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Why Is FactSet (FDS) Down 4.3% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for FactSet Research Systems Inc. (FDS - Free Report) . Shares have lost about 4.3% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is FDS due for a breakout? Before we dive into how investors and analysts have reacted as 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 Surpasses Q2 Earnings and Revenue Estimates

FactSet 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.

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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to three lower.

VGM Scores

At this time, FDS has a nice Growth Score of B. Its Momentum is doing a bit better with an A. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than growth investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, FDS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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