FactSet Research Systems Inc. — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2015; interim financial statements are unaudited. FactSet provides subscription-based financial information, analytics and workflow applications to investment professionals.
Financial performance and liquidity
Amounts below are in millions, except per-share data and where noted.
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $254.5 (+9.8%) | $231.8 | $745.0 (+9.3%) | $681.7 |
| Operating income | $85.4 (+16.9%) | $73.0 | $246.3 (+10.5%) | $222.8 |
| Operating margin | 33.5% | 31.5% | 33.1% | 32.7% |
| Net income | $61.4 (+19.2%) | $51.5 | $178.9 (+14.6%) | $156.1 |
| Diluted EPS | $1.45 (+19.8%) | $1.21 | $4.23 (+16.9%) | $3.62 |
| Operating cash flow | $102.1 | $95.0 | $222.8 | $193.7 |
| Free cash flow (non-GAAP) | $98.5 | $91.3 | $207.5 | $182.0 |
- Q3 gross operating costs rose 6.6% overall; cost of services increased 11.1%, while SG&A increased 0.6%. Cost of services reached 39.6% of revenue, up 0.5 percentage points, mainly reflecting compensation and hiring. Management cited lower SG&A and foreign-exchange benefits as margin supports.
- At May 31, cash and cash equivalents were $157.9, short-term investments $25.0, total current assets $304.2 and current liabilities $134.9. The company reported $35.0 of long-term debt, versus none at August 31, 2014.
- Nine-month investing cash outflow was $53.8, including $33.6 for acquisitions and $15.4 of capital expenditures. Financing cash outflow was $115.2, including $177.6 of share repurchases and $48.4 of dividends, partly offset by debt and employee-plan proceeds.
- Cash increased $41.5 from August 31, 2014. Management said available cash, operating cash flow and the credit facility should meet operating and capital needs for at least the next 12 months.
Business trends and changes versus prior year
- Annual subscription value (ASV) was $1.021 billion, up 8.9% organically year over year; organic ASV grew $17.0 in the quarter. Management described 8.9% as the highest ASV growth rate in three years. Buy-side and sell-side organic ASV growth was 8.5% and 10.6%, respectively.
- Q3 revenue growth reflected client and user additions, Portfolio Analytics and wealth-management products, proprietary content, pricing, and Code Red. Currency reduced revenue by $1.0 in the quarter. Excluding acquisitions and currency, management reported U.S. and non-U.S. revenue growth of 8.6% and 10.5%.
- FactSet added 47 net clients, reaching 2,915, and 1,587 users, reaching 58,995. Client retention was 94% by client count and greater than 95% of ASV.
- Q3 revenue by geography: U.S. $172.1 (+10.1%), Europe $63.2 (+8.4%) and Asia Pacific $19.3 (+11.8%). International revenue was $82.5, up 9.2% reported and 10.5% excluding currency.
- Operating margin increased 2.0 percentage points year over year; management noted the prior-year quarter included $3.0 of charges for performance-based option vesting and a legal settlement. Adjusted diluted EPS, a non-GAAP measure, was $1.42 versus $1.25, up 13.6%.
- Code Red was acquired February 6, 2015 for a preliminary $34.8. It had $9.3 of annual subscriptions at acquisition and contributed $2.8 of Q3 and $3.3 of nine-month revenue. Purchase accounting remained preliminary; recorded goodwill was $29.6.
Outlook, commentary and risks
- FY2015 Q4 guidance: revenue $259–$263; operating margin 33.0%–34.0%; annual effective tax rate 30.0%–31.0%; diluted EPS $1.46–$1.48. Guidance was stated as of June 16, 2015.
- The nine-month effective tax rate was 27.8%, including a $5.1 discrete benefit from the retroactive reinstatement of the U.S. federal R&D credit. Q3 rate was 28.5%.
- Currency is a material exposure: management estimated net non-U.S.-dollar expense exposure of $171.5 annually. A hypothetical 10% weaker U.S. dollar without hedges was estimated to reduce operating income by $19.0 over 12 months. FactSet uses forward contracts to hedge selected currency exposures.
- Management highlighted sensitivity to equity-market declines and client assets under management, and to investment-bank downsizing, consolidation or reduced M&A and capital-markets activity. Employee compensation, hiring, data costs and execution of growth investments are additional cost considerations.
- The $35.0 revolving-facility borrowing matures February 6, 2018 and bears interest at one-month LIBOR plus 0.50%; the company was in covenant compliance. The facility allows for additional borrowing arrangements up to $265.0, subject to terms.
- Operating lease commitments were $193.4 at May 31, 2015; supplier purchase commitments were $53.3 at August 31, 2014, with no material change reported in FY2015. Legal matters were described as ordinary-course matters not expected to have a material adverse effect. Gross unrecognized tax benefits were $6.4, including accrued interest.
- CEO Philip Hadley stepped down effective July 1, 2015 and remained Chairman; President Philip Snow became CEO. Management reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether ASV growth, client retention and user additions continue to translate into revenue growth, particularly across buy-side and sell-side customers.
- Whether the Q4 guidance is achieved and how margins respond to compensation growth, foreign exchange, data costs and occupancy costs.
- Code Red’s finalized purchase accounting, ongoing contribution and progress against its subscription and operating-margin targets.
- Cash generation and capital allocation, including repurchases, dividends, the $35.0 borrowing and compliance with credit covenants.
- Potential effects of market declines, investment-bank retrenchment, currency movements and tax-audit outcomes.