FactSet Research Systems Inc. — FY2018 Form 10-K
Business context and reporting period: FactSet provides subscription-based financial data, analytics, software and related services to investment professionals. This filing covers the fiscal year ended August 31, 2018. Although the request identifies 2018 Q4, the filing is an annual report; selected fourth-quarter figures are shown below. Financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,350.1 million | $1,221.2 million | +10.6%; organic growth was 5.6% |
| Operating income | $366.2 million | $352.1 million | +4.0% |
| Operating margin | 27.1% | 28.8% | Down 1.7 percentage points |
| Net income | $267.1 million | $258.3 million | +3.4% |
| Diluted EPS | $6.78 | $6.51 | +4.1% |
| Operating cash flow | $385.7 million | $320.5 million | +20.3% |
| Capital expenditures | $33.5 million | $36.9 million | Down $3.3 million |
| Free cash flow | $352.1 million | $283.7 million | +24.1% |
Liquidity and debt: At year-end, cash and cash equivalents were $208.6 million, short-term investments were $29.3 million, and current assets and current liabilities were $430.9 million and $221.1 million, respectively. Long-term debt was $574.8 million net of issuance costs ($575.0 million principal), under a floating-rate facility priced at LIBOR plus 1.00%, maturing March 17, 2020. The company reported covenant compliance and said available liquidity and expected cash generation were adequate for operating needs and planned capital returns.
Subscription and operating indicators: Annual subscription value (ASV) was $1.393 billion, up 5.8% overall and 5.7% organically. Clients numbered 5,142 and users 91,897. Client retention was above 95% of ASV. Buy-side clients represented 83.9% of ASV; buy-side and sell-side ASV growth were 5.4% and 7.3%, respectively. U.S. revenue grew 7.4%, Europe 17.3%, and Asia Pacific 13.1%.
Fourth-quarter figures: Fiscal Q4 revenue was $345.9 million, operating income $88.4 million, net income $68.8 million and diluted EPS $1.77. In Q4 FY2017, the corresponding figures were $326.6 million, $82.4 million, $59.6 million and $1.52.
Material changes versus the prior comparable period
- Revenue growth accelerated to 10.6%, with 5.6% organic growth; acquisitions and currency contributed to reported growth. ASV increased 5.8% overall.
- Operating margin fell to 27.1% from 28.8%, as cost of services rose 16.4%, faster than revenue. Management attributed cost pressure to hiring and compensation, restructuring, acquisition-related data costs and intangible amortization, partly offset by lower stock-based compensation and foreign-exchange hedging gains.
- Cash generation strengthened: operating cash flow rose to $385.7 million and free cash flow to $352.1 million. Capital returns included $302.4 million of share repurchases and $89.4 million of dividends paid.
- Revenue from international operations increased to 37.6% of total, from 35.8%. Europe’s reported growth included a favorable currency contribution; Asia Pacific growth was primarily subscription-driven.
- Debt remained at $575.0 million principal, while interest expense increased to $15.9 million from $8.4 million, reflecting the debt outstanding and interest rates.
Outlook, commentary, risks and unusual items
- FY2019 outlook: Management forecast revenue of $1.41–$1.45 billion; organic ASV plus professional services growth of $75–$90 million; GAAP operating margin of 29%–30% and adjusted margin of 31.5%–32.5%; GAAP diluted EPS of $8.70–$8.90 and adjusted diluted EPS of $9.45–$9.65. The expected effective tax rate was 17.5%–18.5%, primarily reflecting U.S. tax reform. Guidance was as of September 25, 2018, and subject to risks; the filing says GAAP margin and EPS guidance excludes certain non-recurring items that may arise.
- Tax items: FY2018 included a $23.2 million provisional one-time transition-tax charge on previously untaxed foreign earnings and a $2.3 million deferred-tax remeasurement charge. The company also recognized $9.5 million of excess tax benefits from share-based payments. The transition-tax estimate remained subject to refinement.
- Other charges: Operating income included $17.4 million of restructuring charges, $4.7 million related to other corporate actions including accelerated stock compensation, and $4.9 million of legal costs. Management’s adjusted measures exclude specified items; they are non-GAAP and should not be treated as substitutes for GAAP results.
- Contingency: Massachusetts requested information regarding possible sales and use taxes on prior-period sales. FactSet had not recorded a liability because the outcome could not be reasonably estimated; a resulting assessment, penalties and interest could materially affect financial position, cash flows and results.
- Business risks: Key exposures include cybersecurity, data privacy and service outages; intense competition and pricing pressure; a shift from active to passive investing; clients’ exposure to market declines and financial-sector consolidation; reliance on third-party content; foreign-currency movements; and regulatory and economic uncertainty related to MiFID II and Brexit. GDPR became effective in May 2018; the filing notes potential penalties of up to 4% of worldwide revenue for noncompliance.
- Commitments: Future operating lease payments totaled $407.8 million, including the new Norwalk headquarters lease; supplier purchase commitments were $79.0 million. The company expected a new lease-accounting standard to materially increase balance-sheet amounts, without a material impact on income, comprehensive income or cash flows.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No goodwill impairment was identified in FY2018.
Important facts for investors to verify
- How much reported growth in FY2018 and FY2019 guidance is organic versus attributable to acquisitions, currency and price increases; reconcile the 5.8% total and 5.7% organic ASV growth figures.
- Whether margins recover as forecast after the FY2018 contraction, and how hiring, data costs, acquired-intangible amortization and restructuring affect expense growth.
- Progress against FY2019 revenue, ASV, margin, EPS and tax-rate outlook, including the effect of any excluded or non-recurring items.
- Debt repayment or refinancing plans ahead of the March 2020 maturity, and sensitivity to floating LIBOR rates; management estimated a 25-basis-point rate change would alter annual interest expense by $1.4 million.
- Resolution of the Massachusetts sales-tax matter and finalization of the provisional TCJA transition-tax estimate.
- Retention, client spending and demand trends amid active-to-passive investment shifts, market volatility, MiFID II and Brexit uncertainty, alongside cybersecurity and third-party data continuity risks.