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Shares of FactSet Research Systems Inc. dropped 6.36% on Tuesday after the company’s first-quarter results fell shy of the Zacks Consensus Estimate. The company reported adjusted earnings per share of $1.22 which lagged the Zacks Consensus Estimate of $1.24 per share.

Quarter Details

Although FactSet reported revenues of $222.9 million which increased 5.6% on a year-over-year basis, it lagged the Zacks Consensus Estimate of $224.0 million. Reported revenues were at the lower end of management’s guided range of $222.0 million to $225.0 million. Organic revenue growth, excluding the Revere Data acquisition, was 5.5% year over year.

During the quarter, FactSet’s U.S. revenues grew 6.0% from the year-ago quarter to $153.0 million, while its non-U.S. revenues of $70.0 million were up 4.0% on a year-over-year basis.

FactSet added 25 new clients this quarter taking the tally to a total of 2525. The company retained 92% of clients, amounting to 95% of the Annual Subscription Value (ASV).   

The company’s ASV increased $2.0 million and reached a total figure of $890.0 million on Nov 30, 2013. Nearly 82.2% of this total figure is generated from buy-side clients, with the rest coming from sell-side firms performing functions like Mergers & Acquisition advisory work and equity research.

Now coming to the operational metrics, FactSet reported a 5.9% increase in operating expenses while as a percentage of revenues its operating expenses increased 16 basis points (bps) during the quarter to 66.5%.

FactSet’s operating income increased 5.1% from the year-ago quarter to $74.7 million while its margins contracted 16 bps primarily due to the Revere Data acquisition Adjusted net income during the quarter came in at $53.3 million or $1.22 per share which improved from $49.8 million or $1.11 per share.

FactSet exited the quarter with $174.0 million in cash and cash equivalents, compared with $196.6 million in the previous quarter. The company has no long-term debt.

FactSet generated free cash flow of $53.0 million during the quarter and purchased 530K shares for $57.8 million. The company also paid $15.1 million as dividends. Moreover, FactSet has approved a $300 million share buyback program in addition to the $5 million that the company already has.

Guidance

For the second quarter of fiscal 2014, FactSet expects revenues in the range of $225.0 million to $228.0 million. Apart from this, the operating margin is expected to range between 32.6% and 33.6%, reflecting a 30 bps reduction due to the Revere acquisition and a 50 bps reduction due to the recent acquisition of 60.0% in Matrix Data Limited. While the GAAP earnings per share should range between $1.20 and $1.23 (GAAP diluted earnings per share presumes the enforcement of U.S. Federal R&D tax credit). The Zacks Consensus Estimate for the second quarter is pegged at $1.26.

Our Take

Although FactSet’s first-quarter results lagged the Zacks Consensus Estimate, the year-over-year comparisons were favorable. Moreover, ASV increased compared to the year-ago quarter and FactSet added a good number of clients. However, the company provided a tepid guidance for the forthcoming quarter. The fresh buyback program will also support its earnings per share in the long run and will also invoke shareholders’ loyalty.

FactSet continues to launch products and applications across its segments with special emphasis on financial services to gain more customers. Moreover, the company’s acquisition of Revere Data and the stake in Matrix Data will help it to deliver innovative products to its clients and evolve as a global financial database company. It will also help FactSet to maximize value for its partners and provide customers with exclusive content sets.

Nonetheless, competition from Bloomberg L.P., Dow Jones & Company Inc., MSCI Inc. and Thomson Reuters, which are also coming up with substitute products at competitive prices, is a headwind for the company.

FactSet carries a Zacks Rank #3 (Hold). Investors may consider Stratasys Ltd. and SanDisk Corp. , both carrying a Zacks Rank #2 (Buy).

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