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Why Is FactSet (FDS) Down 3.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for FactSet Research (FDS - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the S&P 500.

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

FactSet Beats Earnings and Revenue Estimates in Q3

FactSet Research Systems reported impressive results for third-quarter fiscal 2019, wherein the company topped the Zacks Consensus Estimate on both counts. The company reported adjusted earnings per share of $2.62, which surpassed the Zacks Consensus Estimate of $2.37. The figure increased 20.2% on a year-over-year basis driven by strong operating performance.

Revenues in Detail

FactSet’s revenues of $364.5 million increased 7.2% from the year-ago quarter and exceeded the Zacks Consensus Estimate of $358.9 million. The uptick was driven by higher sales of analytics, content and technology solutions (CTS) as well as wealth management solutions. Organic revenues increased 7.3% year over year to $366.3 million.

Region-wise, U.S. revenues increased to $227 million from $210.3 million in the year-ago quarter. International revenues were $137.5 million compared with $129.6 million in the year-ago quarter.

ASV Plus Professional Services

FactSet’s Annual Subscription Value (ASV) plus professional services was $1.45 billion at the end of the quarter, up 5.1% year over year. Organically, it increased 5.6% year over year.

Buy-side and sell-side ASV growth rates were 5.2% and 6.8%, respectively. Nearly 84% of organic ASV was generated by buy-side clients. The rest were derived from sell-side firms performing functions like mergers and acquisitions advisory work, equity research and capital markets services.

ASV generated from the United States was $887.6 million, up 5.2% from the prior-year quarter’s level. Internationally, ASV was $535.4 million, up 4.4% year over year.

FactSet added 50 clients in the reported quarter, taking the total number to 5,455. Annual client retention was 90% of clients and more than 95% of ASV. At the end of the quarter, total employee count was 9,366, up 1.8% year over year.

Operating Results

Adjusted operating income came in at $122.8 million, up 16.2% from the year-ago quarter’s figure. Adjusted operating margin increased 300 basis points (bps) to 34%. Selling, general and administration expenses increased 2.3% to $83.5 million. Total operating expenses increased slightly to $247.3 million.

Balance Sheet and Cash Flow

FactSet exited the fiscal third quarter with cash and cash equivalents of $324 million compared with $218.3 million in the previous quarter. Long-term debt at the end of the quarter was $574.1 million compared with $574.8 million in the prior quarter. In the quarter, the company generated $159.8 million of cash from operating activities and capital expenditure was $11.4 million. Free cash flow was $148.3 million.

Share Repurchase and Dividend Payout

FactSet repurchased 175,000 shares for $47.6 million during the reported quarter. The company has $300 million under existing share repurchase program after a recent addition of $210 million. FactSet paid dividends of $27.3 million in the quarter. The company increased its quarterly dividend by 12.5% to 72 cents marking the 14th consecutive year of dividend increase.

Fiscal 2019 Outlook

FactSet updated fiscal 2019 guidance. The company now anticipates adjusted EPS in the range of $9.80 and $9.90 compared with the previous guidance of $9.50-$9.65. The company expects revenues between $1.42 billion and $1.44 billion compared with the previous guidance of $1.41-$1.45 billion. Organic ASV plus professional services for fiscal 2019 is now projected to increase in the range of $70-$75 million compared with the previously projected range of $75-$90 million. Adjusted operating margin is projected in the range of 32.5, compared with the previously projected range of 31.5-32.5%. The annual effective tax rate is expected between 16% and 16.5%. The previous expectation was between 17% and 18%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, FactSet has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

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


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