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FactSet (FDS) Surpasses Q2 Earnings and Revenue Estimates

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FactSet Research Systems Inc. (FDS - Free Report) reported impressive results for second-quarter fiscal 2018, wherein the company topped the Zacks Consensus Estimate on both counts.

The company reported adjusted earnings per share of $2.12, which surpassed the Zacks Consensus Estimate of $2.05. The figure increased 17.1% on a year-over-year basis.

Quarter Details

FactSet’s revenues of $335.2 million increased 13.9% from the year-ago quarter and exceeded the Zacks Consensus Estimate of $334 million.

Notably, organic revenues increased 5.7% year over year to $310.4 million during the quarter. The increase was primarily driven by accelerated sales of content and technology solutions (CTS) as well as analytics products.

In the reported quarter, FactSet’s revenues from the United States increased to $208.9 million while international revenues grew to $126.3 million. Excluding the impact of foreign currency, acquisitions and disposition, U.S. revenues and international revenues rose 4.8% and 7.3%, respectively, on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased to $1.35 billion as of Feb 28, 2018, up around 13.4% from the year-ago quarter figure of $1.19 billion. Of this, nearly 83.3% was generated by buy-side clients while the rest came from sell-side firms, performing functions like mergers & acquisition, advisory work and equity research. Organically, it increased $25.5 million during the quarter.

FactSet added 86 clients in the reported quarter, taking the tally to 4,895. The company retained 89% of its clients. The percentage of client retention was more than 95% of ASV.

Coming to operational metrics, FactSet reported an 18.3% rise in total operating expenses. As a percentage of revenues, operating expenses increased approximately 300 basis points (bps) to 72%.

FactSet’s adjusted operating income increased 8.8% from the year-ago quarter to $106 million. However, adjusted operating margin decreased 170 bps year over year to 31.4%, owing to increased operating expenses as a percentage of revenues.

Adjusted net income during the quarter was $84.3 million compared with $71.8 million in the year-ago quarter.

FactSet exited the quarter with $233.6 million in cash and cash equivalents, compared with $221.9 million in the previous quarter. Long-term debt at the end of the quarter amounted to $574.7 million.

Cash flow from operations during the quarter was $153.7 million. The company generated free cash flow of $86.1 million.

FactSet repurchased $81.9 million worth of its common stock under its existing share repurchase authorization during the second quarter. With the recent approval of an addition of $300 million to the company’s in-progress share repurchase program, the company still has $431 million remaining under the share repurchase authorization.

FactSet Research Systems Inc. Price, Consensus and EPS Surprise

FactSet Research Systems Inc. Price, Consensus and EPS Surprise | FactSet Research Systems Inc. Quote

Guidance

The company reiterated parts of the guidance for fiscal 2018 provided last quarter. GAAP revenues are expected to be between $1.34 billion and $1.36 billion (mid-point $1.35 billion). The Zacks Consensus Estimate is currently pegged at $1.35 billion.

Organic ASV for fiscal 2018 is projected to be in the range of $65 million to $85 million, representing year-over-year growth of 4.9% to 6.5%. The anticipated range for adjusted operating margin is 31% and 32.5%.

FactSet updated parts of its fiscal 2018 guidance pertaining to the recent tax reforms in the United States. The annual effective tax rate is now expected to be between 18% and 19.5%. Adjusted earnings are expected to be within $8.35 and $8.55, up from the previous range of $8.25 and $8.45. The Zacks Consensus Estimate is pegged at $8.40 per share.

Bottom Line

The company fared well in the second quarter of fiscal 2018 on the back of new customer wins across United States, Europe and Asia.

Management was particularly optimistic about the analytics segment that accounted for more than 50% of the increased ASV, primarily attributed to the performance of portfolio analytics, risk, fixed income and portfolio services.

The ongoing and completed integration of the acquired entities appear promising as these are assisting the company in winning new clients like Alberta Investment Management.

Additionally, management stated that the rise of quant-based research work has increased the demand for data feeds. Hence, it is also looking to expand its Data Feeds business to tap the relevant growth opportunity.

Moreover, the company’s shareholder-friendly initiative, as reflected in the amendment of its share repurchase program with additional funds, is a positive and is expected to instill investors’ confidence in the stock.

However, declining client retention ratio remains a concern for the company. Although, the company has been able to add new clients every quarter, failure to retain old clients may prove to be an overhang in the long run.

Zacks Rank and Other Stocks to Consider

Factset has a Zacks Rank #2 (Buy).

Some of the top-ranked stocks in the broader technology sector are Paycom Software, Inc. (PAYC - Free Report) , Facebook, Inc. and Western Digital Corporation (WDC - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected EPS growth rate for Paycom, Facebook and Western Digital is 25.8%, 26.2% and 19%, respectively.

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