FactSet Research Systems Inc. — Fiscal 2011 Second-Quarter 10-Q
Reporting period: Three and six months ended February 28, 2011. The interim financial statements are unaudited. FactSet provides subscription-based financial information and analytical applications to investment professionals; approximately 82% of revenue came from buy-side clients.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $177.6m | $157.3m | $350.9m | $312.5m |
| Operating income | $58.1m | $54.5m | $117.5m | $108.5m |
| Operating margin | 32.7% | 34.6% | 33.5% | 34.7% |
| Net income | $45.3m | $36.1m | $86.9m | $72.3m |
| Diluted EPS | $0.95 | $0.75 | $1.83 | $1.48 |
| Operating cash flow | — | $72.5m | $70.1m | |
| Capital expenditures | — | $15.4m | $9.1m | |
| Free cash flow, company-defined | — | $57.0m | $61.1m |
Q2 revenue grew 12.9%, operating income 6.6%, net income 25.3% and diluted EPS 26.7% year over year. For the first six months, revenue grew 12.3%, operating income 8.3%, net income 20.2% and diluted EPS 23.6%. Operating expenses rose faster than revenue, contributing to lower GAAP operating margins.
At February 28, cash and cash equivalents were $203.1m; current assets were $298.5m and current liabilities $91.3m. Total liabilities were $124.9m and the company reported no outstanding debt. Stockholders’ equity was $558.2m. Cash increased $7.4m from August 31, 2010. The company paid $21.1m in dividends and repurchased $75.1m of stock during the six-month period.
Business trends and changes
- Annual subscription value (ASV) was $723m, up 11% excluding $16m from the Market Metrics acquisition; Q2 ASV increased $27.9m. Q2 reported revenue included $4.0m from Market Metrics.
- Client retention was greater than 95% of ASV; client-based annual retention improved to 90% from 88% a year earlier. The company reported 2,161 clients and 44,800 users at quarter-end.
- Q2 revenue increased in each region: U.S. 13.8%, Europe 10.6% and Asia Pacific 12.6%. Asia Pacific operating income declined 17.2% in Q2, mainly due to higher compensation, occupancy and travel costs.
- Headcount reached 4,768, up 39% year over year, with hiring concentrated in content operations in India and the Philippines and in consulting and software engineering. Worldwide leased office space increased 16% since fiscal year-end.
- Operating cash flow rose modestly, but company-defined free cash flow fell to $57.0m from $61.1m, reflecting higher capital spending and working-capital effects. Q2 receivables rose with annual client billings; DSO was 36 days versus 39 a year earlier.
Outlook, management commentary and risks
- Management expected Q3 FY2011 revenue of $181m–$184m and EPS of $0.90–$0.92. FY2011 capital expenditure guidance, net of landlord contributions, remained $22m–$28m; projected recurring annual effective tax rate was 31%. These are forward-looking estimates, not guarantees.
- Q2 GAAP results included a $4.9m benefit from retroactive reinstatement of the U.S. federal R&D tax credit and a $2.5m incremental stock-based compensation expense tied to a higher estimated vesting level for performance-based options. Management’s Q2 non-GAAP diluted EPS was $0.89, excluding both items, versus GAAP EPS of $0.95.
- Cost growth and hiring investments pressured margins. Management cited higher employee and travel costs, partly offset by lower third-party data costs and technology efficiencies.
- Foreign-currency exposure is material: management estimated annual net non-U.S.-dollar expenses of $134m and used forward contracts to hedge selected currency exposures. A hypothetical 10% weaker dollar without hedges was estimated to reduce operating income by $12.2m over 12 months.
- Management identified risks from equity-market weakness affecting investment-management clients, investment-bank consolidation and spending, service outages or data-security incidents, competition and product development, foreign exchange, international operations, hiring, tax audits and litigation. Japanese clients represented about 2% of ASV; management stated recent natural disasters were not expected to materially affect consolidated results.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. Gross unrecognized tax benefits were $7.5m, including accrued interest; tax examinations could result in adjustments. The JPMorgan three-year credit facility matured March 31, 2011, after quarter-end. The filing states the company had no debt at February 28 and was complying with covenants applicable to approximately $4.3m of standby letters of credit.
Important facts for investors to verify
- Whether reported growth and the $723m ASV level are sustained, separating organic performance from Market Metrics and annual price increases.
- Whether revenue growth converts into stronger margins and free cash flow as hiring, compensation, travel and capital spending continue.
- The recurring earnings impact of the R&D credit benefit and performance-option compensation estimate; compare GAAP results with management’s non-GAAP presentation.
- Progress against Q3 revenue and EPS guidance, FY2011 capital expenditure guidance and the 31% recurring tax-rate expectation.
- The status of credit arrangements after the March 31 facility maturity, and the company’s ongoing foreign-exchange, tax, operational and client-industry exposures.