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Are Tougher Times Coming for FactSet?

By Dan Caplinger - Sep 26, 2019 at 11:40AM

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The investment data specialist has kept doing well, but some fear turbulent markets in the near future.

When investors are making money, FactSet Research Systems ( FDS 0.89% ) often makes money right beside them. The company provides vital information to the financial institutions that work with investors, and that makes FactSet's performance run closely in line with the success of key markets. That's been good for most of the past several years, although episodes like the market downturn in late 2018 raised some concerns that look similar to what a few investors are experiencing right now.

Coming into Thursday's fiscal fourth-quarter financial report, FactSet shareholders wanted to see solid gains from a good market environment during the summer months and get some perspective on what could be coming down the road. FactSet's results were generally good, but some of what management suggested about the future wasn't to everyone's liking.

Markets stay kind to FactSet

FactSet's fiscal fourth-quarter results reflected the good conditions in the market. Revenue was up 5.3% to $364.3 million, which was a bit stronger than most of those following the stock had expected. Adjusted net income of $101.9 million was 19% higher than it was a year ago, and adjusted earnings of $2.61 per share topped the consensus forecast among investors for $2.47 per share.

Screens showing graphs, charts, and information.

Image source: FactSet Research Systems.

FactSet kept drawing in more money from its customers. Annual subscription value plus professional services amounted to $1.48 billion at the end of the quarter, up 5.1% over the past 12 months. The figure saw particularly solid gains during the summer, rising more than $35 million in just the past three months. Some of the biggest gains came from FactSet's content and technology solutions division and its wealth segment, outpacing more stagnant figures from the core research business.

As we've seen in the past, FactSet got more of its growth from its sell-side clients. Growth rates on the sell side came in at 6.3%, which was slightly higher than the 4.8% growth in buy-side annual subscription value. Geographically, growth rates were relatively constant, with U.S. revenue rising 4.7% and international sales climbing 4.6%. However, the overseas figure took a significant hit because of the strength of the U.S. dollar, as the adjusted growth rate internationally would have come in at 7.8%.

Operationally, FactSet kept expanding. The company brought on almost 120 new clients over the past three months, coming closer to the 5,600 level. User counts were up almost 3,900 to about 126,800, and retention gave up just a single percentage point to 89%.

FactSet executives were pleased with how the year went. As CEO Phil Snow said, "FactSet performed well in full year 2019, delivering solid revenue and strong EPS growth despite market headwinds." CFO Helen Shan noted that "our dedication to operational improvements and cost discipline served our company well" during the period.

What's next for FactSet?

FactSet has ambitious plans for its future. In Snow's words, "To further our winning proposition in the marketplace, we will be accelerating critical investments over the next three years from a position of strength, capitalizing on industry trends and enhancing our core offerings." That strategy should put FactSet in a better long-term position in times of market growth as well as decline.

Yet FactSet's guidance for fiscal 2020 fell short of the hopes that many investors seemed to have. The company said that it expects revenue to finish between $1.49 billion and $1.50 billion during the year -- that's less than the $1.51 billion forecast from most investors following the research provider. Similarly, adjusted earnings projections for between $9.85 and $10.15 per share are considerably less than the consensus prediction among investors for about $10.50 per share on the bottom line.

That shortfall was enough to disappoint FactSet shareholders, and the stock opened lower by 8% following the announcement. After a strong advance over the past couple of years, it's not surprising to see FactSet's stock give up some of those gains in anticipation of a potentially tougher road ahead for the financial markets -- even if it doesn't change the company's long-term fundamental prospects for success.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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