FACTSET RESEARCH SYSTEMS INC quarterly report, Q1 FY2016

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FactSet Research Systems Inc. — Q1 FY2016 10-Q

Business context and period: Quarter ended November 30, 2015. FactSet provides subscription-based financial information, analytics and workflow applications to investment professionals. Its business is reported across the U.S., Europe and Asia Pacific. Buy-side clients generated 83.2% of annual subscription value (ASV).

Financial performance

  • Revenue: $270.5 million, up 11.5% year over year. Growth reflected 9.4% organic ASV growth, client and user additions, product strength and $4.3 million of Portware revenue; currency reduced revenue by $0.6 million.
  • Profit and margins: Operating income was $87.3 million, up 8.8%; operating margin was 32.3%, down from 33.1%. Net income increased 7.3% to $60.0 million. Diluted EPS rose 8.3% to $1.43. The effective tax rate was 31.4%, versus 30.8%.
  • Costs: Cost of services rose 17.6% to $114.7 million, faster than revenue, primarily due to compensation, hiring and acquired-intangible amortization. SG&A increased 5.5% to $68.5 million. Portware operations reduced operating margin by 110 basis points; acquisition expenses reduced it by a further 20 basis points.
  • Cash flow: Operating cash flow was $71.1 million, essentially unchanged year over year. Capital expenditures were $14.4 million, versus $4.8 million; reported free cash flow was $56.7 million, down 14.6%, largely reflecting office buildout costs.
  • Liquidity and debt: Cash and equivalents were $180.1 million and short-term investments were $23.1 million at quarter-end. Current assets were $320.8 million and current liabilities $128.7 million. Long-term debt increased to $300.0 million from $35.0 million, primarily to fund Portware; it bears interest at one-month LIBOR plus 0.75% and matures September 21, 2018. FactSet reported compliance with debt covenants.
  • Capital returns: FactSet repurchased 250,000 shares for $41.9 million and paid $18.1 million in dividends during the quarter. The quarterly dividend was $0.44 per share. A December authorization expansion left $342.3 million available for future repurchases.

Changes and business developments

  • FactSet acquired Portware on October 16, 2015, for approximately $264.8 million. The trade-automation provider contributed $4.3 million of quarterly revenue. Preliminary purchase accounting included $193.1 million of goodwill and $75.5 million of amortizable intangible assets; the allocation remained subject to finalization.
  • ASV was $1.109 billion, up 14.3% overall and 9.4% organically. Client count increased 8.8% to 3,006; users increased 13.6% to 63,169. Client retention was 95%, up from 93% a year earlier; ASV retention remained above 95%.
  • Revenue by region: U.S. $182.2 million (+11.4%); Europe $67.0 million (+10.5%); Asia Pacific $21.3 million (+15.6%). Reported operating income increased 1.6% in the U.S., 15.8% in Europe and 23.0% in Asia Pacific.

Outlook, risks and unusual items

  • Q2 FY2016 outlook: Revenue of $280–$286 million; operating margin of 31.0%–32.0%, including an estimated 160-basis-point reduction from Portware; annual effective tax rate of 28.5%–29.5%; diluted EPS of $1.49–$1.53. These expectations were stated as of December 15, 2015.
  • Tax item after quarter-end: Legislation signed December 18, 2015 reinstated the federal R&D tax credit retroactively and made it permanent. FactSet expected a discrete tax benefit of $7.0–$7.5 million in Q2.
  • Key exposures: Management cited potential effects from equity-market declines on investment-management clients and from consolidation or reduced activity among investment banks. Non-U.S.-dollar expenses exceeded corresponding revenues, creating a stated annual net exposure of $176.9 million; currency movements benefited Q1 operating income by $3.3 million. Debt is floating-rate: a 25-basis-point LIBOR change was estimated to alter annual interest expense by $0.8 million.
  • Other matters: FactSet reported $7.1 million of gross unrecognized tax benefits, including accrued interest. It said ordinary-course legal matters were not expected to have a material adverse effect. Lease commitments totaled $278.7 million; supplier purchase commitments were $65.2 million at August 31, 2015, with no material change reported during the quarter.

Investor verification priorities

  • Track organic ASV, retention, client additions and the split between organic growth, acquisitions and currency effects.
  • Assess Portware integration, contribution to growth and profitability, and the final purchase-price allocation.
  • Monitor operating-margin progression against the Q2 outlook and the acquired business’s stated margin impact.
  • Review cash generation and capital spending after the New York office buildout, alongside debt repayment capacity and floating-rate exposure.
  • Confirm realization and timing of the expected R&D tax-credit benefit and any changes in the effective tax rate or uncertain tax positions.