MSCI Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This quarterly report covers the three and nine months ended September 30, 2023. MSCI provides indexes, analytics, ESG and climate solutions, and private-assets data and tools to institutional investors and other clients. Most revenue comes from recurring subscriptions; index-linked asset-based fees are also material.
Financial results and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $625.4m (+11.6%) | $560.6m | $1,838.8m (+10.0%) | $1,672.4m |
| Operating income | $353.3m (+14.1%) | $309.5m | $1,013.9m (+12.8%) | $898.9m |
| Net income | $259.7m (+19.9%) | $216.6m | $745.2m (+13.7%) | $655.6m |
| Diluted EPS | $3.27 | $2.68 | $9.32 | $8.05 |
| Adjusted EBITDA (non-GAAP) | $386.3m (+13.3%); 61.8% margin | $341.0m; 60.8% margin | $1,108.3m (+11.9%); 60.3% margin | $990.6m; 59.2% margin |
| Operating margin | 56.5% | 55.2% | 55.1% | 53.7% |
- Q3 revenue growth included recurring subscriptions up 10.7% and asset-based fees up 12.3%. For the first nine months, those categories increased 11.3% and 2.3%, respectively; non-recurring revenue rose 42.5%, partly due to one-time license fees related to prior periods.
- Q3 segment revenue growth was strongest in ESG and Climate (+26.8%), followed by Index (+12.4%) and Analytics (+6.5%); All Other—Private Assets was nearly flat (+0.3%). For the nine months, ESG and Climate grew 28.3%, Index 9.2%, Analytics 5.8% and All Other—Private Assets 4.8%.
- Cash from operations for the first nine months was $847.1m, compared with $779.9m a year earlier. Investing used $69.4m; financing used $842.4m, including $504.2m of share repurchases and $331.6m of dividends. Cash and restricted cash ended at $928.6m, down from $993.6m at year-end 2022.
- At September 30, total debt principal was $4.541bn, with carrying value of $4.509bn; the $500m revolving facility was undrawn. The variable-rate term loan carried a 7.42% rate. The company reported a 2.77x consolidated leverage ratio and 8.46x interest coverage ratio, within stated covenant limits.
- Current assets were $1.639bn and current liabilities $1.205bn. Shareholders’ deficit was $1.049bn, principally reflecting treasury stock and accumulated repurchases.
Material changes and management commentary
- Total Run Rate, a company-defined recurring-revenue measure, increased 12.0% year over year to $2.468bn at September 30. Recurring-subscription Run Rate rose 11.5%; asset-based-fee Run Rate rose 13.8%.
- Net new recurring subscription sales declined 16.7% in Q3 and 17.7% for the nine months year over year. Subscription cancellations increased 43.4% and 26.9%, respectively. Total retention was 95.4% for both periods, versus 96.4% for Q3 2022 and 95.9% for the 2022 nine-month period.
- Management attributed growth to subscription demand, higher average assets in index-linked funds, and strong ESG and Climate subscriptions. Index-linked ETF AUM was $1.323tn at quarter-end, down sequentially from $1.373tn at June 30, reflecting market depreciation partly offset by inflows.
- Operating expenses rose 8.4% in Q3 and 6.7% for the nine months. Management cited higher compensation, technology and market-data costs; nine-month expense growth also benefited from the absence of prior-year RCA acquisition integration costs. Higher interest income partly offset increased interest expense.
Outlook, events, risks and contingencies
- The filing provides no specific full-year revenue or earnings guidance. Management said available cash, operating cash flows and financing access should be sufficient for operating needs and commitments for at least the next 12 months and the foreseeable future.
- On October 2, 2023, after quarter-end, MSCI acquired the remaining 66.4% of Burgiss for $696.8m in cash, using available cash. The fair value of MSCI’s existing interest was $353.2m; the resulting approximately $140m pre-tax gain was expected to be recorded in Q4 2023. Initial purchase accounting was incomplete at filing.
- On October 30, the board declared a Q4 2023 dividend of $1.38 per share. The 2022 repurchase program had $845.7m of authorization remaining at September 30.
- BlackRock accounted for 10.1% of consolidated revenue for the first nine months; most of its revenue came from fees tied to assets in funds linked to MSCI indexes. MSCI also disclosed foreign-currency exposure, including 17.0% of nine-month revenue subject to currency risk, and noted that declines in non-U.S. currencies can reduce index-related fees.
- Various ordinary-course legal matters remain pending; management did not expect their disposition to have a material effect based on information then available, though outcomes remain uncertain. The company reported no material changes to the risk factors in its 2022 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether weaker net new subscription sales, higher cancellations and lower retention persist, particularly in ESG and Climate and Private Assets.
- How market movements, fund flows, currency changes and trading volumes affect index-linked fees and ETF AUM.
- The final Burgiss purchase accounting, acquisition-related cash impact, and recognition and tax treatment of the approximately $140m remeasurement gain.
- Debt servicing and covenant headroom as rates change, along with cash availability after the Burgiss acquisition, dividends and repurchases.
- The sustainability of reported earnings growth given favorable tax items, non-recurring revenue and the use of non-GAAP Adjusted EBITDA.