MSCI Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. This is an annual report, not a standalone fourth-quarter filing. Unless noted, figures below are for continuing operations and dollars are U.S. dollars.
Business context
MSCI sells investment decision-support products, including equity indexes, real-estate benchmarks, ESG research, and risk and portfolio analytics. Its principal model is annual recurring subscriptions; a further revenue stream consists of fees tied to assets in investment products linked to MSCI indexes. MSCI reported approximately 6,700 clients in 87 countries and served 98 of the top 100 global asset managers.
After agreeing to sell Institutional Shareholder Services (ISS), MSCI completed the sale on April 30, 2014 and began reporting one continuing-operations segment. ISS and the previously sold CFRA product line are presented as discontinued operations.
Financial and operating highlights
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $996.7 million | $913.4 million | +9.1% |
| Operating expenses | $659.5 million | $573.0 million | +15.1% |
| Operating income | $337.2 million | $340.3 million | -0.9% |
| Operating margin | 33.8% | 37.3% | -3.5 percentage points |
| Continuing-operations income | $198.9 million | $199.9 million | -0.5% |
| Net income, including discontinued operations | $284.1 million | $222.6 million | +27.7% |
| Diluted EPS, continuing operations | $1.70 | $1.64 | +3.7% |
| Diluted EPS, total | $2.43 | $1.83 | +32.8% |
| Cash from operating activities | $305.7 million | $321.2 million | -4.8% |
- Revenue mix and growth: Recurring subscriptions were $801.2 million (80.4% of revenue), asset-based fees were $177.1 million (17.8%), and non-recurring revenue was $18.4 million (1.8%). Index, real estate and ESG revenue grew 12.9% to $582.6 million; risk-management analytics grew 6.2% to $309.7 million; portfolio-management analytics declined 1.0% to $104.4 million.
- Run Rate and retention: Year-end Run Rate was $1.007 billion, up 7.7% from 2013. Aggregate retention was 93.0%, up from 91.5%; Core retention was 93.2%, up from 91.8%.
- Cash and liquidity: Cash and cash equivalents were $508.8 million at year-end, versus $358.4 million a year earlier. Operating cash flow was $305.7 million; investing activities provided $297.0 million, primarily reflecting $362.8 million of net cash proceeds from the ISS disposition; financing activities used $442.3 million, including share repurchases and the first dividend payment. The filing states available domestic and foreign cash and operating cash flows are expected to fund operations and commitments for at least the next 12 months.
- Debt: Year-end debt was $800.0 million of 5.25% senior notes due 2024; the $200.0 million revolving facility was undrawn. MSCI refinanced and repaid $794.8 million of prior secured term debt in November 2014. Revolver covenants cap consolidated leverage at 3.75x and require interest coverage of at least 4.00x; reported year-end ratios were 1.80x and 25.79x, respectively.
- Capital returns: MSCI initiated a quarterly dividend of $0.18 per share, with an anticipated initial annual rate of $0.72. It paid $300 million under a September 2014 accelerated share repurchase and had $550 million remaining under its $850 million authorization at year-end.
Material changes versus 2013
- Revenue growth did not translate into operating-income growth: expenses rose faster than revenue, chiefly reflecting the Enhanced Investment Program, higher staffing, technology, marketing and professional-service costs. The operating margin contracted to 33.8% from 37.3%.
- Total net income benefited materially from the ISS sale: 2014 discontinued-operations income was $85.2 million, including a $78.7 million net gain on disposition. Continuing-operations income was nearly flat year over year.
- Index, real estate and ESG asset-based fees increased 18.5%, supported by higher average ETF assets linked to MSCI indexes. Year-end linked ETF assets were $373.3 billion, up 12.1% from 2013.
- Portfolio-management analytics remained weaker: revenue fell 1.0%, although its year-end Run Rate rose 4.1%.
Outlook, commentary and risks
- Management said the Enhanced Investment Program was largely complete and expected margin expansion to begin in the second half of 2015, excluding potential non-recurring charges. The filing provides no specific numerical revenue or earnings guidance.
- Management’s strategy emphasizes expanding client relationships, developing and integrating products under its “OneMSCI” approach, growing index-linked licensing and pursuing acquisitions. GMI Ratings was acquired in August 2014 for $15.5 million; management said it had no significant impact on 2014 results.
- Key business risks include dependence on third-party data suppliers; competition and pricing pressure; market movements, currency changes and client decisions affecting asset-based fees; and revenue concentration. BlackRock accounted for 10.6% of 2014 revenue, and the ten largest clients represented 25.8%.
- Other material risks include technology outages, cyber and data-security incidents, errors in indexes or analytics, regulatory changes affecting benchmarks, international operating and currency exposure, acquisition integration, and debt-covenant or refinancing risks. Asset-based fees were 17.8% of revenue and are exposed to market performance, fund flows, fee negotiations and index-provider changes.
- Legal proceedings arise in the ordinary course; management stated it did not expect currently pending matters to have a material effect, while noting outcomes and liabilities can be uncertain. The filing also describes potential tax exposures and uncertain-tax-position examinations.
- Unusual accounting item: MSCI revised 2013 balance-sheet and cash-flow figures for previously understated tax liabilities. It reported the corrections as not material to previously issued financial statements and stated they did not affect debt-covenant compliance. The 2014 fourth quarter also included a $7.9 million non-cash charge for accelerated amortization of deferred financing costs and debt discounts tied to the refinancing.
Most important facts for investors to verify
- Whether subscription Run Rate growth and retention remain durable, particularly in portfolio-management analytics and during the seasonally significant fourth-quarter renewal period.
- BlackRock’s index-license relationship, client concentration, and the effect of changes in ETF assets, flows, fee rates and index selection on asset-based revenue.
- Whether the expected second-half 2015 margin expansion materializes after the elevated 2014 investment spending.
- Cash generation and capital allocation after the ISS proceeds, $800 million note issuance, share repurchases and dividend initiation; also monitor debt covenants and future interest expense.
- The effects of the ISS divestiture and continuing-operations presentation on comparisons, and the treatment of the $78.7 million disposal gain in total earnings.
- Potential regulatory changes to benchmark administration, data access and index licensing, as well as tax exposures, data-supplier continuity and cybersecurity controls.