FactSet Research Systems Inc. — FY2012 Form 10-K
Business context and reporting period: FactSet provides subscription-based financial information, data and analytics to investment managers, investment banks and other financial professionals. This annual report covers the fiscal year ended August 31, 2012; fourth-quarter figures refer to the three months ended that date.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $805.8 million | $726.5 million | +10.9% |
| Operating income | $273.0 million | $238.3 million | +14.5% |
| Operating margin | 33.9% | 32.8% | +1.1 percentage points |
| Net income | $188.8 million | $171.0 million | +10.4% |
| Diluted EPS | $4.12 | $3.61 | +14.1% |
| Operating cash flow | $232.0 million | $207.1 million | +12.0% |
| Free cash flow | $209.4 million | $177.8 million | +17.8% |
Fourth-quarter revenue was $207.7 million, operating income $70.6 million, net income $48.5 million and diluted EPS $1.08. The comparable FY2011 quarter reported $191.9 million, $59.0 million, $40.9 million and $0.88, respectively.
At year-end, cash and cash equivalents were $189.0 million, with $13.9 million of short-term investments and no outstanding borrowings. Total assets were $694.1 million and total liabilities $141.9 million. Capital expenditures were $22.5 million. FactSet generated $231.97 million of operating cash flow and returned $204 million to stockholders through dividends and share repurchases.
ASV was $843 million, up 7% organically year over year; the total increase was $64 million, including $11.4 million of acquired StreetAccount subscriptions. Client retention was 92% by client count and greater than 95% by ASV. Revenue mix was 68.3% U.S. and 31.7% international; investment-management clients represented 81% of ASV.
Material changes versus FY2011
- Revenue growth moderated to 10.9% from 13.3%; organic ASV growth slowed to 7% from 14%.
- Operating margin recovered to 33.9% from 32.8%, partly because FY2011 included a $7.9 million stock-compensation charge. FY2012 also benefited from lower travel, computer depreciation and intangible amortization, offset in part by higher employee and data costs.
- The effective tax rate rose to 31.3% from 28.4%; FY2011 included $6.3 million of tax benefits, including the federal R&D credit, which had expired by FY2012.
- Cash increased $7.4 million. Share repurchases fell to $153.6 million from $216.6 million, while dividends paid rose to $50.0 million from $43.9 million.
Outlook, management commentary and risks
Management’s September 25, 2012 outlook for FY2013 first-quarter revenue was $210–$213 million, operating margin 33.5%–34.0%, effective tax rate 31.5%–32.5%, and diluted EPS $1.10–$1.12. FY2013 capital expenditures were projected at $20–$28 million; the annual effective tax rate was expected at 31.5%–32.5%. The filing does not provide full-year FY2013 revenue or EPS guidance.
Management emphasized continued investment in products, technology and employees, including the multi-year NextGen platform transition and wider mobile, proprietary-data and analytics offerings. FactSet acquired StreetAccount in June 2012 for a total purchase price of $26.4 million; it contributed $1.8 million of FY2012 revenue and did not affect fourth-quarter diluted EPS. The preliminary allocation included $22.0 million of goodwill and remained subject to final working-capital adjustment.
- Market declines or prolonged volatility could constrain clients’ budgets and demand; about 81% of ASV comes from investment-management clients.
- Investment-bank consolidation, spending cuts and hiring reductions could pressure sell-side subscriptions; investment banking clients reduced users by about 500 over the year.
- Competition, lower-cost or free data sources, and the need to maintain product quality and innovation could affect pricing, retention and growth.
- FactSet has a net annual foreign-currency expense exposure of about $146 million; hedging may not fully offset currency movements.
- Other disclosed risks include data-center outages, cybersecurity or client-data breaches, dependence on third-party data, hiring and compensation costs, tax audits, and acquisition integration. Management said ordinary-course legal matters were not expected to materially affect results, financial position or cash flows.
Unusual or judgment-sensitive items include the FY2012 reversal of $1.4 million of stock-based compensation after performance-based options failed to vest; the prior-year $7.9 million performance-option charge; and the FY2012 $1.0 million loss on foreign-exchange derivatives, versus a $4.2 million gain in FY2011. Management and the independent auditor reported effective internal control over financial reporting as of August 31, 2012.
Important facts for investors to verify
- Whether subscription and ASV growth can sustain momentum after decelerating, and how much growth is organic versus acquisition-related or price-driven.
- Whether the stated FY2013 first-quarter guidance and capital-spending plans were achieved, and how margins respond to continued hiring and platform investment.
- StreetAccount’s subsequent subscription growth, integration costs and contribution to earnings; the purchase-price allocation was preliminary.
- The effects of client spending, investment-bank reductions, market conditions and foreign-exchange movements on retention, users and revenue.
- Cash deployment, including the remaining $189.8 million share-repurchase authorization, dividend sustainability, and the $141.2 million of future operating-lease payments.