Monday, January 7, 2013

FactSet Research is Worth Watching Closely

It’s always interesting when a company that you monitor gives disappointing results, because it can create a decent buying opportunity. In this case it’s time to take a look at financial information services company FactSet Research Systems  whose results were greeted with an immediate markdown. So is it time to buy?

FactSet Research’s Q1 Results

A quick summary of the results and guidance:

  • Q1 Revenues of $211.1 million vs. estimates of 212.3 million
  • Q1 Non-GAAP EPS of $1.11 vs. estimates of $1.11
  • Q2 Revenue Guidance of $212-215 million vs. estimates of $216.3 million
  • Q2 Non-GAAP EPS Guidance of $1.11-1.13 vs. estimates of $1.13

So it’s a revenue miss, and the guidance is lighter than analyst estimates for both revenues and earnings.  Time to get worried?

Yes and no. This was a somewhat confusing set of commentary and results which left as many questions as answers. For example, the key metric that FactSet always guides investors to is the Annual Subscription Value (ASV), which is a snapshot of what its annual revenues should look like. Of course, as time goes forward FactSet will lose and gain clients so it usually increases in time. It's only a snapshot.

The ASV number came in quite healthy, although the number of clients seemed to be slowing in growth.

In order to demonstrate the underlying trend, I have charted the growth rates below. They reveal that the ASV is actually increasing its growth rate this quarter. There was some contribution from the StreetAccount acquisition in June, but nevertheless organic growth was at a healthy 7% organic growth rate.

Moreover, FactSet disclosed that more than 95% of its ASV was retained as well as 92% of clients. Furthermore, in the conference call, investors were encouraged to think of future revenues being more about the quantum of growth in customers than any significant client churn. So the ASV looks good.

So Why the Weak Guidance?

It was interesting to hear analysts asking these questions but FactSet kept a pretty straight bat in answering them. It is understandable if, for reasons of commercial sensitivity, the company doesn’t disclose too much granular detail, but as investors we are entitled to ask. Indeed, one of its rivals Thomson Reuters had reported weaker numbers with its financial information subset earlier in the reporting season. So perhaps TRI was responsible for weaker pricing? Or is the market weak overall?

In addition, FactSet sees its chief rivals as being Bloomberg and, McGraw-Hill’s subsidiary Standard & Poors.  Both have been coming out with new products and innovating so, again, this may be an indicator that FactSet is facing competitive pricing pressure?

A Novel Answer

In the end I don’t think it was either of these issues. FactSet’s management declared that there wasn’t any significant change to pricing in the quarter, so the weaker guidance is probable not due to market share losses or pricing.

My take on it all is so novel that it is brilliant. Perhaps its better just to accept what the management said? In short, FactSet placed a lot of emphasis on headwinds within its sell-side business (around 19% of revenues) with some challenges faced by the industry due to low transaction volumes and a lack of merger & acquisition advisory work.

On the other hand, the buy side (81% of revenues) is doing okay with equity markets given solid returns this year and clients happy to expand. A nice way to think of this is to compare Bankrate  with Morningstar this year.

RATE data by YCharts

This is a rough proxy, but Bankrate sells a lot of banking & insurance information while Morningstar sells information mainly on mutual funds and investment management. It’s not hard to see who has been faring better this year.

The Bottom Line

In conclusion, I think what we are seeing here is some weaker guidance simply because one area of FactSet’s revenue generation is weak, but these situations don’t last forever, and I think the environment is favorable for a pick-up in M&A activity. Then again you’ve heard that one before!

As for competition from Bloomberg , Reuters and S&P I think it is fair to think of FactSet’s offering as a ‘trading down’ option. It has the potential to do well even if the economy turns down, because instead of buying expensive terminals (which as ever I will point out that I have never seen turn a bad investor into a good one) clients may choose FactSet’s products. The company might not agree that it is a trading down option but then again, I’m investing my own money on my own opinions, and that’s all that matters to me.

With today’s decline, the stock looks close to fair value to me so it’s still on the monitor list. There is not a lot wrong here, and if M&A activity does pick up then so will FactSet’s stock price. One to watch.

No comments:

Post a Comment