FactSet Research Systems Inc. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Three months ended November 30, 2017; comparative period ended November 30, 2016. FactSet provides subscription-based financial information, analytics, applications, content and related services to investment professionals.
Financial performance
Unless stated otherwise, amounts are in U.S. dollars.
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $329.1 million | $288.1 million | +14.3%; organic revenue growth was 5.8% |
| Operating income | $89.1 million | $90.3 million | -1.4% |
| Operating margin | 27.1% | 31.4% | -4.3 percentage points |
| Net income | $70.4 million | $66.6 million | +5.7% |
| Diluted EPS | $1.77 | $1.66 | +6.6% |
| Operating cash flow | $61.1 million | $51.1 million | +19.6% |
| Free cash flow | $55.2 million | $38.6 million | +43.2% |
- Cost of services rose 26.9% to $161.5 million; SG&A rose 11.4% to $78.5 million. The filing attributes margin pressure principally to compensation, acquisition-related amortization and data costs, including restructuring charges.
- Annual subscription value (ASV) was $1.32 billion, up 12.8% year over year, including acquisitions and foreign exchange; organic ASV growth was 5.1%. Buy-side and sell-side ASV growth was 5.3% and 3.9%, respectively.
- Cash and cash equivalents were $221.9 million at November 30, 2017, versus $194.7 million at August 31, 2017. Current assets were $427.0 million and current liabilities $161.6 million.
- Long-term debt was $574.7 million, substantially the full $575 million revolving facility, bearing interest at daily LIBOR plus 1.00% and maturing March 17, 2020. FactSet reported compliance with debt covenants.
- The company paid $21.7 million in dividends and repurchased $31.7 million of stock during the quarter; $213.2 million remained authorized for repurchases.
Changes and business drivers
- Revenue growth reflected recent acquisitions, organic growth and foreign exchange. Organic revenue growth was strongest in analytics and content and technology solutions; management also cited strength in wealth products.
- International revenue rose 23.5%, compared with U.S. growth of 9.5%. Europe benefited substantially from acquisitions; organic revenue growth was 5.9% in Europe and 4.8% in the U.S.
- Operating income fell despite higher revenue. European operating income declined 9.9%; U.S. and Asia Pacific operating income increased 1.9% and 11.8%, respectively.
- Net income and EPS growth benefited from a lower tax provision and fewer diluted shares, partly offset by lower operating income and higher interest expense. The effective tax rate was 18.3%, versus 25.9%.
- Operating cash flow increased, while capital expenditure fell to $5.9 million from $12.5 million. The prior-year investing cash outflow included acquisition spending.
Outlook, commentary and risks
- For FY2018, management forecast organic ASV growth of $65–$85 million (4.9%–6.5%), revenue of $1.34–$1.36 billion, GAAP operating margin of 28.5%–30.0%, and GAAP diluted EPS of $7.60–$7.80. Adjusted operating margin was forecast at 31.0%–32.5%, and adjusted diluted EPS at $8.25–$8.45. Management moved to annual rather than quarterly guidance.
- Guidance’s annual effective tax rate range was 21.0%–22.5% and did not incorporate the impact of the U.S. Tax Cuts and Jobs Act, signed December 22, 2017. FactSet was evaluating that law’s financial statement impact.
- Management said ASV and revenue growth rates were below the prior-year rates, citing clients’ shift from active to passive investing, cost-control focus and industry consolidation. It also noted increased cancellations and lower trading volumes for its Portware EMS product.
- Management identified equity-market and investment-management trends, banking-sector consolidation, foreign exchange, Brexit and the implementation of MiFID II as business uncertainties. FactSet cited client interest in research-unbundling solutions related to MiFID II.
- Q1 included approximately $6.5 million of pre-tax restructuring charges across cost of services and SG&A. The company also recognized $4.1 million of excess share-based-payment tax benefits and $1.5 million of tax benefits from settlements. These helped lower the reported tax rate; adoption of the share-based-payment standard contributed $0.09 to diluted EPS.
- Subsequent events included the COO’s separation effective December 31, 2017, with a scheduled $427,500 payment and accelerated vesting of certain equity awards. FactSet reported no material change in its previously disclosed risk factors and did not expect pending legal matters to materially affect its financial position, results or cash flows.
Key facts investors should verify
- How much of reported growth is recurring organic subscription growth versus acquisition and foreign-exchange contributions; track ASV growth and cancellations.
- Whether operating margins recover as restructuring costs and acquisition-related compensation, amortization and data costs change.
- The durability of earnings and guidance after separating recurring performance from tax benefits and other adjustments; adjusted results are non-GAAP.
- The effect of the Tax Act on the effective tax rate, deferred taxes and future cash taxes.
- Floating-rate debt exposure, covenant headroom and refinancing or repayment plans ahead of the March 2020 maturity.
- Execution and cost implications of expanded office leases, including the 41% increase in leased space, and ongoing capital returns relative to cash generation.