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FactSet (FDS) Q4 Earnings & Revenues Miss, Outlook Weak

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Shares of FactSet Research Systems Inc. (FDS - Free Report) went down more than 11% yesterday, after the company posted lower-than-expected fourth-quarter of fiscal 2016 results. Also, a tepid guidance negatively impacted the share price.

The company reported adjusted earnings per share of $1.69, which lagged the Zacks Consensus Estimate of $1.70 per share. However, reported earnings improved on a year-over-year basis.

On a GAAP basis, the company reported earnings per share of $3.55 compared with $1.48 in the year-ago quarter.

Quarter Details

FactSet’s revenues of $287.3 million increased 9.7% from the year-ago quarter but missed the Zacks Consensus Estimate of $291 million. Moreover, reported revenues also lagged the guided range of $292 million to $298 million.

FactSet witnessed better-than-expected growth across products and geographic regions, which aided quarterly revenues. Also, synergies from the Portware acquisition contributed to revenue growth.

During the quarter, FactSet’s revenues from the U.S. grew 7.4% year over year to $190.4 million, while non-U.S. revenues went up to $96.9 million. Excluding the impact of foreign currency and acquired revenues from Portware and Market Metrics business, international revenues rose 11.7% on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased 8.8% to $1.15 billion as of Aug 31, 2016. Of this, nearly 82.6% was generated by buy-side clients while the rest came from sell-side firms performing functions like mergers & acquisition, advisory work and equity research.

FactSet added 17 clients in the reported quarter, taking the tally to 3,092. The company retained 95% of its clients. The retention percentage was more than 94% of ASV.
Coming to the operational metrics, FactSet reported a 13.3% rise in total operating expenses, primarily due to an increase in cost of services (up 15.4% on a year-over-year basis). As a percentage of revenues, operating expenses increased 218 basis points (bps) to 69.5%.

FactSet’s adjusted operating income increased 6.2% from the year-ago quarter to $96.1 million. However, operating margin contracted 110 bps year over year to 33.5%, mainly due to higher operating expenses as a percentage of revenues.

Adjusted net income during the quarter was $68.6 million, which improved from $63.2 million reported in the year-ago quarter.

FactSet exited the quarter with $228.4 million in cash and cash equivalents, compared with $187.4 million in the previous quarter. Long-term debt during the quarter amounted to $300 million.

Cash flow from operations during the 12 months ended Aug 31, 2016 was $331.1 million. The company generated free cash flow of $57 million during the reported quarter. FactSet purchased approximately 258K shares for $42.8 million. During the quarter, the company paid a quarterly dividend of 50 cents per share.


For fiscal first quarter of 2017, FactSet expects revenues in the range of $286 million to $292 million (mid-point $289 million). The Zacks Consensus Estimate is pegged at $291 million.

Adjusted operating margin is expected between 32.5% and 33.5%. Adjusted earnings per share are projected in the band of $1.68 to $1.72 (mid-point $1.70). The Zacks Consensus Estimate stands at $1.72. The annual effective tax rate is expected within 28% to 29%.

FACTSET RESH Price, Consensus and EPS Surprise

Our Take

FactSet reported dismal fourth-quarter fiscal 2016 results. FactSet also issued a not-so-encouraging guidance for the current quarter. Nonetheless, year-over-year comparisons were favourable on both the counts. Moreover, the company has a high client retention ratio, which is a positive. Also, ASV increased year over year and the company added a good number of clients.

The share repurchase program is expected to support earnings in the long run apart from boosting shareholders’ value.

The company continues with product innovation across its segments with special emphasis on financial services to gain more customers. Moreover, the company’s acquisitions of Portware, Revere Data, Matrix Data and Code Red will enhance its product suite and help it to evolve as a global financial database company. It will also help FactSet to maximize value for its partners and provide exclusive content set.

Nonetheless, competition from Bloomberg L.P., Dow Jones & Company Inc., MSCI Inc. (MSCI - Free Report) and Thomson Reuters, which are also introducing substitute products at competitive prices, is a headwind.

FactSet carries a Zacks Rank #4 (Sell).

A couple of better-ranked stocks are 3D Systems Corporation (DDD - Free Report) and Intel Corporation (INTC - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Intel and 3D Systems have a long-term expected earnings per share growth rate of 7.79% and 24.28%, respectively.

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