FactSet Research Systems Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017. This annual filing also reports fourth-quarter results. FactSet provides subscription-based financial data, analytics, software and related services to investment professionals.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,221.2 million (+8.3%) | $1,127.1 million |
| Organic revenue growth | 6.9% | Not directly comparable in the cited table |
| Operating income / margin | $352.1 million / 28.8% | $349.7 million / 31.0% |
| Net income | $258.3 million | $338.8 million |
| Diluted EPS | $6.51 | $8.19 |
| Operating cash flow | $320.5 million | $331.1 million |
| Capital expenditures / free cash flow | $36.9 million / $283.7 million | $47.7 million / $283.4 million |
| Cash and cash equivalents | $194.7 million | $228.4 million |
| Long-term debt | $575.0 million | $300.0 million |
Annual subscription value (ASV) was $1.317 billion, up 5.7% organically. Buy-side clients represented 84.1% of ASV and grew 5.9%; sell-side ASV grew 4.6%. Clients totaled 4,744 and users 88,846. The effective tax rate was 25.0%. Current assets were $409.4 million and current liabilities $201.1 million; cash plus investments totaled $227.2 million.
Fourth quarter: Revenue was $326.6 million versus $287.3 million in Q4 FY2016. Operating income was $82.4 million versus $87.7 million; net income was $59.6 million versus $144.3 million; diluted EPS was $1.52 versus $3.55.
Material changes versus the prior year
- Revenue growth slowed to 8.3% from 12.0% in FY2016; organic revenue growth was 6.9%. Acquisitions contributed to reported growth.
- Operating margin declined 2.2 percentage points to 28.8%, as cost of services rose 16.2%, faster than revenue. Management cited compensation, technology costs, acquired-intangible amortization and acquisition-related costs.
- Net income and diluted EPS fell year over year, principally because FY2016 included an $81.7 million after-tax gain from the Market Metrics sale. Excluding that gain, management reported FY2017 net income up 0.4% and diluted EPS up 5.3%.
- FY2017 acquisitions included Vermilion, BISAM and Interactive Data Managed Solutions, renamed FactSet Digital Solutions. Acquisition cash outflows were $303.1 million; goodwill rose to $707.6 million from $452.9 million.
- Debt increased following the March 2017 refinancing and BISAM acquisition funding: FactSet borrowed $575 million under a revolving facility and repaid $365 million of prior debt. The facility matures in March 2020 and bears interest at daily LIBOR plus 1.00%.
Outlook, risks and unusual items
- Q1 FY2018 guidance: GAAP revenue of $327–$333 million; GAAP operating margin of 28%–29% and adjusted margin of 31%–32%; effective tax rate of 25%–26%; GAAP diluted EPS of $1.75–$1.81 and adjusted diluted EPS of $1.93–$1.99. Management said the midpoint of adjusted EPS guidance implied 12% year-over-year growth.
- FY2017 included approximately $18 million of non-recurring operating charges, including restructuring, share-based compensation vesting modifications and acquisition-related costs. It also included a $1.2 million pre-tax loss on the final Market Metrics working-capital adjustment.
- Management said available liquidity and expected operating cash flows were sufficient for near- and longer-term needs. Contractual obligations totaled $937.7 million, including $575 million of debt, $281.7 million of operating leases and $81 million of purchase commitments.
- Key risks include dependence on investment-management clients and market conditions, a shift from active to passive investing, pricing and competitive pressure, client-data security, service outages, reliance on third-party content, talent retention, acquisition integration, and foreign exchange exposure. Net annual foreign-currency exposure was estimated at approximately $210 million; a hypothetical 10% weaker U.S. dollar without hedges would reduce operating income by $20.3 million over 12 months.
- Legal proceedings were described as ordinary-course matters; management did not expect their outcome to have a material adverse effect. Tax authorities were auditing the company; unrecognized tax benefits were $11.5 million. Management reported effective internal controls, but its assessment excluded the acquired BISAM, FactSet Digital Solutions and Vermilion businesses, which represented 4.5% of revenue.
Important facts for investors to verify
- Reconcile reported earnings with the prior-year Market Metrics sale gain and FY2017 acquisition, restructuring and compensation-modification charges.
- Track operating-margin trends and whether acquired businesses contribute to growth without sustained cost pressure.
- Review debt repayment capacity, floating-rate exposure and the maturity and covenant terms of the $575 million facility.
- Monitor ASV growth and retention, particularly the deceleration in buy-side and sell-side ASV growth; note that FactSet changed its ASV, client-count and user-count definitions during FY2017.
- Assess acquisition integration, goodwill and intangible-asset balances, and the planned integration of acquired companies’ financial controls.