FactSet Research Systems Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended November 30, 2021; comparisons are with the three months ended November 30, 2020 unless stated otherwise. FactSet provides subscription-based financial data, analytics and workflow products across the Americas, EMEA and Asia Pacific.
Financial performance
| Metric | Q1 FY2022 | Prior year | Change |
|---|---|---|---|
| Revenue | $424.7 million | $388.2 million | +9.4%; organic revenue +9.1% |
| Operating income | $122.7 million | $121.0 million | +1.3% |
| Operating margin | 28.9% | 31.2% | Down 2.3 percentage points |
| Net income | $107.6 million | $101.2 million | +6.4% |
| Diluted EPS | $2.79 | $2.62 | +6.5% |
| Operating cash flow | $72.9 million | $89.3 million | Down $16.4 million |
| Free cash flow (non-GAAP) | $64.3 million | $70.9 million | Down 9.3% |
Revenue grew in all geographies: Americas 9.2%, EMEA 8.7%, and Asia Pacific 12.4%. Growth was broad across workflows, led by Research & Advisory. Organic ASV plus Professional Services was $1.70 billion at November 30, up 8.9% year over year. The effective tax rate declined to 10.2% from 15.8%, principally reflecting higher stock-option-related windfall tax benefits, along with R&D credits and the FDII deduction.
Financial position and capital allocation
- Cash and cash equivalents were $673.9 million and investments were $35.0 million at November 30, 2021. Long-term debt was $574.6 million net of issuance costs; $575 million was drawn on the $750 million revolving facility, leaving $175 million available. The facility matures in March 2024; FactSet reported covenant compliance.
- Operating cash flow was lower mainly due to timing of tax payments and higher bonus payouts. Investing cash use was $58.9 million, including $50.0 million for the Cobalt acquisition. Financing cash use was $16.5 million.
- FactSet paid $30.7 million in dividends and repurchased $18.6 million of shares during the quarter. The quarterly dividend was $0.82 per share; $181.3 million remained authorized for repurchases at quarter-end.
- Operating expenses rose 13.1%, faster than revenue. Management cited higher technology and computer costs, employee compensation, intangible amortization, restructuring, and charges for vacating New York office space. GAAP margin fell to 28.9%; adjusted operating margin, a non-GAAP measure, was 33.6% versus 34.3%.
Material developments, outlook and risks
- FactSet acquired Cobalt Software on October 12, 2021, for approximately $50 million net of cash acquired, expanding private-capital portfolio monitoring capabilities.
- After quarter-end, on December 24, 2021, FactSet agreed to acquire CUSIP Global Services for $1.925 billion in cash. The company expected the transaction to close in the first quarter of calendar 2022, subject to customary conditions, regulatory approvals and completion of the S&P Global/IHS Markit merger. It planned to fund the deal with cash and committed financing of up to $2.5 billion, and expected to suspend share repurchases for the remainder of FY2022 after closing, apart from possible dilution-offset repurchases.
- The filing provides no specific revenue or earnings guidance. Management said liquidity and financing alternatives were expected to meet needs for the next 12 months and foreseeable future. It reported no material negative financial impact from COVID-19 to date, while noting uncertainty around variants and office reopening. Hybrid and remote work arrangements were prompting a review of office space.
- Massachusetts issued notices concerning potential sales-tax, interest and penalty assessments for periods from 2006 through 2018, and requested information for 2019 through June 2021. FactSet is contesting/cooperating with the inquiries, has not recorded a liability, and says the ultimate outcome cannot be reasonably estimated; an assessment could materially affect results, financial position or cash flows.
- Foreign-exchange movements, net of hedging, reduced operating income by $4.3 million. FactSet also has floating-rate debt exposure; a 25-basis-point LIBOR change was estimated to affect annual interest expense by $0.7 million. The filing reports ordinary-course legal matters and tax audits, which management did not expect to have a material effect.
- Management attributed operating-margin pressure to higher technology costs, intangible amortization and office-vacating charges. Non-GAAP adjusted results exclude, among other items, restructuring/severance, real-estate charges, transformation costs and intangible amortization; they should be considered alongside GAAP results.
Key facts for investors to verify
- Progress, closing conditions, financing terms and post-close leverage for the proposed $1.925 billion CUSIP Global Services acquisition.
- The potential exposure and status of the Massachusetts sales-tax matters, for which no liability was recorded and no outcome estimate was available.
- Whether subscription growth and ASV gains translate into improved operating margins and cash generation as technology investment and compensation costs rise.
- Cash-flow trends, including the timing of tax payments and bonuses, and planned dividend and repurchase policy after the acquisition.
- Exposure to currency and interest-rate movements, including the effectiveness and coverage of hedges.