MSCI Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are to Q1 2018 unless otherwise noted. MSCI provides investment decision-support products and services, including indexes, analytics, ESG research and real estate data. Financial statements are unaudited; PwC performed an interim review, not an audit.
Financial performance and position
| Metric | Q1 2019 | Comparable / change |
|---|---|---|
| Revenue | $371.4 million | Up 5.7% reported; up 6.2% excluding currency effects |
| Operating income / margin | $162.7 million / 43.8% | Operating income down 2.7%; margin was 47.6% in Q1 2018 |
| Adjusted EBITDA / margin | $197.7 million / 53.2% | Up 5.9%; margin was 53.1% |
| Net income / diluted EPS | $178.2 million / $2.08 | Net income up 54.8%; diluted EPS was $1.24 |
| Operating cash flow | $87.9 million | $88.6 million in Q1 2018 |
| Cash and cash equivalents | $642.8 million | $904.2 million at December 31, 2018 |
| Debt | $2.6 billion principal; $2.576 billion carrying value | Revolver was undrawn; $250 million commitment |
Revenue growth was led by recurring subscriptions, up 8.3% to $282.4 million. Asset-based fees fell 4.3% to $81.8 million, while non-recurring revenue rose 43.7% to $7.2 million. By segment, Index revenue grew 6.4%, Analytics 2.1%, and All Other 15.6%.
Operating expenses increased 13.3% to $208.7 million, faster than revenue. Compensation and benefits rose 20.0%, including $15.4 million in payroll taxes tied to vesting of 2016 multi-year performance stock units. Interest expense and other expense also increased. The resulting operating margin declined to 43.8%.
Material changes and capital allocation
- Net income was substantially boosted by a $49.9 million income tax benefit, versus a $24.3 million tax expense in Q1 2018. The 2019 benefit reflected $77.8 million of discrete tax items, primarily excess tax benefits from share-based compensation. Thus, reported earnings growth does not reflect comparable operating-income growth.
- Average AUM in ETFs linked to MSCI indexes fell 1.7% year over year to $766.0 billion, contributing to lower asset-based fee revenue. Period-end ETF AUM was $802.2 billion, up 4.9% year over year.
- Operating cash flow was nearly flat, while financing cash outflow rose to $341.6 million, principally reflecting $284.5 million of treasury-share repurchases and $57.9 million of dividends paid. Cash declined by $261.4 million during the quarter.
- MSCI repurchased approximately 690,000 shares on the open market for $102.1 million; $706.1 million remained authorized under its repurchase program. The quarterly dividend declared was $0.58 per share. A further $0.58-per-share dividend was declared May 1, 2019.
- Adoption of lease accounting in January 2019 added right-of-use assets and operating lease liabilities; lease liabilities totaled $190.7 million at March 31.
Liquidity, outlook and risks
Management stated that operating cash flows, cash balances, the undrawn revolving facility and potential capital-market access should fund operating needs and commitments for at least the next 12 months and the foreseeable future. MSCI seeks to maintain global cash of approximately $200–$250 million. Its March 31 consolidated leverage ratio was 3.08x, against a maximum of 4.25x; interest coverage was 6.69x, against a minimum of 4.00x.
No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management reported total Run Rate of $1.478 billion, up 5.3% year over year; recurring-subscription Run Rate grew 6.7%. Net new recurring subscription sales were $23.9 million, up 34.3%, and total retention rate was 95.2%, versus 94.6% a year earlier. Run Rate is a management metric, not a forecast of recognized revenue.
Key exposures include changes in investment markets and ETF assets, product mix and index fees, foreign exchange, client renewals, and execution of growth investments. BlackRock represented 11.6% of consolidated revenue in Q1. Tax examinations include U.S. and foreign jurisdictions; management said it has adequate reserves but noted unrecognized tax benefits could change. Management did not expect pending legal matters to have a material effect based on currently available facts. The filing reported no material change to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- How much of Q1’s 54.8% net-income increase is attributable to the discrete tax benefit, and what earnings look like at a normalized tax rate.
- Whether recurring subscription and Run Rate growth can continue, particularly in Analytics, and whether lower asset-based fees or changing product mix persist.
- Whether expense growth moderates after the one-time payroll-tax impact from performance-unit vesting, and how operating margins develop.
- Cash generation and liquidity after repurchases and dividends, including leverage covenant headroom and debt-service requirements.
- Updates on tax examinations, foreign-currency exposure, and any changes in material litigation or other contingencies.