FactSet Rides On Annual Subscription Value Amid Competition

FactSet Research Systems Inc. (NYSE:FDS) looks strong on the back of higher growth in organic revenue, annual subscription value and increasing product portfolio. Growth across regions outside the United States is acting as another major tailwind for the company’s growth prospects.

Notably, in third-quarter fiscal 2018, FactSet reported strong results with earnings and revenues surpassing the Zacks Consensus Estimate. Adjusted earnings per share of $2.18 beat the consensus mark by 4 cents and increased 17.8% year over year. Revenues of $339.9 million beat the Zacks Consensus Estimate by a slight margin and increased 8.9% year over year.

Despite such impressive results, we observe that shares of FactSet have rallied 18.8% in the past year, underperforming the industry’s rise of 25.5%.

Higher Annual Subscription Value

FactSet is witnessing growth in its Annual Subscription Value (ASV), driven by new client additions. The company added 80 new clients in third-quarter fiscal 2018, taking the total to 4,975. The company’s ASV increased 6.3% and reached $1.36 billion as of May 31, 2018. Organically, it increased $9 million during the quarter.

Further, FactSet’s ASV reported robust growth on the basis of region. ASV generated $843.6 million revenues from the United States, up 4.4% from the prior-year quarter as well as organically. Internationally, ASV derived $512.6 million revenues, up 8.1% on a reported basis and 6.7% organically. While 13% growth was observed from the Asia-Pac region, Europe grew at a rate of 5%.The company's proprietary content revenues are expected to gain momentum in the quarters ahead, attributable to stronger demand driven by the company's competitive pricing strategy. We believe that its growing customer base, solid revenue growth, coupled with high client retention rate (90%) and a competitive pricing strategy, will positively impact results over the long term.

Robust Organic Growth

FactSet continues to grow organically. In third-quarter fiscal 2018, organic revenues grew 5.7% to $332.5 million on the back of accelerated sales of content and technology solutions (CTS), analytics products and wealth management solutions. Region-wise,FactSet reported 5% organic growth from the United States and 6.9% internationally. The uptrend was due to higher sales from international price increase and analytics, data feed products along with a rise in workstation sales. FactSet’s ASV organic growth rate was 5.3% in the reported quarter.

Expanding Global Footprint

FactSet is strengthening its presence in the Asia Pacific region with the opening of a new office in Shanghai, China on May 31. With the opening, FactSet can now offer its data and analytic solutions to the growing number of investors and investment managers in China who seek better tools to aid them in their investment. FactSet has been working with the Chinese investment community since 1996.

Additionally, the company’s ASV recorded 13% organic growth from the Asia-Pac region in third-quarter fiscal 2018. The region witnessed new client addition and higher sales to existing clients particularly in Singapore and Australia. Growth across both fixed income and equity products and Content & Technology Solutions (CTS) products boosted its analytical suite.

We believe all these factors will perfectly complement the robust growth in the Asia-Pacific region. Despite contributing only 8% to total revenues, the Asia-Pacific region recorded marked improvement over the past two years. Revenues grew almost 40% from fiscal 2015 ($76.5 million) to fiscal 2017 ($106.7 million). The Asia Pacific segment operates offices in Australia, Hong Kong, India, Japan, Singapore and Shanghai.

In third-quarter fiscal 2018, FactSet’s ASV recorded 5% organic growth from Europe. The company enjoyed major gains from the region in analytics, CTS and an increase in workstation sales. The UK and Nordic regions reported robust performance. Notably, FactSet generates around 25-27% of revenues from Europe. The European segment operates offices in Bulgaria, Dubai, England, France, Germany, Italy, Latvia, the Netherlands, Spain and Switzerland.

Strong Product Suite Across Analytics

FactSet is highly optimistic about the integrated data-related products and services within its analytical suite, which it offers to the investment community. With the market adapting a quantitative approach to save time, reduce operating expenses and increase work efficiency, FactSet’s innovative analytical product suite should benefit. To this end, FactSet’s recent launch of Open: FactSet Marketplace looks exciting. Open:FactSet Marketplace is a new online platform, which offers both core financial and alternative datasets to address the growing demand for integrated data. The company believes that this new platform will boost its CTS suite next year.

Risks

Despite such tailwinds, FactSet continues to face stiff competition from other players providing financial market data, analytics and related services. These competitors may be able to expand their offerings and data content more effectively, price their products more aggressively or respond more rapidly to situations developing in the marketplace.

Additionally, FactSet’s balance sheet is highly leveraged. As of May 31, 2018, long-term debt was $574.74 million compared with $574.70 million at the end of the prior quarter. The company exited third-quarter fiscal 2018 with cash and cash equivalents of $213.1 million compared with $233.6 million at the end of the prior quarter. Such a cash position implies that FactSet needs to generate adequate amount of operating cash flow to service its debt. Also, high debt may limit the company’s future expansion and worsen its risk profile.

Zacks Rank & Stocks to Consider

FactSet currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the broader Business Services sector include Automatic Data Processing, Inc. (NASDAQ:ADP) , Broadridge Financial Solutions, Inc. (NYSE:BR) and FLEETCOR Technologies, Inc. (NYSE:FLT) . All the stocks carry a Zacks Rank #2 (Buy).

The long-term expected earnings per share (three to five years) growth rate for Automatic Data Processing, Broadridge and FLEETCOR Technologies is 11.3%, 10% and 16.5%, respectively.

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