FactSet Research Systems Inc. — Q2 Fiscal 2012 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2012; comparative periods ended February 28, 2011. Unaudited interim financial statements. FactSet provides subscription-based financial information and analytical applications to investment-management and investment-banking clients.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $199.4 million | $177.6 million | $395.8 million | $350.9 million |
| Operating income | $67.1 million | $58.1 million | $133.9 million | $117.5 million |
| Operating margin | 33.7% | 32.7% | 33.8% | 33.5% |
| Net income | $46.7 million | $45.3 million | $92.3 million | $86.9 million |
| Diluted EPS | $1.02 | $0.95 | $2.01 | $1.83 |
| Operating cash flow | $43.7 million | $50.3 million | $98.5 million | $72.5 million |
| Free cash flow | $39.1 million | $42.9 million | $87.8 million | $57.0 million |
- Q2 revenue grew 12.2%; six-month revenue grew 12.8%. Q2 operating income rose 15.5%, while net income rose 3.3% and diluted EPS rose 7.4%. For the six months, operating income increased 13.9%, net income 6.3%, and diluted EPS 9.8%.
- Cost of services was 33.9% of Q2 revenue, consistent with the prior-year quarter; for the six-month period it was 33.9%, up 0.6 percentage points year over year. Employee additions and compensation costs were partly offset by lower data, depreciation, and intangible-amortization costs.
- Cash and cash equivalents were $185.0 million at February 29, 2012, plus $15.2 million of short-term investments. Current assets were $292.0 million and current liabilities $90.7 million. The company reported no outstanding borrowings.
- Six-month capital expenditures were $10.6 million. Cash returned to shareholders included $24.2 million in dividends and $59.8 million in share repurchases. The quarterly dividend was $0.27 per share, or $1.08 annualized; $83 million remained authorized for repurchases.
Business developments and changes
- Annual Subscription Value (ASV) reached $803 million, up 11% year over year, and increased $21.7 million during Q2. FactSet added 53 net clients in the quarter, reaching 2,324 clients, and had 47,300 users, up 400 during the quarter.
- Annual client retention exceeded 95% of ASV; client-count retention improved to 92% from 90% a year earlier. Investment-management clients generated 81% of revenue, up from 80%.
- Revenue grew across regions in Q2: U.S. 12.2%, Europe 11.3%, and Asia Pacific 15.7%. Growth reflected client and user additions, price increases, advanced applications, and proprietary content. Investment-banking client spending remained weak; related ASV declined $1.1 million in Q2.
- Reported earnings comparisons were affected by prior-year items. Q2 FY2011 included a $4.9 million tax benefit from reinstatement of the U.S. federal R&D credit and a $2.5 million pretax stock-compensation charge. Excluding those prior-year items, management reported non-GAAP net-income growth of 11.2% and diluted-EPS growth of 14.6% for Q2; these are non-GAAP comparisons, not reported GAAP growth rates.
- The FY2012 six-month effective tax rate was 31.5%, versus 26.3% a year earlier, partly reflecting the prior-year R&D-credit benefit and expiration of the credit on December 31, 2011.
Outlook, risks, and contingencies
- Q3 FY2012 guidance: Revenue of $200–$204 million; operating margin of 33.5%–34.0%; effective tax rate of 31.0%–32.0%; diluted EPS of $1.03–$1.05, including an estimated $0.02 per-share impact from expiration of the federal R&D credit. Guidance reflects expectations as of March 13, 2012.
- Management said liquidity should be sufficient for operating needs, capital expenditures, dividends, and repurchases. It reported $185 million cash and no borrowings. No full-year financial guidance is provided in the filing text.
- Key business risks include equity-market declines affecting investment-management clients, continued cost-cutting or headcount reductions among investment banks, and foreign-currency exposure. Management estimated annual net foreign-currency expense exposure of $143 million; a hypothetical 10% weaker U.S. dollar without hedges could reduce operating income by $13.6 million over 12 months. Indian-rupee forward contracts hedged approximately 90% of that exposure through Q1 FY2013.
- Gross unrecognized tax benefits were $5.5 million, including accrued interest. Tax examinations are ongoing; management did not expect a material adverse outcome. Ordinary-course legal proceedings, including intellectual-property matters, were not expected to have a material adverse effect. Operating-lease commitments totaled $146.7 million; the filing reported no material change in supplier purchase commitments.
- Two new office leases increased future minimum rent commitments by $10.1 million when entered into. The company reported compliance with covenants tied to $4.3 million of standby letters of credit. No material changes to the previously disclosed risk factors were reported.
Investor verification priorities
- Track ASV, client and user additions, retention, and the balance of growth between investment-management and investment-banking customers.
- Assess whether revenue growth converts to earnings and cash flow as hiring and compensation costs rise; distinguish reported GAAP results from management’s adjusted comparisons.
- Monitor the effective tax rate and any renewal or further effects of the federal R&D tax credit, along with the resolution of uncertain tax positions.
- Review currency movements and hedge coverage, particularly the Indian-rupee exposure and the company’s substantial foreign-currency-denominated expense base.
- Evaluate capital allocation and commitments, including buybacks, dividends, lease obligations, and whether cash generation remains adequate without debt.