FactSet Research Systems Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; comparisons are with the corresponding prior-year periods. FactSet provides subscription-based financial data, analytics, applications and related services through its Americas, EMEA and Asia Pacific segments.
Financial performance
| Metric | Q2 FY2021 | Year-over-year change | Six months FY2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $391.8 million | +6.0% | $780.0 million | +5.9% |
| Operating income | $116.1 million | +9.3% | $237.2 million | +8.1% |
| Operating margin | 29.6% | 28.7% prior year | 30.4% | 29.8% prior year |
| Net income | $96.6 million | +9.0% | $197.8 million | +8.3% |
| Diluted EPS | $2.50 | +8.7% | $5.12 | +8.2% |
| Operating cash flow | Not separately stated for the quarter | — | $229.9 million | $195.5 million prior year |
| Free cash flow (non-GAAP) | Not separately stated for the quarter | — | $201.2 million | +40.1% |
Q2 organic revenue grew 4.9%; the reported 6.0% increase also included acquisition/deferred-revenue accounting effects and foreign exchange. Organic annual subscription value plus professional services was $1.593 billion at quarter-end, up 5.5% year over year. Growth was led by the Americas in dollars; Asia Pacific had the fastest reported segment revenue growth in Q2, at 9.6%.
Cost of services rose 11.0% in Q2 and 12.4% year to date, driven principally by employee compensation, technology and cloud-hosting costs, and intangible amortization. SG&A fell 8.2% in Q2 and 9.4% year to date, reflecting lower travel, office and other employee-related costs during the pandemic and lower professional fees. Management attributed improved operating margin to revenue growth and lower discretionary costs, partly offset by technology investment, compensation and amortization.
Financial position, cash flow and capital allocation
- Cash and cash equivalents were $602.7 million at February 28, 2021, versus $585.6 million at August 31, 2020. Current assets were $867.7 million and current liabilities $271.3 million.
- Long-term debt was $574.4 million net of issuance costs ($575.0 million principal). Of the $750.0 million revolving facility, $175.0 million remained available; it matures March 29, 2024. FactSet was in compliance with covenants. A swap hedges $287.5 million of principal; the remaining $287.5 million is exposed to floating rates.
- Six-month investing cash outflow was $69.7 million, including $41.9 million for the Truvalue Labs acquisition; financing cash outflow was $146.7 million. Capital expenditures were $28.8 million, down from $51.9 million.
- FactSet returned $172.8 million to stockholders in the first six months through repurchases and dividends. It repurchased $114.6 million of shares and paid $58.2 million in dividends. The board later increased repurchase authorization; $350.0 million was available after the March 23, 2021 increase.
- Operating lease liabilities totaled $309.4 million. Cash, debt and lease figures are reported separately and should not be treated as interchangeable liquidity measures.
Material developments and management commentary
- FactSet acquired Truvalue Labs, an ESG data provider, on November 2, 2020 for approximately $41.9 million. Preliminary purchase accounting included $30.1 million of goodwill; the acquisition’s pro forma effect was deemed immaterial.
- Management said remote work had not significantly affected financial results through February 28, 2021 and client service had experienced minimal disruption. It cautioned that the pandemic could lengthen sales cycles, reduce incremental billings, delay implementations or lead clients to reduce spending. No formal earnings or revenue guidance is provided in the supplied filing text.
- Management said liquidity and financing alternatives should be sufficient for planned needs over the next 12 months and foreseeable future. Organic ASV growth reflected sales and price increases, partly offset by existing-client cancellations; annual retention exceeded 95% of ASV.
- The effective tax rate was 15.7% for Q2 and 15.8% for the six months, up from 14.0% and 13.8%, respectively. The filing cites reduced tax benefits versus prior year, while R&D credits, the FDII deduction and stock-compensation windfalls continued to lower the rate.
Risks, contingencies and unusual items
- FactSet is contesting a Massachusetts sales-tax notice concerning prior-period transactions. No liability was recorded because the outcome could not be reasonably estimated; the company says an adverse outcome could materially affect financial position, cash flows and results.
- Management believes other unresolved ordinary-course legal matters and tax audits will not have a material adverse effect, based on information available at filing. Two data suppliers each represented more than 10% of data costs for the six-month period.
- Foreign exchange remains a risk. The filing estimates that, without hedges, a hypothetical 10% weaker U.S. dollar would reduce operating income by $39.8 million over 12 months, assuming operating results held constant in local currencies. A 25-basis-point LIBOR change would alter annual interest expense by about $0.7 million on unhedged debt.
- COVID-19-related reductions in travel and other discretionary spending supported margins, while cloud-hosting, software, compensation and headcount costs increased. Adjusted results are non-GAAP and exclude specified items including transformation costs and intangible amortization.
- The filing describes uncertainty around Brexit’s effects on financial-services regulation and clients’ spending. Management reported no other material risk-factor changes during the six months beyond the updated Brexit discussion.
Important facts for investors to verify
- Whether organic ASV and revenue growth persist, especially given client cancellations, sales-cycle length and the concentration of growth by segment and workflow.
- The outcome and potential exposure of the Massachusetts sales-tax matter, which is not quantified in the filing.
- Whether rising cloud, technology, compensation and amortization costs offset operating leverage as pandemic-related cost savings change.
- Debt repayment, refinancing and interest-rate exposure, including the floating-rate portion not covered by the swap and the 2024 facility maturity.
- Truvalue Labs integration and the development of its ESG data offering, as well as the returns from continued share repurchases and dividends.