FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2011; filed July 11, 2011. Financial statements are unaudited. FactSet provides subscription-based financial information and analytics to investment professionals.
Key financial results
| Metric | Three months ended May 31, 2011 | Year-over-year change | Nine months ended May 31, 2011 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $183.6 million | +14.6% | $534.6 million | +13.1% |
| Operating income | $61.8 million | +11.0% | $179.3 million | +9.2% |
| Operating margin | 33.7% | Down from 34.7% | 33.5% | Down from 34.7% |
| Net income | $43.3 million | +12.0% | $130.2 million | +17.4% |
| Diluted EPS | $0.92 | +13.6% | $2.75 | +19.6% |
| Operating cash flow | Not separately stated for the quarter | — | $137.0 million | Compared with $140.8 million |
| Free cash flow | $57 million | Compared with $66 million | $114.2 million | Compared with $127.2 million |
All financial amounts are U.S. dollars. Nine-month diluted EPS benefited in part from a lower effective tax rate and fewer diluted weighted-average shares. The nine-month effective tax rate was 27.6%, versus 32.6% a year earlier, including a $4.9 million benefit from the reinstated federal R&D tax credit; management projected a 31.0% full-year rate before discrete items.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $208.7 million at May 31, 2011, up from $195.7 million at August 31, 2010. Total assets were $684.6 million and total liabilities were $130.2 million.
- FactSet reported no outstanding debt. Approximately $4.5 million of letters of credit supported office leases; the company reported compliance with their covenants.
- Nine-month capital expenditures were $22.8 million, up from $13.7 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $114.2 million.
- During the first nine months, the company repurchased 1.36 million shares for $133.0 million and paid $31.7 million in dividends. The board raised the quarterly dividend 17% to $0.27 per share, beginning with the June 2011 payment.
- On June 13, 2011, the board authorized a further $200 million expansion of the repurchase program; $226 million was then available for future repurchases.
Performance and changes versus prior periods
- Quarterly revenue growth included $4.2 million from Market Metrics, acquired June 1, 2010; excluding that contribution, quarterly revenue growth was 11.9%. Management said ASV growth excluding $16 million from the acquisition was 12% over the prior year.
- Annual Subscription Value (ASV) was $741 million at May 31, 2011, versus $646 million a year earlier. It advanced $17 million during the quarter. The largest client represented 2% of ASV; the ten largest represented no more than 16%.
- FactSet reported 2,187 clients and 45,600 users. Annual client retention exceeded 95% measured by ASV; retention measured by client count was 92%, compared with 89% a year earlier.
- Quarterly revenue increased across all regions: U.S. +16.0%, Europe +10.4%, and Asia Pacific +15.7%. Asia Pacific operating income declined 1.6% for the quarter and 5.5% for the nine-month period, amid higher compensation, occupancy and travel costs.
- Operating margins fell as employee compensation, hiring, travel and performance-based stock compensation grew. Cost of services increased 21.2% in the quarter, faster than revenue. Nine-month results included a $2.5 million incremental stock-based compensation charge tied to revised performance-award vesting estimates.
- Headcount reached 4,805, up 32% year over year, largely reflecting expansion of content operations in India and the Philippines and hiring in engineering, consulting and sales.
Outlook, risks and contingencies
- Fourth-quarter fiscal 2011 guidance: Revenue of $187–$191 million and EPS of $0.93–$0.95. Full-year capital expenditure guidance, net of landlord contributions, was $24–$30 million; projected annual effective tax rate was 31.0% before discrete items.
- Management said cash, operating cash generation and credit-facility availability were expected to cover working capital, capital expenditures, dividends and repurchases for at least the next year. It also anticipated continued significant operating expenses and possible future acquisitions or investments.
- Foreign-currency exposure is material: forecast non-U.S.-dollar expenses of $159 million versus revenues of $15 million over the next 12 months, or net exposure of $144 million. The company uses currency forwards as cash-flow hedges and reported no speculative derivative activity.
- Management identified market and client risks, including equity-market declines, investment-management outflows, banking-sector contraction, sovereign-debt turmoil, geopolitical events and natural disasters. Other cited risks include data-center outages, cybersecurity and privacy, technology execution, proprietary-content development, hiring, currency, intellectual-property claims, international operations and tax audits.
- The company had $6.8 million of gross unrecognized tax benefits, including accrued interest. Multiple tax audits were ongoing; management did not expect a material adverse outcome beyond recorded estimates. Ordinary-course legal proceedings, including intellectual-property matters, were not expected by management to have a material adverse effect, although outcomes were uncertain.
- Operating lease commitments were $155.8 million, up from $140.8 million at August 31, 2010, reflecting expansion. No material change in supplier purchase commitments was reported. The company disclosed no off-balance-sheet arrangements.
- No goodwill or intangible-asset impairment was recorded. Adoption of the revised revenue-recognition guidance had no impact on financial position or results.
Important facts for investors to verify
- Whether the fourth-quarter revenue and EPS guidance was achieved, and how subsequent ASV growth compares with reported growth excluding Market Metrics.
- Whether margin pressure from hiring, compensation, travel and performance-based awards persisted, and whether regional operating trends—especially Asia Pacific—changed.
- How much of reported earnings growth and the lower nine-month tax rate reflects the one-time $4.9 million R&D credit, and the company’s subsequent effective tax rate.
- Whether operating cash flow and free cash flow recovered as capital spending and working-capital movements changed, given that nine-month free cash flow declined year over year.
- The scale and timing of future share repurchases and dividends relative to cash generation, lease commitments and planned investment.
- Developments in tax examinations, legal matters, foreign-exchange exposure and other disclosed market and operational risks.