FactSet - Unleashing the Power of Data
Every month we share 2 write-ups on companies we decided to examine as potential additions to our portfolio. Although the companies analysed may tick most of the boxes, if the margin of safety is not considered sufficient, we will not initiate a position but rather monitor the stock.
In case we decide to initiate a position at any time, we will share an Investment Thesis memo. For any additions to existing positions we will update you through our Quarterly Portfolio Updates.
A quick note before we begin. The team is currently offering a 15% discount on all plans until the end of June 2023.
1. Key Facts
Description: FactSet Research Systems Inc (“FactSet”, “Company”) with ticker $FDS is a global financial data and analytics company serving the global investment community.
Key Financials: Over the period FY13 to trailing twelve months (“TTM”) Q3 FY23*, the Company depicted a revenue Compound Annual Growth Rate (“CAGR”) of 9.3% and operating income CAGR of 8.7%, reaching a TTM revenue of c. $2.05B and operating income of $648 million (margin of 31.6%). FactSet has cash and short-term investments of $519 million compared to total debt and lease liabilities of $1.9B.
*Factset’s Fiscal Year ends on 31st August
Price & Market Cap (as of 25th June 2023): Its market cap is $15.1B with a 52-week low of $372 and a 52-week high of $474, whereas it currently trades at $394.
Valuation: FactSet trades at a TTM EV/EBITDA of 20.8 (3 Year average of 24.5) and a TTM EV/Sales of 8.0 (3 Year average of 9.0).
The rest of the write-up includes the following sections:
Competitive Advantages, Opportunities and Risks
2. Business Overview
FactSet operates under a subscription-based model by providing financial data, analytics and workflow solutions for the global investment community.
The Company generates over 95% of its revenue from subscriptions, with an annual subscription value ("ASV") plus professional services reaching $2.1 billion as of Q3'23. ASV represents the forward-looking revenues for the next 12 months from all subscription services.
So, what exactly does FactSet offer?
In their own words, "We provide financial data and market intelligence on securities, companies, industries, and people to enable our clients to research investment ideas, as well as to analyze, monitor, and manage their portfolios. We combine dedicated client service with open and flexible technology offerings, including a configurable desktop and mobile platform, comprehensive data feeds, cloud-based digital solutions, and APIs." (Source: FactSet 10K 2022)
FactSet boasts a client base of over 7,700, which includes asset managers, bankers, wealth managers, asset owners, channel partners, hedge funds, corporate users, private equity and venture capital professionals. The company's solutions encompass investment research, portfolio construction and analysis, trade execution, performance measurement, risk management, and reporting. Moreover, FactSet's solutions provide data for key industry verticals, private companies, wealth management, real-time data, and ESG data.
Source: Source: FactSet Investors Day, August 2022
FactSet Workflow Solutions
FactSet categorizes its solutions into three workflows: Research & Advisory (“R&A”), Analytics & Trading (“A&T”), and Content & Technology Solutions (“CTS”). These workflows enable FactSet to address the diverse needs of its clients.
R&A is the largest part of FactSet which makes approximately 52% of the business (wealth is included in R&A and makes approximately 15%), followed by A&T which approximates 31% and CTS which approximates 15%.
Research & Advisory
R&A solutions are utilized for idea generation, company and market analysis, fundamental research, presentation building and distribution, and research management. Within R&A, the Wealth Management solution stands out as a market-leading product, with notable wins such as the partnership with Bank of America's Merrill Lynch in 2019. R&A has been growing at high single digits and management expects R&A's ASV to continue growing at the same rate over the medium term.
The Company sees future growth opportunities in wealth, corporate clients, and private equity, driven by investments in ESG offerings, private markets, and deep sector (industry data and analytics).
Additionally, Goran Shoko, Head of Research & Advisory Solutions highlighted “We are underpenetrated in restructuring capital markets, leveraged finance and financial sponsors. So those are all opportunities for us to grow within the existing clients today.”
