FactSet Research Systems Inc. — Form 10-Q
Reporting period: Fiscal third quarter ended May 31, 2013; comparisons are with the prior-year quarter or nine-month period, as indicated. FactSet provides subscription-based financial information and analytics to investment professionals.
Financial performance
| Metric | Three months ended May 31, 2013 | Change year over year | Nine months ended May 31, 2013 | Change year over year |
|---|---|---|---|---|
| Revenue | $214.6 million | +6.1% | $638.8 million | +6.8% |
| Operating income | $71.6 million | +4.6% | $198.9 million | -1.7% |
| Operating margin | 33.4% | 33.9% prior year | 31.1% | 33.8% prior year |
| Net income | $53.4 million | +11.2% | $147.7 million | +5.3% |
| Diluted EPS | $1.20 | +14.3% | $3.30 | +8.2% |
- Quarterly cost of services rose 11.4% to $76.7 million, faster than revenue; SG&A rose 2.0% to $66.3 million. Nine-month operating expenses increased 11.1%.
- Quarterly diluted EPS growth benefited from higher revenue, lower tax expense and fewer diluted weighted-average shares. The quarter’s 25.9% effective tax rate included a $2.3 million benefit from finalizing prior-year tax returns; management gave a 29.0% projected annual rate before that benefit.
- Nine-month results included a $15.7 million pretax stock-compensation charge when performance-based Market Metrics options vested. Management said this reduced year-to-date operating margin by about 250 basis points. Nine-month net income also reflected $8.5 million of cumulative tax benefits from the federal R&D credit, prior-year tax returns and UK cash repatriation.
Cash, liquidity and capital
- At May 31, 2013, cash and cash equivalents were $242.8 million, short-term investments were $14.6 million, total assets were $735.3 million and total liabilities were $132.0 million. FactSet reported no outstanding borrowings.
- For the first nine months, operating cash flow was $193.6 million; capital expenditures were $13.3 million and management-defined free cash flow was $180.3 million. Third-quarter operating cash flow was $96.6 million and free cash flow was a record $92.4 million.
- Nine-month financing cash outflow was $122.9 million, including $188.1 million of share repurchases and $40.7 million of dividends, partly offset by employee stock-plan proceeds and related tax benefits. The company repurchased 2.02 million shares for $183.3 million under its program.
- The board approved a 13% increase in the quarterly dividend to $0.35 per share, or $1.40 annualized, and expanded the repurchase authorization by $200 million. $206.5 million remained authorized at quarter-end. The June dividend payment was made after quarter-end.
- Current assets were $360.1 million versus current liabilities of $105.1 million. Operating lease commitments were $121.3 million; supplier purchase commitments were $52.2 million at August 31, 2012, with no material change reported during the nine-month period.
Business trends and changes from prior period
- Annual subscription value (ASV) was $863.7 million, up 5.5% organically year over year. ASV advanced $1.7 million in the quarter excluding a $1.2 million foreign-currency impact. Annual client retention remained above 95% of ASV; client-based retention was 92%.
- Quarterly revenue growth was supported by advanced applications, proprietary data, pricing and StreetAccount, acquired in June 2012. StreetAccount contributed $2.9 million of quarterly revenue and 145 basis points to revenue growth. Excluding its revenue, quarterly growth was 4.6%.
- Investment banking clients remained under pressure: their ASV decreased $1.8 million in the quarter and their user count fell by 404. Investment management clients added 465 users; the buy-side represented 83% of ASV. FactSet reported 2,440 clients and 49,516 users at quarter-end.
- Quarterly revenue increased across segments: U.S. +6.3%, Europe +5.9% and Asia Pacific +4.3%. Nine-month U.S. segment operating income fell 8.1%, mainly reflecting the Market Metrics charge; Europe and Asia Pacific operating income increased 6.6% and 4.5%, respectively.
- Headcount was 5,900, up 8% year over year. Higher hiring and StreetAccount costs pressured cost of services; lower third-party data costs partly offset the increase. Share repurchases reduced shares outstanding, while employee stock issuance partly offset that reduction.
Outlook, risks and contingencies
- Fourth-quarter fiscal 2013 outlook: revenue of $218–$221 million; operating margin of 33.0%–34.0%; annual effective tax rate of 28.5%–29.5%; diluted EPS of $1.18–$1.21. Full-year capital expenditures, net of landlord contributions, were expected to be $20–$28 million.
- Management cited cautious investment-bank spending, sell-side headcount reductions and hesitant investment-management purchases as constraints on ASV growth. It also identified equity-market declines, client assets under management, banking-sector deleveraging and foreign-exchange movements as risks.
- FactSet estimated net foreign-currency expense exposure of $159 million annually and hedged approximately 75% of Indian-rupee exposure and 40% of net British-pound exposure. A hypothetical 10% weaker U.S. dollar without hedges would reduce operating income by an estimated $15.1 million over 12 months.
- Gross unrecognized tax benefits were $5.0 million, including accrued interest. The company was subject to tax examinations but did not expect a material adverse outcome. Management did not believe unresolved ordinary-course legal matters would materially affect financial position, results or cash flows.
- Approximately $4.4 million of standby letters of credit supported office leases; FactSet reported compliance with their covenants. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether organic ASV growth stabilizes or improves given investment-banking contractions and reported quarterly ASV additions.
- How much reported earnings growth depends on tax benefits, share-count reduction and the timing of performance-based stock compensation, especially the Market Metrics charge.
- Whether operating margins recover from higher employee, content-collection and acquisition-related costs while FactSet continues hiring.
- Whether the fourth-quarter revenue, margin, tax-rate and EPS outlook is achieved, and whether planned capital returns remain consistent with cash generation.
- Developments in foreign-exchange exposure, tax audits, lease and supplier commitments, and the company’s stated market and client-spending risks.