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Baron Funds Insight on FactSet Research
Posted by: guruhl (IP Logged)
Date: June 5, 2012 12:46PM
Neal Rosenberg, vice president and research analyst at Baron Funds, discusses FactSet Research (FDS) in his first-quarter 2012 Baron Insight:
Finally, we want to highlight our investment in FactSet as a unique example of our information services investment strategy. FactSet is a rapidly growing supplier of financial intelligence to the global investment community. FactSet's core applications include tools that help investors perform detailed, data driven analysis on individual companies and industries, screen for new investment ideas, monitor markets via real-time news and quotations, and better understand the components of portfolio performance. FactSet's core assets include its proprietary databases and unique and flexible analytical capabilities.
We estimate that the company's product line address an $11-$16 billion subset of the financial intelligence market, implying an opportunity 15 to 22 times larger than the $725 million in revenues earned in 2011. On a user basis, FactSet currently has just 47,300 subscribers out of a market that currently includes over 600,000 potential users.
Like most information services companies, FactSet has generated high incremental margins. However, instead of reporting margin expansion like many of its peers, the company has aggressively reinvested its profits back into its business to improve its R&D, sales, and support functions. We believe this has been a key driver of the company's ongoing market share gains, allowing FactSet to prosper despite end markets that are less than robust. Over the last 12 months, FactSet has added $80 million of new annual subscription volume (representing more than 11.1% year over year organic growth), while global market data spending has only grown around 3%. The most telling statistic, as shown in the chart above, overall domestic industry headcount is currently down 8.8% off its peak in June 2008, while FactSet's user count and annual subscription volumes have grown 18% and 31%, respectively, over the same period.
Like most information services companies, FactSet generates outstanding cash flow. The company is not particularly acquisitive, preferring to rely on organic product development to improve its product portfolio. Therefore, the company has been able to return its excess cash above its reinvestment to shareholders. Over the last 12 months, the company returned almost $250 million of cash to shareholders, including $202 million of share repurchases and $47 million of dividend payments.
We expect data growth to continue unabated. Companies of all types will need to identify high quality information and turn it into insights that can be impactful on their businesses. We think leading information services vendors will continue to benefit from this trend, and are uniquely able to convert sustained demand for their products into growing levels of cash generation. Overall, we are extremely excited about the opportunity to invest in best-in-class information services companies.
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