FactSet’s Recurring Revenue Model Fares Well but Is Not Immune to Macroenvironment Volatility

Equity Analyst

Rajiv Bhatia

FactSet has built an attractive subscription-based business providing data and analytics to the financial-services industry. FactSet is best known for its research solutions, which include its core desktop offering geared toward buy-side asset managers and sell-side investment bankers. Research is the largest component of the firm’s annual subscription value but is FactSet’s slowest-growing segment due to its maturity and pressures on asset managers. Beyond research, FactSet offers analytics and trading solutions (32% of firm ASV), which include portfolio analytics, risk management, performance reporting, trade execution, and order management.

FactSet's fastest-growing segment is its data feed business, known as content and technology solutions, which makes up 25% of ASV, including CUSIP Global Services. Users of CTS access data through feeds or application programming interfaces. Through repurposing its research and analytics capabilities, FactSet has built software products suitable for financial advisors.

FactSet’s adjusted operating margins have been range-bound (31%-36%) over the last 10 years as the firm continues to invest in new content. We believe this is prudent as investments have historically allowed FactSet to take share from competitors such as Refinitiv. However, we do expect some margin expansion as the company increases scale and CFO Linda Huber takes a disciplined approach on expenses. FactSet has mostly grown organically and its acquisition strategy has mostly focused on adding an additional data source or software capability. In March 2022, FactSet completed its purchase of CUSIP from S&P Global for $1.9 billion, its largest acquisition to date. 

Given consolidation in the financial technology industry, FactSet could become an acquisition target. The industry has seen large deals such as LSE Group acquiring Refinitiv and S&P Global acquiring IHS Markit. We believe FactSet’s recurring revenue model would be attractive to potential acquirers, but its valuation and heightened antitrust scrutiny could be a challenge.

Business Strategy & Outlook

Overall, we believe FactSet warrants a narrow economic moat rating based on switching costs. FactSet provides its integrated financial information and analytical applications across four workflows: research, analytics and trading, content and technology solutions, and wealth. 

FactSet's research workflow includes its core desktop offering used by buy-side and sell-side investment professionals to analyze companies, monitor markets, and generate ideas. FactSet’s desktops consist of aggregated data from third-party data suppliers, news sources, exchanges, brokerages, and its own contributions. FactSet faces competitors such as S&P Capital IQ, Refinitiv, and, at the high end, Bloomberg. While FactSet may have some proprietary data (supply chain, geographic revenue mix, and so on), we believe the proprietary data offerings can depreciate over time as suitable alternatives are developed. In addition, we believe some of these data sets fall in the “nice to have” rather than “mission critical” category for a subset of FactSet’s users. As a result, we view the primary moat source for its research desktops as switching costs. Once an analyst or company is familiar with a certain product, switching to a new product can be disruptive. 

FactSet's analytics and trading solutions include portfolio analytics, risk management, performance measurement and attribution, portfolio construction and trade execution/order management. We view FactSet’s closest competitors as MSCI, Qontigo (Deutsche Boerse), Aladdin (BlackRock), Bloomberg, and Charles River Development (State Street). Given the embedded nature of software systems in buy-side operations, the decision to switch providers is not taken lightly as implementations can be hard and complex. That said, MSCI has seen some competitive losses in part due to price. As a result, we believe switching costs are high enough to warrant a narrow moat.

CTS is FactSet’s data feed business and includes its acquisition of CUSIP Global Services. Rather than content being delivered through a desktop application, it is delivered through data feeds or through application programming interfaces. An example would be a quant fund using FactSet data to input into an algorithm. While FactSet has seen strong growth, competitors such as S&P have too, and while switching costs are real, we don’t believe they are strong enough to generate a wide moat. 

Wealth management has been a focus for FactSet in recent years as the company has been able to take its research content and repackage it for financial advisors. On the positive side, wealth managers are an attractive segment, given the limited fee pressure they face. On the negative side, wealth managers’ willingness and ability to pay is more limited, and as a result, wealth management desktops tend to be at a much lower price point versus institutional-focused research desktops. FactSet has seen some nice wins such as Merrill Lynch, but overall, we believe this segment remains competitive with established players such as Refinitiv and upstarts such as YCharts.

