FactSet Research Systems Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended November 30, 2013; unaudited. FactSet provides subscription-based financial information and analytics to the global investment community. Comparisons below are against the three months ended November 30, 2012 unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $223.0 million | $211.1 million | +5.6% |
| Operating income | $74.7 million | $71.1 million | +5.1% |
| Operating margin | 33.5% | 33.7% | -0.2 percentage points |
| Net income | $52.2 million | $49.8 million | +4.8% |
| Diluted EPS | $1.19 | $1.11 | +7.2% |
| Operating cash flow | $58.1 million | $50.6 million | +14.8% |
| Capital expenditures | $5.4 million | $6.1 million | |
| Free cash flow (non-GAAP) | $52.7 million | $44.5 million | +18.3% |
Cost of services rose 13.1% to $83.3 million, while selling, general and administrative expense declined 2.2% to $65.0 million. The effective tax rate was 30.5%, versus 30.4%.
At November 30, 2013, cash and cash equivalents were $174.0 million and short-term investments were $13.8 million. Total assets were $671.2 million, current assets $281.0 million and current liabilities $97.7 million. Total liabilities were $124.5 million; FactSet reported no outstanding borrowings. Cash declined $22.6 million from August 31, principally reflecting the Revere acquisition, share repurchases, dividends and capital spending.
Annual subscription value (ASV) was $890 million, up 5.0% organically year over year. FactSet reported 2,525 clients, 51,014 users and annual client retention above 95% of ASV. Approximately 82.2% of revenue and ASV came from investment management clients.
Material changes and drivers
- Growth reflected client and user additions, wealth-management and Portfolio Analytics subscriptions, proprietary content sales, pricing and $1.2 million of Revere revenue. Revere contributed approximately 80 basis points to reported revenue growth.
- Management cited a challenging sell-side market: investment-banking ASV fell $5 million in the quarter, with investment-banking users down 851. Market Metrics ASV declined $2 million, attributed to clients exiting life and variable-annuity businesses.
- A weaker Japanese yen reduced quarterly revenue by $0.8 million and lowered year-over-year growth by 40 basis points. Asia-Pacific revenue grew 10.9% on a constant-currency basis.
- Higher compensation and Revere-related costs contributed to the increase in cost of services and the slight margin decline. The acquisition reduced operating margin by an estimated 30 basis points in the quarter.
- Net cash used in investing activities was $21.0 million, including $15.3 million for Revere. Net cash used in financing activities was $63.5 million, including $57.8 million of program repurchases, $2.3 million of employee tax-related share repurchases and $15.1 million of dividends, partly offset by employee-plan proceeds and tax benefits.
Outlook, risks and unusual items
- Q2 FY2014 guidance: Revenue of $225–$228 million; operating margin of 32.6%–33.6%; diluted EPS of $1.20–$1.23; and annual effective tax rate of 30.0%–31.0%. Guidance assumes the U.S. federal R&D tax credit is not reenacted by the end of Q2; its lapse reduced each end of the EPS range by $0.03.
- FactSet acquired a 60% interest in Matrix Data on December 10, 2013, for £12 million, with the ability to acquire the remaining 40%. Management expected Matrix to add $2 million of Q2 revenue, reduce operating margin by 50 basis points and reduce diluted EPS by $0.01.
- Management said cash and expected operating cash flows should fund operating needs, capital expenditures, dividends and repurchases for at least the next 12 months. A $300 million share-repurchase authorization expansion was approved December 16; $304.7 million was then available for future repurchases.
- Key exposures include equity-market weakness affecting investment-management clients, continued investment-banking retrenchment, foreign exchange and interest-rate risk. The company estimated annual net foreign-currency exposure of $158 million, principally due to foreign-currency operating expenses; it hedged portions of its Indian rupee, British pound and Philippine peso exposures.
- Operating lease commitments were $124.6 million at November 30; supplier purchase commitments were $50.2 million at August 31, with no material change reported during the quarter. Approximately $2.2 million of standby letters of credit were outstanding, and FactSet reported covenant compliance.
- Gross unrecognized tax benefits were $5.0 million, including accrued interest. Tax audits were ongoing; management did not expect a material adverse effect. Ordinary-course legal matters were not expected to materially affect financial position, results or cash flows. The filing reported no material change in previously disclosed risk factors.
Investor verification priorities
- Track organic ASV growth, client and user retention, and whether wealth-management and Portfolio Analytics gains offset investment-banking and Market Metrics declines.
- Compare subsequent revenue and margins with Q2 guidance, including the expected Matrix contribution and R&D tax-credit assumption.
- Assess whether higher cost-of-services growth and acquisition-related expenses pressure operating margins further.
- Reconcile cash generation with repurchases, dividends and acquisitions, and monitor the expanded repurchase authorization and outstanding share count.
- Review foreign-currency sensitivity, hedge positions, tax-audit developments and the final purchase-price allocation for Revere; its allocation was provisional at quarter-end.