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FDS > SEC Filings for FDS > Form 10-Q on 9-Apr-2014All Recent SEC Filings

Show all filings for FACTSET RESEARCH SYSTEMS INC

Form 10-Q for FACTSET RESEARCH SYSTEMS INC


9-Apr-2014

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 approximately 83% of our revenues from investment management clients and the remainder is from investment banking firms who perform M&A advisory and capital markets work and equity research. Included in the 83% are revenues attributable to off-platform sales and the Market Metrics business.

Essential to our focus on the growth and improvement of our applications and customer service, is the investment and development of our people. As of February 28, 2014, we employed 6,486 employees, an increase of 87 over the past three months and up 7.2% from a year ago. Of these employees, 1,969 were located in the U.S., 717 in Europe and 3,800 in Asia Pacific. Approximately 56% of employees are involved with content collection, 22% work in product development, software and systems engineering, another 20% conduct sales and consulting services and the remaining 2% provide administrative support.

Our second quarter of fiscal 2014 results reflect an improving investment management client base, the acquisition of Matrix Data Limited and growth in many of our key metrics. Our current return on equity exceeded our three year average of 35% and we continue to be aggressive in deploying capital in the form of new product development, business acquisitions and share repurchases to maximize earnings per share accretion. We believe FactSet has the products and solutions to meet the needs of our clients. We grew each key metric; revenues, ASV, diluted earnings per share, client count and user count. Revenue from our U.S. and non-U.S. operations grew by 6% and 8%, respectively, over the year ago quarter. Diluted earnings per share rose to $1.22 making this quarter our 15th consecutive quarter of double-digit EPS growth. ASV totaled $920 million at February 28, 2014, up 6% organically over the prior year. Including $7.3 million from the acquisition of Matrix, ASV increased $29.8 million over the last three months. Our net client growth in the past three months was the highest quarterly total since 2006. Investment management users grew at their highest since 2004. Quarterly free cash flow was $38 million; over the last 12-months free cash flow was $254 million, up 21%. We believe our financial and operational performance is a direct result of our commitment to client service and continued reinvestment in the development of our products, application enhancements, technology and content. We are also proud to have been named one of Fortune's "100 Best Companies to Work For," marking our sixth appearance on the list in the last seven years.


Results of Operations

For an understanding of the significant factors that influenced our performance
during the three and six months ended February 28, 2014 and 2013, 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                          Six Months Ended
                                    February 28,                               February 28,
(in thousands, except
per share data)              2014          2013      Change             2014          2013      Change
Revenues                $ 226,934     $ 213,083           6.5 %    $ 449,909     $ 424,167           6.1 %
Cost of services           87,254        75,842          15.0 %      170,504       149,427          14.1 %
Selling, general and
administrative             64,626        81,077         (20.3 )%     129,610       147,492         (12.1 )%
Operating income           75,054        56,164          33.6 %      149,795       127,248          17.7 %
Net income              $  52,426     $  44,539          17.7 %    $ 104,604     $  94,307          10.9 %
Diluted earnings per
common share            $    1.22     $    1.00          22.0 %    $    2.41     $    2.11          14.2 %
Diluted weighted
average common shares      43,107        44,455                       43,432        44,788

Revenues

Revenues for the three months ended February 28, 2014 were $226.9 million, up 6.5% compared to the same period a year ago. For the first six months of fiscal 2014, revenues increased 6.1% to $449.9 million. Revenue growth drivers during fiscal 2014 were increases in clients and users, continued growth of our wealth management workflow solutions, sales of our Portfolio Analytics suite of products, steady expansion in selling our proprietary content, an annual price increase, and incremental revenues from the acquisitions of Revere and Matrix which were completed during the first half of fiscal 2014. Partially offsetting the positive revenue drivers discussed above was a decrease in ASV from our global banking and brokerage clients as they continue to face challenges in their industry.

