FactSet Q2 Earnings In Line, Shares Up - Analyst Blog

Shares of FactSet Research Systems Inc. FDS increased 9.67% on Tuesday after the company reported second-quarter fiscal 2014 results. The company reported adjusted earnings per share of $1.22, which came in line with the Zacks Consensus Estimate. Earnings increased from 86 cents reported in the year-ago quarter.

Quarter Details

FactSet reported revenues of $226.9 million, which increased 6.5% on a year-over-year basis. However, it marginally lagged the Zacks Consensus Estimate of $227.0 million. Reported revenues were within management's guided range of $225.0 million to $228.0 million. Organic revenue growth, excluding the Revere and Matrix acquisitions, was 5.1% year over year.

During the quarter, FactSet's U.S. revenues grew 6.0% from the year-ago quarter to $154.3 million, while its non-U.S. revenues grew to $72.7 million. Excluding the impact of the Matrix Data acquisition and foreign currency, international revenues grew 6.0% on a year-over-year basis.

FactSet added 32 new clients this quarter taking the tally to 2632. The company retained 92.0% of clients and the client retention percentage was more than 95% of the Annual Subscription Value (ASV).   

The company's ASV increased 6.0% and reached a total of $920.0 million on Feb 28, 2014. Nearly 82.7% of this total figure is generated from buy-side clients while the rest comes from sell-side firms performing functions like mergers & acquisition advisory work and equity research.

During the quarter, FactSet acquired the remaining 40% of Matrix Data Limited. In Dec 2013, the company had bought 60% of Matrix Data for $20 million.

Coming to the operational metrics, FactSet reported a 3.2% decline in operating expenses. As a percentage of revenues, its operating expenses decreased 671 basis points (bps) during the quarter to 66.9%, primarily due to a decline in selling, general and administrative expenses (decreased 950 bps), which more than offset the increase in cost of services (increased 280 bps) resulting from the acquisitions of Revere Data and Matrix Data, and higher compensation expense.

FactSet's operating income increased 33.6% from the year-ago quarter to $75.1 million. Operating margin expanded 671 bps primarily due to lower operating costs. Adjusted net income during the quarter came in at $52.4 million or $1.22 per share, which improved from $38.3 million or 86 cents per share in the year-ago quarter.

FactSet exited the quarter with $88.8.0 million in cash and cash equivalents, compared with $174.0 million in the previous quarter. The company has no long-term debt.

FactSet generated free cash flow of $38.0 million during the quarter and purchased 800K shares for $86.1 million. The company also paid $14.8 million as dividends. Moreover, the company had $219.0 million in its share repurchase program as of Feb 28, 2014.

Guidance

For the third quarter of fiscal 2014, FactSet expects revenues in the range of $229.0 million to $233.0 million. The Zacks Consensus Estimate is pegged at $229.0 million.

Operating margin is expected to range between 32.5% and 33.5%, down 70 bps due to the Revere and Matrix acquisitions. Earnings per share are expected between $1.24 and $1.26. The Zacks Consensus Estimate for the third quarter stands at $1.24.

Our Take

FactSet delivered modest second-quarter results. While the bottom line matched the Zacks Consensus Estimate, the top line lagged the same. Nonetheless, the year-over-year comparisons were favorable. Moreover, ASV increased compared with the year-ago quarter and the company added a good number of clients.

However, FactSet provided a tepid guidance for the forthcoming quarter. The share repurchase program is expected to support its earnings per share in the long run and boost shareholder value.

FactSet continues to launch products and applications across its segments with special emphasis on financial services to gain more customers. Moreover, the company's acquisition of Revere Data and Matrix Data will help it to deliver innovative products to its clients and evolve as a global financial database company. It will also help FactSet to maximize value for its partners and provide customers with exclusive content sets.

Nonetheless, competition from Bloomberg L.P., Dow Jones & Company Inc., MSCI Inc. MSCI and Thomson Reuters, which are also coming up with substitute products at competitive prices, is a headwind for the company.

FactSet carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Lexmark International Inc. LXK and Micron Technology Inc. MU, both sporting a Zacks Rank #1 (Strong Buy).