FactSet posts Q3 results

Source: FactSet Research Systems

FactSet Research Systems (NYSE:FDS), a leading provider of integrated financial information and analytical applications to the global investment community, today announced its results for the third quarter of fiscal 2008.

For the quarter ended May 31, 2008, revenues increased to $147.4 million, up 22% compared to the prior year period. Income from operations for the third quarter rose to $47.9 million, up 22% from $39.2 million in the same period of fiscal 2007. Net income advanced to $32.5 million as compared to net income of $28.6 million a year ago. Diluted earnings per share increased to $0.65, up from $0.56 in the same period of fiscal 2007. In the third quarter last year, diluted earnings per share included income tax benefits of $1.9 million or $0.04 per share primarily from a tax deduction pertaining to fiscal 2006. The growth rates of net income and diluted earnings per share were also impacted by a 60% decline in other income to $0.9 million for the quarter ended May 31, 2008.

Philip A. Hadley, Chairman and CEO said, "Given the difficult economic conditions, we are pleased to report revenue and operating income growth of 22%. Our healthy growth is indicative of a product suite that is highly integrated in the workflow of a global, blue chip client base. We were also very excited to announce that during the third quarter, subject to regulatory approval, we have reached an agreement with Thomson Reuters for the purchase of a copy of the Thomson Fundamentals database and related assets. FactSet Fundamentals will be ready for sale upon close of the transaction and will provide our clients with another strong choice for global fundamentals data over the FactSet system."

Additional information about the transaction with Thomson Reuters and the related market opportunity for FactSet can be found on pages 2 and 3 of this press release.

Annual Subscription Value ("ASV")

Organic ASV increased $18.2 million during the third quarter and is up 20% over the last year. Including foreign exchange and the cancellation of services to Bear Stearns, ASV increased $14.7 million during the quarter.

The ASV change in the third quartge in the third quarthird quarter was derived from FactSet's global investment management client base. FactSet's overseas client base contributed strong ASV growth of 26% excluding currency. Investment banks continue to manage expenses during the current market conditions. The adverse ASV change from Bear Stearns was $2.6 million during the third quarter.

At May 31, 2008, ASV was $590 million, up 21% over the last twelve months.

Of this total, ASV from FactSet's domestic operations was $403 million, while overseas operations support ASV of $187 million. ASV at any given point in time represents the forward-looking revenues for the next 12 months from all annual subscription services currently being supplied to clients.

Other Financial Highlights

  • U.S. revenues were $102 million, up 18% from the year ago quarter.
  • Revenues from non-U.S. operations increased 30% to $45.7 million. On a constant currency basis the increase was 29%.
  • Operating margins were 32.5%, consistent with the previous and year ago quarters.
  • Other income declined 60% to $0.9 million from a reduction in U.S. interest rates during the last nine months.
  • Free cash flows generated during the quarter was a record $45.8 million, exceeding the average of the previous four quarters by $17 million.

Operational Highlights -- Third Quarter of Fiscal 2009

  • Users rose to 39,600 at quarter end, up 500 professionals over the past three months.
  • Client count was 2,044 at May 31, a net increase of 23 clients.
  • PA 2.0 subscribers totaled 5,487 users from 607 clients at the end of the quarter.
  • Employee count at May 31, 2008 was 1,826. Headcount did not change during the third quarter. The number of employees is up 18% over the last year.
  • FactSet already has accepted offers from 80 new employees for the upcoming fourth quarter, the majority of which will expand the sales and consulting and engineering departments.
  • Capital expenditures were $12.3 million, net of landlord contributions for construction. Expenditures for computer equipment were $7.6 million and the remainder covered office space expansion.
  • Client retention rate remained above 95%.
  • On May 8, the Company's Board of Directors approved a 50% increase in the regular quarterly dividend from $0.12 per share to $0.18 per share. The cash dividend of $0.18 per share will be paid on June 17, 2008 to holders of record of FactSet's common stock on May 29, 2008.
  • Common shares outstanding at May 31, 2008 were 48.0 million.

Acquisition of a Copy of the Thomson Fundamentals Database and Related Assets

FactSet signed an agreement with Thomson Reuters ("Thomson") dated as of April 22, 2008 to purchase a copy of the Thomson Fundamentals database and related assets. The agreement is subject to regulatory approval by both the European Commission and U.S. Department of Justice. The transaction is expected to close before or in July 2008.

Fundamental data is historical financial information (i.e. income statement, balance sheet and cash flows) and related underlying data from the footnotes to the financial statements. The Thomson Fundamentals Database is a preeminent global financial database with coverage of over 43,000 companies and history back to 1980 and has been available and distributed by FactSet since 1991.

