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FDS > SEC Filings for FDS > Form 10-Q on 10-Jul-2013All Recent SEC Filings

Show all filings for FACTSET RESEARCH SYSTEMS INC

Form 10-Q for FACTSET RESEARCH SYSTEMS INC


10-Jul-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

Executive Overview

Results of Operations

Foreign Currency

Liquidity

Capital Resources

Off-Balance Sheet Arrangements

Share Repurchase Program

Contractual Obligations

Dividends

Significant Accounting Policies and Critical Accounting Estimates

New Accounting Pronouncements

Market Trends

Forward-Looking Factors

Executive Overview

FactSet is a provider of integrated financial information and analytical applications to the global investment community. We combine content regarding companies and securities from major markets all over the globe into a single online platform of information and analytics. By consolidating content from hundreds of databases with powerful analytics, FactSet supports the investment process from initial research to published results for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. Our applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios. With Microsoft Office integration, wireless access and customizable options, we offer a complete financial workflow solution. Our revenues are derived from month-to-month subscriptions to services, databases and financial applications. We generate 83% of our revenues from investment management clients and the remainder is from investment banking firms who perform M&A advisory work and equity research.

As of May 31, 2013, we employed 5,900 employees, up 8% from a year ago. Of these employees, 1,818 were located in the U.S., 637 in Europe and 3,445 in Asia Pacific. Approximately 54% of employees are involved with content collection, 24% work in product development, software and systems engineering, another 18% conduct sales and consulting services and the remaining 4% provide administrative support.

FactSet delivered double-digit diluted EPS growth and our free cash flow reached an all-time high of $92 million during the third quarter of fiscal 2013. Off-market conditions, especially on the sell-side, continue to interrupt client buying patterns and limited our ASV, or annual subscription value, growth this quarter as expected. We define ASV as, at any given point in time, the forward-looking revenues for the next 12 months from all services currently being supplied to clients. We continue to return capital to stockholders as evidenced by a 13% increase in our dividend during the third quarter. Our third quarter results include $2 million in ASV growth, expanding revenues by 6%, generating cash from operations of $97 million, increasing operating income by 5% and growing headcount by 8% over last year. Annual client retention remained greater than 95% of ASV, and on a client basis, the annual retention rate was 92% of clients at May 31, 2013, consistent with a year ago. Our return on equity has averaged 32% over the past five years. We continue to improve and enhance our FactSet workstation and make it more valuable to our end users. Most recently, we announced the release of a new instant messenger platform - FactSet IM that is available to all FactSet workstation users. FactSet IM, as a product, is consistent with our philosophy of offering choices to our clients. This instant message platform allows connectivity to any contact, regardless of the messaging network they belong to. In addition, during April 2013, The Wall Street Journal published the results of the first annual "Europe's Best Analysts Survey" in conjunction with FactSet as the data provider on May 22, 2013. FactSet also provided the data for the Wall Street Journal's U.S. and Asia "Best Analysts" surveys. FactSet was also recently named one of FORTUNE's 100 Best Companies to Work For, marking our fifth appearance on that list in the last six years. We're pleased to receive this acknowledgement and we've recently been awarded similar accolades in the UK and France. Our employees are FactSet's most valuable asset and the recognition in these surveys is based on their feedback and reflects the dedication of our employee base.


Results of Operations

For an understanding of the significant factors that influenced our performance
during the three and nine months ended May 31, 2013 and 2012, respectively, the
following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements
presented in this Quarterly Report on Form 10-Q.

                                  Three Months Ended                         Nine Months Ended
                                       May 31,                                    May 31,
(in thousands, except
per share data)           2013          2012          Change         2013          2012         Change
Revenues                $ 214,613     $ 202,311            6.1 %   $ 638,779     $ 598,130           6.8 %
Cost of services           76,721        68,878           11.4 %     226,148       203,243          11.3 %
Selling, general and
administrative             66,255        64,939            2.0 %     213,746       192,524          11.0 %
Operating income           71,637        68,494            4.6 %     198,885       202,363         (1.7) %
Net income              $  53,367     $  47,980           11.2 %   $ 147,674     $ 140,270           5.3 %
Diluted earnings per
common share            $    1.20     $    1.05           14.3 %   $    3.30     $    3.05           8.2 %
Diluted weighted
average common shares      44,485        45,736                       44,784        45,971

