FactSet Research Systems Inc. — FY2015 Form 10-K
Business context and reporting period. FactSet provides subscription-based financial data, analytics and workflow applications to investment professionals. This annual report covers the fiscal year ended August 31, 2015; FY2014 is the principal comparison. Buy-side clients represented 82.5% of annual subscription value (ASV). The company reported 2,976 clients and 62,205 users at year-end.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $1,006.8 million | $920.3 million | +9.4% |
| Operating income | $331.9 million | $302.2 million | +9.8% |
| Operating margin | 33.0% | 32.8% | +0.2 percentage points |
| Net income | $241.1 million | $211.5 million | +13.9% |
| Diluted EPS | $5.71 | $4.92 | +16.1% |
| Operating cash flow | $306.4 million | $265.0 million | +15.6% |
| Capital expenditures | $25.7 million | $17.7 million | +$7.9 million |
| Free cash flow (company-defined, non-GAAP) | $280.8 million | $247.3 million | +13.5% |
Cost of services rose 14.6% to $405.3 million, reaching 40.3% of revenue versus 38.4% in FY2014, mainly from higher compensation and staffing. SG&A increased 1.9% to $269.5 million but declined to 26.8% of revenue from 28.7%. The filing does not present a separately labeled gross margin; revenue less cost of services equates to approximately 59.7% in FY2015 versus 61.6% in FY2014.
Year-end cash and cash equivalents were $158.9 million, up from $116.4 million; short-term investments were $23.5 million. Current assets were $304.2 million and current liabilities $139.8 million. Long-term debt was $35.0 million at August 31, 2015, compared with none a year earlier. Total assets were $736.7 million and stockholders’ equity $531.6 million. Cash plus investments totaled $182.4 million.
ASV reached $1.058 billion, up 9.8% including acquisitions and 9.2% organically. Revenue growth was broad-based; international revenue rose 10.9% to $328.0 million, while U.S. revenue increased 8.7% to $678.8 million. Client retention exceeded 95% measured by ASV, and was 94% by client count.
Material changes and notable items
- Growth accelerated: organic ASV growth rose to 9.2% from 7.3% in FY2014; revenue growth rose to 9.4% from 7.3%.
- Operating margin increased slightly to 33.0%. Management cited revenue growth and $11.2 million of net foreign-currency benefits to operating income; higher service costs, especially compensation, offset some gains.
- Net income and EPS benefited from an $8.8 million tax benefit, primarily from reenactment of the U.S. Federal R&D tax credit, prior-year tax return finalization and other discrete items. The effective tax rate fell to 27.8% from 30.3%.
- FY2015 operating results included $3.0 million of pretax charges related to vesting performance-based equity awards and $3.2 million primarily related to sales leadership changes.
- FactSet acquired Code Red for approximately $36.0 million in February 2015, adding research-management technology and approximately $5.2 million of FY2015 revenue. The acquisition was not material to consolidated results, according to management.
- FactSet returned $322.8 million to stockholders through dividends and repurchases. It repurchased 1.7 million shares for $252.8 million and increased its quarterly dividend 12.8%, to $0.44 per share.
Outlook, risks and contingencies
For Q1 FY2016, including Portware, management expected revenue of $270–$274 million, operating margin of 32.0%–33.0%, diluted EPS of $1.44–$1.46 and an annual effective tax rate of 31.0%–32.0%, assuming no R&D tax-credit reenactment by quarter-end. If reenacted by November 30, 2015, management estimated EPS of $1.49–$1.51 and a potential retroactive tax benefit of $0.14 per share. These are forward-looking estimates, not guarantees.
After year-end, FactSet completed its $265 million cash acquisition of Portware on October 16, 2015, funded with an additional $265 million borrowing. Debt outstanding was $300 million as of October 30, 2015, with maturity in September 2018. The acquisition is intended to add multi-asset trade automation; purchase-price allocation and pro forma financial information were not available in this filing.
Key risks include dependence on investment-management clients and equity-market conditions; banking-sector consolidation and spending; intense competition and potential pricing pressure; cybersecurity, privacy and service outages; reliance on third-party data suppliers; recruiting and retaining skilled employees; foreign-exchange exposure; and tax audits and uncertain tax positions. Non-U.S.-dollar expenses exceeded forecast non-dollar revenue, creating a stated net currency exposure of $174.7 million; the company uses currency forwards to hedge portions of certain exposures. Unrecognized tax benefits, including accrued interest, totaled $6.8 million. Management did not expect unresolved ordinary-course legal matters to have a material adverse effect, while noting that outcomes are uncertain. The company reported effective internal controls and received unqualified audit opinions.
Important facts for investors to verify
- Whether organic ASV growth and user additions remain strong, and whether the higher growth rate is sustained without acquisition contributions.
- How margins respond to continued hiring, compensation costs, data expenses and integration of Code Red and Portware.
- Portware’s final purchase-price allocation, contribution to revenue and earnings, and the effect of the additional borrowing on leverage and interest costs.
- Whether the R&D tax credit is reenacted and how tax audits and unrecognized tax positions affect the effective tax rate.
- Foreign-exchange movements, hedge coverage and the sensitivity of operating income to currency changes.
- Cash generation relative to dividends, repurchases, capital expenditures, contractual commitments and acquisition-related debt.