FactSet Research Systems Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. The filing also reports fourth-quarter results; this is an annual filing, not a standalone Q4 report. Unless noted, amounts are U.S. dollars.
Business context and reporting period
FactSet provides subscription-based financial data, analytics, workflow software and related services to investment and corporate clients. Its reporting segments are the U.S., Europe and Asia Pacific; offerings include Research, Analytics and Trading, Content and Technology Solutions, and Wealth. Revenue is primarily recurring subscription revenue.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,435.4 million | $1,350.1 million | +6.3% |
| Operating income | $438.0 million | $366.2 million | +19.6% |
| Operating margin | 30.5% | 27.1% | +3.4 percentage points |
| Net income | $352.8 million | $267.1 million | +32.1% |
| Diluted EPS | $9.08 | $6.78 | +33.9% |
| Cash from operations | $427.1 million | $385.7 million | +10.8% |
| Capital expenditures | $59.4 million | $33.5 million | +$25.9 million |
| Free cash flow | $367.8 million | $352.1 million | +4.4% |
- Revenue growth was 6.2% on an organic basis. Annual subscription value (ASV) was $1.458 billion as reported; organic ASV was $1.463 billion, up 5.0%. Organic ASV plus professional services was $1.48 billion, up 5.1%.
- Growth was led by Analytics and Trading, CTS and Wealth. Revenue increased 6.3% in the U.S., 5.3% in Europe and 10.0% in Asia Pacific. International operations generated 37.7% of revenue.
- Cost of services was $663.4 million, or 46.2% of revenue, down 2.6 percentage points year over year. SG&A was $333.9 million, or 23.3% of revenue. Management attributed margin expansion to revenue growth outpacing expense growth, lower compensation and restructuring costs, and favorable currency effects; higher data, computer-related and bad-debt costs partly offset these benefits.
- Effective tax rate fell to 16.4% from 24.1%, mainly reflecting the full-year effect of the Tax Cuts and Jobs Act and the absence of FY2018’s $23.2 million transition-tax charge. The lower tax provision materially contributed to net income and EPS growth.
- Cash and cash equivalents were $359.8 million at year-end; cash plus investments totaled $385.6 million. Debt principal was $575.0 million (balance-sheet carrying amount $574.2 million), implying approximately $189 million of net debt against cash alone. The floating-rate revolver matures March 29, 2024; $175 million remained available, and the company reported covenant compliance.
- Operating cash flow less capital expenditures was $367.8 million. Cash from operations increased, with management citing higher net income and improved collections; days sales outstanding declined to 37 from 41.
- FY2019 dividends declared were $2.72 per share. FactSet repurchased 0.9 million shares for $213.1 million and reported $320.4 million returned to stockholders through repurchases and dividends. The board authorized a $210 million expansion of the repurchase program.
- Fourth-quarter revenue was $364.3 million, operating income $111.6 million, net income $91.5 million and diluted EPS $2.34.
Material changes versus the prior comparable period
- Revenue growth slowed to 6.3% from 10.6% in FY2018; organic revenue growth was 6.2% versus 5.6% in FY2018.
- Operating margin recovered to 30.5% from 27.1%, while FY2018 had higher restructuring, legal and other corporate-action charges.
- Net income and diluted EPS grew faster than revenue, reflecting operating improvement, a lower tax burden and fewer diluted weighted-average shares. Reported FY2019 diluted EPS included an estimated $0.15 net reduction from specified unusual items; FY2018 EPS was affected by restructuring, legal and other charges and tax items.
- Operating cash flow rose, but capital expenditures increased substantially, including $22.3 million for the new Norwalk headquarters and investments in infrastructure, data centers and office space.
- FactSet replaced its $575 million credit facility with a new $750 million revolving facility and borrowed $575 million to retire the previous facility. The borrowing amount was unchanged, but the new facility extends to 2024.
- Client count rose 8.4% to 5,574 and users rose 38.0% to 126,822. The company changed its client-count definition in FY2019 to include FDSG acquisition clients, so the prior-year client count was not restated.
Outlook, commentary, risks and unusual items
- FY2020 guidance: organic ASV plus professional services growth of $65 million to $85 million; GAAP revenue of $1.49 billion to $1.50 billion; GAAP operating margin of 28.5% to 29.5%; adjusted operating margin of 31.5% to 32.5%; effective tax rate of 17.0% to 17.5%; GAAP diluted EPS of $8.70 to $9.00 and adjusted diluted EPS of $9.85 to $10.15. Management stated GAAP margin and EPS guidance excludes certain potential non-recurring benefits or charges.
- Management cited client additions and product expansion as growth drivers, while cancellations reflected industry cost pressure, firm consolidation and closures. Annual client retention was 89%; buy-side clients represented 83.7% of ASV.
- Key business risks include cybersecurity, data privacy and service continuity; competition and pricing pressure; a continued shift from active to passive investing; market declines affecting investment-manager clients; supplier contract and data availability; foreign currency and interest-rate exposure; and regulatory uncertainty, including Brexit and MiFID II.
- In August 2019, Massachusetts issued a Notice of Intent to Assess sales taxes, interest and penalties on prior-period transactions. FactSet appealed and intends to contest any assessment. The company could not reasonably estimate the outcome and recorded no liability; an adverse outcome could materially affect financial position, cash flows and results.
- FY2019 included $8.0 million of pre-tax charges, primarily severance and other corporate actions, partly offset by $5.0 million of non-core transaction revenue. A Massachusetts sales-tax contingency remains unrecorded. The auditor issued an unqualified opinion on the financial statements and internal controls; management concluded controls were effective.
Important facts for investors to verify
- Whether FY2020 revenue and ASV guidance is achieved, and whether organic subscription growth continues to offset cancellations.
- How much of FY2019 earnings growth came from sustainable operating performance versus the lower tax rate and prior-year transition-tax comparison.
- The outcome and potential financial exposure of the Massachusetts sales-tax matter, which had no recorded liability at year-end.
- Debt-service and refinancing exposure under the floating-rate facility, including the sensitivity that a 25-basis-point LIBOR move would change annual interest expense by about $1.4 million.
- Whether higher capital spending, the new headquarters and cloud-related costs affect future margins and free cash flow.
- The client-count definition change when comparing reported client growth, and the concentration of ASV in buy-side clients and the investment-management sector.