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The market for providing financial data and other business information isn't getting any bigger -- which means the companies in that sector have to take market share from their rivals if they want to grow. That's fueling intense competition in the industry, forcing prices down and eroding the once-strong loyalty of business information services' customers. Amid such a perilous set of circumstances, let's see what three major industry players are doing to stay competitive.
Verdict still pending
Well-known financial information provider McGraw Hill Financial (NYSE: MHFI) also owns one of the top credit rating agencies, Standard & Poor's.
McGraw Hill posted third-quarter results that were better than expected, with 7% year-over-year revenue growth to $1.19 billion. It is important to point out that while the company posted growth across all its business segments, its S&P Dow Jones Indices segment remained the star.
After offloading its education segment, the company decided to focus on high-margin businesses, aiming to become the industry leader in providing financial benchmarks and ratings. To achieve this goal, McGraw Hill Financial formed S&P Dow Jones Indices, and acquired Credit Market, QuantHouse, and other companies to support S&P Capital IQ's business.
However, McGraw Hill Financial still faces a pending verdict on a $5 billion civil fraud case that was filed against the company. It stands accused of deliberately providing high ratings to U.S. collateralized debt obligations, or CDOs, and residential mortgage backed securities, or RMBS, whose later underperformance contributed to the collapse of the housing market in 2008.
It's all about ASV
FactSet Research Systems (NYSE: FDS ) is a leading provider of integrated financial information and analytical applications with approximately 2,500 clients.
The company reported modest fourth-quarter results, with 6% year-over-year growth in annual subscription value, or ASV -- the industry's key metric -- and revenue, which reached reaching $219.3 million. FactSet notable grew its free cash flow by 38%, to $71 million.
Thanks to the company's competitive pricing strategy and order-winning marketing approaches, FactSet is managing to gain market share despite the fact that customers' demand for its services is not improving massively. Price difference is important: When a Bloomberg workstation costs around $22,000 a year, a FactSet terminal's $6,000 annual price works as a great lure for corporate customers.
But price isn't the only thing driving customers in this business; quality products are very important as well. That's why FactSet acquired Revere Data, focusing on new products to evolve into a global financial database company.
However, as we mentioned, competition is fierce. As a consequence, ASV remains at a low 6% right now, though it should reach at least last year's value of 10%. Without a healthy growth in subscriptions, it is impossible to show increasing profitability.
Major changes coming up
Just like FactSet, data giant Thomson Reuters' (NYSE: TRI) third-quarter was modest as well, with revenue growing 2% year over year to $3.1 billion. But encouragingly, the financial segment showed net sales growth for the first time in eight quarters.
Thomson Reuters is committed to making several strategic changes, including simplifying its organization and making fewer acquisitions, to pursue higher margins and greater returns in the mid-term. Management expects to save $300 million by 2015, and believes that most of those savings will drop straight to its bottom line. The company has mostly grown through acquisitions since the early 2000s, but it's moving away from that strategy now -- raising doubts about how it'll make up that significant share of its growth in the future.
Strategic investments and a strong focus toward high margin generation makes McGraw Hill Financial a good stock to own for the long term. However, the pending verdict on the case it is facing remains a short-term challenge, and could affect its valuation. Keep an eye on it.
FactSet is making progress, but subscriptions would need to grow a bit faster as price competition has a limit and affects profitability.
Although the major changes will drive greater returns in the mid term, Thomson Reuters structural progress will require time and this might bring some variations for the stock price. If you are starting a position or holding this stock, monitor the company's net sales growth, and ASV.