FactSet Research Systems Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended May 31, 2016; comparisons are with the corresponding 2015 periods. The filing was signed July 11, 2016. FactSet provides subscription-based financial information, analytics, content, and workflow technology to investment professionals.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $287.5 | $254.5 | $839.8 | $745.0 |
| Operating income | $89.3 | $85.4 | $261.9 | $246.3 |
| Operating margin | 31.1% | 33.5% | 31.2% | 33.1% |
| Net income | $66.8 | $61.4 | $194.5 | $178.9 |
| Diluted EPS | $1.62 | $1.45 | $4.68 | $4.23 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $261.1 | $222.8 |
| Free cash flow* | $88.6 | $98.5 | $226.4 | $207.5 |
*Free cash flow is a non-GAAP measure defined by FactSet as operating cash flow less capital expenditures.
- Growth and margins: Third-quarter revenue increased 13.0%, while operating income rose 4.6% and diluted EPS rose 11.7%. For the first nine months, revenue grew 12.7%, operating income 6.4%, and diluted EPS 10.6%. Revenue growth outpaced profit growth as costs increased.
- Cost drivers: Cost of services rose 23.8% in the quarter, to $124.6 million, and increased to 43.3% of revenue from 39.6%. Management attributed the increase mainly to employee compensation, acquired-intangible amortization, and computer-related costs. Portware reduced quarterly operating margin by 130 basis points; $1.4 million of Market Metrics sale-related professional fees reduced it by a further 40 basis points.
- Liquidity and debt: May 31 cash and cash equivalents were $187.4 million, with $23.7 million of investments. Current assets were $383.0 million and current liabilities $154.7 million. Long-term debt was $300.0 million, up from $35.0 million at August 31, 2015, primarily reflecting Portware acquisition financing. Debt bears interest at one-month LIBOR plus 0.75%, matures September 21, 2018, and was subject to covenants with which FactSet reported compliance.
- Capital returns: First-nine-month dividends were $54.0 million and share repurchases were $189.5 million. The quarterly dividend was increased 13.6% to $0.50 per share ($2.00 annualized). The board expanded the repurchase authorization by $165.0 million; $359.7 million remained authorized at May 31.
Material changes and operating developments
- Annual Subscription Value (ASV) was $1.156 billion, up 13.2% year over year, including 9.3% organic growth. Buy-side ASV growth accelerated to 9.6%; sell-side growth slowed to 8.1%, which management linked to market volatility delaying investment-bank purchasing decisions. Client retention was greater than 95% of ASV; client count was 3,075 and user count 63,535.
- Analytics, Content & Technology Solutions, and Portware were cited as growth drivers. Portware was acquired in October 2015 for approximately $264.8 million; its preliminary allocation included $188.4 million of goodwill. The acquisition added revenue but also raised compensation and amortization costs.
- International operations grew faster than the U.S. in the quarter: U.S. revenue rose 12.3%, Europe 11.2%, and Asia Pacific 24.9%. International operations represented 32.8% of quarterly revenue.
- FactSet classified Market Metrics and Matrix-Data as held for sale at May 31, 2016. The sale closed July 1, 2016, for $165.0 million less estimated working-capital and other adjustments, including a $9.7 million bonus adjustment; FactSet may receive a further $10.0 million earn-out if growth targets are met. The business was not treated as a discontinued operation.
- Other comprehensive loss for the first nine months was $7.6 million, principally reflecting $7.9 million of foreign-currency translation losses.
Outlook, risks, and contingencies
- Fiscal Q4 2016 outlook: Management expected revenue of $286–$292 million, GAAP operating margin of 31.0%–32.0%, adjusted operating margin of 32.5%–33.5%, annual effective tax rate of 28.0%–29.0%, GAAP diluted EPS of $1.61–$1.65, and adjusted diluted EPS of $1.68–$1.72. Guidance included Market Metrics results through its July 1 sale closing. Adjusted measures are non-GAAP.
- Foreign exchange and Brexit: FactSet reported annualized non-U.S.-dollar expenses of $207.4 million against non-U.S.-dollar revenue of $21.7 million, creating stated net exposure of $185.7 million. Hedges covered approximately 50% of sterling exposure, 50% of euro exposure, and 75% of Indian-rupee exposure for specified periods. Management cautioned that Brexit-related market and currency volatility and subsequent negotiations could affect operations and results.
- Business risks: A substantial majority of ASV came from investment-management clients, whose demand may be affected by equity-market declines and asset outflows. Investment-banking demand may be affected by reduced headcount, lower M&A activity, consolidation, and industry weakness.
- Other exposures: Debt is floating-rate; management estimated that a 25-basis-point change in one-month LIBOR would change annual interest expense by $0.8 million. The filing reports ongoing tax audits and $8.2 million of gross unrecognized tax benefits, including accrued interest. Management did not expect tax matters or ordinary-course litigation to have a material adverse effect. Operating lease minimum payments totaled $282.0 million.
- Subsequent capital action: On July 1, 2016, FactSet entered a $120.0 million accelerated share repurchase agreement and paid the amount on July 5, receiving an initial 0.6 million shares; final settlement was scheduled for fiscal Q1 2017.
Important facts for investors to verify
- Whether organic ASV and revenue growth remain durable, especially given slower sell-side growth and market sensitivity among financial-sector clients.
- Whether cost growth moderates and operating margins recover as Portware is integrated and staffing, technology, and amortization costs evolve.
- The final economics of the Market Metrics sale, including working-capital adjustments, the bonus adjustment, and any earn-out achieved.
- Debt repayment capacity, floating-rate exposure, covenant compliance, and cash available after dividends and planned repurchases.
- The effects of Brexit and currency movements despite hedging, and whether reported tax benefits recur; the filing includes discrete tax benefits that affected period comparisons.
- Progress against Q4 guidance, including the difference between GAAP and adjusted measures and the treatment of the disposed business.