FactSet Research Systems Inc. — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2014. FactSet provides subscription-based financial information and analytical applications to the global investment community. Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended May 31, 2014 | Nine months ended May 31, 2014 |
|---|---|---|
| Revenue | $231.8 million, up 8.0% | $681.7 million, up 6.7% |
| Operating income / margin | $73.0 million / 31.5% | $222.8 million / 32.7% |
| Net income | $51.5 million, down 3.4% | $156.1 million, up 5.7% |
| Diluted EPS | $1.21, up 0.8% | $3.62, up 9.7% |
- Quarterly operating margin contracted from 33.4% a year earlier; year-to-date margin increased from 31.1%. Cost of services rose 18.2% for the quarter, faster than revenue, reflecting compensation, acquisition costs and a $1.4 million StreetAccount stock-compensation charge.
- For the quarter, SG&A included a $1.6 million legal settlement charge. The higher tax rate—29.8% versus 25.9%—also weighed on quarterly net income; management attributed the increase largely to the expired federal R&D tax credit and prior-year tax benefits.
- Operating cash flow was $193.7 million for nine months, versus $193.6 million. Capital expenditures were $11.7 million; company-defined free cash flow was $182.0 million, versus $180.3 million.
- Cash and cash equivalents were $118.9 million at May 31, 2014, down from $196.6 million at August 31, 2013; short-term investments were $15.2 million. Total liabilities were $144.4 million, and the company reported no borrowings. Current assets were $240.1 million and current liabilities $119.2 million.
- Nine-month investing cash outflow was $59.5 million, including $46.9 million for acquisitions. Financing cash outflow was $216.3 million, including $205.2 million of repurchases and $44.7 million of dividends.
Changes and business drivers
- Annual subscription value (ASV) reached $932 million, up 6.8% organically year over year and $12 million during the quarter. The figure includes $12 million of acquired ASV.
- FactSet added 30 net clients and 620 net users in the quarter; total users were 52,483. Annual retention was over 95% measured by ASV and 93% by client count.
- Investment management clients represented 83.1% of ASV and remained the main growth engine. Investment banking ASV fell $1.5 million in the quarter and $7.1 million year to date amid client headcount reductions.
- Revenue grew across regions: U.S. 6.3%, Europe 11.3% and Asia Pacific 12.9% in the quarter. Acquisitions and currency movements contributed to reported international growth.
- Revere Data and Matrix were acquired for a combined $47.1 million; together they added $8.2 million of revenue during the first nine months. Management said neither acquisition materially affected fiscal 2014 results to date.
- Quarterly diluted EPS growth was supported by lower weighted-average shares following repurchases, despite lower net income. The quarterly dividend increased 11% to $0.39 per share, or $1.56 annualized.
Outlook, risks and notable items
- For Q4 FY2014, management forecast revenue of $235–$240 million, operating margin of 32.5%–33.5%, an annual effective tax rate of 30%–31%, and diluted EPS of $1.30–$1.32. The margin outlook includes an estimated 100-basis-point impact from Revere and Matrix; EPS guidance reflects a $0.03-per-share reduction from the lapsed R&D tax credit.
- Management expected available cash and operating cash flows to fund operations and commitments for at least the next 12 months. It also noted that cash decreased primarily due to acquisitions, repurchases and dividends.
- Key exposures include market weakness affecting investment-management clients and equity assets, continued contraction or consolidation among investment-banking clients, and foreign-currency movements. FactSet estimated a $172 million annual net foreign-currency expense exposure and hedged about 75% of Indian rupee exposure and 50% of Philippine peso exposure for specified periods.
- Commitments include $212.1 million of future minimum operating lease payments, including $93.7 million under a 15-year New York lease. Purchase commitments were $50.2 million at August 31, 2013, with no material change reported.
- Legal proceedings arise in the ordinary course; management did not expect unresolved matters to have a material adverse effect. Gross unrecognized tax benefits were $5.2 million, including accrued interest; management did not anticipate a significant change in that balance over the next 12 months.
- The company reported effective disclosure controls, no material change in internal control over financial reporting, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether ASV growth, client and user additions, and retention remain resilient—particularly against ongoing investment-banking contraction.
- Whether cost growth moderates and operating margins move within management’s Q4 range as acquisition and compensation costs continue.
- How the higher tax rate and the status of the federal R&D tax credit affect reported earnings and EPS.
- Whether operating cash generation can sustain dividends, repurchases, acquisitions and long-term lease obligations while cash balances decline.
- How Revere and Matrix perform relative to their acquired subscription bases and goodwill, and whether currency hedges offset the company’s foreign operating-cost exposure.