FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended February 29, 2016; comparisons are to the periods ended February 28, 2015. The interim financial statements are unaudited.
Business context
FactSet provides subscription-based financial information, analytics, and workflow applications to investment professionals. Investment-management clients generated 83.4% of annual subscription value (ASV); investment-banking clients generated the remainder. The company reports U.S., Europe, and Asia Pacific segments.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $281.8 million | $247.8 million | $552.3 million | $490.5 million |
| Operating income | $85.3 million | $80.6 million | $172.7 million | $160.9 million |
| Operating margin | 30.3% | 32.5% | 31.3% | 32.8% |
| Net income | $67.8 million | $61.6 million | $127.7 million | $117.5 million |
| Diluted EPS | $1.63 | $1.46 | $3.06 | $2.78 |
| Free cash flow | $81.1 million | $42.6 million | $137.8 million | $109.0 million |
Quarterly revenue rose 13.7%, operating income 5.8%, net income 10.0%, and diluted EPS 11.6%. For the first half, revenue increased 12.6%, operating income 7.3%, net income 8.7%, and diluted EPS 10.1%. Management reported quarterly organic ASV growth of 9.5%; total ASV was $1.139 billion, up 13.4% including acquisitions and currency effects. Client count increased 6.6% to 3,057, users increased 10.6% to 63,500, and annual client retention was 95% by client count.
Operating-margin compression reflected Portware’s lower margin, increased employee compensation and acquired-intangible amortization, plus restructuring and stock-option vesting charges. Management attributed 140 basis points of quarterly margin reduction to restructuring and vesting charges, 70 basis points to higher amortization, and 130 basis points to Portware. The quarter also included a $7.3 million discrete tax benefit from reinstatement of the U.S. federal R&D credit; Q2 effective tax rate was 20.2%, versus 24.1% a year earlier. First-half effective tax rates were 25.9% and 27.4%, respectively.
Cash, debt, and liquidity
- Operating cash flow was $164.2 million in the first half, compared with $120.7 million a year earlier. Capital expenditures were $26.4 million, versus $11.8 million, producing reported free cash flow of $137.8 million.
- At February 29, 2016, cash and cash equivalents were $175.2 million and short-term investments were $22.9 million. Current assets were $327.3 million and current liabilities $140.0 million.
- Long-term debt was $300.0 million, up from $35.0 million at August 31, 2015. The floating-rate borrowing is due September 21, 2018, bears interest at one-month LIBOR plus 0.75%, and funded the Portware acquisition. FactSet reported compliance with debt covenants.
- First-half cash uses included $264.1 million for Portware, $113.3 million of share repurchases, $36.1 million of dividends, and $26.4 million of capital expenditures. The company reported $270.9 million remaining under its repurchase authorization and stated that liquidity should meet operating and investment needs.
Material changes and unusual items
- FactSet acquired Portware on October 16, 2015, for approximately $264.8 million. Preliminary allocation included $188.5 million of goodwill and $75.5 million of amortizable intangible assets; the purchase-price allocation was not final at quarter-end. Portware’s results were included from the acquisition date.
- Goodwill rose to $489.3 million from $308.3 million at August 31, 2015, and net intangible assets rose to $106.8 million from $40.1 million, principally reflecting Portware.
- Reported Q2 results included $1.2 million of restructuring charges and a $1.4 million charge related to a change in performance-based stock-option vesting. The company’s non-GAAP adjusted measures also exclude deal-related amortization and the R&D tax benefit; adjusted diluted EPS was $1.59 versus $1.42.
- FactSet repurchased 715,000 shares for $113.3 million in the first half and declared a quarterly dividend of $0.44 per share, or $1.76 annualized.
Outlook, risks, and contingencies
For fiscal Q3 2016, management forecast revenue of $286–$289 million, GAAP operating margin of 31.0%–32.0% (including an estimated 120-basis-point Portware reduction), adjusted operating margin of 32.5%–33.5%, GAAP diluted EPS of $1.54–$1.58, and adjusted EPS of $1.60–$1.64. The expected annual effective tax rate was 28.5%–29.5%.
Management cited equity-market volatility and client exposure to investment-management assets under management as risks to demand; investment-banking clients may also reduce headcount or spending. FactSet has material foreign-currency exposure: estimated non-U.S.-dollar expenses exceed revenues by $182.0 million over the next 12 months. It uses forward contracts to hedge portions of sterling, euro, and rupee exposure. Its $300.0 million floating-rate debt creates interest-rate exposure; a 25-basis-point LIBOR change would change annual interest expense by approximately $0.8 million.
The filing reports $8.5 million of gross unrecognized tax benefits, including accrued interest, and ongoing tax examinations; management did not expect a material adverse outcome. Ordinary-course legal matters, including intellectual-property litigation, were not expected to have a material adverse effect. Operating-lease minimum payments totaled $269.6 million; supplier purchase commitments were $65.2 million at August 31, 2015, with no material first-half change. Management reported effective disclosure controls and no material change in internal control over financial reporting; Portware control integration remained in progress.
Investor verification priorities
- Assess whether organic ASV growth, client retention, and user additions continue, and distinguish organic performance from Portware contributions and currency effects.
- Track operating-margin recovery against Q3 guidance, especially Portware profitability, restructuring and vesting charges, and acquired-intangible amortization.
- Separate recurring earnings from the $7.3 million R&D tax-credit benefit and compare GAAP results with the company’s adjusted measures.
- Review Portware integration, final purchase accounting, goodwill and intangible-asset assumptions, and the effect of acquisition-related debt and interest rates.
- Monitor operating cash generation against acquisition spending, capital expenditures, dividends, and repurchases, alongside foreign-exchange and market-demand risks.