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FactSet Misses on Q3 Earnings, Beats Revenues - Analyst Blog

Shares of FactSet Research Systems Inc. ( FDS ) increased 3.53% on Tuesday after the company reported third quarter fiscal 2014 results. The company reported adjusted earnings per share (excluding legal charges and other tax impact but including stock-based compensation) of $1.23, which increased from $1.13 per share (excluding the income tax impact) reported in the year-ago quarter. Earnings, however, lagged the Zacks Consensus Estimate of $1.26 per share.

Quarter Details

FactSet reported revenues of $231.8 million, which not only increased 8.0% from the year-ago quarter but also came marginally ahead of the Zacks Consensus Estimate of $231.0 million. Reported revenues were within management's guided range of $229.0 million to $233.0 million. Organic revenues, excluding the Revere and Matrix acquisitions, grew 6.0% year over year.

During the quarter, FactSet's U.S. revenues grew 6.0% from the year-ago quarter to $156.3 million, while its non-U.S. revenues grew to $75.5 million. Excluding the impact of the Matrix Data acquisition and foreign currency, international revenues grew 8.0% on a year over year basis.

FactSet added 30 new clients this quarter taking the tally to 2,662. The company retained 93.0% of clients and the client retention percentage was more than 95% of the Annual Subscription Value (ASV).

The company's ASV increased 7.0% and reached a total of $932.0 million on May 31, 2014. Nearly 83.1% 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 inked a deal with QUICK Corp., a Japan-based financial information services company to jointly develop a new service for redistribution in Asia.

Coming to the operational metrics, FactSet reported an 11.0% increase in operating expenses. As a percentage of revenues, its operating expenses increased 187 basis points (bps) during the quarter to 68.5%, primarily due to higher selling, general and administrative expenses on a year-over-year basis (up 2.7%) and an increase in cost of services (up 18.0%), resulting from the acquisitions of Revere Data and Matrix Data, and higher compensation expense.

FactSet's adjusted operating income increased 4.2% from the year-ago quarter to $74.7 million, primarily due to higher operating costs. Acquisitions of Revere and Matrix Data, which were completed in Jun 2013 impacted operating margin (excluding legal charges but including stock-based compensation), which decreased 116 bps from the year-ago quarter to 32.2%.

Adjusted net income (excluding legal charges and other tax impact but including stock-based compensation) during the quarter came in at $52.1 million or $1.23 per share, which improved from $50.1 million or $1.13 per share in the year-ago quarter. On a GAAP basis, net income came in at $51.5 million or $1.21 per share compared with $53.4 million or $1.20 per share reported in the year-ago quarter.

FactSet exited the quarter with $118.8 million in cash and cash equivalents, compared with $88.8.0 million in the previous quarter. The company has no long-term debt.

FactSet generated free cash flow of $91.0 million during the quarter and purchased 540K shares for $56.9 million. Moreover, the company had $162.0 million in its share repurchase program as of May 31, 2014. The company also increased its quarterly dividends by 11% to 39 cents, which was paid on Jun 17, 2014.

Guidance

For the fourth quarter of fiscal 2014, FactSet expects revenues in the range of $235.0 million to $240.0 million. The Zacks Consensus Estimate is pegged at $235.0 million, at the low end of the range.

Operating margin is expected to range between 32.5% and 33.5%, down 100 bps due to the Revere and Matrix acquisitions. Earnings per share are expected to be between $1.30 and $1.32. The Zacks Consensus Estimate for the fourth quarter stands at $1.30, again at the low end of the range.

Our Take

FactSet reported mixed third-quarter fiscal 2014 results. The company's bottom line missed the Zacks Consensus Estimate while the top line beat the same by a slight margin. Nonetheless, the year-over-year comparisons were favorable. Moreover, the company has a high client retention ratio of 93%, which is a positive. Also, 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 Micron Technology Inc. ( MU ) and Juniper Networks, Inc. ( JNPR ). While Micron sports a Zacks Rank #1 (Strong Buy), Juniper carries a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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