FactSet Research Systems Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended August 31, 2013. The filing also reports fourth-quarter results for the three months ended August 31, 2013. FactSet provides subscription-based financial information, analytics, and workflow applications to investment professionals; 81.6% of revenue came from investment-management clients.
Key financial and operating metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $858.1 million | $805.8 million | +6.5% |
| Operating income | $269.4 million | $273.0 million | -1.3% |
| Operating margin | 31.4% | 33.9% | -2.5 percentage points |
| Net income | $198.6 million | $188.8 million | +5.2% |
| Diluted EPS | $4.45 | $4.12 | +8.0% |
| Cash from operations | $269.8 million | $232.0 million | +16.3% |
| Capital expenditures | $18.5 million | $22.5 million | Lower by $4.0 million |
| Free cash flow (non-GAAP) | $251.3 million | $209.4 million | +20% |
- Cash and cash equivalents were $196.6 million at year-end; short-term investments were $12.7 million. The company reported no borrowings and $541.8 million of stockholders’ equity.
- Current assets were $318.0 million and current liabilities $118.3 million. Management said cash and expected operating cash flows would meet operating and capital needs for the foreseeable future.
- Annual subscription value (ASV) reached $888 million, up 5.9% organically. Client retention was 92% by client count and greater than 95% by ASV; the company had 2,500 clients and 50,925 users.
- Revenue by region: U.S. $586.9 million (+6.6%); Europe $208.8 million (+5.8%); Asia Pacific $62.4 million (+7.8%).
Changes versus the prior year
- Revenue growth slowed from 10.9% in FY2012 to 6.5% in FY2013. StreetAccount contributed $11.5 million of FY2013 revenue and approximately 1.2 percentage points of reported growth; excluding it, growth was 5.3%.
- Operating margin fell to 31.4%, chiefly because of $18.3 million in additional performance-based stock compensation tied to Market Metrics and StreetAccount awards, higher employee costs, and StreetAccount expenses. The company presented adjusted operating margin of 33.5%, excluding that compensation charge.
- Net income and EPS increased despite lower operating income, aided by a lower effective tax rate and fewer diluted weighted-average shares. The 26.7% effective tax rate included $7.2 million of tax benefits, primarily from the U.S. federal R&D tax credit and prior-year tax return finalization.
- FactSet repurchased 3.4 million shares for approximately $327 million, paid $56.0 million in dividends, and returned a reported $388.2 million to stockholders. The regular quarterly dividend increased 13% to $0.35 per share in May 2013.
Outlook, commentary, risks, and unusual items
- FY2014 Q1 outlook, as of September 17, 2013: revenue of $222–$225 million; operating margin of 33.0%–34.0%; diluted EPS of $1.21–$1.24. The EPS range assumed re-enactment of the federal R&D tax credit; without it, management estimated EPS would be $0.03 lower. Expected annual effective tax rate was 28.5%–29.5%, also assuming re-enactment. No full-year FY2014 guidance is provided in the supplied filing text.
- Management cited continued demand for Portfolio Analysis, proprietary content, wealth-management workflows, Market Metrics, and StreetAccount. Investment-bank clients remained cautious about spending and hiring, although fourth-quarter user additions improved.
- Key risks include financial-market weakness affecting investment-management clients, investment-bank spending reductions and consolidation, competitive pricing and lower-cost data alternatives, cybersecurity or service outages, dependence on third-party content suppliers, talent retention, and foreign-exchange exposure. Non-U.S.-dollar expenses exceeded expected non-U.S.-dollar revenue by an estimated $154 million annually; hedging may not fully offset currency movements.
- Contractual obligations totaled $210.2 million, including $129.9 million of operating leases and $50.2 million of purchase commitments; an additional $7.8 million of non-current tax and deferred-tax obligations was disclosed separately. Legal matters were described as ordinary-course matters that management did not expect to have a material adverse effect.
- After year-end, FactSet acquired Revere Data assets for $15.4 million on September 1, 2013; Revere had $4.9 million in annual subscriptions. The company also announced that Ernst & Young would replace PwC as auditor beginning FY2014. PwC issued an unmodified FY2013 audit opinion, and the filing reports no accounting disagreements or reportable events.
Important facts for investors to verify
- Whether organic ASV growth and client/user additions continue, particularly as investment-bank spending remains pressured.
- Whether margins recover as the FY2013 acquisition-related performance-award charges pass, and how ongoing hiring and product investment affect costs.
- How much FY2013 EPS growth reflects recurring operating performance versus tax benefits, share repurchases, and stock-compensation adjustments.
- Whether FY2014 Q1 guidance assumptions about revenue, margin, and R&D tax-credit renewal were achieved.
- Whether currency hedges, third-party data access, and security and service-continuity controls adequately manage the risks identified in the filing.