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FactSet (FDS) Down 3.3% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for FactSet Research Systems Inc. (FDS - Free Report) . Shares have lost about 3.3% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

FactSet Beats Q3 Earnings Estimates, Misses Revenues

FactSet reported mixed results for third-quarter fiscal 2017. Adjusted earnings came ahead of the Zacks Consensus Estimate, while revenues missed the same.

The company reported adjusted earnings per share of $1.85, which surpassed the Zacks Consensus Estimate by a penny. The figure was toward the higher end of the guided range of $1.80 to $1.86 per share. Moreover, adjusted earnings improved 12.8% on a year-over-year basis.

On a GAAP basis, the company reported earnings per share of $1.66 compared with $1.62 from the year-ago quarter.

Quarter Details

FactSet’s revenues of $312.1 million increased 8.6% from the year-ago quarter but missed the Zacks Consensus Estimate of $314 million. However, reported revenues were ahead of the management’s guidance range of $301 million--$307 million. Organic revenues increased 5.9% year over year to $293.9 million during the quarter.

FactSet witnessed better-than-expected growth across products and geographic regions, which aided quarterly revenues.

In the reported quarter, FactSet’s revenues from U.S. increased to $197.8 million. Excluding the impact of foreign currency, acquisitions and disposition, U.S. revenues and international revenues rose 4.6% and 8.2%, respectively, on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased 5.7% year over year to $1.28 billion as of May 31, 2017. Of this, nearly 84% was generated by buy-side clients while the rest can be attributed to sell-side firms performing functions like mergers & acquisition, advisory work and equity research.

FactSet added 225 clients in the reported quarter, taking the tally to 4,629. The company retained 92% of its clients. The percentage of client retention was more than 95% of ASV.

Coming to the operational metrics, FactSet reported a 13.2% rise in total operating expenses, primarily due to an increase in cost of services (17.5% higher on a year-over-year basis). As a percentage of revenues, operating expenses increased 300 basis points (bps) to 71.9%.

FactSet’s adjusted operating income increased 5.9% from the year-ago quarter to $100.3 million. However, operating margin decreased 110 bps year over year at 31.9%, owing to acquisition related expenses and deferred revenue adjustment.

Adjusted net income during the quarter was $72.9 million compared with $67.5 million in the year-ago quarter.

FactSet exited the quarter with $161.7 million in cash and cash equivalents, compared with $155.3 million from the previous quarter. Long-term debt during this quarter amounted to $575 million.

Cash flow from operations during the nine months ended May 31, 2017 was $220.3 million. The company generated free cash flow of $84.3million in the reported quarter.

FactSet purchased approximately 300K shares for $48.3 million under its existing share repurchase authorization. The company returned $458 million to shareholders in the form of share repurchase and dividends, over the last twelve months.

The company paid dividend of $22 million during the quarter. FactSet increased its dividend by 12%.

Guidance

For fiscal fourth-quarter 2017, FactSet expects revenues in the range of $321 million--$328 million (mid-point $324.5 million). Adjusted operating margin is expected between 31% and 32%. Adjusted earnings per share are projected in the band of $1.86--$1.92 (mid-point $1.89). The annual effective tax rate is expected within 25.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter.

FactSet Research Systems Inc. Price and Consensus

VGM Scores

At this time, FactSet's stock has a subpar Growth Score of 'D'. Its Momentum is also lagging with an 'F'. The stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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