FactSet Research Systems Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended February 28, 2019. Unless noted, financial amounts are in U.S. dollars; figures below are in millions except per-share data. FactSet provides subscription-based financial information, analytics, applications, and related services to investment professionals.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $354.9 (+5.9%) | $335.2 | $706.5 (+6.3%) | $664.4 |
| Operating income | $108.7 (+13.8%) | $95.5 | $209.2 (+13.4%) | $184.6 |
| Operating margin | 30.6% | 28.5% | 29.6% | 27.8% |
| Net income | $84.7 (+59.4%) | $53.1 | $169.0 (+36.8%) | $123.5 |
| Diluted EPS | $2.19 (+64.7%) | $1.33 | $4.37 (+40.5%) | $3.11 |
- Growth drivers: Management attributed revenue growth mainly to Analytics, Content and Technology Solutions (CTS), and Wealth workflows, including sales of analytics products, data feeds, and workstations, as well as U.S. annual price increases. Organic revenue growth was 5.7% in Q2 and 6.1% for the first half.
- Recurring-business indicators: Organic annual subscription value (ASV) plus professional services was $1.441 billion, up 6.0% year over year. Annual retention exceeded 95% of ASV; retention measured by client count was 91%. Client and user counts were 5,405 and 122,063, respectively; the prior-year client count was not restated after a definition change.
- Regional revenue, Q2: U.S. $223.3 million (+6.9%); Europe $98.9 million (+2.8%); Asia Pacific $32.6 million (+8.4%). U.S. and international operations accounted for 62.9% and 37.1% of revenue.
- Costs and margins: Q2 cost of services was 46.5% of revenue, down 2.2 percentage points year over year; SG&A was 22.9% of revenue, broadly unchanged. Higher cloud-hosting and licensed-software costs, compensation, and bad-debt expense partly offset operating leverage. For the first half, cost of services was 47.0% of revenue and SG&A 23.4%.
- Taxes and earnings comparability: The effective tax rate was 18.8% in Q2 versus 42.4% a year earlier, and 15.6% for the first half versus 30.8%. The prior-year comparison included a $23.2 million TCJA transition-tax charge and a $2.2 million deferred-tax remeasurement charge. FY2019 results benefited from TCJA-related tax-rate changes and adjustments; a $2.4 million tax-authority settlement expense partly offset the benefit. Share repurchases also reduced diluted share counts.
- Cash flow: First-half operating cash flow was $145.6 million, compared with $153.7 million; capital expenditures were $21.5 million versus $12.4 million. Company-defined free cash flow was $124.1 million, down 12.2%, primarily reflecting higher capital expenditures and the timing of tax payments. Investing cash outflow was $19.4 million and financing cash outflow was $115.8 million.
- Liquidity and debt: At February 28, cash and cash equivalents were $218.3 million and short-term investments were $27.1 million. Long-term debt was $574.8 million net of issuance costs, under a floating-rate facility; interest expense was $5.1 million in Q2 and $9.9 million for the first half. FactSet reported covenant compliance and management expected liquidity to meet operating and investment needs.
- Capital returns and investment: First-half dividends paid were $48.4 million and share repurchases were $110.7 million, including employee tax-withholding repurchases. The quarterly dividend was $0.64 per share; $137.2 million remained authorized for repurchases. First-half capital expenditures increased, including spending on data-center infrastructure, equipment, and office build-outs.
Material changes, outlook, and commentary
- Q2 operating margin expanded 2.1 percentage points. Management cited revenue growth, favorable foreign exchange, and lower marketing expenses, partly offset by computer-related expenses and compensation.
- First-half revenue growth was broad-based, though management noted cancellations increased versus the prior-year first half. Q2 cancellations were described as consistent with the prior-year quarter. Asia Pacific Q2 operating income declined 1.1%, despite revenue growth, amid higher compensation.
- FY2019 outlook, as of March 26, 2019: FactSet confirmed expected organic ASV plus professional services growth of $75–$90 million over FY2018; GAAP revenue of $1.41–$1.45 billion; GAAP operating margin of 29.0%–30.0%; and adjusted operating margin of 31.5%–32.5%. It updated expected annual effective tax rate to 17%–18%, GAAP diluted EPS to $8.70–$8.85, and adjusted diluted EPS to $9.50–$9.65. Management said the midpoint of adjusted EPS guidance implied 12% growth. Guidance excludes certain potential non-recurring items.
- Subsequent refinancing: On March 29, 2019, FactSet entered a new $750 million revolving credit facility maturing March 29, 2024, with up to $500 million of additional borrowings subject to requirements. It borrowed $575 million to repay the prior facility; the stated current spread was 0.875% over daily LIBOR. This occurred after the balance-sheet date.
- Risks and contingencies: Management identified potential exposure to equity-market weakness, a shift from active to passive investing, investment-banking contraction, Brexit, and MiFID II-related market changes. Foreign-currency exposure is significant; FactSet hedged portions of exposures in the Philippine peso, Indian rupee, euro, and British pound. It also cited technology, cybersecurity, data-center, and service-continuity risks.
- A Massachusetts sales-tax inquiry could lead to an assessment, but FactSet had not recorded a liability because the outcome could not be reasonably estimated; the company said the matter could materially affect results, cash flows, or financial position. Other legal proceedings and tax examinations were not expected by management to have a material adverse effect. Future operating lease payments totaled $423.1 million, including the new headquarters lease; adoption of the lease accounting standard was expected to materially affect the balance sheet, but not materially affect income or cash flows.
- FactSet adopted ASC 606 using the modified retrospective method in FY2019. The adoption did not materially change revenue timing or amount; the opening retained-earnings increase was $2.5 million before tax ($2.0 million net of tax) for qualifying fulfillment costs.
Important facts for investors to verify
- How much of EPS growth and FY2019 EPS guidance depends on tax-rate changes, discrete tax items, and the prior-year TCJA transition-tax comparison.
- Whether ASV growth, retention, and demand in Analytics, CTS, and Wealth continue, particularly given the reported first-half increase in cancellations and slower European growth.
- Whether operating-margin gains persist as cloud-hosting, licensed-software, compensation, and bad-debt costs evolve.
- Cash conversion and free-cash-flow trends, including working-capital and tax-payment timing, capital spending, dividends, and repurchases.
- Debt refinancing terms, floating-rate exposure, leverage covenant headroom, and the effect of the $575 million borrowing on interest expense.
- Resolution of the Massachusetts sales-tax inquiry, other tax audits, and the balance-sheet impact of lease-standard adoption and ongoing lease commitments.
- Exposure to currency movements, technology or cybersecurity disruption, market shifts, Brexit, and changes in investment-banking activity.