FactSet Research Systems Inc. — Q1 FY2017 10-Q
Reporting period: Three months ended November 30, 2016; comparisons are with the three months ended November 30, 2015 unless noted. FactSet provides subscription-based financial information, analytics, and workflow tools to investment professionals.
Financial performance
| Metric | Q1 FY2017 | Prior year | Change |
|---|---|---|---|
| Revenue | $288.1 million | $270.5 million | +6.5%; organic growth 8.4% |
| Operating income | $90.3 million | $87.3 million | +3.4% |
| Operating margin | 31.4% | 32.3% | Down 0.9 percentage points |
| Net income | $66.6 million | $60.0 million | +11.0% |
| Diluted EPS | $1.66 | $1.43 | +16.1% |
| Effective tax rate | 25.9% | 31.4% | Lower following operational realignment |
| Operating cash flow | $51.1 million | $71.1 million | Down 28.1% |
| Free cash flow (non-GAAP) | $38.6 million | $56.7 million | Down 31.9% |
Revenue growth reflected organic subscription expansion, analytics and Wealth Management deployments, and strong Portware activity. Annual subscription value (ASV) was $1.17 billion, up 7.9% organically; reported ASV growth was 5.6%. Clients totaled 3,116 and users 66,963, up 3.7% and 6.0%, respectively. Annual client retention was above 95% measured by ASV.
Operating expenses grew 7.9%, faster than revenue. Cost of services rose 10.9% to $127.3 million, or 44.2% of revenue, up 1.8 percentage points; management cited higher compensation, amortization and computer costs, partly offset by lower data costs. SG&A rose 3.0% to $70.5 million, while its revenue share declined to 24.5% from 25.3%. Net income and EPS benefited from the lower tax rate and fewer diluted shares, partly offset by higher compensation and acquired-intangible amortization.
Liquidity, capital and balance sheet
- At November 30, cash and cash equivalents were $173.3 million and short-term investments were $21.0 million. Current assets were $324.7 million versus current liabilities of $136.2 million.
- Long-term debt was $365.0 million, up from $300.0 million at August 31, 2016 after a $65.0 million borrowing for general corporate purposes. The floating-rate loan bears one-month LIBOR plus 0.75%, matures September 21, 2018, and was subject to covenant compliance at quarter-end.
- Cash declined $55.1 million during the quarter, primarily reflecting $79.3 million of share repurchases, $71.7 million of acquisition spending net of cash acquired, $19.9 million of dividends, and capital expenditures of $12.5 million. These outflows were partly funded by operating cash flow and debt proceeds.
- Free cash flow fell chiefly because of a $34.2 million year-over-year adverse working-capital swing, including higher receivables and payroll timing. Days sales outstanding increased to 34 from 31 at August 31, 2016.
- FactSet repurchased 505,000 shares for $79.3 million and had $117.7 million remaining under its repurchase authorization. The quarterly dividend was raised to $0.50 per share, or $2.00 annualized.
Material changes, outlook and risks
- FactSet acquired CYMBA Technologies for $7.7 million and Vermilion Holdings for $68.4 million during the quarter. Together they added $14.7 million of acquired ASV. Management expected the acquisitions to reduce Q2 FY2017 adjusted diluted EPS by $0.01 and GAAP diluted EPS by $0.02, with breakeven contribution to both measures by Q4 FY2017. Vermilion’s purchase-price allocation remained preliminary.
- Effective September 1, 2016, FactSet shifted certain global operations to its U.K. subsidiary. Management attributed the Q1 effective tax-rate decline to this realignment; the lower rate materially supported earnings growth.
- Q2 FY2017 outlook: revenue of $293–$298 million; GAAP operating margin of 31%–32% and adjusted margin of 32.5%–33.5%; annual effective tax rate of 25.5%–26.5%; GAAP diluted EPS of $1.70–$1.74 and adjusted diluted EPS of $1.78–$1.82.
- Risks include client cost pressure and firm closures, exposure to investment-management activity and investment-banking headcount reductions, foreign-exchange volatility and uncertainty associated with Brexit. FactSet hedged approximately 50% of British pound exposure through Q4 FY2017 and 75% of Indian rupee exposure through Q1 FY2019.
- Unrecognized tax benefits, including accrued interest, were $9.4 million; tax examinations were ongoing, though management did not expect a material adverse outcome. Ordinary-course legal matters, including intellectual-property claims, were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track organic ASV and revenue growth against reported growth, including acquisition and foreign-exchange effects.
- Assess whether cost growth moderates and operating margin stabilizes after the quarter’s decline, particularly in the U.S. segment.
- Monitor receivables, DSO and operating cash flow for improvement following the working-capital outflow.
- Verify acquisition integration, Vermilion’s final purchase-price allocation, and progress toward the stated EPS breakeven timing.
- Review the sustainability of the reduced tax rate, floating-rate debt exposure and debt repayment or refinancing before the September 2018 maturity.
- Compare subsequent results with Q2 guidance and monitor currency and Brexit-related developments.