FactSet Research Systems Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012. The unaudited results are compared with the three months ended November 30, 2011; balance-sheet comparisons are with August 31, 2012.
Business context
FactSet provides subscription-based financial information, analytics and workflow applications to the global investment community. Approximately 81% of annual subscription value (ASV) came from investment management clients. The company reported 6,020 employees and operated through U.S., Europe and Asia Pacific segments.
Key financial metrics
| Metric | Q1 FY2013 | Prior comparable quarter | Change |
|---|---|---|---|
| Revenue | $211.1 million | $196.4 million | +7.5% |
| Operating income | $71.1 million | $66.8 million | +6.5% |
| Operating margin | 33.7% | 34.0% | Down 0.3 percentage points |
| Net income | $49.8 million | $45.5 million | +9.3% |
| Diluted EPS | $1.11 | $0.99 | +12.1% |
| Cash from operations | $50.6 million | $54.8 million | Lower |
| Capital expenditures | $6.1 million | $6.1 million | Approximately flat |
| Free cash flow (company-defined, non-GAAP) | $44.5 million | $48.7 million | Lower |
At November 30, cash and cash equivalents were $210.7 million, investments were $14.5 million, current assets were $320.0 million and current liabilities were $95.3 million. Total liabilities were $125.3 million and stockholders’ equity was $586.5 million. FactSet reported no outstanding borrowings. Cash increased $21.7 million from August 31. The quarterly dividend was $0.31 per share; $13.6 million of dividends were paid during the quarter.
ASV was $847 million, up 7.0% organically year over year, and increased $5 million during the quarter. Users numbered 49,605; FactSet added 105 net users and nine net clients during the quarter. Annual retention was greater than 95% measured by ASV and 92% by client count.
Revenue by segment: U.S. $143.9 million (+7.0%); Europe $51.6 million (+7.3%); Asia Pacific $15.5 million (+11.9%).
Material changes versus the prior period
- Revenue and earnings increased, while operating margin contracted 30 basis points. Management attributed the margin decline mainly to StreetAccount costs, higher cost-of-services compensation, foreign-exchange hedging losses and occupancy costs, partly offset by lower SG&A compensation and computer-related costs.
- Cost of services rose 10.1%, faster than revenue; SG&A rose 5.7%. Total operating expenses increased 7.9%.
- StreetAccount, acquired in June 2012, contributed $2.7 million of quarterly revenue. Its acquisition-related compensation and intangible amortization reduced operating margin by an estimated 40 basis points. The acquisition had a $26.3 million purchase price, including $22.0 million of goodwill.
- Diluted weighted-average shares declined to 45.0 million from 46.1 million, supporting per-share growth. FactSet repurchased 270,000 shares for $25.4 million under its program and repurchased additional shares to cover employee tax withholding.
- Cash from operations and free cash flow were below the prior-year quarter, with working-capital movements including higher receivables and accrued compensation affecting operating cash flow.
Outlook, commentary and risks
- Q2 FY2013 guidance: Revenue of $212–$215 million; operating margin of 33.5%–34.0%; effective tax rate of 31.5%–32.5%; GAAP diluted EPS of $1.11–$1.13. These were management expectations as of December 18, 2012, not guarantees.
- Management cited a difficult selling environment, particularly in investment banking, but described investment management conditions as more constructive. It highlighted demand for wealth-management workflow solutions, portfolio analytics and Market Metrics, alongside continued investment in hiring and product development.
- The U.S. Federal R&D tax credit was reenacted in January 2013, retroactive to January 1, 2012. FactSet expected a $4.5–$5.0 million discrete tax benefit in Q2. Q1 included a $1.3 million tax benefit related to repatriating U.K. subsidiary cash; the Q1 effective tax rate was 30.4%, or 32.2% excluding that discrete benefit.
- Foreign-currency exposure is significant because non-U.S.-dollar expenses exceeded expected non-U.S.-dollar revenues by an estimated $154 million annually. Currency movements reduced Q1 operating income by $0.6 million; the company used forward contracts and reported a $0.5 million derivative loss in operating income.
- Risks discussed include equity-market declines affecting investment-management clients, banking-sector contraction and reduced M&A or equity-research activity, currency fluctuations, and uncertainty in client demand. Management reported no material change to the risk factors in the prior Form 10-K.
- Operating-lease commitments totaled $136.3 million at November 30; supplier purchase commitments were $52.2 million at August 31, with no material quarterly change. The company reported ordinary-course legal matters that management did not expect to have a material adverse effect, and $5.7 million of gross unrecognized tax benefits, including accrued interest. It stated that it was in compliance with standby-letter-of-credit covenants.
- Management estimated that none of the November 2011 performance-based options would vest based on then-current forecasts; vesting estimates for newer performance awards also depend on future ASV, EPS or StreetAccount user growth. A change in estimates could affect compensation expense.
Important facts for investors to verify
- Whether ASV growth, client and user additions, and retention remain strong, particularly amid weakness in investment banking and uncertainty in Europe and Asia.
- Whether revenue growth and the Q2 guidance are achieved, and whether operating margins stabilize as StreetAccount and hiring costs are absorbed.
- Whether operating cash flow and free cash flow recover, including the trend in days sales outstanding, which increased to 34 days from 30 days a year earlier.
- The expected Q2 tax benefit from the R&D credit and the effect of repatriation and other tax items on reported tax rates.
- Foreign-exchange exposure and hedge performance, along with share repurchases, dividends and the use of cash held across geographic regions.
- Potential changes in performance-based stock-option vesting estimates, related compensation expense, and outcomes of tax examinations or legal matters.