FactSet (FDS) Beats Q3 Earnings Estimates, Misses Revenues

FactSet Research Systems Inc. FDS reported mixed results for third-quarter fiscal 2017. Adjusted earnings came ahead of the Zacks Consensus Estimate, while revenues missed the same.

The company reported adjusted earnings per share of $1.85, which surpassed the Zacks Consensus Estimate by a penny. The figure was toward the higher end of the guided range of $1.80 to $1.86 per share. Moreover, adjusted earnings improved 12.8% on a year-over-year basis.

On a GAAP basis, the company reported earnings per share of $1.66 compared with $1.62 from the year-ago quarter.

Notably, FactSet has underperformed the Zacks Categorized Business Information Services industry. The company has gained just 1.4% on a year-to-date basis while the industry has grown 17.3% in the same time frame.

Quarter Details

FactSet’s revenues of $312.1 million increased 8.6% from the year-ago quarter but missed the Zacks Consensus Estimate of $314 million. However, reported revenues were ahead of the management’s guidance range of $301 million--$307 million. Organic revenues increased 5.9% year over year to $293.9 million during the quarter.

FactSet witnessed better-than-expected growth across products and geographic regions, which aided quarterly revenues.

In the reported quarter, FactSet’s revenues from U.S. increased to $197.8 million. Excluding the impact of foreign currency, acquisitions and disposition, U.S. revenues and international revenues rose 4.6% and 8.2%, respectively, on a year-over-year basis.

The company’s Annual Subscription Value (ASV) increased 5.7% year over year to $1.28 billion as of May 31, 2017. Of this, nearly 84% was generated by buy-side clients while the rest can be attributed to sell-side firms performing functions like mergers & acquisition, advisory work and equity research.

FactSet added 225 clients in the reported quarter, taking the tally to 4,629. The company retained 92% of its clients. The percentage of client retention was more than 95% of ASV.

Coming to the operational metrics, FactSet reported a 13.2% rise in total operating expenses, primarily due to an increase in cost of services (17.5% higher on a year-over-year basis). As a percentage of revenues, operating expenses increased 300 basis points (bps) to 71.9%.

FactSet’s adjusted operating income increased 5.9% from the year-ago quarter to $100.3 million. However, operating margin decreased 110 bps year over year at 31.9%, owing to acquisition related expenses and deferred revenue adjustment.

Adjusted net income during the quarter was $72.9 million compared with $67.5 million in the year-ago quarter.

FactSet exited the quarter with $161.7 million in cash and cash equivalents, compared with $155.3 million from the previous quarter. Long-term debt during this quarter amounted to $575 million.

Cash flow from operations during the nine months ended May 31, 2017 was $220.3 million. The company generated free cash flow of $84.3million in the reported quarter.

FactSet purchased approximately 300K shares for $48.3 million under its existing share repurchase authorization. The company returned $458 million to shareholders in the form of share repurchase and dividends, over the last twelve months.

The company paid dividend of $22 million during the quarter. FactSet increased its dividend by 12%. 

Guidance

For fiscal fourth-quarter 2017, FactSet expects revenues in the range of $321 million--$328 million (mid-point $324.5 million). The Zacks Consensus Estimate is pegged at $326.6 million.

Adjusted operating margin is expected between 31% and 32%. Adjusted earningsper share are projected in the band of $1.86--$1.92 (mid-point $1.89). The Zacks Consensus Estimate stands at $1.90. The annual effective tax rate is expected within 25%--26%.

Our Take

FactSet reported mixed results for the third quarter. The company also did not provide an encouraging guidance for the fourth-quarter.

Nonetheless, we are encouraged by favorable year-over-year comparisons on both counts. Moreover, FactSet has a high client retention ratio, which is a positive. Also, ASV increased year over year and added a good number of clients.

The share repurchase program is expected to support earnings in the long run apart from boosting shareholder value.

The company continues with product innovation across its segments with special emphasis on financial services to gain customers. Moreover, the company’s acquisitions of Portware, Revere Data, Matrix Data, Code Red and BISAM Technologies S.Awill enhance its product suite and help it evolve as a global financial database company. It will also help FactSet to maximize value for its partners and provide exclusive content set.

Nonetheless, substitute products at competitive prices, from the likes of Bloomberg L.P., Dow Jones & Company Inc., MSCI Inc. MSCI and Thomson Reuters TRI, is giving tough competition toFactSet.

Currently, FactSet carries a Zacks Rank #4 (Sell).  A better-ranked stock worth considering in the broader technology sector is Applied Optoelectronics, Inc. AAOI, sporting a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has a long-term expected EPS growth rate of 20%.

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