We believe that the proposed transaction is valuable to FactSet for four primary reasons:

  1. The opportunity to buy a copy of a trusted premium, global fundamental database with history back to the 1980s is rare and is unlikely to repeat itself in the foreseeable future.
  2. Fundamentals is one of three core data sets (along with security prices and estimates) all major providers require. Upon completion of the transaction, FactSet will own all three core content sets, on a global basis.
  3. Fundamental data is used by all FactSet clients and prospective clients and nearly every user in FactSet's addressable universe.
  4. The estimated market opportunity for fundamental data just among our existing client base is in excess of $100 million, representing a large new source of potential revenue growth for FactSet.

The sale will include copies of the Thomson Fundamental database, source documents, collection software, documentation and collection training materials. Thomson retains full ownership of the original fundamentals database and associated intellectual property. Thomson Fundamentals will continue as a product on the FactSet platform.

At closing, FactSet will enter into a Transition Services Agreement ("TSA") with Thomson. Under the TSA, Thomson will provide services for 18 months from closing date, including daily updates to FactSet's fundamental database. The daily updates will be provided on the same schedule and with the same timeliness, content and quality as the updates FactSet receives for Thomson Fundamentals today. The TSA also outlines consulting and support services Thomson will provide to FactSet to give us a full understanding of the structure and content of the database and the know how to conduct training programs for collection employees.

Thomson agreed to facilitate a hiring process of key employees connected with the database and related assets. Eight key employees have accepted employment offers to join FactSet, effective on the close of the transaction. In addition, FactSet may acquire revenue pertaining to certain Thomson contracts upon receipt of a client's consent. The majority of these contracts relate to Thomson Fundamentals over the FactSet platform. The consent period will end on August 12, 2008.

The cash consideration to be paid by FactSet is $48.8 million plus five times annual revenues assigned to FactSet after the consent of certain clients of the Thomson Fundamental database. Under the TSA, FactSet is scheduled to pay Thomson $9.1 million, a significant portion of which is consideration for the daily database updates over the next 18 months. Total cash consideration to be paid by FactSet should range between $67 million and $80 million. This range assumes that annual revenues of $2.0 to $5.0 million will be included in the transaction and transferred to FactSet.

FactSet anticipates that this transaction will be dilutive to earnings per share ("EPS") until the 18 month transition period concludes, after which the transaction is expected to be accretive.

  • In the fourth quarter of fiscal 2008, EPS dilution should be approximately $0.03 per share.
  • EPS dilution for each fiscal quarter in fiscal 2009 should be approximately $0.04 per share or $0.16 for the full 2009 fiscal year. A primary expense driver is the cost of the TSA from Thomson. The quarterly costs of transition services on a pre-tax basis should approximate $1.6 million or $6.5 million for the full 2009 fiscal year. These costs are eliminated at the end of the 18 month transition period.
  • The transaction is expected to be accretive to EPS in fiscal 2010.

In summary, we believe this transaction will extend FactSet's competitive advantage of providing clients choice of premium content sets over the FactSet system. FactSet has no plans to alter its redistribution of the vast fundamental data offerings available on the FactSet service including Thomson Fundamentals, Reuters Fundamentals and S&P Compustat(r). FactSet Fundamentals will expand our selection for clients and be ready for sale on the day the transaction closes. FactSet is excited to enter the fundamentals business with such a high quality asset. Our strategy is to win based on features and value and we believe our deep understanding and 30 year history working with fundamental data will aid us significantly in this process.

Business Outlook

The following forward-looking statements reflect FactSet's expectations as of June 17, 2008. Given the number of risk factors, uncertainties and assumptions discussed below, actual results may differ materially. The Company does not intend to update its forward-looking statements until its next quarterly results announcement, other than in publicly available statements.

Fourth Quarter Fiscal 2008 Expectations

Excluding the purchase of FactSet Fundamentals:

  • Revenues are expected to range between $150 and $154 million.
  • Operating margins are expected to range between 31% and 33%.
  • Other income is expected to be between $0.9 million and $1.2 million.
  • The effective tax rate is expected to range between 33.8% and 34.6% and assumes the U.S. Federal R&D tax credit is not reenacted.

Including the purchase of FactSet Fundamentals:

  • Revenues are expected to range between $150 and $155 million.
  • Operating margins should range between 29.5% and 31.5%
  • Other income is expected to be between $0.6 million and $0.9 million.
  • The effective tax rate is expected to range between 33.8% and 34.6% and assumes the U.S. Federal R&D tax credit is not reenacted.

Full Year Fiscal 2008

  • Capital expenditures, net of landlord contributions, remains at $32 million and $38 million.
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