Narrow

Economic Moat

FactSet Research Systems

FactSet Research Systems Inc. (the Company or FactSet) is a global provider of integrated financial information, analytical applications and services for the investment and corporate communities. Since inception, global financial professionals have utilized the Company's content and multi-asset class solutions across each stage of the investment process. FactSet's goal is to provide a seamless user experience spanning idea generation, research, portfolio construction, trade execution, performance measurement, risk management, reporting, and portfolio analysis, in which the Company serves the front, middle, and back offices to drive productivity and improved performance. FactSet's flexible, open data and technology solutions can be implemented both across the investment portfolio lifecycle or as standalone components serving different workflows in the organization. FactSet is focused on growing the business throughout each of its three segments, the Americas, EMEA (formerly known as Europe), and Asia Pacific. The Company primarily delivers insight and information through the workflow solutions of Research, Analytics and Trading, Content and Technology Solutions (CTS) and Wealth. FactSet currently serves financial professionals, which include portfolio managers, investment research professionals, investment bankers, risk and performance analysts, wealth advisors and corporate clients. FactSet provides both insights on global market trends and intelligence on companies and industries, as well as capabilities to monitor portfolio risk and performance and to execute trades. The Company combines dedicated client service with open and flexible technology offerings, such as a configurable desktop and mobile platform, comprehensive data feeds, an open marketplace and digital portals and application programming interfaces (APIs). The Company’s revenue is primarily derived from subscriptions to products and services such as workstations, analytics, enterprise data, and research management. FactSet Research Systems was founded by Howard E. Wille and Charles J. Snyder in September 1978 and is headquartered in Norwalk, CT.

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FactSet reports solid Q1 performance amidst cautious client spending

FactSet reports solid performance with organic ASV growth and revenue, but faces challenges from cautious client spending and a muted hiring environment. The company is optimistic about future opportunities in margin expansion, potential M&A activities, and advancements in product evolution and generative AI.

FactSet Research Systems reports robust Q2 performance amidst market challenges

FactSet's Q2 performance showcased strong growth, disciplined expense management, and strategic acquisitions. While facing challenges in market volatility, the company remains optimistic about future opportunities. With a focus on investments, margin improvement, and client-centric growth strategies, FactSet aims for sustained success.

FactSet reports solid Q3 earnings amidst market challenges and growth opportunities

FactSet Research Systems delivered solid financial performance in Q3, driven by organic ASV growth, margin expansion efforts, and strategic investments in generative AI technology.
While facing challenges from market volatility and cautious client behavior, the company remains focused on cost management, client alignment, and driving growth through product evolution and M&A opportunities.
With a diverse revenue mix, strong client relationships, and a commitment to margin expansion, FactSet is well-positioned to capitalize on opportunities in generative AI, wealth channel growth, and market recovery indicators.

FactSet reports strong fiscal 2023 performance, eyes gen AI growth

FactSet's fiscal 2023 performance reflects solid organic ASV growth and revenue, driven by strategic wins and investments in gen AI and user experience.
While facing challenges in adjusted EPS growth and cost savings realization, FactSet's strengths in gen AI, client interactions, and market optimism present growth opportunities.
With a focus on innovation, efficiency, and client-centric solutions, FactSet is poised for continued growth and market leadership in fiscal 2024 and beyond.

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FactSet's Q1 performance showcased growth in ASV and revenue, but revised guidance reflects challenges in sales cycles and client budgets. Despite market uncertainties, the company is confident in long-term growth, emphasizing efficiency gains through AI and strategic M&A opportunities.

FactSet reports solid Q2 performance amidst market challenges and opportunities

FactSet's Q2 2024 performance showed growth in ASV and EPS, but challenges in ASV retention and market conditions. The company's strengths lie in partner growth and efficiency gains from AI tools, while facing challenges in client count growth and expense management. Opportunities include cost avoidance through AI tools and a focus on margin improvement.

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