An Increase in Number of Clients and Users of FactSet

Net new client growth was strong in the current quarter as we added 64 net new clients organically, compared to 35 in the year ago quarter. This net new client growth during the second quarter of fiscal 2014 represented our highest total since the third quarter of fiscal 2006, and marks the seventeenth consecutive quarter in which we experienced net new client growth. Overall, client count rose by 96, including 32 new clients acquired from the Matrix acquisition and totaled 2,632 at February 28, 2014. Over the past 12 months, we have added 166 net new clients, which has helped drive revenue growth. It is important to note that 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. In addition, our annual client retention rate was greater than 95% of ASV and 92% when expressed as a percentage of clients, 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.

Users of the FactSet workstation increased by 849 over the past three months and totaled 51,863 professionals at February 28, 2014. This user growth represented our highest total since the fourth quarter of fiscal 2004. Over the past 12 months, we have been able to add 2,408 new users, excluding any acquired users from the Matrix acquisition. Our strong growth in new users was driven by expansion within the investment management space, while partially offset by contraction in headcount within our investment banking clients. In the past 12 months, our investment management client base has added 3,041 users while our investment banking clients have contracted by 633 users. We believe that although headcount at our investment banking clients is still under pressure, we continue to make gains on the buy-side, which constitutes approximately 82.7% of our revenues. In addition, average ASV from investment management users is significantly higher than from investment banking users, so we believe that a shift towards more internal research at investment management firms is a long-term positive ASV trend for FactSet.


Continued growth in our Wealth Management Workflow Solution

Wealth management continues to be a growing area for us with positive returns. We have experienced continued success in expanding the net number of wealth management clients and users as our clients continue to benefit from the ability to tailor our workstations to accommodate their needs and improve their competitive position. Through a customized workstation, our wealth management clients can operate in both large teams and in small groups, depending on their needs. Our clients use of the FactSet workstation often closely parallels those of our traditional institutional asset management clients as their practices become ever more sophisticated. Those clients are also increasingly making use of our portfolio analytics suite of products. Our trend of increased quarterly user growth has continued each quarter for over the past five years.

Sales of our Portfolio Analytics Suite of Products

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 this quarter. The PA suite includes several products that encompass a range of workflows around portfolios. The number of clients and users subscribing to PA, Fixed Income in PA, SPAR, Risk and Portfolio Publishing experienced broad-based growth as this suite is comprehensive and includes highly desired applications for portfolio attribution, risk, quantitative analysis, portfolio publishing and returns based, style analysis. Our clients appreciate the value of the PA suite of products, which enables the user to analyze securities and portfolios based on a variety of asset classes. In the just completed second quarter we experienced sales growth related to our equity attribution and risk as well as success with clients that focus heavily on fixed income portfolio analysis. In addition, our Publisher and SPAR applications were successful this quarter as well and added several new users.

Steady Expansion in Selling our Proprietary Content

Servicing client needs with bulk data outside the FactSet workstation has proven to be another valuable means to monetize our investment in content. We continued to be successful in licensing our proprietary FactSet data through the focus of our global content sales team, especially, FactSet Fundamentals and FactSet Estimates. Data licensed in feed form includes Ownership, Transcripts, M&A and Corporate Hierarchy data. Licensing of proprietary content data to single purpose applications or through bulk data feeds continues to see demand as the range of clients who consume our data feeds expands from that of large existing FactSet clients to those that are outside of our core client base. One of the drivers of our steady expansion in selling proprietary content during fiscal 2014 has been our StreetAccount news product. This offering, both on and off-platform, continues to be a highly regarded and desired product by many of our clients seeking up-to-the-minute news in a streamlined and easy to consume format.

Annual Price Increase

As FactSet has done for the past several years, we issued our annual price increase during the second quarter of fiscal 2014. This price increase, which impacted many of our U.S. investment management clients and a smaller percentage of our investment banking clients, increased ASV during the second quarter of fiscal 2014 by $7.6 million, as compared to the prior year price increase of $9.1 million. The annual price increase, as issued each second quarter, continues to become progressively smaller as more of our clients experience a price increase at the time of contract renegotiation and renewal, which varies by client and occur throughout the year.

