FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended May 31, 2020. Comparisons are with the corresponding 2019 periods unless noted. Amounts are in U.S. dollars.
Business context and financial performance
FactSet provides subscription-based financial information, analytics and workflow solutions to investment and corporate clients. Its operating segments are the Americas, EMEA and Asia Pacific. Management reported that COVID-19 had not materially affected results through May 31, but warned that future impacts remained uncertain.
| Metric | Three months | Change | Nine months | Change |
|---|---|---|---|---|
| Revenue | $374.1 million | +2.6% | $1,110.5 million | +3.7% |
| Operating income | $121.6 million | +3.8% | $341.1 million | +4.5% |
| Operating margin | 32.5% | 32.2% prior year | 30.7% | 30.5% prior year |
| Net income | $101.2 million | +9.7% | $283.9 million | +8.6% |
| Diluted EPS | $2.63 | +11.0% | $7.36 | +9.4% |
| Operating cash flow | Not presented for quarter | — | $346.4 million | $305.3 million prior year |
| Capital expenditures | $11.0 million | $11.4 million prior year | $62.9 million | $32.9 million prior year |
| Free cash flow | Not presented for quarter | — | $283.5 million | $272.4 million prior year |
Quarterly revenue growth was reported as organic and came from all geographic segments. Asia Pacific grew fastest, with revenue up 7.4% for the quarter; Americas revenue rose 1.8% and EMEA 2.8%. Growth was led by Analytics and Trading, Content and Technology Solutions, and Wealth. Organic annual subscription value (ASV) was $1.494 billion, up 5.0%; ASV plus professional services was $1.52 billion, also up 5.0%. ASV retention exceeded 95%, while client retention was 89%, down from 90%.
Liquidity, debt and capital returns
- Cash and cash equivalents were $457.7 million at May 31, 2020, versus $359.8 million at August 31, 2019; short-term investments were $22.6 million.
- Current assets were $708.4 million and current liabilities $247.3 million. The filing states management believed available liquidity and expected operating cash flows would meet requirements.
- Long-term debt was $575.0 million, unchanged from August 31, 2019, under a $750.0 million revolving facility maturing in March 2024; $175.0 million remained available. The company was in compliance with covenants.
- A $287.5 million interest-rate swap hedged part of the floating-rate debt. The reported spread was 0.875%; the swap fixed its reference rate at 0.7995%.
- Operating lease liabilities totaled $305.2 million at May 31, following adoption of the new lease standard. Lease obligations are separate from reported debt.
- For nine months, FactSet repurchased $171.0 million of shares and paid $81.4 million in dividends. The quarterly dividend was raised 7% to $0.77 per share. $287.6 million remained authorized for repurchases at May 31.
Changes, outlook and risks
- Net income and EPS growth exceeded revenue growth, supported by lower interest expense and a lower effective tax rate. The nine-month effective tax rate was 14.2%, versus 16.7%; management cited R&D tax credits and the FDII deduction. The prior-year comparison included a $5.8 million tax expense related to finalizing earlier tax returns.
- Quarterly operating margin improved modestly, partly because COVID-related reductions in travel, entertainment and office costs more than offset additional pandemic-response expenses. Higher technology spending, including cloud hosting and licensed software, pressured service costs. Nine-month capital expenditures nearly doubled, mainly for facilities and technology investment.
- Management said remote work had caused minimal service interruption and had not materially affected results to date. It anticipated possible future weakness from longer sales cycles, lower incremental billings, delayed implementations, client spending reductions or cancellations. The full pandemic impact could not be estimated.
- The filing presents fiscal 2020 outlook updated June 25, 2020: organic ASV plus professional services growth of $60–$75 million; GAAP revenue of $1.485–$1.490 billion; GAAP operating margin of 30.0%–30.5%; adjusted operating margin of 33.0%–33.5%; effective tax rate of 15.5%–16.5%; GAAP diluted EPS of $9.60–$9.80; and adjusted diluted EPS of $10.40–$10.60. Management cited pandemic uncertainty and did not intend to update forward-looking statements.
- Massachusetts tax authorities issued a notice of intent to assess sales taxes, interest and penalties for prior periods. FactSet appealed, recorded no liability because the outcome could not be reasonably estimated, and warned an unfavorable result could materially affect results, cash flows and financial position. Management said other disclosed legal and tax matters were not expected to have a material effect.
- Other identified risks include the pandemic, market declines and a shift from active to passive investing, investment-bank consolidation, client retention, foreign exchange and interest-rate movements, cybersecurity or service disruptions, Brexit-related uncertainty, and vendor or data-supplier dependencies. No individual data supplier exceeded 10% of data costs.
Key facts for investors to verify
- Whether ASV growth, renewals and client retention remain resilient as pandemic-related sales-cycle and spending effects emerge.
- Progress against the fiscal 2020 outlook, noting the stated ranges were updated after the quarter ended.
- Whether margin gains from reduced discretionary spending persist as technology investment and compensation costs rise.
- Cash generation and capital allocation relative to facility, technology, dividend and buyback commitments; separately monitor debt and lease obligations.
- Developments in the Massachusetts sales-tax matter and any changes to the company’s estimate of potential exposure.