MSCI Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. MSCI provides investment decision-support products, including indexes, analytics, real estate benchmarks and ESG research. ISS was sold on April 30, 2014 and is reported as a discontinued operation.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $262.8 million | $239.7 million | +9.6% |
| Operating income | $88.7 million | $79.5 million | +11.6% |
| Operating margin | 33.8% | 33.2% | +0.6 percentage points |
| Continuing-operations income | $49.6 million | $47.1 million | +5.3% |
| Net income | $43.8 million | $80.4 million | -45.5% |
| Diluted EPS | $0.39 | $0.68 | Continuing-operations EPS rose to $0.44 from $0.40 |
| Operating cash flow | $66.7 million | $25.2 million | Increase primarily reflected improved billings and collections |
| Cash and equivalents, March 31 | $537.8 million | — | Up from $508.8 million at December 31, 2014 |
| Long-term debt, March 31 | $800.0 million | — | Unchanged from December 31, 2014 |
Revenue growth was led by performance products: $155.9 million, up 12.8%; analytics revenue was $106.8 million, up 5.3%. Recurring subscription revenue increased 8.9%, while asset-based fees rose 12.2%. ETF assets linked to MSCI indexes reached $418.0 billion, up 22.7% year over year. Total Run Rate was $1.031 billion, up 7.9%; aggregate retention was 94.4%, versus 92.8%.
Operating expenses rose 8.6% to $174.0 million, slower than revenue growth. Compensation and benefits increased 12.7%, reflecting higher staffing and a non-cash charge related to ending an analytics technology project. Interest expense rose to $11.1 million from $5.1 million, primarily following the 2014 notes offering. The effective tax rate was 36.1%, versus 35.9%.
Liquidity, debt and capital allocation
Cash provided by operations was $66.7 million; investing activities used $6.3 million and financing activities used $27.1 million. Cash increased by $29.0 million during the quarter. Capital expenditures were $4.9 million and capitalized software development costs were $1.4 million. The company reported $800 million of 5.25% senior unsecured notes due 2024 and a $200 million revolving credit facility; no revolving borrowings are reported in the supplied filing text. At quarter-end, leverage and interest coverage covenant ratios were 1.72:1.00 and 10.92:1.00, respectively, against maximum and minimum limits of 3.75:1.00 and 4.00:1.00.
MSCI paid dividends of $20.4 million in the quarter and declared a further $0.18-per-share dividend for Q2, payable May 29, 2015. The board had authorized up to $850 million of repurchases under its 2014 program; the filing reports no program repurchases in Q1, while share withholding and director-plan activity accounted for 191,987 shares purchased in the issuer-purchase table.
Material changes, outlook and risks
- Net income fell largely because Q1 2014 included $33.3 million of ISS discontinued-operations income, including a $30.6 million tax benefit. Q1 2015 included a $5.8 million out-of-period tax charge related to the ISS sale. Continuing-operations income increased.
- Management said the Enhanced Investment Program was complete, reported operating-margin expansion in Q1, and expected margin expansion to continue through 2015, excluding possible non-recurring charges. No numerical revenue or earnings guidance was provided.
- Foreign exchange is a material exposure: approximately 13.0% of Q1 revenue was invoiced in non-U.S. currencies, and MSCI reported $1.6 million of foreign-exchange losses. Foreign currency translation also reduced comprehensive income.
- BlackRock represented 10.1% of Q1 operating revenue. The company noted ongoing tax examinations and possible changes in unrecognized tax benefits, but said it could not reasonably estimate the amount or tax-rate impact. Management did not expect pending legal matters to have a material aggregate effect based on information then available.
- Management stated that domestic and foreign liquidity, including operating cash flows, was expected to cover operating and investing commitments for at least the next 12 months. Some foreign-held cash may face tax or local-law restrictions on repatriation.
Important facts for investors to verify
- Whether subscription growth, Run Rate growth and retention continue, particularly the comparatively slower analytics Run Rate growth.
- Whether ETF-linked assets and asset-based fees remain strong and how market moves, currency changes and fund flows affect them.
- Progress on the promised 2015 margin expansion, while monitoring compensation costs, hiring and non-recurring project charges.
- The effects of the ISS-related tax charge, tax examinations and any future changes in unrecognized tax benefits.
- Debt covenant headroom, interest costs, foreign-cash availability, and the balance between dividends and authorized share repurchases.