FactSet Research Systems Inc. — Form 10-Q Summary
Business context and reporting period
FactSet provides subscription-based financial information, analytics and workflow applications to investment professionals. This unaudited report covers the quarter and six months ended February 28, 2013 (fiscal Q2 and first half of fiscal 2013), compared with the corresponding periods in fiscal 2012. The business generated approximately 82% of quarterly revenue from investment-management clients and 18% from investment-banking clients.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $213.1 million, up 6.9% | $424.2 million, up 7.2% |
| Operating income | $56.2 million, down 16.3% | $127.2 million, down 4.9% |
| GAAP operating margin | 26.4%, versus 33.7% | 30.0%, versus 33.8% |
| Net income | $44.5 million, down 4.7% | $94.3 million, up 2.2% |
| Diluted EPS | $1.00, down 2.0% | $2.11, up 5.0% |
| Operating cash flow | $46.4 million | $97.0 million, versus $98.5 million |
| Free cash flow, as defined by FactSet | $43.4 million, up 11.0% | $88.0 million, versus $87.8 million |
Quarterly GAAP results included a $15.7 million pretax stock-compensation charge after performance-based Market Metrics options vested, and a $4.9 million discrete tax benefit from the renewed U.S. federal R&D credit. Excluding these items, management reported quarterly operating income of $71.9 million, a 33.7% operating margin, net income of $50.6 million and diluted EPS of $1.14, up 11.8% year over year.
At February 28, cash and cash equivalents were $151.3 million and short-term investments were $14.8 million; FactSet had no borrowings. Cash declined $37.7 million from August 31, 2012, primarily reflecting $139.0 million of share repurchases and $27.3 million of dividends, partly offset by operating cash generation. Current assets were $284.6 million and current liabilities were $94.8 million. Six-month capital expenditures were $9.1 million.
Material changes and operating trends
- Annual subscription value (ASV) was $863.2 million at February 28, up 6.3% organically year over year. Quarterly ASV increased $17.3 million excluding a $1.5 million foreign-currency impact; 35 net clients were added during the quarter.
- StreetAccount, acquired in June 2012, contributed $2.7 million of quarterly and $5.4 million of six-month revenue; management said the acquisition added 140 basis points to fiscal 2013 revenue growth. Excluding StreetAccount, revenue growth was 5.5% for the quarter and 5.8% year to date.
- Revenue growth reflected demand for portfolio analytics, wealth-management offerings, Market Metrics, proprietary content, client additions and price increases. Annual ASV retention remained above 95%; client retention improved to 93% from 92% a year earlier.
- Growth was partly offset by reduced user counts and spending among investment-banking clients. Total users were 49,455, down 150 from a year earlier. ASV from investment-banking clients fell $4.1 million in the quarter, while investment management remained the larger and stronger customer segment.
- Operating costs rose faster than revenue: quarterly cost of services increased 12.3% and SG&A increased 25.3%. The Market Metrics option-vesting charge accounted for most of the unusual SG&A increase; excluding it, management reported quarterly non-GAAP operating margin of 33.7%, broadly level with the prior year.
Outlook, risks and contingencies
For fiscal Q3 2013, management expected revenue of $213–$216 million, operating margin of 33%–34%, an annual effective tax rate of 29.5%–30.5%, and GAAP diluted EPS of $1.14–$1.16. These expectations were stated as of February 28, 2013 and were subject to risks and uncertainties.
Management cited challenging conditions in investment banking, including industry headcount reductions, lower trading activity and uncertain M&A demand. Equity-market declines could also affect investment-management clients through lower assets under management, redemptions and weaker client formation. FactSet reported an estimated annual net foreign-currency expense exposure of $157 million; it hedged approximately 75% of Indian rupee exposure and 40% of net British pound exposure. The filing reported $5.3 million of gross unrecognized tax benefits, including accrued interest, and ongoing tax examinations. Management did not expect unresolved legal matters or tax audits to have a material adverse effect based on information then available.
Operating leases required $127.7 million of future minimum payments at February 28, 2013. Supplier purchase commitments were $52.2 million at August 31, 2012, with no material change reported in the first half. Approximately $4.4 million of standby letters of credit supported leases; the company said it was in compliance with related covenants. Management stated that available liquidity should fund operating needs and planned investments, dividends and repurchases for at least the next 12 months.
Important facts for investors to verify
- Whether ASV growth, client additions and retention continue to offset customer reductions and spending pressure in investment banking.
- How reported margins and earnings develop after the one-time $15.7 million Market Metrics stock-compensation charge and the $4.9 million R&D tax-credit benefit.
- Whether the Q3 revenue, margin, tax-rate and EPS outlook was achieved, and how much results depended on currency movements and tax items.
- Cash generation relative to continued repurchases and dividends, including the effect on cash balances and share count.
- Progress in managing foreign-currency exposure, tax uncertainties and lease and supplier commitments.