FactSet Research Systems Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended May 31, 2019. FactSet provides subscription-based financial information, analytics, applications and related services to investment professionals. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Change | 9M FY2019 | 9M FY2018 | Change |
|---|---|---|---|---|---|---|
| Revenue | $364.5M | $339.9M | +7.2% | $1,071.1M | $1,004.3M | +6.7% |
| Operating income | $117.2M | $93.3M | +25.7% | $326.5M | $277.8M | +17.5% |
| Operating margin | 32.2% | 27.4% | +4.8 pts | 30.5% | 27.7% | +2.8 pts |
| Net income | $92.3M | $74.7M | +23.4% | $261.3M | $198.3M | +31.8% |
| Diluted EPS | $2.37 | $1.91 | +24.1% | $6.73 | $5.01 | +34.3% |
| Operating cash flow | — | $305.3M | $279.3M | +9.3% | ||
| Capital expenditures | — | $32.9M | $18.4M | +79.1% | ||
| Free cash flow | — | $272.4M | $261.0M | +4.4% |
Q3 cost of services was $163.8M, down 0.8%; SG&A was $83.5M, up 2.3%. For the nine months, cost of services rose 1.2% and SG&A rose 5.2%. Growth in revenue outpaced expense growth, lifting margins. Results benefited from favorable foreign exchange effects on operating costs and lower compensation and travel expenses; higher computer-related costs were a partial offset.
Business and operating trends
- Management attributed revenue growth chiefly to Analytics, Content and Technology Solutions (CTS), and Wealth. Q3 organic revenue growth was 7.3%; nine-month organic revenue growth was 6.5%.
- Organic annual subscription value (ASV) was $1.424B at May 31, up 5.4% year over year; organic ASV plus professional services was $1.45B, up 5.6%.
- Q3 revenue growth by geography: U.S. +7.9%, Europe +3.7%, and Asia Pacific +14.1%. Asia Pacific was the fastest-growing region.
- Annual client retention was over 95% measured by ASV and 90% by client count. Management reported higher cancellations than a year earlier, citing industry cost pressures and firm consolidations and closures.
- Reported client count rose 9.6% to 5,455 and users rose 37.4% to 122,951. The prior-year client count was not restated after FactSet changed its definition to include clients from its 2017 FDSG acquisition.
Cash, debt and capital allocation
- Cash and cash equivalents were $324.0M at May 31, 2019, versus $208.6M at August 31, 2018. Current assets were $549.2M and current liabilities $191.5M.
- Long-term debt was $574.1M net of unamortized issuance costs (principal $575.0M). FactSet refinanced its prior $575.0M borrowing in March 2019 with a new $750.0M revolving facility maturing March 29, 2024; the drawn amount bears floating LIBOR-based interest. The company reported compliance with its covenants.
- Nine-month financing cash outflows included $75.8M of dividends and $158.3M of share repurchases; $575.0M of new borrowing was offset by repayment of the prior facility.
- The quarterly dividend increased to $0.72 per share. On June 24, 2019, the board expanded the repurchase authorization by $210.0M, leaving $299.6M available after the expansion.
- Operating leases had $410.8M of undiscounted future minimum payments. FactSet expected adoption of the new lease accounting standard in fiscal 2020 to materially affect its balance sheet, but not materially affect income, comprehensive income or cash flows.
Outlook, commentary and notable items
- FY2019 outlook, as of June 25, 2019: organic ASV plus professional services growth of $70M–$75M; GAAP revenue of $1.42B–$1.44B; GAAP operating margin of 30.0%–30.5%; adjusted operating margin of 32.5%–33.0%; annual effective tax rate of 16.0%–16.5%; GAAP diluted EPS of $8.90–$9.00 and adjusted diluted EPS of $9.80–$9.90. Management said the midpoint of adjusted EPS guidance implied 15% growth over the prior year. Guidance was subject to risks and exclusions for certain non-recurring items.
- The nine-month effective tax rate fell to 16.7% from 26.0%, mainly reflecting the prior-year TCJA transition-tax charge and the lower U.S. corporate tax rate; Q3 2019 taxes included $4.5M of expense from prior-year return finalization and other discrete items.
- FactSet disclosed a Massachusetts sales-tax inquiry for 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.
- Other risks discussed include continued shift from active to passive investing, client cost reductions and consolidation, market and banking-sector conditions, Brexit uncertainty, foreign currency exposure, cybersecurity and technology/service disruptions, and tax or legal proceedings. FactSet reported no material changes to its previously disclosed risk factors.
- Management reported no material impact from adopting the new revenue-recognition standard. A $2.5M opening retained-earnings increase ($2.0M net of tax) related to certain contract fulfillment costs was recorded; the standard did not materially change revenue timing or amounts.
- The global sales and client solutions head was scheduled to depart August 31, 2019; a successor was appointed effective June 1, 2019.
Important facts for investors to verify
- Whether FY2019 revenue, margin, tax-rate and EPS guidance was achieved, and how adjusted measures reconcile to GAAP.
- How organic ASV, subscription growth and retention compare with actual cancellations and client-industry pressures.
- The effect of floating-rate debt, refinancing terms and covenant headroom; the filing does not state a numerical maximum leverage threshold.
- Potential exposure and developments in the Massachusetts sales-tax matter and other tax examinations.
- Whether higher technology, data, lease and capital spending affects future margins and cash generation, and the balance-sheet impact of lease-standard adoption.
- The sustainability of margin expansion, including reliance on foreign-exchange benefits, cost discipline and headcount mix.