Individual investors may hear the occasionally quip about "paralysis by analysis," but the fact remains that institutional investors (on the whole) love their data. Feeding this endless appetite has been a boon for companies like IBM (NYSE:IBM), EMC (NYSE:EMC) and Bloomberg, as well as smaller players like FactSet (NYSE:FDS), and it does not look like the data deluge is in any danger of drying up soon.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Solid End to the Fiscal Year, or Is It?
FactSet closed out its fiscal year with a solid financial report relative to Wall Street expectations, but careful examination is a little more concerning. Revenue rose 14% this quarter, with 15% growth in the U.S. helping to offset 12% growth in foreign revenue. While FactSet did do a solid job of adding new clients (and getting more paying seats at existing clients), the company is not doing quite as well in terms of wringing more revenue out of each client - client count increased 6% this quarter versus last year, while the number of users increased 12%. In terms of revenue per customer, then, the company saw very modest growth of just 1.5% (to about $3,990 per customer) while revenue per client rose a bit less than 8% to just under $86,000.

Profitability is also somewhat disappointing. The company's cost of services rose 22% this quarter, and reported GAAP operating income was up just 3%. Reported operating income was hurt by higher stock-based compensation expenses, but the adjusted non-GAAP growth rate of 12% still represents some margin erosion. (For related reading on operating income, see Understanding The Income Statement.)

Still Plenty of Growth to Come
FactSet does report a useful forward-looking number called annual subscription value (ASV). This figure was up 14% for the fourth quarter, with about $779 million in revenue in the pipeline. Relative to the Street's prior estimate for fiscal 2012 of $822 million, then, quite a lot is already in the bag so to speak. Not surprisingly, buy-side clients (that is, asset-managers like T. Rowe Price (Nasdaq:TROW), Fidelity, hedge funds and so on) continue to make up over 80% of the forward revenue base.

Downturns and Regulation Don't Change Fundamentals
There has been no shortage of volatility in the equity, credit and commodity markets this year, but volatility often means an even bigger appetite for risk. Moreover, while the U.S. government has tried to implement regulations to curb some of the activities of financial enterprises like Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and Bank of America (NYSE:BAC), the fact remains that so long as there are large pools of money seeking active management, there will be managers to provide it and they will want data.

How Best to Compete in the Future?
FactSet operates in a very difficult market. News Corp (NYSE:NWS), Bloomberg, McGraw-Hill's (NYSE:MHP) Standard & Poors and Thomson Reuters (NYSE:TRI) have advantages of size and scale that are not inconsiderable. There are also more specialized players like RiskMetrics (acquired by MSCI (Nasdaq:MSCI) about a year ago) and Dealogic that fight hard to defend their respective niches. While it may be true that large asset managers are not going to risk losing alpha to save a few basis points of expenses, there is only so much money to go around and clients will flock to those who provide the most impactful data at the lowest cost.

I wonder whether FactSet can, or should, do more to source ("create," if you will) its own data. FactSet has done well in aggregating data from 3rd-party vendors, but does leave it vulnerable as a middleman and the company must often negotiate to acquire data from those it would compete with in the market. With nearly $200 million in cash on the books, perhaps it's at least worth considering if the company should invest some of that in developing more proprietary (and presumably, more profitable) data sources.

The Bottom Line
Barring a full-scale abandonment of the financial markets, it is hard to see FactSet running out of profitable business opportunities. Moreover, even as American retirees begin to withdraw and consume their savings, the rise of middle and upper class investors elsewhere in the world should be a net positive for the global financial services industry.

FactSet is not cheap today, but it seldom has ever been. Prospective investors may wish to wait for another (and seemingly inevitable) market washout before buying in, but existing shareholders may want to just sit tight and continue to reap the benefits of cash-rich growth. (For related reading on cash rich companies, see The Essentials Of Corporate Cash Flow.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  2. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  3. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  10. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center