FactSet Research Systems Inc. — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2015. The interim financial statements are unaudited. FactSet provides subscription-based financial information and analytical applications to the global investment community.
Financial performance and liquidity
- Q2 revenue: $247.8 million, up 9.2% year over year. Six-month revenue was $490.5 million, up 9.0%.
- Q2 operating income: $80.6 million, up 7.5%; operating margin was 32.5%, versus 33.1%. Six-month operating income rose 7.4% to $160.9 million, with a 32.8% margin versus 33.3%.
- Q2 net income and diluted EPS: $61.6 million and $1.46, up 17.5% and 19.7%, respectively. Six-month net income was $117.5 million and diluted EPS $2.78, up 12.3% and 15.4%.
- Cash flow: Six-month operating cash flow was $120.7 million versus $98.7 million a year earlier. Capital expenditures were $11.8 million; company-defined free cash flow was $109.0 million versus $90.7 million. Cash and cash equivalents increased $5.7 million from August 31, 2014 to $122.1 million.
- Balance sheet and debt: Current assets were $281.9 million and current liabilities $121.7 million at February 28, 2015. Investments were $25.3 million. Long-term debt was $35.0 million, newly drawn under a revolving credit facility; the loan matures February 6, 2018 and bears interest at one-month LIBOR plus 0.50%. The agreement permits up to $300 million in aggregate borrowings, subject to its terms. FactSet reported covenant compliance.
- Shareholder returns: Six-month share repurchases totaled $104.1 million and dividend payments $32.3 million. The quarterly dividend was $0.39 per share. A further $282.9 million remained authorized for repurchases at quarter-end.
Changes versus prior comparable periods
- Revenue growth was broad-based: Q2 U.S. revenue rose 8.0%, Europe 11.7%, and Asia Pacific 12.3%. International revenue represented 32.8% of Q2 revenue, up from 32.0%.
- Annual subscription value (ASV) reached $1.005 billion, up 8.5% organically year over year, excluding Code Red and currency effects. Management said first-half ASV growth was its strongest first half since FY2011.
- Cost of services increased 14.1% in Q2, faster than revenue, with higher employee compensation and Code Red costs among the drivers. SG&A increased 4.6%. Lower computer costs and lower SG&A as a share of revenue partly offset cost pressures.
- Net income and EPS growth benefited from fewer diluted shares following repurchases and a $5.1 million discrete tax benefit from reinstatement of the U.S. federal R&D credit. The reported Q2 effective tax rate was 24.1%, versus 30.5% a year earlier; the six-month rate was 27.4% versus 30.5%.
- Foreign currency translation reduced six-month comprehensive income: foreign currency translation adjustments were a loss of $21.6 million, compared with a gain of $11.7 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- Q3 FY2015 outlook, as of March 17, 2015: Revenue of $251–$256 million; operating margin of 33.0%–34.0%, including an estimated 40-basis-point reduction from Code Red; annual effective tax rate of 30.0%–31.0%; and diluted EPS of $1.40–$1.42. No full-year numerical guidance is provided in the filing text.
- Acquisition: FactSet acquired Code Red on February 6, 2015 for a preliminary purchase price of $34.6 million. Code Red had $9.3 million in annual subscriptions; it contributed $0.5 million of Q2 revenue and had no material impact on Q2 results. Preliminary goodwill recorded was $29.6 million; purchase accounting was not finalized.
- Unusual items: Q2 operating expenses included a $3.2 million pre-tax charge primarily related to sales leadership changes and optimization. Management reported adjusted Q2 operating margin of 33.8% excluding this charge. The $5.1 million R&D tax-credit benefit increased reported Q2 net income; management’s adjusted diluted EPS was $1.39, excluding the net effects of that benefit and the sales-leadership charge.
- Management commentary: FactSet reported record ASV, revenue, client and user counts, and EPS; it had 2,868 clients and 57,408 users at quarter-end. Client retention was greater than 95% measured by ASV. CEO Philip Hadley was to step down effective July 1, 2015, remain Chairman, and be succeeded by President Philip Snow.
- Key risks: Approximately 82.8% of ASV came from investment management clients, whose demand may be affected by equity-market declines and asset outflows. Investment-banking clients represented 17.2% of ASV and may reduce headcount or spending amid sector pressures. Management estimated a $168 million annual net foreign-currency expense exposure; hedges mitigate, but do not eliminate, currency risk. Legal proceedings arose in the ordinary course, and management did not expect unresolved matters to have a material adverse effect. Tax audits and uncertain tax positions remain; gross unrecognized tax benefits were $6.9 million.
- Management expected domestic cash and operating cash flows, together with the credit facility if needed, to support requirements for at least 12 months. Approximately 90% of cash was held overseas. The filing notes temporary seasonal working-capital pressure and expected accounts-receivable moderation in Q3.
Important facts for investors to verify
- Whether organic ASV growth, retention, and client/user additions continue, and how much future growth depends on price increases, acquisitions, and product adoption.
- Whether cost-of-services growth moderates and margins recover after the reported Q2 leadership charge and integration costs.
- The sustainability of earnings growth after normalizing for the $5.1 million tax benefit and share repurchases.
- Code Red’s finalized purchase-price allocation, subscription growth, and effect on margins and cash generation.
- Cash availability across jurisdictions, future repurchases and dividends, and debt-facility terms, covenant headroom, and interest-rate exposure.
- Actual Q3 results versus management’s revenue, margin, tax-rate, and diluted-EPS ranges, including the impact of foreign exchange.