estimated, and said an unfavorable result could materially affect financial position, cash flows and results. Tax audits and ordinary-course legal matters were also disclosed; management did not expect those matters to have a material adverse effect. A new Philippines real-estate lease had not commenced at quarter-end and was expected to have approximately $74 million of undiscounted rent over about 10 years.
Most important facts for investors to verify
- Whether organic ASV and revenue growth can sustain the fiscal 2020 outlook, particularly given higher cancellations and sector cost pressures.
- Whether margin improvement persists as computer, occupancy and technology costs rise, and as the Norwalk headquarters and new Philippines lease affect expenses and cash needs.
- Cash generation relative to capital spending, dividends and repurchases; assess the company’s $575 million floating-rate debt and remaining facility capacity.
- Developments in the Massachusetts sales-tax matter, including any formal assessment, and the status of tax audits and other contingencies.
- Execution of disclosed fiscal 2020 guidance, including the gap between the quarter’s 13.6% effective tax rate and the 17.0%–17.5% annual expectation.