Business context and reporting period
FactSet Research Systems Inc. provides subscription-based financial information, data and analytical applications to investment managers, investment banks and other financial professionals. This Form 10-K covers the fiscal year ended August 31, 2011; fiscal 2011 fourth-quarter figures are also summarized below. Revenue is primarily generated through monthly subscriptions to workstations, content and applications.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $726.5 million | $641.1 million | +13.3% |
| Operating income | $238.3 million | $221.6 million | +7.5% |
| Operating margin | 32.8% | 34.6% | −1.8 percentage points |
| Net income | $171.0 million | $150.2 million | +13.9% |
| Diluted EPS | $3.61 | $3.13 | +15.3% |
| Operating cash flow | $207.1 million | $211.1 million | −1.9% |
| Free cash flow | $177.8 million | $190.3 million | −6.6% |
Fiscal 2011 fourth-quarter revenue was $191.9 million, operating income $59.0 million, net income $40.9 million and diluted EPS $0.88, compared with $168.2 million, $57.4 million, $39.3 million and $0.83, respectively, in the prior-year quarter.
- Revenue and subscriptions: Annual subscription value (ASV) was $779 million at year-end, up 14%. FactSet added 127 net clients and approximately 5,300 users, ending with 2,237 clients and 48,100 users. Annual retention exceeded 95% of ASV; client-based retention was 92%, versus 90% a year earlier.
- Geographies: U.S. revenue was $497.6 million, up from $435.4 million; Europe was $178.7 million, up from $161.6 million; Asia Pacific was $50.3 million, up from $44.1 million. International operations contributed 31.5% of revenue.
- Margins and unusual items: Operating expenses rose 16.4%, faster than revenue. A $7.9 million incremental performance-based stock-compensation charge reduced operating margin by about 110 basis points. Higher staffing and travel costs also weighed on margins, partly offset by lower third-party data and computer costs. The 28.4% effective tax rate, down from 32.4%, included approximately $6 million of tax benefits, principally from the R&D credit reenactment and tax-return finalization.
- Cash, liquidity and debt: Cash and cash equivalents were $181.7 million at August 31, 2011, down from $195.7 million. Current assets were $273.2 million and current liabilities $109.4 million. FactSet reported no outstanding borrowings. Capital expenditures were $29.3 million on the cash-flow statement; management cited approximately $28.0 million net of landlord contributions.
- Capital returns: FactSet paid $43.9 million in dividends and repurchased about 2.3 million shares for $216.6 million of cash outlay. It reported returning $261 million to stockholders during the year. The quarterly dividend rose 17% to $0.27 per share; $142 million remained authorized for repurchases at year-end.
Material changes, outlook and risks
Growth accelerated from fiscal 2010’s 3.1% revenue increase, supported by broad-based client and user growth, annual price increases, expanded proprietary data and applications, and $17 million of revenue from the Market Metrics acquisition. Market Metrics had been acquired in June 2010. The company completed migration of all clients to its newer platform and continued investing in data collection, engineering and global capacity; employee headcount increased 28% to 5,251.
Management’s fiscal 2012 outlook, stated as of September 20, 2011, projected first-quarter revenue of $195–$198 million and diluted EPS of $0.98–$1.00. Full-year capital expenditures, net of landlord contributions, were expected at $22–$30 million. The projected annual effective tax rate was 31.0%, assuming the federal R&D credit was reenacted; management estimated 32.5% if it expired. No full-year revenue or EPS guidance was provided in the filing text.
- Market volatility, prolonged economic weakness or equity declines could affect clients’ assets, spending and demand; approximately 82% of ASV came from investment-management clients.
- Banking-sector consolidation, failures or spending cuts could reduce demand from sell-side clients, which represented approximately 18% of ASV.
- FactSet faces competition and must continue developing products and maintaining accurate, timely proprietary data. Service outages, cybersecurity breaches or mishandling of confidential client data could damage operations and reputation.
- Third-party data agreements, foreign-currency movements and international operations create operating risks. Disclosed net foreign-currency expense exposure was approximately $149 million annually; the company used forward contracts to hedge exposures.
- Tax audits and uncertain tax positions remained ongoing; gross unrecognized tax benefits were $7.2 million. Ordinary-course litigation, including intellectual-property matters, was not considered likely by management to have a material adverse effect, based on information then available.
- Operating lease commitments totaled $149.8 million; total contractual obligations, including purchase commitments and specified non-current tax/deferred-tax items, were $230.4 million. The filing reported effective internal controls and unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether ASV growth, retention and client additions continued, and how much growth reflects organic subscriptions, pricing and acquired revenue.
- Whether operating-margin pressure from rapid hiring, travel and performance-based compensation eases, and how recurring stock-based compensation develops.
- Whether operating cash flow and free cash flow remain strong after capital spending, share repurchases and dividends.
- Whether the R&D tax credit was renewed and how tax audits or other tax-position changes affect the effective tax rate.
- How customer spending responds to market conditions, especially among investment managers and sell-side banking clients, and whether currency, data-supplier, outage and cybersecurity risks change.