Business Context and Reporting Period
FactSet Research Systems Inc. provides subscription-based financial data, analytics and workflow applications to investment managers, investment banks and other financial professionals. This Form 10-K covers the fiscal year ended August 31, 2014; the fourth quarter ended on that date. Investment management clients generated 82.6% of annual subscription value (ASV).
Financial and Operating Metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $920.3 million | $858.1 million |
| Operating income / margin | $302.2 million / 32.8% | $269.4 million / 31.4% |
| Net income | $211.5 million | $198.6 million |
| Diluted EPS | $4.92 | $4.45 |
| Operating cash flow | $265.0 million | $269.8 million |
| Free cash flow | $247.3 million | $251.3 million |
- Revenue increased 7.3%; excluding acquisitions and currency effects, growth was 5.9%. Operating income rose 12.2%, net income 6.5%, and diluted EPS 10.6%.
- Cost of services was $353.7 million, or 38.4% of revenue. The filing reports an operating margin of 32.8%.
- At August 31, cash and equivalents were $116.4 million and short-term investments were $20.0 million. Current assets were $249.8 million and current liabilities $127.3 million.
- FactSet reported no outstanding borrowings. Total liabilities were $152.1 million; stockholders’ equity was $511.1 million.
- Fourth-quarter revenue was $238.7 million, operating income $79.4 million, net income $55.4 million and diluted EPS $1.31.
- ASV was $964 million, up 7.3% organically. FactSet added 200 net clients and 3,628 users; year-end totals were 2,743 clients and 54,596 users.
Material Changes Versus the Prior Year
- Operating margin improved from 31.4% to 32.8%, partly because the prior year included an $18.3 million charge for acquisition-related performance stock options. FY 2014 margin was 70 basis points below FY 2013’s adjusted margin of 33.5%.
- Cost of services increased 15.4%, reflecting compensation, third-party data costs and the Revere and Matrix acquisitions. SG&A declined 6.3%, in part because the prior-year stock-option charge did not recur.
- The effective tax rate rose to 30.3% from 26.7%. FY 2013 included $7.2 million of tax benefits, primarily related to the federal R&D credit; the credit expired during FY 2014.
- Cash and equivalents fell $80.2 million, primarily reflecting acquisitions, repurchases and dividends. Operating cash flow and free cash flow were slightly lower than in FY 2013.
- FactSet acquired Revere Data for approximately $15.3 million and Matrix Data for approximately $31.8 million. The acquisitions added $12 million of ASV; management said their impact on consolidated FY 2014 results was not material.
Outlook, Risks and Unusual Items
- For Q1 FY 2015, FactSet expected revenue of $240–$243 million, operating margin of 32.8%–33.8%, and diluted EPS of $1.31–$1.33. The EPS range assumed the R&D tax credit would not be reenacted; if reenacted by November 30, 2014, the indicated range was $1.36–$1.38, with a possible $0.13 per-share benefit from retroactive application.
- Management highlighted continued investment in product development, proprietary content, client service and Project NextGen technology infrastructure. It reported 97% client satisfaction and retention of more than 95% of ASV.
- Key risks include financial-market weakness and client cost reductions, competition and pricing pressure, dependence on continued product innovation, data security and service outages, supplier-contract availability, and recruiting and retaining qualified staff.
- Currency exposure is material: forecast non-U.S.-dollar expenses of $196 million exceeded forecast non-U.S.-dollar revenue of $28 million. Management hedged portions of Indian rupee and Philippine peso exposure; a hypothetical 10% weaker U.S. dollar without hedges was estimated to reduce operating income by $18.9 million over 12 months.
- Contractual commitments included $206.2 million of future operating lease payments and $53.3 million of supplier purchase commitments. A new 15-year New York lease accounted for $93.7 million of future rent payments.
- Management did not expect pending legal matters or ongoing tax audits to have a material adverse effect, while noting that outcomes remain uncertain. Unrecognized tax benefits were $5.5 million.
Investor Facts to Verify
- Whether organic ASV growth and client/user additions continued, and how much growth came from acquired businesses.
- Whether cost-of-services growth, hiring and acquisition integration affect margins relative to management’s outlook.
- Actual FY 2015 tax rate and the status and impact of the federal R&D tax credit.
- Cash generation, cash deployment to repurchases and dividends, and the sustainability of shareholder returns.
- Currency exposure, hedging coverage, data-provider contract renewals, and any changes in security or business-continuity risks.