Analytics & Trading
Analytics & Trading provides solutions for asset managers and asset owners throughout the portfolio lifecycle. FactSet's offerings encompass tools for portfolio construction, performance measurement, reporting, order management, and trade execution. The Company's analytics and trading solutions have established leadership positions in hedge funds, asset owners, and asset managers on the buy side. According to management, over 4 million portfolios are uploaded to FacSet’s workflows every day, which represents around $30 trillion in assets in the marketplace. This compares to global Assets Under Management (“AUM”) of $112 trillion in FY21, according to Statista. Management expects Analytics & Trading to continue growing at high single digits, similarly to R&A.
The company identifies potential opportunities in expanding asset classes, such as FX trading and fixed income capabilities, within trade execution. To take this in context, the daily volume of FX trading reach as high as $7.5 trillion a day in 2022 while the US Bond Market was valued in the range of $50 trillion in 2022. Providing FX and Fixed Income trade execution capabilities is an expansion from just equities a few years back. Additionally, management believes there is room for growth in performance measurement as clients' demands for official performance systems can be met by FactSet's VAULT, a Portfolio Analytics workflow.
Content & Technology (CTS)
CTS serves as the off-platform part of FactSet's business, providing data feeds and real-time market data directly to clients through APIs and cloud infrastructure. CTS is the fastest growing part of the business, increasing in the low teens. The acquisition of CUSIP Global Services ("CUSIP"or “CGS”) in Q2'22 has been a significant addition to CTS. CUSIP supports security masterfiles and serves as an approved system for issuing and maintaining security identifiers (more on this later).
Management expects CTS future growth to be in low double digits over the medium term. The company attributes this growth to the industry trend of clients wanting to consume data natively into their systems as part of digital transformation efforts. Future opportunities for CTS include increasing demand for ESG data, monetizing FactSet's real-time capabilities from 250 global exchanges through data feeds, and expanding the usage of CUSIP identifiers across various countries and asset classes.
Number of clients
As of Q3’23, FactSet’s number of clients with ASV greater than $10,000 increased to 7,770 clients, representing a CAGR of 5.7% since FY16. However, the number of users grew at a higher pace, reaching 187,845 in Q3'23, while 60% of FactSet's ASV comes from clients who purchase solutions from all three workflow segments, indicating the company's ability to expand within its existing client base.
Source: FactSet Earnings Releases, StockOpine Analysis
FactSet's client base comprises both Buy-side and Sell-side clients:
Buy-side, primarily including asset managers, wealth managers, asset owners, channel partners, hedge funds, and corporate firms, accounted for 82.1% of ASV as of Q3'23. The ASV growth rate from buy-side clients for Q3'23 was 7.3%. Among buy-side clients, the majority are long-only asset managers.
Sell-side clients accounted for the remaining 17.9% of ASV, with a growth rate of 12.3% in Q3'23. Sell-side clients include broker-dealers, private equity and venture capital firms, and banking and advisory firms. The ASV growth in the sell-side segment has been higher in the past three years, indicating an increased share in the overall mix, rising from 16% in FY20 to 17.9% in Q3'23.
In FY22, FactSet added 1,085 clients, representing a growth rate of 16.8%, with the majority of new clients coming from corporate, wealth management, and private equity and venture capital firms. Notably, no single client accounted for more than 3% of the company's ASV, indicating that FactSet does not have significant client concentration.
FactSet has achieved strong client retention, measured by the percentage of clients who have continued to do business with the Company over the past twelve months. The client retention rate currently stands at 92%, compared to 89% in FY19. One contributing factor to this improved retention is FactSet's transition to the cloud in FY19, which has likely enhanced the value of its solutions for clients.
A significant aspect worth noting is FactSet's long-term relationships with clients, which have an average duration of over 13 years on a weighted average basis. This suggests that once clients integrate FactSet's workflows into their processes, it becomes challenging for them to switch to another provider.
Furthermore, FactSet's client retention is supported by multi-year contracts with minimum cancellation notices. These contracts provide a level of protection in the short-term, ensuring a stable revenue stream and reducing the likelihood of abrupt client departures.
Overall, FactSet's high client retention rate, long-standing relationships, and contractual safeguards contribute to the company's ability to maintain strong ties with its client base and establish a competitive advantage in the market.