FactSet Research (FDS) Tops On Q1 Earnings, Misses Revenues

FactSet Research Systems Inc. (NYSE:FDS) reported mixed results for fiscal first-quarter 2018. While earnings came ahead of the Zacks Consensus Estimate, revenues missed the same. However, on a year-over-year basis, it registered growth on both the counts.

The company reported adjusted earnings per share of $2.04, which surpassed the Zacks Consensus Estimate of $1.98. The figure exceeded the guided range of $1.93 to $1.99 per share. Moreover, adjusted earnings improved 16.6% on a year-over-year basis.

Quarter Details

FactSet’s revenues of $329.1 million increased 14.3% from the year-ago quarter and came ahead of the guided range of $321 million-$328 million. Organic revenues increased 5.8% year over year to $304.3 million during the quarter. Successful integration of newly acquired businesses along with expansion in workflow-based solutions backed the company’s top-line performance. However, the figure missed the Zacks Consensus Estimate of $331 million.

In the reported quarter, FactSet’s revenues from the United States increased to $208.8 million while international revenues grew to $120.4 million. Excluding the impact of foreign currency, acquisitions and disposition, U.S. revenues and international revenues rose 4.8% and 7.7%, respectively, on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased to $1.32 billion as of Nov 30, 2017, up 12.8% from the year-ago quarter figure of $1.17 billion. Of this, nearly 84.2% 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 had increased 5.1% on a year-over-year basis.

FactSet added 65 clients in the reported quarter, taking the tally to 4,809. The company retained 90% of its clients. The percentage of client retention was more than 95% of ASV.

Coming to the operational metrics, FactSet reported a 21% rise in total operating expenses. As a percentage of revenues, operating expenses increased approximately 400 basis points (bps) to 73%.

FactSet’s adjusted operating income increased 10.6% from the year-ago quarter to $105.1 million. However, operating margin decreased 130 bps year over year to 31.7%, owing to increased operating expenses as a percentage of revenues.

Adjusted net income during the quarter was $80.9 million compared with $70.1 million in the year-ago quarter.

FactSet exited the quarter with $221.9 million in cash and cash equivalents, compared with $194.7 million from 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 $61.1 million. The company generated free cash flow of $55.2 million.

FactSet repurchased $30.9 million worth of its common stock under its existing share repurchase authorization during the first quarter. The company has still $213.2 million remaining under the share repurchase authorization as of Nov 30, 2017.

Guidance

Starting this quarter, the company has decided not to provide quarterly guidance. Instead, it will issue a fiscal guidance. The company initiated guidance for fiscal 2018. 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 $1.36 billion.

Organic ASV for fiscal 2018 is projected to increase by $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%.

Adjusted earnings are expected to be within $8.25 and $8.45 (mid-point $8.35). The midpoint represents 14% year-over-year growth. The Zacks Consensus Estimate is pegged at $8.18 per share.

Bottom Line

Shares of Factset have gained 25.3% year to date, underperforming the industry’s 30.7% rally. Investors seem concern about lower-than-expected revenues and unimpressive top-line guidance for fiscal 2018. Furthermore, declining client retention ratio remains a major concern.

The company’s client retention ratio in the first quarter came in at 90%, tanking 300 basis points (bps) from the year-ago quarter and 100 bps from the fourth quarter of fiscal 2017. It should be noted that a strong client retention ratio signifies more stable revenues.

Although the company continues to add clients every quarter, it has failed to retain old clients. This will negatively impact its near-term top-line growth.

Zacks Rank and Stocks to Consider

Factset has a Zacks Rank #4 (Sell).

Some of the better-ranked stocks in the broader technology sector are Intel Corporation (NASDAQ:INTC) , NetApp, Inc. (NASDAQ:NTAP) and IPG Photonics Corporation (NASDAQ:IPGP) , all sporting a Zacks Rank #1 (Strong Buy). You can see see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected EPS growth rate for Intel, NetApp and IPG is projected to be 8.42%, 11.34% and 12%, respectively.

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