Incremental Revenue from the Acquisitions of Revere and Matrix

On September 1, 2013, we acquired the assets of Revere, whose taxonomy and supply chain relationship data will serve to complement our commitment to provide our clients with unique and insightful content sets. At the time of acquisition, Revere had annual subscriptions of $4.9 million. During the second quarter of fiscal 2014, we acquired Matrix whose primary line of business is to provide intelligence to the UK financial services industry, covering market share of mutual fund distribution. At the time of acquisition, Matrix had annual subscriptions of $7.3 million. For the three and six months ended February 28, 2014, the acquisitions of Revere and Matrix added combined incremental revenue of $3.3 million and $4.5 million, respectively.

Partially offsetting the positive revenue drivers discussed above was the lesser performance of our global banking and brokerage clients, who have continued to monitor their net user count and vendor spend during the second quarter of fiscal 2014, which negatively impacted revenues. ASV from our investment banking clients represents 17.3% of total ASV. During the three and six months ended February 28, 2014, ASV from our sell-side clients decreased by $0.6 million and $5.6 million, respectively, as they continue to face challenges in their industry. During the current quarter, user count at our investment banking clients decreased by 210 professionals and a total of 633 in the past twelve months. Part of this reduction was due to large banks reducing their number of users when their long-term contracts were renewed as these firms experienced workforce reductions over the years and the new level of deployment now matches their current level of headcount.


Revenues by Geographic Region

                          Three Months Ended                        Six Months Ended
                             February 28                              February 28,
(in thousands)        2014          2013      Change           2014          2013      Change
U.S.             $ 154,266     $ 146,034          5.6 %   $ 307,178     $ 289,975          5.9 %
% of revenues         68.0 %        68.5 %                     68.3 %        68.4 %
Europe           $  56,023     $  51,650          8.5 %   $ 109,728     $ 103,280          6.2 %
Asia Pacific        16,645        15,399          8.1 %      33,003        30,912          6.8 %
International    $  72,668     $  67,049          8.4 %   $ 142,731     $ 134,192          6.4 %
% of revenues         32.0 %        31.5 %                     31.7 %        31.6 %
Consolidated     $ 226,934     $ 213,083          6.5 %   $ 449,909     $ 424,167          6.1 %

Three months ended February 28, 2014 (Quarter-to-date)

Revenues from our U.S. segment increased 5.6% to $154.3 million during the three months ended February 28, 2014 compared to the same period a year ago. Our second quarter fiscal 2014 revenue growth rate in the U.S. of 5.6% reflects growth in the number of users and clients of FactSet, sales of our wealth management solutions, increased demand for our proprietary content, an annual price increase for many of our U.S. investment management clients implemented in January 2014, which added $1.2 million in revenues to the just completed second quarter and acquired revenues. Incremental revenue of $1.3 million from acquisitions increased the year over year U.S. segment growth rate from 4.8% to 5.6%. These increases were partially offset by a year over year user decline of 633 among our investment banking client base as they continued to reduce their user populations based on how they perceive the market.

International revenues in the second quarter of fiscal 2014 were $72.7 million, an increase of 8.4% from $67.0 million in the prior year period. More specifically, revenues in the second quarter of fiscal 2014 from our European and the Asia Pacific regions totaled $56.0 million and $16.6 million, respectively. Excluding foreign currency effects and acquisitions, year over year growth rates were 4.6% in Europe and 11.7% in Asia Pacific. Drivers of European revenues were an increase in client count, a rise in the number of PA subscriptions, sales of global proprietary content, an annual price increase for the majority of our non-U.S. investment management clients implemented in March 2013 and acquired revenues. Incremental revenue of $2.1 million recorded in the just completed second quarter from the acquisition of Matrix increased our European revenue growth rate from 4.4% to 8.5%. Foreign currency movements increased the European revenue growth rate by 20 basis points during the second quarter of fiscal 2014. Asia Pacific revenues grew to $16.6 million, up 8.1% 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 second quarter of fiscal 2014. Holding currencies constant, Asia Pacific revenue growth year over year was 11.7%, primarily due to new user and client growth and expansion of our global content offering. The annual price increase implemented in March 2013 for many of our non-U.S. investment management clients increased non-U.S. revenue by $0.9 million year over year.

