FactSet Research Systems Inc. — Q1 FY2011 Form 10-Q
Business context and reporting period. The unaudited quarter ended November 30, 2010. FactSet sells subscription-based financial data, analytics and workflow applications, primarily to investment professionals. About 82% of revenue came from buy-side clients. The filing was signed January 10, 2011.
Financial performance and liquidity
Amounts are in millions except per-share data. Comparisons are with the three months ended November 30, 2009; balance-sheet comparisons are with August 31, 2010.
| Metric | Q1 FY2011 | Prior comparable period / change |
|---|---|---|
| Revenue | $173.3 | $155.2; up 11.6% |
| Operating income / margin | $59.4 / 34.3% | $54.0 / 34.8% |
| Net income | $41.6 | $36.1; up 15.1% |
| Diluted EPS | $0.88 | $0.74; up 18.9% |
| Operating cash flow | $22.2 | $25.2 |
| Capital expenditures | $8.0 | $6.7 |
| Free cash flow (company-defined) | $14.2 | $18.5 |
| Cash and cash equivalents | $202.4 | $195.7 at August 31, 2010 |
| Total assets / liabilities | $659.4 / $116.8 | $644.6 / $142.2 at August 31, 2010 |
FactSet reported no outstanding debt and said it was in compliance with the covenants on its $12.5 million revolving facility, which matures March 31, 2011; approximately $3.3 million was used for standby letters of credit. Cash increased $6.6 million during the quarter. Financing outflows included $26.1 million of share repurchases and $10.5 million of dividends; employee stock-plan proceeds and related tax benefits partly offset these uses. Operating cash flow and free cash flow were lower year over year, primarily reflecting the timing of annual employee bonuses and working-capital movements.
Material changes and operating drivers
- Annual Subscription Value (ASV) was $695 million, up from $621 million a year earlier; excluding $16 million attributable to the Market Metrics acquisition, management reported 9.5% growth. ASV rose $10.9 million during the quarter.
- Users reached 43,600, up 800 during the quarter; client count was 2,123, up 13. Annual client retention exceeded 95% of ASV, while client-based retention was 90%, compared with 87% a year earlier.
- Revenue grew across regions: U.S. $118.2 million (+12.3%), Europe $43.2 million (+10.1%), and Asia Pacific $11.9 million (+10.8%). U.S. growth included $3.9 million from Market Metrics; excluding that acquisition, U.S. organic revenue growth was 8.6%.
- Operating expenses increased 12.5%, slightly faster than revenue. Cost of services rose 12.7% and SG&A rose 12.4%. Management attributed pressure to compensation and hiring, travel, and Market Metrics, partly offset by lower third-party data costs and operating efficiencies. Operating margin declined 50 basis points.
- Headcount reached 4,459, up 36% year over year, with expansion concentrated in content operations in India and the Philippines and in engineering and consulting. The Asia Pacific segment’s operating income fell 2.0%, mainly from compensation and occupancy costs.
Outlook, risks and unusual items
- Q2 FY2011 outlook: revenue of $174–$179 million and diluted EPS of $0.85–$0.87. Management said both EPS endpoints include a $0.02 reduction reflecting the expiration of the U.S. federal R&D tax credit.
- FY2011 capital expenditures: $22–$28 million, net of landlord contributions. Management said cash, operating cash generation and available credit should be sufficient for expected needs over the next year.
- The reported 30.1% effective tax rate included a $1.4 million benefit from adjustments to tax reserves; management’s projected annual rate before discrete items was 32.5%. Gross unrecognized tax benefits were $6.4 million, and multiple tax audits were ongoing; management did not anticipate a significant change in that balance over the next 12 months.
- Foreign-currency exposure was estimated at approximately $126 million net annual expenses. FactSet used forward contracts to hedge portions of its yen, euro and pound exposures and said it did not use derivatives for speculation.
- A new data-center lease added $15.8 million of minimum payments over ten years; total operating-lease commitments were $159.4 million. Purchase commitments were $45.6 million at August 31, 2010, with no material first-quarter change.
- Management cited risks from equity-market declines, investment-banking consolidation or failures, competition, technology and data-center disruption, client-data protection, international operations, currency movements, personnel retention, tax audits and litigation. Ordinary-course legal matters were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether subsequent ASV, client, user and retention trends sustained the reported growth, including growth excluding Market Metrics.
- Whether hiring and other operating costs continue to pressure margins, particularly in Asia Pacific, and whether proprietary data reduces third-party data expenses as expected.
- Whether Q2 revenue and EPS guidance was achieved; assess the tax-reserve benefit and expired R&D credit separately when comparing earnings.
- Whether operating cash flow and free cash flow recover after first-quarter bonus and working-capital timing effects, and how cash is allocated among investment, dividends and repurchases.
- How the March 2011 credit-facility maturity, lease commitments, tax audits and foreign-currency exposure develop.