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

Show all filings for FACTSET RESEARCH SYSTEMS INC

Form 10-Q for FACTSET RESEARCH SYSTEMS INC


10-Jul-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. Investment management clients account for 83.1% of our annual subscription value ("ASV") and the remainder from investment banking firms who perform M&A advisory work and equity research.

As of May 31, 2014, we employed 6,372 employees, up 8% from a year ago. Of these employees, 1,960 were located in the U.S., 749 in Europe and 3,663 in the Asia Pacific region. Approximately 55% 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 3% provide administrative support. We are honored to have recently been named one of FORTUNE's 100 Best Companies to Work For, marking our fifth appearance on that list in the last six years, recognized as one of the UK's "Best Workplaces" by the Great Place to Workฎ Institute UK for the sixth consecutive year, listed in Crain's "Chicago's Best Places to Work" for the second year in a row and included in the "2014 Best Places to Work in France" list for the third consecutive year. Our employees are FactSet's most valuable asset and recognition in these surveys is based on their feedback and underscores our dedication to the development and satisfaction of our employees.

We were pleased to see that our ASV growth rate accelerated to 7% and EPS grew to $1.21 in the just completed third quarter of fiscal 2014. We continued to capitalize on our opportunities as evidenced by adding 30 net new clients and 620 net new users in the past three months. The current quarter marks our 16th consecutive quarter delivering double-digit diluted EPS growth. We continued to return capital to stockholders through an 11% increase in our quarterly dividend from $0.35 to $0.39 in May 2014. Our ASV, or annual subscription value, grew $12.3 million during the current quarter, increasing the organic growth rate from 6% to 7%. ASV totaled $932 million at May 31, 2014, which includes $12 million in acquired ASV from the recent acquisitions of Revere Data and Matrix in September and December of 2013, respectively. Our third quarter results included expanding revenues from both our U.S and non-U.S. operations by 6% and 12%, respectively, and an increase in net user count of 620 as compared to 61 during the same period of fiscal 2013. Annual client retention was greater than 95% of ASV, and on a client base, the annual retention rate was 93% of clients at May 31, 2014, marking the first increase in client retention since fiscal 2011. We continued to improve and develop products and solutions to enhance our FactSet workstation and make it more valuable to our end users as evidenced by a new agreement we entered into with QUICK Corporation, a Japan-based financial information services company in the Nikkei Inc. Group. Together, FactSet and QUICK will work to integrate the Nikkei Group's high-quality content with our own global content and workflow solutions in order to provide a premium FactSet service for redistribution within our Asia segment. Lastly, we announced that Phil Snow was named President, effective July 1, 2014, and reports directly to Philip Hadley, Chairman and CEO. Mr. Snow joined FactSet in 1996 and most recently held the role of Senior Vice President, Director of U.S. Investment Management Sales. In his new role, Mr. Snow will have oversight and management responsibility for both our sales and operations teams and will execute on the strategies that drive our mission which is to provide best-of-breed products and client service to financial professionals worldwide.


Results of Operations

For an understanding of the significant factors that influenced our performance
during the three and nine months ended May 31, 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                          Nine Months Ended
                                       May 31,                                     May 31,
(in thousands, except
per share data)           2014          2013          Change          2014          2013          Change
Revenues                $ 231,761     $ 214,613            8.0 %    $ 681,671     $ 638,779            6.7 %
Cost of services           90,661        76,721           18.2 %      261,165       226,148           15.5 %
Selling, general and
administrative             68,063        66,255            2.7 %      197,673       213,746           (7.5 )%
Operating income           73,037        71,637            2.0 %      222,833       198,885           12.0 %
Net income              $  51,532     $  53,367           (3.4 )%   $ 156,136     $ 147,674            5.7 %
Diluted earnings per
common share            $    1.21     $    1.20            0.8 %    $    3.62     $    3.30            9.7 %
Diluted weighted
average common shares      42,615        44,485                        43,170        44,784

Revenues

Revenues for the three months ended May 31, 2014 were $231.8 million, up 8.0% compared to the prior year. For the first nine months of fiscal 2014, revenues increased 6.7% to $681.7 million. Our revenue growth drivers during fiscal 2014 were increases in clients and users, continued growth in our Portfolio Analytics suite of products, rising sales of our wealth management workflow solution, expansion of proprietary content, price increases, and incremental revenues from the recent acquisitions of Revere and Matrix partially offset by user count decreases from our investment banking clients.

