Fitch Ratings has upgraded FactSet Research Systems Inc. 's (FactSet) Long-Term Issuer Default Rating and its senior unsecured issue ratings to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

The upgrade reflects FactSet's sustained improvements in operating performance, which are expected to drive consistent growth, enhanced profitability, increased scale, and lower financial leverage. The upgrade considers the significant debt reduction achieved since the completion of the CUSIP Global Services (CGS) acquisition from S&P Global, Inc. in March 2022. The ratings are supported by the integration of the company's offerings into global financial services workflows, leading to a high proportion of recurring revenue.

Key Rating Drivers

Strong DAP Operating Profile: Similar to its direct and indirect data, analytics and transaction processing (DAP) peers, FactSet benefits from providing critical inputs that are integrated into its clients' workflows. This yields a substantial portion of recurring subscription-based revenue (more than 98% of Annual Subscription Value) and high client retention rates (90% in 2024 YTD), resulting in a high degree of revenue visibility. These results, at the high end of Fitch's DAP rated universe, are driven primarily by FactSet's flexible open platforms, which allow clients to directly access proprietary, industry and third-party data and feeds.

Solid Operating Performance: FactSet has generated relatively consistent growth across a number of operating metrics, and Fitch expects growth to continue over the rating horizon. Since the CGS acquisition's closing, the number of FactSet users has grown about 20% to 206,000 as of February 2024 from 174,000 as of May 2022. Fitch expects total revenues to grow to $2.5 billion by FY 2026 from $2.1 billion in FY 2023. This compares with $1.8 billion pro forma after the CGS acquisition. Fitch expects EBITDA to grow to $1 billion by FY2026 from roughly $800 million in 2023..

Strong Credit Metrics: Fitch expects EBITDA leverage to decline to 1.5x or lower by fiscal 2025 as the company pays the remaining $250 million under its term facility. The company has repaid $750 million of the $1 billion facility it took as part of its funding of its CGS acquisition. Leverage has been steadily declining since a pro forma peak of 3.2x with CGS's acquisition, driven by debt prepayments and EBITDA growth. FactSet's LTM Feb. 28, 2024 Fitch-calculated EBITDA leverage was 1.7x, compared with 2.2x a year ago. Fitch expects further deleveraging, even as share repurchases and dividends continue to be key items of capital allocation across the forecast period.

Strengthening Margins: FactSet's EBITDA margins have strengthened to around 40% from the mid 35% area since Fitch's initial rating of the company. Improvement has been largely the result of recent cost reductions and CGS's significantly higher profitability. Even with these gains, EBITDA margins are at the lower end of Fitch's rated DAP universe largely due to substantial internal investments, which include costs related to the acquisition and upkeep of an extensive database. Cash flow profitability and leverage should be comparable to DAP peers rated 'BBB+' and above with FCF margins in the 20% range and CFO minus Capex to Debt in the 40%-50% range over the forecast period.

Competitive Landscape: FactSet lacks the depth of proprietary offerings of Moody's Corporation and S&P Global Inc. (corporate securities ratings) and Verisk Analytics., Inc. (aggregated P&C insurance data). Heightened cost cutting activities among global financial institutions over the past year and a slowdown in deal activity adds competitive pressure. However, CGS's highly defensible product set and FactSet's flexible open platform continue to drive industry-leading client retention levels.

Derivation Summary

FactSet's percentage of recurring revenues is among the highest of the data and analytics sector. However, relative to S&P Global (A- /Stable), Moody's (BBB+/Stable) and Verisk (BBB+/Stable), FactSet is smaller and has lower EBITDA margins due primarily to the lack of proprietary offerings.

FactSet's leverage profile is in-line or better than 'BBB+' rated peers, with EBITDA leverage at 1.7x as of February 2024. Although FactSet and CoStar (BBB/Stable) are similar in revenues, FactSet has higher margins and a significantly higher percentage of recurring revenue. Finally, while also similar in size to MSCI (BBB-/Stable), FactSet's lower margins are offset by lower leverage and no customer concentration.

Key Assumptions

The base case reflects revenues of $2.2 billion in FY 2024 and mid-single digit revenue growth in subsequent years;

Total Fitch-calculated EBITDA margin around 40%, supported by continued expense management;

Capex in the range of 3%-4% of revenues, a slight uptick as % of revenue from prior years;

Dividends in the range of 25%-30% of net income;

Term loan is sequentially repaid until maturity;

Excess cash flow used for share repurchases or tuck-in acquisitions.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch does not expect near-term upward rating momentum given the company's scale;

Increased diversification without loss of revenue visibility;

A stated commitment to maintain EBITDA leverage below 1.5x.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

EBITDA leverage sustained over 2.5x without a credible plan to delever;

EBITDA margins in the mid 30% range or lower;

Competitive threats leading to stagnant or declining revenue.

Liquidity and Debt Structure

Solid Liquidity: FactSet had $382 million of cash on hand as of Feb. 28, 2024 and $250 million available on its $500 million revolving facility, which matures on March 1, 2027. Fitch expects liquidity to remain adequate including both cash balances and availability under its revolver. Fitch expects FactSet's FCF in the $500 million range over the forecast, which is more than sufficient to manage amortization and maturities.

Debt Structure: As of Feb. 28, 2024, the company had $250 million of principal remaining on its term loan due 2025, which Fitch anticipates will continue to be sequentially prepaid until maturity with FCF. In addition, the company has two bond issuances of $500 million which mature in 2027 and 2032 as well as $250 million under its revolving credit facility due in 2027.

Issuer Profile

FactSet Research Systems, Inc. (NYSE: FDS) is a financial data and analytics company that provides critical financial data and market intelligence on securities, companies and industries. The company's offerings are integrated within the workflows of financial institutions and investment platforms across the Americas, EMEA and APAC.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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