FactSet Research Systems Inc. — Q2 FY2020 Form 10-Q
Business context and period. FactSet provides subscription-based financial information, analytics, data and workflow solutions. This unaudited quarterly report covers the three and six months ended February 29, 2020; comparisons are with the periods ended February 28, 2019. The filing was signed April 9, 2020.
Financial performance and position
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $369.8 million | $354.9 million | $736.4 million | $706.5 million |
| Operating income | $106.3 million | $108.7 million | $219.4 million | $209.2 million |
| Operating margin | 28.7% | 30.6% | 29.8% | 29.6% |
| Net income | $88.7 million | $84.7 million | $182.6 million | $169.0 million |
| Diluted EPS | $2.30 | $2.19 | $4.73 | $4.37 |
| Operating cash flow | — | $195.5 million | $145.6 million | |
| Capital expenditures | — | $51.9 million | $21.5 million | |
| Free cash flow | — | $143.6 million | $124.1 million |
Q2 revenue grew 4.2%, while operating income fell 2.2%; net income rose 4.7% and diluted EPS rose 5.0%. Revenue growth was organic, with all geographic segments contributing. In Q2, cost of services rose 6.7% and SG&A rose 7.7%, pressuring operating margin. Management cited higher technology and cloud-hosting costs, professional fees, compensation and the timing of certain tax credits. Six-month operating income increased 4.9%, and operating margin improved 0.2 percentage points.
Q2 revenue by region: Americas $232.7 million (+4.2%), EMEA $102.1 million (+3.2%) and Asia Pacific $34.9 million (+7.0%). Organic ASV was $1.479 billion, up 4.2%; organic ASV plus professional services was $1.50 billion, up 4.3%. Client count increased 5.2% to 5,688 and users increased 5.6% to 128,896. ASV retention exceeded 95%, while client retention was 89%, down from 91% a year earlier.
At February 29, 2020, cash and cash equivalents were $343.5 million and investments were $23.9 million. Long-term debt was $575.0 million, with $175.0 million available under the $750.0 million revolving facility; the facility matures March 29, 2024. Debt bears floating-rate interest, with a current spread of 0.875%; the company reported compliance with covenants. Lease liabilities totaled $285.1 million, following adoption of the lease accounting standard. The company had $601.1 million of current assets and $228.5 million of current liabilities.
Six-month cash use included $158.6 million in share repurchases and $54.4 million in dividends. The quarterly dividend was $0.72 per share. On March 24, 2020, the board increased the repurchase authorization by $220 million, leaving $300 million available after the increase.
Outlook, risks and unusual items
- FY2020 guidance: organic ASV plus professional services growth of $50–$75 million; GAAP revenue of $1.49–$1.50 billion; GAAP operating margin of 28.5%–29.5%; adjusted operating margin of 31.5%–32.5%; effective tax rate of 17.0%–17.5%; GAAP diluted EPS of $8.70–$9.00 and adjusted diluted EPS of $9.85–$10.15. Management said the ASV outlook range reflects anticipated coronavirus impacts and cautioned actual results may differ materially. It did not intend to update guidance before its next quarterly results announcement, except through public statements.
- COVID-19: Management could not reasonably estimate the pandemic’s full impact and anticipated possible revenue and ASV weakness from longer sales cycles, lower billings, delayed implementations or cancellations, and reduced seasonal hiring at investment banks. Effects could begin in Q3 FY2020. The company activated continuity plans, shifted many employees to remote work, restricted travel and increased client support; response costs were not material in Q2. It was considering discretionary-spending, hiring and third-party content-cost controls.
- Other risks: client spending pressure, industry consolidation, shifts from active to passive investing, foreign-exchange and interest-rate movements, data-provider and technology dependencies, cybersecurity or service disruptions, Brexit uncertainty, and legal and tax matters. A 25-basis-point change in LIBOR was estimated to change annual interest expense by $1.4 million.
- Contingencies: Massachusetts issued a notice of intent to assess sales/use taxes, interest and penalties for prior periods. FactSet appealed, recorded no liability because the outcome could not be reasonably estimated, and said an unfavorable outcome could materially affect financial position, cash flows and results. Tax audits and ordinary-course legal matters were also disclosed; management did not expect those matters to have a material adverse effect.
- Other notable items: adoption of lease accounting added recognized lease assets and liabilities, primarily for real estate leases. The company reported no material changes in supplier purchase commitments and no off-balance-sheet financing arrangements. Its annual goodwill impairment test in FY2019 found no impairment.
Investor verification priorities
- Track actual revenue, ASV, cancellations, client retention and sales-cycle trends against the FY2020 outlook, especially as COVID-19 effects emerge.
- Assess whether rising technology, cloud and professional-fee spending continues to weigh on operating margins.
- Verify free-cash-flow conversion after elevated capital spending and shareholder distributions, and monitor debt, floating-rate exposure and covenant headroom.
- Follow the Massachusetts sales-tax matter, tax examinations and any changes in the company’s ability to estimate or reserve for potential assessments.
- Review the timing and returns of the expanded $300 million repurchase authorization and the sustainability of dividends.