Revenues

Revenues for the three months ended May 31, 2013 were $214.6 million, up 6.1% compared to the prior year. For the first nine months of fiscal 2013, revenues increased 6.8% to $638.8 million. During the third quarter of fiscal 2013, net new clients rose by 4 and annual subscriptions rose by $1.7 million excluding the $1.2 impact from foreign currency. Our revenue growth drivers during fiscal 2013 were the continued use of our advanced applications such as Portfolio Analysis ("PA"), incremental revenue from the acquisition of StreetAccount in June 2012, growth in the number of clients and users of FactSet, the continued expansion of our proprietary content, growth of the Market Metrics business, an annual price increase, more client subscriptions to internal research notes and growth in our wealth management workflow solution, partially offset by user count decreases and pressures faced by many of our investment banking clients.

Continued Use of our Advanced Applications such as Portfolio Analysis

Our Portfolio Analytics suite of products, including our Fixed Income in PA product, continues to be well received within our client base and was a source of revenue growth during the third quarter of fiscal 2013. The PA suite includes ten separate products and covers a range of workflows around portfolios. Within the suite, Equity PA has been performing well and our Fixed Income in PA product grew at very attractive rates. Our risk optimizer products continue to be in demand as clients search for ways to understand and manage market uncertainty and volatility. The number of clients and users subscribing to PA, Fixed Income in PA, SPAR, Risk and Portfolio Publishing experienced growth compared to a year ago as this suite is comprehensive and includes highly desired applications for portfolio attribution, risk, quantitative analysis, portfolio publishing and returns based, style analysis.

Incremental Revenue from the Acquisition of StreetAccount

On June 29, 2012, we acquired StreetAccount to complement our news offering with distilled and crucial market moving information for buy- and sell-side institutions. Our StreetAccount product receives high client praise as we continue to expand the unique ways the product can make our user base more efficient. For the three and nine months ended May 31, 2013, StreetAccount has added $2.9 million and $8.3 million, respectively, of revenue to our operations. The revenue growth rate during the third quarter of fiscal 2013 was positively impacted by 145 basis points from the acquisition of StreetAccount. Excluding StreetAccount revenue, the revenue growth during the three and nine months ended May 31, 2013 would have been 4.6% and 5.4%, respectively, over the prior year periods.

Growth in the Number of Clients and Users of FactSet

For the fourteenth consecutive quarter, we experienced net new client growth. The total number of FactSet clients as of May 31, 2013 was 2,440, a net increase of 4 clients during the past three months and brings the net new client growth total to 105 over the past 12 months (excluding the StreetAccount acquisition). At FactSet, we do not count every single company that uses our services as a client. Companies that are on trial are not included, nor are clients with ASV of less than $24,000. The addition of new clients is important to FactSet as we anticipate that it lays the groundwork for future additional services, consistent with our strategy of increasing sales of workstations, applications and content at existing clients. At May 31, 2013, our largest individual client accounted for 2% of total subscriptions and annual subscriptions from the ten largest clients did not surpass 15% of total client subscriptions, consistent with August 31, 2012 and down from 16% at May 31, 2012. In addition, our annual client retention rate remained at greater than 95% of ASV, consistent with last year. As a percentage of actual clients, our annual retention rate of 92% was consistent with last year. These statistics show the power of our business model, as the large majority of clients maintain their subscriptions to FactSet throughout each year.


At May 31, 2013, there were 49,516 professionals using FactSet, an increase of 61 users in the past three months and up 1,113 users from a year ago. Investment management clients added users, while some investment banking clients continued to reduce theirs. We believe that although headcount at our investment banking clients is still under pressure, we continue to make gains on the investment management side, which constitutes approximately 83% of our revenues. The sell-side, particularly equity research, has been under significant pressure for some time now. In addition, average ASV for investment management users is significantly higher than for investment banking users, so a shift towards more research being conducted internally at investment management firms is a long-term positive ASV trend for FactSet. In the past 12 months, our investment management client base has added approximately 1,508 users while our investment banking clients have contracted by 395 users.

