FACTSET RESEARCH SYSTEMS INC quarterly report, Q2 FY2018

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FactSet Research Systems Inc. — Form 10-Q Summary

Business context and reporting period

FactSet provides subscription-based financial information, analytics, applications, data and services to investment professionals. This unaudited filing covers the quarter and six months ended February 28, 2018 (fiscal Q2 and first half of fiscal 2018), compared with the corresponding 2017 periods.

Financial performance and liquidity

  • Quarter revenue: $335.2 million, up 13.9%; organic revenue growth, excluding acquisitions, dispositions and foreign currency, was 5.7%. Acquisitions contributed $24.7 million of quarterly revenue.
  • Quarter earnings: Operating income was $95.5 million, up 4.1%; operating margin was 28.5%, versus 31.2%. Net income was $53.1 million, down 20.3%, and diluted EPS was $1.33, down 20.8%.
  • First-half results: Revenue was $664.4 million, up 14.1%; operating income was $184.6 million, up 1.4%, with a 27.8% margin versus 31.3%. Net income was $123.5 million, down 7.3%, and diluted EPS was $3.11, down 6.9%.
  • Growth indicators: Annual subscription value (ASV) was $1.35 billion, up 13.6% as reported and 5.8% organically. Clients totaled 4,895, up 11.1%; users totaled 88,646, up 3.3%. Annual client retention exceeded 95% measured by ASV.
  • Cash flow: First-half operating cash flow was $153.7 million, versus $128.1 million. Free cash flow, a company-defined non-GAAP measure, was $141.3 million, versus $110.0 million; capital expenditures were $12.4 million. Cash and equivalents were $233.6 million at February 28, 2018.
  • Balance sheet and debt: Total assets were $1.47 billion and stockholders’ equity was $612.1 million. 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 debt covenants. Cash less debt was approximately $341.1 million, before considering investments.
  • Margins and costs: Quarterly cost of services rose 24.0%, faster than revenue, reflecting compensation, acquired-intangible amortization and data costs. For the quarter, cost of services was 48.7% of revenue, up 400 basis points; higher costs compressed operating margin.

Material changes versus the prior comparable period

  • Quarterly reported revenue growth was led in part by acquisitions and international growth. Europe revenue rose 26.1%, including acquisition and currency effects; U.S. revenue rose 9.0% and Asia Pacific 13.9%.
  • Operating margin declined as acquisition-related amortization and data costs, employee compensation and foreign currency effects offset revenue growth. European operating income fell 7.4% in the quarter and 8.6% for the first half; U.S. and Asia Pacific operating income increased.
  • Quarterly and first-half GAAP net income and EPS declined despite revenue growth, primarily because of higher income tax expense and interest expense. The first-half effective tax rate was 30.8%, versus 25.7% a year earlier.
  • First-half share repurchases were $112.9 million, down from $160.4 million; dividend payments were $43.4 million. The company retired 13.3 million treasury shares in January, an equity presentation change that did not itself represent a cash repurchase.

Outlook, management commentary, risks and unusual items

  • Fiscal 2018 guidance, confirmed or updated as of March 27, 2018: Organic ASV increase of $65–$85 million (4.9%–6.5%); GAAP revenue of $1.34–$1.36 billion; adjusted operating margin of 31.0%–32.5%; GAAP operating margin of 27.5%–29.0%; GAAP diluted EPS of $6.95–$7.15; adjusted diluted EPS of $8.35–$8.55. The annual effective tax rate is expected at 18.0%–19.5%, excluding one-time TCJA items. FactSet had discontinued quarterly guidance.
  • The Tax Cuts and Jobs Act resulted in a provisional $23.2 million transition-tax expense on approximately $250 million of accumulated foreign earnings, payable over eight years, and a $2.2 million deferred-tax remeasurement charge. The company said its tax accounting was not finalized and estimates could change. First-half results also included $6.1 million of excess tax benefits from share-based payments. Management reported adjusted quarterly net income of $84.3 million and adjusted diluted EPS of $2.12; these non-GAAP measures exclude specified items, including tax charges and acquired-intangible amortization.
  • Management cited industry movement from active to passive investing, client cost controls, financial-market consolidation and delayed purchasing decisions as pressures on organic growth. It also discussed Brexit uncertainty and MiFID II changes, while noting interest in its research-unbundling solutions.
  • Foreign currency exposure is material: estimated annual non-U.S.-dollar expenses of $324.2 million exceeded corresponding revenues of $100.8 million. Indian-rupee forward contracts hedge 75% of exposure through fiscal Q3 2019 and 50% from fiscal Q4 2019 through fiscal Q2 2020. A 25-basis-point LIBOR change would affect annual interest expense by an estimated $1.4 million.
  • On February 14, 2018, FactSet signed a new 173,000-square-foot headquarters lease. Total minimum operating lease commitments were $429.2 million, including that lease; worldwide leased space rose 54% from August 2017. The new headquarters is expected to be ready for occupancy in fiscal Q2 2020.
  • The filing identifies cybersecurity and third-party system security as risks, including potential service disruption, data exposure, reputational harm, legal claims and higher costs. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported apart from the cybersecurity disclosure.

Important facts for investors to verify

  • Whether organic ASV and revenue growth meet the fiscal 2018 guidance range, and how much growth continues to depend on acquisitions, currency and pricing.
  • Whether cost of services and acquisition-related expenses stabilize, and whether operating margins recover from the reported year-over-year decline.
  • How the provisional TCJA transition-tax estimate and effective tax rate evolve as the company finalizes its tax accounting.
  • Debt repayment or refinancing plans ahead of the March 2020 maturity, alongside sensitivity to LIBOR and cash available after dividends, buybacks and lease commitments.
  • Execution and cost implications of the headquarters move, the expanded share-repurchase authorization and the company’s cybersecurity and foreign-currency risk management.