FactSet Research Systems Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended November 30, 2018; comparable period is the three months ended November 30, 2017. FactSet provides subscription-based financial information, analytics, applications and related services to investment professionals. Amounts are in U.S. dollars unless otherwise noted.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $351.6 million | $329.1 million | +6.8% |
| Operating income | $100.5 million | $89.1 million | +12.8% |
| Operating margin | 28.6% | 27.1% | +1.5 percentage points |
| Net income | $84.3 million | $70.4 million | +19.8% |
| Diluted EPS | $2.17 | $1.77 | +22.6% |
| Operating cash flow | $46.3 million | $61.1 million | Down $14.8 million |
| Free cash flow | $36.8 million | $55.2 million | Down 33.4% |
- Revenue growth was led by Wealth workstation sales and Content and Technology Solutions enterprise data feeds; Research also grew. Revenue increased in each region: U.S. 6.4%, Europe 6.6%, and Asia Pacific 10.6%.
- Organic revenue grew 6.4%. Organic annual subscription value (ASV) was $1.40 billion, up 6.3%; organic ASV plus professional services was $1.42 billion, up 6.6%. Management cited Wealth and CTS demand, cross-selling and upselling. Annual client retention exceeded 95% measured by ASV.
- Operating expenses rose 4.6%, slower than revenue. Cost of services increased 3.3% to $166.8 million (47.4% of revenue); SG&A rose 7.4% to $84.3 million (24.0% of revenue). Management cited higher data costs, computer-related expenses, bad debt, professional fees and compensation; prior-year restructuring benefits helped offset costs.
- The effective tax rate fell to 12.1% from 18.3%, principally due to the U.S. corporate tax rate reduction under the TCJA, a $2.3 million favorable transition-tax revision and higher R&D tax benefits. Lower taxes and fewer diluted shares from repurchases supported EPS growth.
Balance sheet, cash flow and capital allocation
- At November 30, 2018, cash and cash equivalents were $170.4 million, short-term investments $27.5 million, total assets $1.366 billion, and stockholders’ equity $541.2 million. Cash declined $38.2 million from August 31, 2018.
- Long-term debt was $574.8 million net of unamortized issuance costs, against a $575 million revolving facility bearing daily LIBOR plus a 1.00% spread and maturing March 17, 2020. The facility was fully drawn; FactSet reported covenant compliance. A 25-basis-point LIBOR change would alter annual interest expense by an estimated $1.4 million.
- Operating cash flow and free cash flow were lower year over year, primarily due to working-capital timing, including supplier payments and payroll, higher days sales outstanding (42 days versus 40), and increased capital expenditures. Capital expenditures were $9.5 million versus $5.9 million.
- Financing cash outflows included $60.4 million of program repurchases (275,000 shares), $4.3 million of employee-share tax-withholding repurchases and $24.3 million of dividends. The quarterly dividend was $0.64 per share; $181.3 million remained authorized for repurchases.
Outlook, risks and notable items
- FY2019 guidance in the filing: revenue of $1.41–$1.45 billion; organic ASV plus professional services growth of $75–$90 million over FY2018; GAAP operating margin of 29.0%–30.0% and adjusted margin of 31.5%–32.5%; annual effective tax rate of 17.5%–18.5%; GAAP diluted EPS of $8.70–$8.90 and adjusted diluted EPS of $9.45–$9.65. Management said the EPS guidance midpoint implied 12% growth over the prior year. The outlook was stated as reflecting expectations as of September 25, 2018, and actual results may differ.
- Management expects available cash, operating cash generation and other expected cash flows to meet operating, investment and capital-return needs. It also expects foreign cash and operating cash flows to fund foreign activities for at least the next 12 months.
- Market and business risks include equity-market declines, shifts from active to passive investing, investment-bank consolidation and reduced staffing, client cancellations, competition, cybersecurity or service disruptions, foreign exchange, Brexit uncertainty and regulatory change including MiFID II.
- Foreign-currency exposure was estimated at $237.3 million net expenses over the next 12 months; forwards hedge portions of Philippine peso, Indian rupee, euro and sterling exposures. A hypothetical 10% weaker U.S. dollar without hedges was estimated to reduce operating income by $7.3 million over 12 months.
- Potential contingencies include a Massachusetts sales-tax inquiry for which the company had not recorded a liability because the outcome could not be reasonably estimated; the filing says an assessment could materially affect financial position, cash flows and results. Management considered other ongoing legal proceedings not likely to have a material adverse effect. Gross unrecognized tax benefits were $9.8 million, including accrued interest.
- Undiscounted operating lease commitments totaled $397.5 million, including a new Norwalk headquarters lease; the new space was expected to be occupied in FY2020. Adoption of the new lease accounting standard in FY2020 was expected to materially affect the balance sheet, but not materially affect income, comprehensive income or cash flows.
- ASC 606 was adopted using the modified retrospective method. It produced a $2.0 million after-tax opening retained-earnings increase for certain capitalized fulfillment costs; management said the adoption did not materially change revenue timing or amount. Goodwill declined $6.9 million, primarily from foreign-currency translation; no impairment was reported.
Key facts for investors to verify
- Whether subscription and organic ASV growth, retention and Wealth/CTS sales momentum continue, and how client-count methodology changes affect comparisons.
- Whether cash conversion improves after the reported working-capital timing effects and whether DSO and capital spending trends normalize.
- Progress on debt refinancing or repayment before the March 2020 facility maturity, floating-rate exposure and compliance with covenants.
- Developments in the Massachusetts sales-tax matter, tax examinations and the company’s unrecognized tax positions.
- Execution and cost implications of the headquarters move and the anticipated balance-sheet impact of lease accounting adoption.
- Performance against FY2019 guidance, noting that adjusted measures exclude specified items and are not GAAP measures.