Growth in the Number of Clients and Users of FactSet

The third quarter of fiscal 2014 represented our strongest third quarter for new client acquisitions since fiscal 2007, as we added 30 net new clients, compared to four during the same period a year ago. Net new client adds in the past 12 months totaled 222, which included 43 clients from the Revere and Matrix acquisitions, bringing our total client count to 2,662 at May 31, 2014. 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 us 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, 2014, our largest individual client accounted for 2% of total subscriptions and annual subscriptions from the ten largest clients did not surpass 15% of our total client subscriptions, consistent with August 31, 2013. 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 improved to 93% of clients, up from 92% a year ago and represents our first increase in that metric since August 2011. We believe these statistics illustrate the power of our business model, as the large majority of clients maintain their subscriptions to FactSet throughout each year.

At May 31, 2014, there were 52,483 professionals using FactSet, an increase of 620 users in the past three months, up 2,967 users from a year ago. During the quarter, our investment management clients added 632 net new users, while we experienced a small reduction of 12 users within our investment banking clients. This minor reduction in sell-side users marks the lowest quarterly level of contraction we have observed in recent periods. In the past 12 months, our investment management client base added 3,208 users, while our investment banking clients contracted by 241 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 83.1% of our ASV. The average ASV from investment management users is also 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. Lastly, while the user count at our investment banking clients has decreased by 241 in the past 12 months, ASV from these same clients has increased by $0.8 million over the same period.


Continued Use of our Portfolio Analytics (PA) 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 during the third quarter. The PA suite includes separate products and covers 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 continued growth as this suite is comprehensive and includes highly desired applications for portfolio attribution, risk, quantitative analysis, portfolio publishing and returns based, style analysis. We continue to see existing clients expand their use of our PA and buy more services that integrate within the portfolio analytics suite. Clients continue to find value in our ability to serve as a single solution for their analytics, risk and publishing needs, over a variety of asset classes, which enables them to analyze securities and portfolios based on a variety of asset classes.

Sales of our Wealth Management Workflow Solution

Consistent with the past two fiscal quarters, wealth management continued to be a growing area for us during the just completed third quarter as our wealth management clients and users continue to benefit from the ability to tailor our workstations to accommodate their needs and improve their competitive position. In the past nine months, we have focused product suite and sales teams to address the workflows of these particular types of clients. Aiming to deliver the value-added service and comprehensive, easy to generate reports, our wealth management clients are using more of our PA suite of products in a manner similar to institutional investors. This has helped continue our trend of increasing quarterly wealth management users each quarter for the past five years.

Expansion of our Proprietary Content

We continue to be successful in licensing our proprietary FactSet data, especially FactSet Fundamentals and FactSet Estimates as our global content sales team pursues expanding the distribution of our content. 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. StreetAccount, our condensed news product, is an application that sells strongly across all FactSet user types and continues to be in demand due to the ability of our clients to receive up-to-the-minute news offered both through and outside the FactSet workstation. In addition, during May 2014, we signed an agreement with Quick Corp. to begin to develop a premium FactSet service for redistribution in Asia by combining our industry-leading global content and workflow solutions with the Nikkei Group's high-quality content.

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 the 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. At the time of the acquisition, Matrix had annual subscriptions of $7.3 million. For the three and nine months ended May 31, 2014, the acquisitions of Revere and Matrix added combined incremental revenue of $3.7 million and $8.2 million, respectively.

Partially offsetting the positive revenue drivers discussed above was the underperformance of our global banking and brokerage clients, who represent 16.9% of our total ASV. During the three and nine months ended May 31, 2014, ASV from these sell-side clients decreased by $1.5 million and $7.1 million, respectively, as they continue to face challenges in their industry. During the just completed third quarter, user count at our investment banking clients decreased by 12 professionals for a total reduction of 241 in the past twelve months. Part of this decline was due to large banks reducing their number of users when their long-term contracts were renewed in order to match the level of deployment with their current headcounts. While investment banking was not an area of growth for us during the recent quarter, our investment banking clients fared better in this third quarter than in recent quarters. We are also encouraged by the uptick in the both the IPO and M&A marketplaces.


