FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended May 31, 2012; comparisons are with the quarter ended May 31, 2011. Year-to-date figures cover the nine months ended May 31. Amounts are in U.S. dollars.
Business context and performance
FactSet provides subscription-based financial information, data, and analytical applications to investment professionals. About 80% of annual subscription value (ASV) came from investment-management clients. The company reported 5,455 employees, up 14% year over year.
| Metric | Q3 FY2012 | Change year over year | Nine months FY2012 | Change year over year |
|---|---|---|---|---|
| Revenue | $202.3 million | +10.2% | $598.1 million | +11.9% |
| Operating income | $68.5 million | +10.8% | $202.4 million | +12.8% |
| Operating margin | 33.9% | +0.2 percentage points | 33.8% | 33.5% in prior year |
| Net income | $48.0 million | +10.8% | $140.3 million | +7.8% |
| Diluted EPS | $1.05 | +14.1% | $3.05 | +10.9% |
| Operating cash flow | $76.4 million | $64.5 million in prior year | $174.9 million | $137.0 million in prior year |
| Free cash flow | $70.2 million | +23% | $158.0 million | $114.2 million in prior year |
Revenue drivers and material changes
- Quarterly revenue grew in all regions: U.S. +9.7%, Europe +10.0%, and Asia Pacific +15.0%. Advanced applications, proprietary data, client and user additions, and price increases supported growth.
- ASV was $811 million at May 31, up 9% year over year, and rose $8 million during the quarter. Users increased by 1,100 during the quarter to 48,400; client count reached 2,335, adding 11 net clients in the quarter.
- Cancellation of an earnings-estimates feed agreement following TheMarkets.com’s acquisition by S&P Capital IQ reduced ASV by $4.1 million. The company said the cancellation did not affect user count.
- Expense growth was led by compensation and data costs, including investment in content collection, engineering, product development, and consulting. Lower travel, computer depreciation, and intangible-asset amortization partly offset these costs.
- Year-to-date net income growth was slower than operating-income growth, in part because the prior-year period included a $4.9 million tax benefit from reenactment of the federal R&D credit. The credit had expired for FY2012; the nine-month effective tax rate was 31.1%, versus 27.6% in the prior-year period.
Financial position and capital allocation
At May 31, 2012, cash and cash equivalents were $228.5 million, with an additional $13.6 million of short-term investments. Total assets were $694.5 million and total liabilities were $134.1 million. The company reported no outstanding borrowings. Cash increased $46.8 million from August 31, 2011; operating cash generation funded capital spending, dividends, and repurchases.
- Nine-month capital expenditures were $16.9 million, down from $22.8 million in the prior-year period.
- FactSet repurchased 933,800 shares for $86.9 million during the first nine months. Following a $200 million program expansion, $256 million remained authorized at May 31, subject to market conditions.
- The board increased the quarterly dividend 15% to $0.31 per share, or $1.24 annualized. The June 19 payment was $13.9 million.
- Quarterly free cash flow was $70.2 million, supported in part by working-capital improvements; management reported trailing 12-month free cash flow of $221.6 million.
Outlook, risks, and notable items
- For fiscal Q4 2012, management expected revenue of $204–$208 million, operating margin of 33.5%–34.0%, an effective tax rate of 31%–32%, and GAAP diluted EPS of $1.06–$1.08. EPS guidance included an estimated $0.02 impact from expiration of the federal R&D credit.
- FactSet acquired StreetAccount LLC on June 29, 2012, after quarter-end. Management said the acquisition was not expected to materially affect Q4 FY2012 or full-year FY2013 diluted EPS.
- Foreign-exchange exposure is material: management estimated annual non-U.S.-dollar expenses of $159 million against $17 million of revenues. Indian-rupee forward contracts had a $30.0 million notional value and a $3.7 million fair-value liability at May 31. Management uses derivatives for hedging, not speculation.
- Management cited volatility in equity markets, client budget scrutiny and headcount reductions, and potential contraction or consolidation among investment banks as risks to demand. It said clients remained cautious, though annual client retention exceeded 95% measured by ASV.
- The company estimated that none of the November 2011 performance-based options would vest, citing decelerating ASV growth and lower expected achievement of performance targets; this resulted in a $0.4 million compensation reversal in Q3. The company also disclosed a possible $1.4 million Q4 compensation reversal if specified organic ASV growth targets were not met for an earlier grant.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Approximately $5.3 million of gross unrecognized tax benefits, including accrued interest, remained recorded; management did not expect a significant change in that balance over the next 12 months.
Most important facts for investors to verify
- Whether ASV and revenue growth sustain the reported pace, particularly given client caution and the $4.1 million feed cancellation.
- Whether Q4 guidance is achieved and how the expiration or possible reenactment of the federal R&D tax credit affects the effective tax rate and EPS.
- Whether compensation and third-party data costs continue to rise with hiring and platform usage, and whether operating margins remain near guidance.
- How foreign-exchange movements and the Indian-rupee hedge affect expenses, cash flows, and reported earnings.
- The financial and strategic effects of StreetAccount, and the pace of future share repurchases and dividend payments.
- Whether performance-based equity awards ultimately vest; the related estimates depend on future ASV and diluted-EPS performance.