Head-Count Reduction in Sell-Side Firms Continue to Pressure FactSet’s Near-Term Top-Line Growth

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FactSet  reported second-quarter results that were in line with expectations. Second-quarter revenue increased 7% year over year to $213 million. Top-line growth has slowed over the past few quarters as the demand environment remains challenging, especially on the sell side, which makes up about one-fifth of the business. This trend is reflected in the company’s annual subscription value, which grew 7.5% year over year to $863 million.

Given the volatile environment in the financial sector, we expect FactSet’s top-line growth to remain in the mid- to high single digits in the next few quarters. FactSet had a net addition of 35 clients during the quarter, up 1.5% sequentially. Despite solid client growth, the firm reported a modest sequential decline (0.3%) in user count during the quarter. Head-count reduction by major sell-side firms in the last few months negatively affected the company. On a positive note, FactSet reported an increase in user-count on the buy side.

The company has been steadily increasing its penetration within its existing buy-side client base and we partly attribute FactSet’s wallet share gains on the buy side to Thomson Reuters’ recent struggles within its markets division. We think it will likely take Thomson Reuters’ a few more quarters to turn around the performance of its markets division and wouldn’t be surprised if FactSet manages to further increase its wallet share in the meantime.

FactSet’s operating margin in the quarter was 26.4%, down 730 basis points from the 33.7% reported in the year-ago quarter. Margin compression was primarily due to higher stock-based compensation expenses related to the Market Metrics acquisition in 2010. FactSet awarded performancebased stock options with vesting tied to revenue growth targets and a significant portion of these options vested during the quarter, leading to an increase in stock-option expenses. We think this was a one-time item and don’t expect this trend to continue.

 

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