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Morningstar | FactSet at Risk of Decelerating Revenue Given Outflows at Active Asset Managers

We believe the rise in passive investing will weigh on FactSet’s target market through customer fee compression, resulting in slower growth. Since investor funds have flowed away from active managers, which require more analysts, FactSet's opportunity to sell additional seat licenses has decreased. Passive investors typically favor cheaper and less sticky data feed subscriptions over workstations that include a full suite of FactSet solutions. As a result, we anticipate FactSet will experience slower growth and lower returns. Nevertheless, we still anticipate the company to maintain returns well in excess of its cost of capital as it enjoys high recurring revenue built upon deep relationships with its customers. We believe FactSet’s portfolio attribution software delivered through its workstation continues to be the key differentiator from rivals Bloomberg and Thomson Reuters. However, with data feeds, FactSet is at a disadvantage. It has few proprietary data sets and is mostly an aggregator of publicly available data. As a result, there are substitutions for many of the company's data feeds, which lowers customer switching costs. As of 2017, we estimate FactSet controlled less than 5% of the market for financial data providers. Bloomberg and Thomson Reuters controlled approximately 33% and 24%, respectively. Despite a stagnant or potentially shrinking market opportunity, we believe FactSet could expand share mostly at the expense of rival Thomson Reuters’ flagship product, Eikon. As investors have sought to cut costs, FactSet’s workstation represents a significantly cheaper alternative to Thomson Reuters, whose product does not have the same breadth and depth as Bloomberg. In addition, we believe FactSet will continue making tuck-in acquisitions to increase the breadth of its proprietary data while purchasing ancillary products that it can cross-sell to its base of 122,000 users. Finally, we believe slowing end markets will force FactSet to venture beyond its traditional customer set and target customers with more limited use cases. We've already seen the trend of FactSet unbundling some of its offering to target these types of customers.