FactSet Research Systems Inc. — Q1 Fiscal 2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; comparison is the three months ended November 30, 2013. The quarter is unaudited. FactSet provides subscription-based financial information, analytics and workflow applications to investment professionals.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $242.7 | $223.0 | +8.8% |
| Operating income | $80.3 | $74.7 | +7.4% |
| Operating margin | 33.1% | 33.5% | -0.4 percentage points |
| Net income | $55.9 | $52.2 | +7.1% |
| Diluted EPS | $1.32 | $1.19 | +10.9% |
| Operating cash flow | $71.2 | $58.1 | — |
| Free cash flow, company-defined non-GAAP | $66.4 | $52.7 | +26% |
Cost of services rose 17.2% to $97.5 million, reaching 40.2% of revenue versus 37.3% a year earlier. SG&A was nearly unchanged at $64.9 million and declined to 26.7% of revenue from 29.1%. Management attributed cost-of-services pressure mainly to compensation, third-party data expenses and Matrix acquisition costs; lower computer-related costs and lower SG&A helped offset the pressure. The effective tax rate was 30.8%, versus 30.5%.
Cash and cash equivalents were $115.2 million at November 30, 2014, down $1.1 million from August 31, 2014 and below $174.0 million a year earlier. Current assets were $245.7 million and current liabilities $120.6 million. FactSet reported no outstanding borrowings. Quarterly capital expenditures were $4.8 million. Cash uses included $48.4 million of program share repurchases, $2.2 million of employee tax-withholding share repurchases, and $16.2 million of dividends. The quarterly dividend was $0.39 per share.
Total assets were $646.5 million and total liabilities $144.8 million at quarter-end. The company held $24.7 million of short-term investments. It reported approximately $1.7 million of standby letters of credit related to leases and compliance with their covenants.
Business performance and changes versus prior year
- Revenue growth was broad-based: U.S. revenue increased 7.0%, Europe 12.9%, and Asia Pacific 12.5%. International revenue rose 12.8%; excluding foreign currency and Matrix, Europe grew 8.2% and Asia Pacific 15.2%.
- Annual subscription value (ASV) was $970.2 million, up 8.5% organically year over year, excluding $7.3 million acquired from Matrix and a $2.6 million currency headwind. Management said organic ASV growth had risen 350 basis points since November 2013.
- FactSet added 997 net users and 19 net clients during the quarter. Users totaled 55,593, up 9.0% year over year; annual client retention remained above 95% of ASV. The largest client represented 2% of subscriptions.
- Management cited growth in Portfolio Analytics, wealth-management workflows, proprietary content and sell-side subscriptions. Investment-banking ASV grew 6.7% year over year. Matrix contributed $2.5 million of European revenue and lowered consolidated operating margin by approximately 50 basis points, according to management.
- Diluted weighted-average shares declined 3.3% year over year, supporting EPS growth above net-income growth. Comprehensive income fell to $42.2 million from $63.0 million, principally reflecting a $13.6 million foreign-currency translation loss versus an $8.1 million gain in the prior-year quarter.
Outlook, management commentary and risks
For Q2 FY2015, guidance issued December 16, 2014 called for revenue of $244–$248 million, operating margin of 32.8%–33.8%, an annual effective tax rate of 31%–32%, and diluted EPS of $1.35–$1.37. The tax-rate assumption stated that the federal R&D credit would not be reenacted by quarter-end. Congress passed the Tax Increase Prevention Act on December 16 and it was signed December 19, after the guidance date; FactSet expected the retroactive credit to produce a discrete Q2 tax benefit of $5–$6 million. Investors should consider this subsequent event when assessing the guidance.
Management said operating cash flow and available liquidity were expected to fund operating needs, capital expenditures, dividends and repurchases for at least the next 12 months. The board approved a $300 million expansion of the repurchase authorization on December 15, leaving $338.7 million available; timing and amounts depend on market conditions.
Key risks discussed include equity-market weakness affecting investment-management clients and demand, investment-bank headcount reductions or industry disruption, and foreign-exchange volatility. FactSet estimated net annual foreign-currency exposure of $171 million, reflecting $199 million of non-U.S.-dollar expenses against $28 million of revenues; hedges covered specified portions of Indian rupee and Philippine peso exposure. A hypothetical 10% weaker U.S. dollar without hedges was estimated to reduce operating income by $16.7 million over 12 months. The company also reported ordinary-course legal matters and tax audits, but did not expect unresolved matters to have a material adverse effect. Gross unrecognized tax benefits were $5.8 million, including accrued interest.
Operating lease minimum payments totaled $205.9 million, with lease terms extending through 2031; new Boston and Hyderabad amendments added $6.6 million and $2.2 million of future minimum payments, respectively. No material change in supplier purchase commitments was reported.
Important facts for investors to verify
- Whether revenue and organic ASV growth continue, including the contribution from Matrix and the impact of currency movements.
- Whether operating-margin pressure from compensation and data costs eases, and how Matrix affects margins.
- How Q2 results compare with the stated guidance after the subsequent federal R&D credit enactment and expected $5–$6 million tax benefit.
- Whether cash generation can sustain dividends and the expanded repurchase program while preserving liquidity.
- Developments in investment-management and investment-banking client activity, foreign-exchange exposures and outstanding tax examinations.