FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2018; comparisons are with the periods ended May 31, 2017. Dollar amounts below are in U.S. dollars.
Business context and performance
FactSet provides subscription-based financial information, analytics, applications and services to investment professionals. Revenue is primarily from subscriptions to workstations, analytics, enterprise data, research management and trade execution.
Management cited demand for analytics, content and technology solutions (CTS), and wealth management products as growth drivers. Third-quarter organic revenue increased 5.7%; organic annual subscription value (ASV) grew 5.3% to $1.36 billion. Management also noted client cost pressures, firm closures and consolidations, and longer sales cycles.
Financial results and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $339.9 million | $312.1 million | $1,004.3 million | $894.5 million |
| Operating income | $93.3 million | $87.6 million | $277.8 million | $269.7 million |
| Operating margin | 27.4% | 28.1% | 27.7% | 30.2% |
| Net income | $74.7 million | $65.4 million | $198.3 million | $198.7 million |
| Diluted EPS | $1.91 | $1.66 | $5.01 | $5.00 |
| Effective tax rate | 16.5% | 23.2% | 26.0% | 24.9% |
For the quarter, revenue rose 8.9%, operating income 6.4%, net income 14.3% and diluted EPS 15.1%. For the nine-month period, revenue rose 12.3%, while operating income rose 3.0%; net income was down 0.2% and diluted EPS up 0.2%. Cost of services grew faster than revenue, contributing to lower operating margins. Quarterly adjusted diluted EPS, a non-GAAP measure, was $2.18 versus $1.85; the filing excludes amortization, purchase-accounting adjustments and specified non-recurring items from this measure.
Cash flow: Nine-month operating cash flow was $279.3 million and capital expenditures were $18.4 million, producing company-defined free cash flow of $261.0 million, up 34.3%. Cash and cash equivalents at May 31, 2018 were $213.1 million; cash plus investments totaled approximately $243.5 million. Cash increased $18.3 million during the nine months, despite $235.9 million of share repurchases and $65.0 million of dividends.
Debt and liquidity: Long-term debt was $574.7 million, nearly all of the $575 million revolving facility, bearing interest at daily LIBOR plus 1.00% and maturing March 17, 2020. The company reported compliance with its debt covenants. Management said available liquidity and operating cash flows were expected to meet operating, investment and capital-return needs.
Capital returns: FactSet repurchased 1.205 million shares for $234.8 million under its repurchase program during the first nine months. The quarterly dividend increased to $0.64 per share from $0.56.
Material changes and unusual items
- Revenue growth reflected organic product demand, acquisitions and foreign currency. International revenue increased to 38.1% of quarterly revenue from 36.6% a year earlier; Europe and Asia Pacific grew faster than the U.S.
- Operating margin contracted year over year, reflecting restructuring charges, higher employee compensation, acquisition-related amortization and data costs, and currency effects. European operating income declined 1.0% for the quarter and 6.1% for the nine months; U.S. and Asia Pacific operating income increased.
- The Tax Cuts and Jobs Act resulted in a provisional $23.2 million transition-tax expense on approximately $250 million of previously undistributed foreign earnings and a $2.2 million deferred-tax remeasurement charge, both recorded in Q2. The transition tax is payable over eight years. The nine-month tax provision also benefited from $7.1 million of excess share-based-payment tax benefits.
- The company reported $3.0 million of adverse foreign-currency impact on operating income for the nine months. It uses currency forwards to hedge certain rupee and peso exposures.
- Worldwide leased office space rose 54% from August 31, 2017, primarily due to added Philippines space and a new Norwalk headquarters lease. Minimum operating lease commitments totaled $416.3 million.
- The company signed separation agreements with its CFO, whose planned termination date is December 31, 2018, and its CHRO, whose planned termination date is November 30, 2018. The CHRO agreement was entered into after quarter-end.
Guidance, outlook and risks
FactSet confirmed its fiscal 2018 outlook for organic ASV growth of $65–$85 million (4.9%–6.5%), GAAP revenue of $1.34–$1.36 billion and adjusted operating margin of 31.0%–32.5%. It updated guidance to GAAP operating margin of 27.5%–29.0%, an annual effective tax rate of 18.0%–19.5% (excluding the one-time transition tax, among other TCJA provisions), GAAP diluted EPS of $6.92–$7.17 and adjusted diluted EPS of $8.37–$8.62. Management said the margin and GAAP EPS outlook excluded any fourth-quarter non-recurring benefits or charges.
Risks discussed include shifts from active to passive investment management and client cost-cutting; Brexit and MiFID II-related market and purchasing uncertainty; currency and floating-rate interest exposure; cybersecurity and data privacy, including GDPR; and tax audits. The company estimated a $224.1 million net foreign-currency exposure; a 25-basis-point change in one-month LIBOR would change annual interest expense by about $1.4 million.
Contingency: Massachusetts tax authorities requested information concerning prior-period sales and could assess sales tax, penalties and interest. FactSet disputes the preliminary conclusions, has not recorded a liability because the outcome cannot be reasonably estimated, and cautioned that a required payment could materially affect results, cash flows or financial position. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track organic ASV and revenue growth against guidance, including the contribution from acquisitions, pricing and foreign exchange.
- Assess whether cost growth and acquisition-related expenses continue to pressure operating margins, particularly in Europe.
- Monitor final accounting for the TCJA transition tax and deferred-tax remeasurement, and the effects of tax settlements or audits.
- Follow the Massachusetts sales-tax matter: the filing gives no clear estimate of potential exposure and records no liability.
- Reconcile the repurchase authorization: the filing reports $309.3 million available in several places but also states $431.2 million after the $300 million program expansion.
- Review debt repayment or refinancing plans before the March 2020 facility maturity, floating-rate interest sensitivity, and the scale of lease commitments.