FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended November 30, 2020. Comparisons are with the three months ended November 30, 2019 unless stated otherwise. Amounts are in U.S. dollars.
Business context and financial performance
FactSet provides subscription-based financial information, analytics and related services to investment and corporate clients. Revenue is primarily generated by subscriptions to its hosted platform. The company reports geographically across the Americas, EMEA and Asia Pacific.
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $388.2 million | $366.7 million | +5.9% |
| Operating income | $121.0 million | $113.2 million | +6.9% |
| Operating margin | 31.2% | 30.9% | +0.3 percentage points |
| Net income | $101.2 million | $94.0 million | +7.7% |
| Diluted EPS | $2.62 | $2.43 | +7.8% |
| Operating cash flow | $89.3 million | $95.8 million | Down $6.5 million |
| Free cash flow, a non-GAAP measure | $70.9 million | $69.0 million | +2.8% |
Organic revenue was $386.7 million, up 5.1%; reported growth also reflected acquisition-related revenue, purchase-accounting deferred revenue adjustments and favorable currency effects. Operating expenses rose 5.4% overall. Cost of services increased 14.0% to $188.1 million, or 48.5% of revenue, reflecting higher employee compensation, technology costs and intangible amortization. SG&A fell 10.7% to $79.1 million, or 20.4% of revenue, mainly due to lower travel, office and other employee-related costs and reduced occupancy expense. The effective tax rate was 15.8%, versus 13.6%; the company attributed the increase in tax provision to higher operating income and fewer tax benefits.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $560.1 million at November 30, 2020, down from $585.6 million at August 31, 2020. Cash and investments totaled $578.3 million.
- Long-term debt was $575.5 million, including $575.0 million drawn under a $750.0 million revolving facility; $175.0 million remained available. The facility matures March 29, 2024, and the company reported covenant compliance.
- A $287.5 million interest-rate swap hedges part of the floating-rate debt. The reported weighted average rate, including the swap, was 1.40% for the quarter.
- Current assets were $804.1 million and current liabilities were $227.9 million. The balance sheet also included $310.7 million of lease liabilities.
- Cash used in investing was $58.3 million, including $41.9 million for an acquisition; capital expenditures were $18.3 million. Cash used in financing was $56.4 million, including $43.1 million of share repurchases and $29.1 million of dividends.
- The quarterly dividend was $0.77 per share. At quarter-end, $215.9 million remained authorized under the share repurchase program.
Material changes and operating developments
- Revenue increased across all three regions: Americas 5.6% to $244.3 million, EMEA 4.9% to $105.8 million, and Asia Pacific 10.4% to $38.1 million. Asia Pacific had the fastest reported growth.
- Management cited Analytics and Trading and Content and Technology Solutions as the main workflow growth drivers, followed by Wealth. Organic annual subscription value (ASV) was $1.53 billion, up 5.0%; organic ASV plus professional services was $1.56 billion, also up 5.0%.
- FactSet acquired Truvalue Labs, an ESG data provider, on November 2, 2020, for approximately $41.9 million. Preliminary purchase accounting included $29.3 million of goodwill; the acquired business’s results were included from the acquisition date.
- Share repurchases were $43.1 million, compared with $84.4 million in the prior-year quarter. Dividends declared rose to $0.77 per share from $0.72.
Outlook, management commentary and risks
The filing provides no specific numerical earnings or revenue guidance. Management said subscription revenue, earnings and ASV remained relatively stable and predictable, and that remote work had not significantly affected results or service delivery. It cautioned that the pandemic could bring longer sales cycles, lower incremental billings, delayed or reduced client spending, cancellations, and implementation delays. Management said discretionary-spending reductions had more than offset pandemic-related incremental expenses to date and identified potential cost controls if needed.
Management stated that current liquidity and financing alternatives were expected to fund operations and planned growth for the next 12 months and the foreseeable future. Foreign exchange and floating interest rates remain exposures; the filing’s sensitivity analysis estimated that, absent hedging, a 10% weaker U.S. dollar could reduce operating income by $40.5 million over the next 12 months. Brexit-related effects on the company and clients remained uncertain.
- Contingencies: FactSet is contesting a Massachusetts sales-tax notice concerning prior periods. It had not recorded a liability because the outcome could not be reasonably estimated; an adverse outcome could materially affect financial position, cash flows and results.
- Tax authorities were auditing the company; management did not expect the ultimate outcome to materially affect results. Ordinary-course legal matters were also not expected to have a material adverse effect.
- Purchase commitments were $226.0 million as of August 31, 2020; the company added a three-year software subscription commitment of approximately $10.0 million during the quarter.
- No material changes to the prior annual-report risk factors were reported except updated Brexit discussion. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether organic ASV and revenue growth persist, particularly given management’s caution about pandemic-related sales-cycle and client-spending risks.
- Whether higher cost of services—especially cloud, software and employee costs—pressures margins despite lower SG&A.
- How the Truvalue Labs acquisition performs, and whether final purchase-price allocation or integration affects reported results.
- Liquidity and debt levels, including variable-rate exposure, facility covenants, and continued cash returns through buybacks and dividends.
- Developments in the Massachusetts sales-tax matter, tax audits, Brexit-related risks and other disclosed contingencies.
- How GAAP results compare with management’s non-GAAP measures, which exclude specified amortization, purchase-accounting adjustments and other items.