Revenues by Geographic Region



                         Three Months Ended                       Nine Months Ended
                              May 31,                                  May 31,
(in thousands)     2014          2013        Change        2014          2013         Change
U.S.             $ 156,241     $ 146,972         6.3 %   $ 463,419     $ 436,947          6.1 %
% of revenues         67.4 %        68.5 %                    68.4 %        68.4 %
Europe           $  58,265     $  52,358        11.3 %   $ 167,993     $ 155,638          7.9 %
Asia Pacific        17,255        15,283        12.9 %      50,259        46,194          8.8 %
International    $  75,520     $  67,641        11.6 %   $ 218,252     $ 201,832          8.1 %
% of revenues         32.6 %        31.5 %                    32.0 %        31.6 %
Consolidated     $ 231,761     $ 214,613         8.0 %   $ 681,671     $ 638,779          6.7 %

Three months ended May 31, 2014 (Quarter-to-date)

Revenues from our U.S. segment increased 6.3% to $156.2 million during the three months ended May 31, 2014 compared to the same period a year ago. Our third quarter fiscal 2014 revenue growth rate in the U.S. of 6.3% reflects the continued growth in the number of users and clients of FactSet, use of our Portfolio Analytics products, increased data feed sales of our proprietary content, $1.4 million of incremental revenue from the acquisition of Revere and price increases. The U.S. growth was partially offset by a decrease in net user count at our investment banking clients as they continue to reduce user populations and closely monitor vendor spend as they perceive market opportunities.

International revenues in the third quarter of fiscal 2014 were $75.5 million, an increase of 11.6% from $67.6 million in the prior year period. Excluding foreign currency effects and the Matrix acquisition completed in the second quarter of fiscal 2104, the year over year growth rates were 6.5% in Europe and 14% in Asia Pacific. The acquisition of Matrix in the second quarter added $2.3 million of revenues to the European segment in the just completed third quarter while foreign currency exchange rate fluctuations added 50 basis points to the European revenue growth rate. The 6.5% rise in European revenue was attributable to increases in client count, growth in the number of PA subscriptions, sales of global proprietary content and price increases.

Asia Pacific revenues grew to $17.3 million, up 12.9% 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 $0.2 million during the third quarter of fiscal 2014. Year over year Asia Pacific revenue growth was 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.

Nine months ended May 31, 2014 (Year-to-date)

Our U.S. segment revenue increased 6.1% to $463.4 million during the first nine months of fiscal 2014 as compared to $436.9 million in the same period a year ago. Fiscal year to date incremental revenues from the Revere acquisition of $3.9 million increased our U.S. segment growth rate by 90 basis points. This revenue growth rate reflects the addition of users and clients, sales of our PA suite of products, the continued commitment to our wealth management solutions, increased demand for our proprietary content, and price increases partially offset by user count declines at our investment banking clients.

International revenues also increased 8.1% to $218.3 million during the nine months ended May 31, 2014. Excluding foreign currency effects and the Matrix acquisition completed in fiscal 2104, the year over year growth rates were 5.0% in Europe and 12.2% in Asia Pacific. The acquisition of Matrix added $4.3 million of revenues to the European segment during fiscal 2014 while foreign currency added $0.3 million. European revenues advanced 5.0% due to sales of our advanced applications, price increases and user and client growth partially offset by user declines at investment banking firms. Asia Pacific revenue growth, when excluding a $1.6 million reduction in revenue from a weaker Japanese Yen, was 12.2% year over year, driven by growth in our global content offering and increases in both our user and client counts.


Annual Subscription Value (ASV)

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. At May 31, 2014, ASV was $932 million, up 6.8% organically over the prior year, and $12 million over the past three months. ASV from our U.S. operations was $630 million, up $40 million from a year ago and included $4.9 million of acquired ASV from Revere. ASV from international operations totaled $302 million, an increase of $28 million over the past 12 months and included $7.3 million of acquired ASV from Matrix. The growth in ASV during the third quarter of fiscal 2014 was driven by the net addition of 30 new clients and 620 new users during the current quarter, continued expansion in the use of our PA products, growth in the sales and deployment of our wealth management workflow solutions, sales of proprietary content and a price increase for many of our non-U.S. investment management clients, partially offset by a $1.5 million decrease in ASV from our investment banking clients.

Operating Expenses

                                  Three Months Ended                         Nine Months Ended
                                       May 31,                                    May 31,
(in thousands)               2014          2013       Change            2014          2013       Change
Cost of services*       $  90,661     $  76,721           18.2 %   $ 261,165     $ 226,148           15.5 %
Selling, general and
administrative
("SG&A")**                 68,063        66,255            2.7 %     197,673       213,746           (7.5 )%
Total operating
expenses***             $ 158,724     $ 142,976           11.0 %   $ 458,838     $ 439,894            4.3 %
Operating income        $  73,037     $  71,637            2.0 %   $ 222,833     $ 198,885           12.0 %

Operating Margin 31.5 % 33.4 % 32.7 % 31.1 %

* Cost of services for the three and nine months ended May 31, 2014 include a non-cash pre-tax charge of $1.4 million related to vesting of performance-based options in connection with StreetAccount.