Six months ended February 28, 2014 (Year-to-date)

U.S. segment revenue increased 5.9% to $307.2 million during the first half of fiscal 2014 as compared to $290.0 million in the same period a year ago. This revenue growth reflects the addition of users and clients, sales of our PA suite of products, the deepening commitment to our wealth management solutions, increased demand for our proprietary content, an annual price increase for many of our U.S. investment management clients, and acquired revenues. International revenues increased 6.4% to $142.7 million during the six months ended February 28, 2014 compared to $134.2 million in the prior year period. European revenues advanced 6.2% due to user and client growth, a rise in the number of PA subscriptions, sales of global proprietary content, and an annual price increase for the majority of our non-U.S. investment management clients and acquired revenues. These increases were partially offset by foreign currency effects, which decreased international revenues by $1.3 million year over year. Excluding the impact of foreign currency, Asia Pacific revenue growth was 11.3% year over year and driven by increases in both our user and client counts.

Annual Subscription Value

ASV, or annual subscription value, is a key metric for us, which we define as a snapshot view of services currently being supplied to clients. ASV at a given point in time represents the forward-looking expected revenues for the next 12 months from all subscription services being supplied to our clients. With proper notice to us, our clients are able to add to, delete portions of, or terminate service at any time. ASV totaled $920.1 million at February 28, 2014, up 5.5% organically over the prior year. Including $7.3 million from the acquisition of Matrix, ASV increased $29.8 million over the last three months. ASV from our U.S. operations was $626.5 million, up $33.9 million from a year ago and includes acquired Revere ASV of $4.9 million. ASV from our non-U.S. operations increased $23.0 million to $293.6 million at February 28, 2014 and includes acquired Matrix ASV of $7.3 million. ASV derived from international operations increased from 31.4% a year ago to 31.9% at February 28, 2014. Organic ASV growth of 5.5% over the prior year was driven by 166 net new clients, adding 2,408 net new users, increased deployment of our wealth management workflow solutions, additional subscriptions to our PA suite of products, expanded sales of our proprietary content, and price increases issued in the last twelve months partially offset by a contraction in ASV within our investment banking client base.


Operating Expenses

                                 Three Months Ended                          Six Months Ended
                                    February 28,                               February 28,
(in thousands)               2014          2013      Change             2014          2013      Change
Cost of services        $  87,254     $  75,842          15.0 %    $ 170,504     $ 149,427          14.1 %
Selling, general and
administrative
("SG&A")*                  64,626        81,077         (20.3 )%     129,610       147,492         (12.1 )%
Total operating
expenses                $ 151,880     $ 156,919          (3.2 )%   $ 300,114     $ 296,919           1.1 %
Operating income        $  75,054     $  56,164          33.6 %    $ 149,795     $ 127,248          17.7 %

Operating Margin 33.1 % 26.4 % 33.3 % 30.0 %

* SG&A expenses for the three and six months ended February 28, 2013 included an incremental $15.5 million from the vesting of performance-based stock options granted in connection with the acquisition of the Market Metrics business.

Cost of Services

Three months ended February 28, 2014 (Quarter-to-date)

For the three months ended February 28, 2014, cost of services increased 15.0% to $87.3 million as compared to $75.8 million in the same period a year ago. Cost of services expressed as a percentage of revenues was 280 basis points higher in the current year quarter due to higher compensation expense from additional headcount within our consulting, software engineering and content collection departments and incremental costs from the Revere and Matrix acquisitions.

