FactSet (FDS) Beats Q3 Earnings Estimates, Guides Well

FactSet Research Systems Inc. (NYSE:FDS) posted modest results for the third quarter of fiscal 2016, wherein the bottom line surpassed the Zacks Consensus Estimate whereas the top line almost matched same. The company reported adjusted earnings per share of $1.64, which came ahead of the Zacks Consensus Estimate of $1.63 and improved on a year-over-year basis.

On a GAAP basis, the company reported earnings per share of $1.62 compared with $1.45 in the year-ago quarter. The year-over-year improvement was mainly driven by strong top-line performance and lower share count.

Quarter Details

FactSet’s revenues of $287.5 million increased 13% from the year-ago quarter and almost came in line with the Zacks Consensus Estimate of $288 million. Moreover, reported revenues were within the guided range of $286 million to $289 million.

FactSet witnessed better-than-expected growth across products and geographic regions which aided quarterly revenues. Also, synergies from acquisitions completed within the last 12 months contributed to revenue growth.

During the quarter, FactSet’s revenues from the U.S. grew 8.5% year over year to $193 million, while non-U.S. revenues went up to $94 million. Excluding the impact of foreign currency and acquired revenues from acquisitions completed in the past 12 months, international revenues rose 10.1% on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased 9.3% and reached $1.156 billion as of May 31, 2016. Of this, nearly 83.6% was generated by buy-side clients while the rest came from sell-side firms performing functions like mergers & acquisition, advisory work and equity research.

FactSet added 18 clients in the reported quarter, taking the tally to 3,075. The company retained 95% of its clients. The retention percentage was more than 94% of ASV.

Coming to the operational metrics, FactSet reported 17.2% rise in total operating expenses, primarily due to an increase in cost of services (up 23.8% on a year-over-year basis). As a percentage of revenues, operating expenses increased 248 basis points (bps) to 68.9%.

FactSet’s adjusted operating income increased 8.1% from the year-ago quarter to $94.8 million. However, operating margin contracted 147 bps year over year to 32.9%, mainly due to higher operating expenses as a percentage of revenues.

Adjusted net income during the quarter was $67.5 million, which improved from $61.6 million reported in the year-ago quarter.

FactSet exited the quarter with $187.4 million in cash and cash equivalents, compared with $175.2 million in the previous quarter. Long-term debt during the quarter amounted to $300 million.

Cash flow from operations during the first three quarters of fiscal 2016 came in at $261.1 million. The company generated free cash flow of $88.6 million during the reported quarter. FactSet purchased approximately 505K shares for $76.3 million. During the quarter, the company increased its quarterly dividend to 50 cents per share (up 13.6%).

Guidance

For fiscal fourth quarter, FactSet expects revenues in the range of $292 million to $298 million (mid-point $295 million). The Zacks Consensus Estimate is pegged at $286 million.

Adjusted operating margin is expected between 32.5% and 33.5%. Adjusted earnings per share are projected in the band of $1.68 to $1.72 (mid-point $1.7). The Zacks Consensus Estimate stands at $1.69. The annual effective tax rate is expected within 28% to 29%.

Our Take

FactSet reported modest third-quarter fiscal 2016 results. Nonetheless, year-over-year comparisons were favourable on both the counts. Moreover, the company has a high client retention ratio, which is a positive. Also, ASV increased year over year and the company added a good number of clients.

FactSet also issued an encouraging guidance for the upcoming quarter. The share repurchase program is expected to support earnings in the long run apart from boosting shareholders’ value.

The company continues with product innovation across its segments with special emphasis on financial services to gain more customers. Moreover, the company’s acquisitions of Portware, Revere Data, Matrix Data and Code Red will enhance its product suite and help it to evolve as a global financial database company. It will also help FactSet to maximize value for its partners and provide exclusive content set.

Nonetheless, competition from Bloomberg L.P., Dow Jones & Company Inc., MSCI Inc. (NYSE:MSCI) and Thomson Reuters, which are also introducing substitute products at competitive prices, is a headwind.

FactSet carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks are Insperity, Inc. (NYSE:NSP) and Amazon.com, Inc. (NASDAQ:AMZN) , both sporting a Zacks Rank #1 (Strong Buy).