FactSet Research Systems Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016; includes fourth-quarter results. The filing was signed October 31, 2016.
Business context
FactSet provides subscription-based financial information, analytics, content and workflow technology to investment professionals. Revenue comes primarily from workstations, analytics, enterprise data, research management and trade execution. Buy-side clients represented 82.6% of annual subscription value (ASV). FactSet acquired multi-asset execution platform Portware in October 2015 and sold its Market Metrics research business in July 2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change or context |
|---|---|---|---|
| Revenue | $1,127.1 million | $1,006.8 million | +12.0% |
| Operating income | $349.7 million | $331.9 million | +5.4% |
| Operating margin | 31.0% | 33.0% | Down 2.0 percentage points |
| Net income | $338.8 million | $241.1 million | +40.6%; FY2016 includes Market Metrics sale gain |
| Diluted EPS | $8.19 | $5.71 | FY2016 includes $2.01 per share from sale gain |
| Operating cash flow | $331.1 million | $306.4 million | +8.1% |
| Free cash flow | $283.4 million | $280.8 million | +0.9%; non-GAAP measure |
| Capital expenditures | $47.7 million | $25.7 million | Increase primarily reflected office build-outs |
Excluding the $81.7 million after-tax gain on the Market Metrics sale, management reported net income growth of 6.7% and diluted EPS of $6.18. The sale produced a $112.5 million pretax gain and $153.1 million in net cash proceeds. The effective tax rate was 26.5%, versus 27.8% in FY2015; FY2016 included $10.5 million of tax benefits, primarily from the R&D tax credit and other discrete items.
At year-end, cash and cash equivalents were $228.4 million, investments were $24.2 million, and total assets were $1.02 billion. Current assets were $369.3 million and current liabilities were $158.2 million. Long-term debt was $300.0 million, floating at one-month LIBOR plus 0.75%, with a September 2018 maturity. FactSet reported compliance with debt covenants and said available liquidity was sufficient for expected requirements. On October 26, 2016, after year-end, it borrowed an additional $65.0 million.
Annual ASV was $1.15 billion, up 8.8% organically. Client count rose 3.9% to 3,092; users increased 5.5% to 65,655. Client retention was more than 95% measured by ASV and 94% measured by clients. International operations generated 33.0% of revenue; international ASV was 34.4% of total.
For Q4 FY2016, revenue was $287.3 million versus $261.8 million in Q4 FY2015. Net income was $144.3 million and diluted EPS was $3.55, reflecting the Market Metrics sale gain.
Material changes and management commentary
- Portware contributed $33.3 million of FY2016 revenue from its acquisition date. Management said the business grew at a double-digit rate and was break-even on an EPS basis, while Portware reduced FactSet’s operating margin by 120 basis points.
- Cost of services rose 20.2% to $487.4 million, or 43.2% of revenue, up 2.9 percentage points. Management cited compensation, acquired-intangible amortization and computer-related costs. Revenue growth was offset in part by increased staffing and Portware costs.
- The company returned $431.0 million to stockholders through dividends and share repurchases. The quarterly dividend was increased 13.6% to $0.50 per share; $197.0 million remained authorized for future repurchases at year-end.
- Management cited demand for portfolio analytics, Content & Technology Solutions, workstation products and Portware as growth drivers. Market-related cancellations slowed buy-side and sell-side ASV growth versus the prior year.
Outlook, risks and contingencies
For Q1 FY2017, FactSet expected revenue of $286–$292 million, GAAP operating margin of 31.0%–32.0%, adjusted operating margin of 32.5%–33.5%, and GAAP diluted EPS of $1.62–$1.66. Adjusted diluted EPS guidance was $1.68–$1.72. The expected annual effective tax rate was 28.0%–29.0%. These were expectations as of September 27, 2016, not guarantees.
Key risks include dependence on investment-management clients and financial markets; client cost reductions and a shift toward passive investing; intense competition and pricing pressure; data security and service outages; dependence on third-party content; recruitment and retention of specialized staff; acquisition integration; international operations and foreign-exchange exposure; and regulatory, litigation and tax uncertainties. Management identified Brexit-related currency and business uncertainty and political unrest risk affecting Manila operations. Estimated net foreign-currency expense exposure was $193.3 million over the next 12 months; hedges covered approximately 50% of pound sterling exposure and 75% of Indian rupee exposure.
FactSet disclosed ordinary-course legal matters and ongoing tax audits; management did not believe unresolved matters were likely to have a material adverse effect. Unrecognized tax benefits were $8.8 million, including accrued interest. Management and the auditor reported effective internal control over financial reporting, but Portware’s controls were excluded from the FY2016 assessment and were to be included in the FY2017 assessment.
Important facts for investors to verify
- Reconcile reported FY2016 net income and EPS with the Market Metrics gain and assess underlying growth excluding the divestiture.
- Track whether Portware meets growth and profitability expectations and whether integration benefits offset its margin impact.
- Monitor organic ASV, market-related cancellations, retention, client additions and growth across buy-side and sell-side customers.
- Review debt and interest expense, including the post-year-end $65.0 million borrowing, alongside capital returns and investment needs.
- Assess foreign-exchange exposure, Brexit developments, Manila continuity risks, data security and any material changes in litigation or tax matters.
- Compare subsequent results with the stated Q1 FY2017 revenue, margin, tax-rate and EPS outlook.