Continued Expansion of our Proprietary Content

We continue to be successful in licensing our proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates. This type of data is licensed in feed form and includes Ownership, Transcripts, M&A and Corporate Hierarchy data. Data feeds are consumed by a wide-range of clients, including existing large FactSet clients and some outside of our core client base that do not manage money or provide sell side services. In addition, StreetAccount has developed new features that offer timely information to our users in an easy to consume format.

Growth of the Market Metrics business

Our Market Metrics business continues to be a strong contributor on a relative basis to our growth. Our Market Metrics local market share suite of products, which was introduced last year, continues to perform well. This suite includes mutual fund, variable annuity and life insurance analytical products and applications for wholesalers that have enabled senior management to understand the value and penetration of their own products in local markets in greater detail than they have been able to examine before. In addition, in the past six months, Market Metrics has experienced growth in Europe. While we are pleased about the growth in our Market Metrics business, its size relative to the rest of FactSet means that its out-performance has had a limited impact on our overall growth rate because at the time of acquisition its ASV was $16 million.

Annual Price Increase

As FactSet has done for the past several years, we issued annual price increases during fiscal 2013. These price increases impacted the majority of our U.S. and non-U.S. investment management clients and resulted in ASV growth of $12.5 million during the first nine months of fiscal 2013 as compared to $12.9 million a year ago. The annual price increases implemented in January 2013 (for U.S. investment management clients) and March 2013 (for non-U.S. investment management clients) grew revenues by $3.1 million during the third quarter of fiscal 2013 as compared to last year.

Growth in our Wealth Management Workflow Solution

We have been successful during fiscal 2013 in expanding the FactSet footprint within our wealth management clients and configuring a solution for their workflow. We have experienced positive rates of client and user acquisition both in Europe and the U.S. as we believe we have a great offering for that segment of the market. We enhanced Company Analysis reports with release of Company Guide. Company Guide is the next generation application for Company Analysis on FactSet. The application is quick, easy, and graphically rich with reports linked seamlessly between the FactSet desktop and iPad.

Partially offsetting the positive revenue drivers discussed above was global banking and brokerage clients reducing their net user count and vendor spend during the third quarter of fiscal 2013, which negatively impacted revenues. ASV from our investment banking clients decreased by $1.8 million in the third quarter of fiscal 2013 as volatility in the financial markets interrupted the short-term buying patterns of our investment banking client base. These clients reduced internal headcount, which lowered user counts by 404 professionals during the past three months. Despite growth in the global equity markets during 2013, we are still facing the effects of heavy job cuts at many of the largest global investment banks. Our clients continue to be cautious in a market that is still far from settled. On the investment banking side, which constitutes about 17% of our revenues, they continue to contract both in terms of headcount and purchasing, and focus significantly on cost savings. Investment management clients are still hesitant to make large purchases because market volatility has prevented them from being certain where they will wind up for the year in terms of performance. These factors continue to make selling in the current environment challenging. In light of these conditions, we delivered revenue growth of 6% during the third quarter of fiscal 2013.


Revenues by Geographic Region



                          Three Months Ended                       Nine Months Ended
                               May 31,                                  May 31,
(in thousands)     2013          2012         Change        2013          2012         Change
U.S.             $ 146,972     $ 138,213          6.3 %   $ 436,947     $ 409,105          6.8 %
% of revenues         68.5 %        68.3 %                     68.4 %        68.4 %
Europe           $  52,358     $  49,451          5.9 %   $ 155,638     $ 146,380          6.3 %
Asia Pacific        15,283        14,647          4.3 %      46,194        42,645          8.3 %
International    $  67,641     $  64,098          5.5 %   $ 201,832     $ 189,025          6.8 %
% of revenues         31.5 %        31.7 %                     31.6 %        31.6 %
Consolidated     $ 214,613     $ 202,311          6.1 %   $ 638,779     $ 598,130          6.8 %

Three months ended May 31, 2013 (Quarter-to-date)

Revenues from our U.S. segment increased 6.3% to $147.0 million during the three months ended May 31, 2013 compared to the same period a year ago. Incremental revenue from the acquisition of StreetAccount in June 2012 increased the year over year U.S. segment growth rate from 4.2% to 6.3%. Our third quarter fiscal 2013 revenue growth rate in the U.S. of 6.3% reflects the continued use of our advanced applications such as PA, the $2.9 million of incremental revenue from the acquisition of StreetAccount in June 2012, growth in our Market Metrics suite of products, increased data feed sales of our proprietary content, growth in the number of users and clients of FactSet and an annual price increase for our U.S. investment management clients implemented in January 2013, which drove revenues up by approximately $2.3 million partially offset by a net investment banking user count decrease due to the pressures faced by many sell-side firms today. During the past three months, penetration on the buy-side added 465 investment management users, but these additions were partially offset by a user decline of 404 among our investment banking clients as they continued to reduce their user populations based on how they perceive the market.

