FactSet Research Systems Inc. — Q1 Fiscal 2012 Form 10-Q
Reporting period: Three months ended November 30, 2011; financial statements are unaudited. FactSet provides financial information and analytical applications to the global investment community, with subscription-based revenues. About 82% of revenue came from investment management clients.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $196.4 million | $173.3 million | +13.4% |
| Operating income | $66.8 million | $59.4 million | +12.3% |
| Operating margin | 34.0% | 34.3% | Down 0.3 percentage points |
| Net income | $45.5 million | $41.6 million | +9.5% |
| Diluted EPS | $0.99 | $0.88 | +12.5% |
| Operating cash flow | $54.8 million | $22.2 million | Up $32.6 million |
| Free cash flow (company-defined, non-GAAP) | $48.7 million | $14.2 million | More than tripled |
Cost of services rose 17.7% to $66.8 million, faster than revenue, reflecting compensation and variable data costs. SG&A rose 10.1% to $62.9 million. The effective tax rate was 32.1%, versus 30.1%; FactSet cited expiration of the U.S. federal R&D tax credit and a $1.4 million tax benefit in the prior-year quarter.
Balance sheet and liquidity
- Cash and cash equivalents were $193.8 million at November 30, 2011, with a further $13.8 million in short-term investments. Cash increased $12.1 million from August 31, 2011.
- Total assets were $663.5 million and total liabilities were $127.1 million. FactSet reported no outstanding borrowings.
- Current assets were $287.6 million and current liabilities were $95.3 million. The company said cash and expected operating cash flows would be sufficient for operating needs, capital expenditures, dividends and repurchases.
- Quarterly capital expenditures were $6.1 million. FactSet paid $12.1 million in dividends and repurchased 150,000 shares for $14.6 million. A further $128 million remained authorized for repurchases.
Business trends and changes from the prior period
- Annual Subscription Value (ASV) was $782 million, up 12.5% year over year, but advanced only $3.5 million during the quarter. Growth came from investment management clients; investment banking ASV declined.
- FactSet added 34 net clients, reaching 2,271. Professionals using its services fell by 1,200 during the quarter to 46,900, as investment banking clients reduced user counts amid market uncertainty.
- Revenue grew across regions: U.S. +13.7% to $134.5 million; Europe +11.4% to $48.1 million; Asia Pacific +16.7% to $13.9 million. Annual client retention exceeded 95% of ASV; client-based retention improved to 92% from 90%.
- Management attributed growth to broad geographic demand, advanced applications, proprietary data and improved client retention. It said volatile markets and tighter client spending, particularly among investment banks, tempered short-term buying and ASV growth.
- Headcount reached 5,450, up 22% year over year, with hiring concentrated in proprietary content operations in India and the Philippines. Higher compensation, stock-based compensation and office costs contributed to margin pressure.
Outlook, risks and notable items
- For Q2 fiscal 2012, FactSet expected revenue of $197–$200 million, operating margin of 33.7%–34.2%, and diluted EPS of $0.99–$1.01. EPS guidance included a $0.02 reduction related to expiration of the federal R&D tax credit.
- Foreign currency translation and hedge movements reduced comprehensive income: it was $31.8 million versus $45.3 million a year earlier, including a $11.6 million foreign-currency translation loss in the quarter. FactSet hedged approximately 90% of its Indian rupee exposure through Q1 FY2013; outstanding forward contracts had a $22.3 million notional value and a $2.4 million liability.
- Management identified equity-market weakness, client budget cuts, investment-banking contraction and foreign-exchange movements as risks to demand and results. It also cited tax audits and uncertain tax positions; gross unrecognized tax benefits were $7.5 million. Management did not expect unresolved legal matters or tax examinations to have a material adverse effect based on current information.
- New office leases increased worldwide leased space to approximately 766,000 square feet. Operating lease commitments were $151.6 million; supplier purchase commitments were $47.8 million at August 31, 2011, with no material quarterly change.
- After quarter-end, shareholders approved increasing authorized common shares from 100 million to 150 million; the amendment took effect December 16, 2011. On December 31, FactSet retired treasury shares, returning them to authorized but unissued shares.
Key facts for investors to verify
- Whether ASV growth and investment-banking demand recover, given quarterly ASV growth of $3.5 million and declining user counts.
- Whether revenue growth can be sustained while compensation, data costs and hiring weigh on operating margin.
- Actual Q2 revenue, margin and EPS versus management’s December 13, 2011 outlook, including the tax-credit impact.
- Cash generation and shareholder returns alongside planned investment, lease obligations and repurchase activity.
- Foreign-exchange exposure and hedge performance, as well as developments in tax audits and unrecognized tax benefits.