FactSet Research Systems Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended February 28, 2014. Unaudited interim results; dollar amounts below are USD millions unless otherwise noted.
Business context
FactSet provides subscription-based financial information, analytics, applications and workflow solutions to investment professionals. Approximately 83% of annual subscription value (ASV) came from investment management clients; the balance was principally from investment banking clients. Operations are reported across the U.S., Europe and Asia Pacific.
Financial performance and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $226.9 (+6.5%) | $213.1 | $449.9 (+6.1%) | $424.2 |
| Operating income | $75.1 (+33.6%) | $56.2 | $149.8 (+17.7%) | $127.2 |
| Operating margin | 33.1% | 26.4% | 33.3% | 30.0% |
| Net income | $52.4 (+17.7%) | $44.5 | $104.6 (+10.9%) | $94.3 |
| Diluted EPS | $1.22 (+22.0%) | $1.00 | $2.41 (+14.2%) | $2.11 |
| Operating cash flow | $40.6 | $46.4 | $98.7 | $97.0 |
| Free cash flow* | $38.0 | $43.4 | $90.7 | $88.0 |
*Management-defined, non-GAAP measure: operating cash flow less capital expenditures. Trailing-12-month free cash flow was $254.0 million, up 21% year over year.
- Q2 revenue growth was 5.6% in the U.S. and 8.4% internationally; Europe grew 8.5% and Asia Pacific 8.1%. Management cited client and user additions, wealth-management solutions, portfolio analytics, proprietary data sales and pricing as drivers.
- ASV was $920.1 million at February 28, up 5.5% organically year over year; the filing also describes this as approximately 6% in its overview. ASV increased $29.8 million over the quarter, including $7.3 million from Matrix.
- Current assets were $232.0 million and current liabilities $109.3 million. Cash and equivalents were $88.8 million, with $14.2 million in short-term investments. FactSet had no outstanding borrowings; management said liquidity was sufficient for expected needs.
- Six-month investing cash outflow was $55.8 million, including $47.2 million for acquisitions; financing cash outflow was $154.3 million, including $146.2 million of share repurchases and $30.0 million of dividends. Cash declined $107.8 million from August 31, 2013.
- For the six months, cost of services rose 14.1%, faster than revenue, reflecting compensation, hiring and acquisition-related costs. SG&A fell 12.1%, partly because prior-year expense included a $15.5 million charge for vesting performance-based options.
Material changes and unusual items
- FactSet acquired Revere Data for $15.3 million in September 2013 and Matrix Data for $32.1 million in Q2. The acquisitions contributed $4.5 million of combined revenue in the first half and added $37.2 million of goodwill; management said neither materially affected reported results.
- Prior-year Q2 included a $15.7 million pre-tax stock-compensation charge tied to Market Metrics options vesting. Its absence materially lifted comparative operating income and margin in FY2014.
- The U.S. federal R&D tax credit expired December 31, 2013. Q2 effective tax rate rose to 30.5% from 21.2% a year earlier; management attributed the change partly to the lapsed credit and prior-year tax benefits.
- Shares repurchased in the first half totaled 1.33 million for $143.8 million. The board expanded the repurchase authorization by $300 million; $218.6 million remained available at quarter-end. The quarterly dividend was $0.35 per share.
- Cash and equivalents fell from $196.6 million at August 31, 2013 to $88.8 million at February 28, 2014, mainly due to acquisitions, repurchases and dividends.
Outlook, risks and contingencies
- Q3 FY2014 guidance: Revenue of $229–$233 million; operating margin of 32.5%–33.5%, including an estimated 70-basis-point acquisition impact; annual effective tax rate of 30%–31%; diluted EPS of $1.24–$1.26. Guidance assumed the federal R&D tax credit would not be reenacted by quarter-end; its lapse reduced each end of the EPS range by $0.03.
- Management identified market volatility and weaker investment-management assets or client demand as risks, alongside continued cost and headcount pressure among investment-banking clients. Sell-side ASV declined $0.6 million in Q2 and $5.6 million in the first half.
- Foreign-currency exposure is significant because foreign-currency expenses exceed revenues. FactSet estimated a $164 million annual net exposure and hedged about 75% of Indian-rupee exposure and 50% of Philippine-peso exposure. A hypothetical 10% weaker dollar without hedges would reduce operating income by $17.2 million over 12 months.
- Q2 DSO was 39 days versus 36 days a year earlier. Management attributed weaker quarterly free cash flow to higher receivables and expected collection levels to normalize in Q3.
- A new 15-year New York office lease adds $93.7 million of future minimum rent; total operating-lease commitments were $214.8 million. Purchase commitments were $50.2 million at August 31, 2013, with no material change reported in the first half.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Gross unrecognized tax benefits were $5.3 million, including accrued interest; the company did not expect a material adverse outcome from tax examinations. Standby letters of credit were $1.8 million, and related covenants were met.
Investor verification priorities
- Reconcile reported ASV growth of 5.5% organically with the overview’s rounded 6% figure, and assess the contribution from acquisitions and pricing.
- Track receivables, DSO and cash conversion to test management’s expectation that the Q2 collection increase was temporary.
- Assess sustainable margins and earnings growth after adjusting comparisons for the prior-year $15.7 million stock-compensation charge and the change in tax-credit availability.
- Monitor investment-banking client contractions, acquisition integration and the provisional Matrix purchase-price allocation.
- Evaluate cash deployment, repurchases, dividends and the substantial long-term lease commitments against future operating cash generation.