Employee compensation, including stock-based compensation, expressed as a percentage of revenues, increased 280 basis points for the three months ended February 28, 2014 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, base salary and variable pay increases, and the addition of 135 new employees from the acquisitions of Revere and Matrix during fiscal 2014. Over the last 12 months, we have added 140 net new engineering and product development employees as we continue to improve our applications used by our existing client base. In addition, we hired 153 net new content collection employees at our facilities in India and the Philippines as we continue to collect more proprietary content. At February 28, 2014, approximately 56% of employees are involved with content collection, 22% work in product development, software and systems engineering and another 20% conduct sales and consulting services. The headcount increases disclosed above exclude 135 employees acquired from Revere and Matrix. Total headcount, including acquired Revere and Matrix employees, was 6,486 at February 28, 2014, an increase of 438 from a year ago. Excluding the acquired Revere and Matrix workforce of 135 people, our year over year headcount increased 5.0%. The acquisitions of Revere and Matrix increased cost of services, when expressed as a percentage of revenues, by 130 basis points due to higher compensation paid to the acquired workforce, stock-based compensation from equity based awards granted, incremental third party data costs and amortization of acquired intangible assets.

Six months ended February 28, 2014 (Year-to-date)

Cost of services increased 14.1% to $170.5 million for the six months ended February 28, 2014 compared to the same period a year ago. Expressed as a percentage of revenues, cost of services was 37.9% during fiscal 2014, an increase of 270 basis points from fiscal 2013. The increase was driven by higher employee compensation partially offset by lower computer-related expenses and third-party data costs.

During fiscal 2014, employee compensation increased 300 basis points, expressed as a percentage of revenues, as we continued to increase employee headcount, incurred higher employer payroll taxes and recorded six months of Revere expenses and approximately three months of Matrix related expenses. Since March 1, 2013, we have hired 153 net new employees for our content collection operations and 140 net new software engineers as we continue to improve our applications that service our existing client base. Revere and Matrix related expenses during the first half of fiscal 2014 increased cost of services, when expressed as a percentage of revenues, by 100 points due to compensation paid to the acquired workforce, stock-based compensation expense from equity based awards granted to the new employees, incremental third party data costs and amortization of acquired intangible assets.

Partially offsetting the growth in cost of services during the first half of fiscal 2014 was a reduction in computer-related expenses and lower third party data costs. Computer-related expenses, including computer depreciation and maintenance costs decreased 20 basis points in the first half of fiscal 2014 as compared to a year ago due to the continued use of fully depreciated servers and our transition to more efficient and cost-effective servers in our data centers. Third party data costs, expressed as a percentage of revenues, decreased 10 basis points for the six months ended February 28, 2014 compared to the same period in fiscal 2013 as a result of a reduction in CallStreet third party collection costs, lower variable fees payable to data vendors based on deployment of their content over the FactSet platform and a reduction in fees from negotiating existing data vendor contracts.


Selling, General and Administrative

Three months ended February 28, 2014 (Quarter-to-date)

For the three months ended February 28, 2014, SG&A expenses decreased 20.3% to $64.6 million from $81.1 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, decreased 950 basis points to 28.5% during the second quarter of fiscal 2014 due to lower employee compensation and to a prior year non-cash pre-tax charge of $15.5 million from vesting performance-based stock options. Excluding the incremental $15.5 million of stock-based compensation expense from the vesting of performance-based stock options, SG&A expenses, expressed as a percentage of revenues, decreased 230 basis points from 30.8%.

Employee compensation decreased 240 basis points during the second quarter of fiscal 2014 compared to the same period a year ago primarily due to a change in the mix of employees working in an SG&A capacity over the prior year. The majority of our hiring during the past 12 months has been within our software . . .

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