International revenues in the third quarter of fiscal 2013 were $67.6 million, an increase of 5.5% from $64.1 million in the prior year period. The impact of foreign currency (related to the Japanese Yen) decreased the year over year non-U.S. revenue growth rate from 6.5% to 5.5% during the quarter. European revenues advanced 5.9% to $52.4 million due to an increase in client count, an annual price increase for the majority of our non-U.S. investment management clients implemented in March 2013, an increase in the number of PA users, the continued licensing our advanced applications and sales of global proprietary content. Foreign currency movements had no impact on European revenues during the third quarter of fiscal 2013. Asia Pacific revenues grew to $15.3 million, up 4.3% from a year ago. The foreign currency impact attributable to the change in the value of the Japanese Yen compared to the U.S. dollar decreased revenues by $0.6 million during the third quarter of fiscal 2013. Holding currencies constant, Asia Pacific revenue growth year over year was 8.7%, primarily due to growth in our global content offering, net new user and client growth over the last 12 months, our ability to sell additional services to existing clients and the increased demand of our real-time news and quotes that service the needs of a global investor. In March 2013, we issued our annual price increase for the majority of our non-U.S. investment management clients resulting in incremental revenue of $0.9 million during the third quarter of fiscal 2013. Revenues from our international operations accounted for 31.5% of our consolidated revenues during the third quarter of fiscal 2013, down from 31.7% in the year ago quarter, driven by incremental revenues from StreetAccount and Market Metrics as well as the strengthening of the U.S. dollar against the Japanese Yen.

Nine months ended May 31, 2013 (Year-to-date)

Our U.S. segment revenue increased 6.8% to $436.9 million during the first nine months of fiscal 2013 as compared to $409.1 million in the same period a year ago. International revenues also increased 6.8% to $201.8 million during the nine months ended May 31, 2013. The impact from foreign currency decreased international revenues by $1.2 million year over year. European revenues advanced 6.3% due to sales of our advanced applications, an annual price increase and user and client growth partially offset by declines from investment banking firms. Excluding the impact of foreign currency, Asia Pacific revenue growth was 11.2% year over year driven by growth in our global content offering and increases in both our user and client counts. The annual price increases in March 2013 and 2012 increased revenues by $1.5 million during fiscal 2013 as compared to the first nine months of fiscal 2012.

Annual Subscription Value (ASV)

At May 31, 2013, ASV was $863.7 million, up 5.5% organically over the prior year. With proper notice to us, our clients are able to add to, delete portions of, or terminate service at any time. ASV from our U.S. operations was $589.9 million, up $29.2 million from a year ago, excluding acquired StreetAccount ASV of $11.4 million. ASV from international operations increased $11.8 million to $273.8 million at May 31, 2013. As a result of the acquisition of StreetAccount in June 2012, the U.S. investment management clients annual price increase implemented in January 2013 and strong growth in our predominantly U.S.-based Market Metrics business, the percentage of our total ASV derived from international operations decreased from 32.3% a year ago to 31.7% at May 31, 2013.


ASV advanced $1.7 million, when excluding a $1.2 million impact from foreign currency, during the third quarter of fiscal 2013. The rise in ASV was driven by our $3.4 million annual price increase in March 2013 to our non-U.S. investment management clients, continued growth of Portfolio Analysis, the net addition of 4 new clients and 61 new users and the growth of proprietary content business partially offset by net user count decreases and pressures faced by many of our investment banking clients. The percentage of our total ASV derived from buy-side clients increased from 80% a year ago to 83% at May 31, 2013 due to growth in our buy-side, including our annual price increases and the continued weakness of our sell-side.