** SG&A expenses for the nine months ended May 31, 2013 include a non-cash pre-tax charge of $15.5 million related to vesting of performance-based options granted in connection with Market Metrics.

Cost of Services

Three months ended May 31, 2014 (Quarter-to-date)

For the three months ended May 31, 2014, cost of services increased 18.2% to $90.7 million compared to $76.7 million in the same period a year ago. Cost of services expressed as a percentage of revenues was 39.1% during the third quarter of fiscal 2014, an increase of 340 basis points over the same prior year period due to a non-cash pre-tax charge of $1.4 million related to vesting of performance-based options granted in 2012 in connection with the acquisition of StreetAccount, higher compensation expense from additional headcount in our engineering, consulting and product development groups, and incremental costs from the Revere and Matrix acquisitions partially offset by lower computer-related expenses, including deprecation.

Employee compensation, including stock-based compensation, expressed as a percentage of revenues, increased 360 basis points for the three months ended May 31, 2014 compared to the same period a year ago due to the $1.4 million pre-tax stock-based compensation charge related to vesting of performance-based options, the hiring of new engineers and consultants, the continued expansion of our proprietary content collection operations, the addition of 135 new employees from the acquisitions of Revere and Matrix and base salary increases. Over the last 12 months, we have added 202 net new engineers and 31 net new consultants, as we further develop and enhance our applications and service to our existing client base. In addition, we hired 89 net new employees to collect more content, primarily at our facilities in India and the Philippines. The headcount increases disclosed above exclude the 135 employees acquired from Revere and Matrix. Total headcount, including acquired Revere and Matrix employees, was 6,372 at May 31, 2014, up 8% or 472 people over last year. The $1.4 million charge related to vesting StreetAccount performance-based options resulted in a 60 basis point increase in stock-based compensation. The acquisitions of Revere and Matrix increased cost of services, when expressed as a percentage of revenues, by 110 basis points due to 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.


Partially offsetting the growth in cost of services during the third quarter of fiscal 2014 was a reduction in computer-related expenses, including depreciation. Computer-related expenses decreased 50 basis points due to the lower capital expenditures, the continued use of fully depreciated computer equipment and our recent transition to more efficient and cost-effective servers in our data centers.

Nine months ended May 31, 2014 (Year-to-date)

Cost of services increased 15.5% to $261.2 million for the nine months ended May 31, 2014 compared to the same period a year ago. Expressed as a percentage of revenues, cost of services was 38.3% during fiscal 2014, an increase of 290 basis points from fiscal 2013. The increase was driven by higher employee compensation and incremental costs from the Revere and Matrix acquisitions partially offset by lower computer-related expenses, including deprecation.

During fiscal 2014, employee compensation, including stock-based compensation, increased 320 basis points, expressed as a percentage of revenues, as we continued to increase employee headcount, recorded nine months of Revere expenses and approximately six months of Matrix expenses. Since June 1, 2013, we have hired 202 net new software engineers, 31 net new consultants and 89 net new employees for our content collection. Revere and Matrix related expenses during fiscal 2014 increased cost of services, when expressed as a percentage of revenues, by 80 basis points due to 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.

Partially offsetting the growth in cost of services during fiscal 2014 was a reduction in computer depreciation. Computer-related expenses, including computer depreciation and maintenance costs decreased 40 basis points in fiscal 2014 as compared to a year ago due to the continued use of fully depreciated equipment and our transition to more efficient and cost-effective servers in our data centers. .

Selling, General and Administrative

Three months ended May 31, 2014 (Quarter-to-date)

For the three months ended May 31, 2014, SG&A expenses increased 2.7% to $68.1 million from $66.3 million in the same period a year ago. SG&A expenses, expressed as a percentage of revenues, decreased 150 basis points to 29.4% during the third quarter of fiscal 2014 due to lower compensation from employees performing SG&A roles partially offset by higher legal fees, more employee travel and entertainment ("T&E") expenses and incremental costs from the Revere and Matrix acquisitions.

Employee compensation, expressed as a percentage of revenues, decreased 270 basis points in the third quarter of fiscal 2014 compared to the same period in fiscal 2013 due to a higher percentage of our employee based working in a cost of services capacity versus SGA over the prior year. Of our total employee headcount increase in the past 12 months, 86% was hired by our software engineering, content collection and product development teams, which are . . .

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