FactSet Research Systems Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended May 31, 2017; fiscal year ends August 31. FactSet provides subscription-based financial information, analytics, applications, content and technology to investment professionals worldwide.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement figures below are in millions except per-share data.
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $312.1 | $287.5 | $894.5 | $839.8 |
| Operating income | $87.6 | $89.3 | $269.7 | $261.9 |
| Operating margin | 28.1% | 31.1% | 30.2% | 31.2% |
| Net income | $65.4 | $66.8 | $198.7 | $194.5 |
| Diluted EPS | $1.66 | $1.62 | $5.00 | $4.68 |
| Cash provided by operations | Not stated for quarter | Not stated for quarter | $220.3 | $261.1 |
| Free cash flow (non-GAAP) | $84.3 | $88.6 | $194.3 | $226.4 |
- Q3 revenue rose 8.6%; organic revenue growth was 5.9%. Nine-month revenue rose 6.5%, with organic growth of 7.1%.
- Q3 cost of services was 46.9% of revenue, up 360 basis points year over year. Management attributed margin pressure to employee compensation, data costs, acquired-intangible amortization and acquisition-related costs.
- At May 31, cash and cash equivalents were $161.8 million and investments were $31.9 million. Current assets were $373.2 million and current liabilities were $182.1 million.
- Long-term debt was $575.0 million, versus $300.0 million at August 31, 2016. The revolving facility bears interest at daily LIBOR plus 1.00%, matures March 17, 2020, and was fully drawn. FactSet reported compliance with its debt covenants.
- Nine-month investing cash outflow was $334.4 million, including $301.8 million for acquisitions; financing cash inflow was $51.4 million. Cash declined $66.6 million from fiscal year-end.
Changes versus the prior comparable period
- Q3 operating income fell 1.8% and net income fell 2.0%, despite higher revenue; diluted EPS rose 2.5%, helped by lower diluted share count following repurchases. For nine months, operating income rose 3.0%, net income 2.2%, and diluted EPS 6.8%.
- Organic ASV grew 5.7% year over year to $1.28 billion, while reported ASV increased 10.9%. Management said organic growth was below the prior year, citing client cost pressures, firm consolidations and failures, and related cancellations.
- Acquisitions expanded the business and contributed to reported growth and costs. FactSet acquired BISAM for $216.9 million in March 2017 and Vermilion for $67.9 million in November 2016; it also acquired Interactive Data Managed Solutions, renamed FactSet Digital Solutions Group (FDSG). The BISAM purchase-price allocation remained preliminary. Acquired goodwill increased by $234.1 million during the nine months.
- Debt increased following a new $575 million revolving facility, which refinanced the prior facility and helped fund BISAM. FactSet repurchased $208.8 million of shares in the first nine months and paid $59.1 million in dividends.
- The effective tax rate was 23.2% for Q3 and 24.9% for the nine months. A global operational realignment effective September 1, 2016 was expected to benefit fiscal 2017’s annual effective tax rate by approximately 250 basis points.
Outlook, risks and contingencies
- Q4 FY2017 guidance: GAAP revenue of $321–$328 million; GAAP operating margin of 28%–29%; adjusted operating margin of 31%–32%; annual effective tax rate of 25%–26%; GAAP diluted EPS of $1.67–$1.73; and adjusted diluted EPS of $1.86–$1.92. Management said the midpoint of adjusted EPS guidance implies 12% growth year over year.
- Management described solid wins among plan sponsors and hedge funds, strength in analytics and Content & Technology Solutions, and growth in wealth management. It also cited acquisition-related costs, higher employee expenses, and client cancellations as constraints.
- Risks include equity-market declines and shifts from active to passive investing, investment-bank consolidation or reduced staffing, currency volatility and Brexit-related uncertainty. FactSet estimated a $205.6 million net annual foreign-currency expense exposure; its hedges covered about 50% of GBP exposure through Q4 FY2017 and 75% of INR exposure through Q3 FY2019.
- A hypothetical 25-basis-point change in one-month LIBOR would change annual interest expense by approximately $1.4 million, assuming other debt terms remain unchanged.
- FactSet had $10.8 million of gross unrecognized tax benefits, including accrued interest. Tax audits and ordinary-course legal matters were disclosed; management did not expect unresolved matters to have a material adverse effect. Operating lease commitments totaled $281.7 million.
Important facts for investors to verify
- Whether organic ASV and revenue growth stabilize, particularly given cancellations and the distinction between organic and acquisition-driven growth.
- Acquisition integration, the final BISAM purchase-price allocation, acquired-intangible amortization and the profitability of the U.S. segment, where quarterly operating income declined 18.2%.
- Cash conversion and collections: nine-month free cash flow declined 14.2%, and DSO rose to 42 days from 31 days at August 31, 2016; management linked the increase partly to acquired businesses’ collection policies.
- Debt service, floating-rate exposure, covenant compliance and capital returns alongside the $575 million borrowing and ongoing repurchases and dividends.
- Delivery against Q4 guidance, including adjusted metrics and the effects of acquisition costs, tax benefits and share repurchases.
- Comparability of client, user and ASV metrics: FactSet changed the client and user count definitions and excluded professional services from reported ASV in FY2017.