MSCI Inc. Form 10-Q Summary: Third Quarter 2015
Business context and reporting period
MSCI provides indexes, investment analytics, ESG products and real estate benchmarks. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Results reflect continuing operations unless noted; MSCI sold Institutional Shareholder Services (ISS) in April 2014.
The company reported three segments: Index, Analytics and All Other (ESG and Real Estate). It also changed its segment and operating-expense presentation during the quarter; prior periods were recast for comparison, without changing previously reported net income or EPS.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Revenue | $268.8 million | $251.7 million | +6.8% |
| Operating income | $109.1 million | $84.0 million | +29.8% |
| Operating margin | 40.6% | 33.4% | +7.2 percentage points |
| Net income | $64.4 million | $51.7 million | +24.5% |
| Diluted EPS | $0.59 | $0.44 | +34.1% |
| Adjusted EBITDA | $128.9 million | $102.0 million | +26.4% |
| Adjusted EBITDA margin | 47.9% | 40.5% | +7.4 percentage points |
Q3 revenue growth was led by Index (+9.0%) and Analytics (+4.9%); All Other grew 1.7%. Recurring subscriptions rose 7.0% and asset-based fees 8.7%, while non-recurring revenue fell 17.2%. ESG revenue increased 28.4%; Real Estate revenue declined 16.7%.
For the first nine months, revenue was $802.1 million (+7.6%), operating income $296.4 million (+17.6%), and income from continuing operations $170.0 million (+9.2%). Continuing-operations diluted EPS was $1.52 versus $1.32. Net income declined 31.5% to $164.2 million, and diluted EPS declined to $1.47 from $2.03, principally because 2014 included an $84.1 million after-tax gain from the ISS sale; 2015 included a $5.8 million out-of-period tax charge related to that sale.
Cash, debt and liquidity
- Nine-month operating cash flow was $224.7 million, up from $201.6 million. Capital expenditures were $24.5 million; capitalized software development costs were $6.1 million.
- Cash and cash equivalents were $993.5 million at September 30, 2015, versus $508.8 million at year-end 2014. The increase included $800 million of proceeds from the August 2025 notes offering.
- Long-term debt was $1,578.8 million, net of financing fees, compared with $788.4 million at year-end. The company had $800 million of 5.25% notes due 2024 and $800 million of 5.75% notes due 2025. Q3 interest expense was $17.3 million versus $5.6 million.
- The $200 million revolving credit facility was available as a liquidity source. At quarter-end, the consolidated leverage ratio was 3.20x against a maximum of 3.75x; interest coverage was 10.27x against a minimum of 4.00x.
- MSCI repurchased approximately $444.6 million of shares and paid $65.0 million in dividends during the first nine months. A new $1.0 billion repurchase authorization and a $0.22-per-share fourth-quarter dividend were announced after quarter-end.
Changes, outlook, risks and unusual items
- Management attributed margin expansion to revenue growth, cost discipline and completion of its Enhanced Investment Program in 2014. Q3 operating expenses fell 4.7%; for the nine-month period they rose 2.5%, including a $3.4 million non-cash charge for termination of an Analytics technology project.
- Run Rate was $1.062 billion at quarter-end, up 6.1% year over year but essentially flat sequentially. Recurring-subscription Run Rate grew 6.2%; asset-based-fee Run Rate declined 6.7% sequentially, alongside a quarterly decline in linked ETF assets to $390.2 billion.
- Net new recurring subscription sales were $14.6 million in Q3, down 7.2% year over year. Total retention was 94.8%; All Other retention was 89.1%, with Real Estate at 87.0%.
- Management said operating cash flow and existing cash were expected to fund domestic and foreign operating needs and planned commitments for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing text.
- Foreign exchange is a material exposure: about two-thirds of assets in index-linked investment products were invested in non-U.S.-dollar securities, and 12.2% of nine-month revenue was invoiced in foreign currencies. MSCI uses foreign-exchange forwards and reported $2.4 million of currency losses for the nine months.
- BlackRock accounted for 10.4% of consolidated revenue and 19.5% of Index revenue for the first nine months. Tax examinations were ongoing in several jurisdictions; management said reserves were adequate but potential changes in unrecognized tax benefits over the next 12 months could not be estimated.
- Management said pending legal matters were not expected, based on currently available facts, to have a material effect. No material changes to previously disclosed risk factors were reported. The interim financial statements received an auditor review, not a full audit.
Important facts for investors to verify
- Whether subscription growth, net new sales and retention—particularly in Analytics and All Other—remain consistent with Run Rate growth.
- How market movements, foreign exchange and fund flows affect asset-based fees and linked ETF assets.
- Whether margin gains persist as staffing, technology investment and the terminated-project charge affect expenses.
- The impact of the higher debt balance and fixed-rate interest obligations on cash available for buybacks, dividends and investment.
- Developments in tax examinations and the ISS-related tax charge, as well as compliance with credit-facility covenants.
- That reported nine-month net income and EPS comparisons are distorted by the prior-year ISS disposal gain.