Operating Expenses

                                  Three Months Ended                         Nine Months Ended
                                       May 31,                                    May 31,
(in thousands)               2013          2012         Change          2013          2012        Change
Cost of services*       $  76,721     $  68,878           11.4 %   $ 226,148     $ 203,243          11.3 %
Selling, general and
administrative
("SG&A")**                 66,255        64,939            2.0 %     213,746       192,524          11.0 %
Total operating
expenses***             $ 142,976     $ 133,817            6.8 %   $ 439,894     $ 395,767          11.1 %
Operating income        $  71,637     $  68,494            4.6 %   $ 198,885     $ 202,363         (1.7) %

Operating Margin 33.4 % 33.9 % 31.1 % 33.8 %

* Cost of services for the nine months ended May 31, 2013 include an incremental $0.2 million from the vesting of performance-based stock options granted in connection with the acquisition of the Market Metrics business in June 2010. These options vested in the second quarter of fiscal 2013 when the Market Metrics business accelerated to achieve stretch revenue growth targets established on the date of grant.

** SG&A expenses for the nine months ended May 31, 2013 include an incremental $15.5 million from the vesting of performance-based stock options granted in connection with the acquisition of the Market Metrics business.

*** Total operating expenses for the three and nine months ended May 31, 2013 include incremental expenses of $2.7 million and $7.9 million, respectively, from the acquisition of StreetAccount in June 2012. The additional StreetAccount expenses resulted in a 200 basis point increase in total operating expenses for each period presented.

Cost of Services

Three months ended May 31, 2013 (Quarter-to-date)

For the three months ended May 31, 2013, cost of services increased 11.4% to $76.7 million as compared to $68.9 million in the same period a year ago. Cost of services expressed as a percentage of revenues was 35.7% during the third quarter of fiscal 2013, an increase of 170 basis points over the same prior year period due to higher compensation expense associated with new hires in software engineering, consulting and content collection, additional StreetAccount expenses and higher computer-related expenses partially offset by lower third party data costs.

Employee compensation, including stock-based compensation, expressed as a percentage of revenues, increased 195 basis points for the three months ended May 31, 2013 compared to the same period a year ago due to bringing in new classes of engineers and consultants, the continued expansion of our proprietary content collection operations and salary increases year over year. Excluding $2.1 million of compensation attributable to the StreetAccount workforce, the increase in employee compensation was 99 basis points over the same period last year. Over the last 12 months, we have added approximately 129 net new engineering and product development employees and 60 net new consultants, as we continue to improve our applications and service our existing client base. In addition, we hired approximately 247net new employees to collect more content, primarily at our facilities in India and the Philippines. At May 31, 2013, approximately 54% of employees are involved with content collection, 24% work in product development, software and systems engineering and another 18% conduct consulting services. The disclosed headcount increases exclude the 49 employees acquired from StreetAccount in June 2012. The total headcount was 5,900 at May 31, 2013, a net increase of 445 over last year. Year over year our headcount has increased 7%, excluding the acquired StreetAccount workforce. StreetAccount expenses increased cost of services by approximately 110 basis points due to compensation paid to the acquired workforce, stock-based compensation expense from equity based awards granted to the new employees and the amortization of acquired intangible assets. Computer-related expenses, including depreciation and computer maintenance costs, increased 30 basis points in the third quarter of fiscal 2013 as compared to a year ago due to reinvesting in our computer infrastructure. Previously we had relied on fully depreciated servers, but in the past three months we purchased additional servers to improve the speed and stability of our applications.


Partially offsetting the growth in cost of services during the third quarter of fiscal 2013 were lower levels of third party data costs. Data costs, expressed as a percentage of revenues, decreased 45 basis points for the three months ended May 31, 2013 compared to the same period in fiscal 2012 as a result of lower variable fees payable to data vendors based on deployment of their content over the FactSet platform. Annual third-party royalty payments were reduced due to the deployment of our own proprietary content over the FactSet platform including FactSet Fundamentals, FactSet Estimates and FactSet Economics.

Nine months ended May 31, 2013 (Year-to-date)

Cost of services increased 11.3% to $226.1 million for the nine months ended May 31, 2013 compared to the same period a year ago. Expressed as a percentage of revenues, cost of services was 35.4% during fiscal 2013, an increase of 140 basis points from fiscal 2012. The increase was driven by higher employee compensation partially offset by lower levels of third party data costs and a reduction in intangible asset amortization expense.

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