MSCI Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; filed August 2, 2013. MSCI provides investment decision-support tools and governance services through Performance and Risk and Governance segments. The interim financial statements are unaudited; the auditor conducted a review, not an audit.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $257.9 | $238.6 | $509.8 | $467.6 |
| Operating income | $97.2 | $87.1 | $187.7 | $168.1 |
| Operating margin | 37.7% | 36.5% | 36.8% | 35.9% |
| Net income | $61.1 | $37.5 | $120.0 | $81.5 |
| Diluted EPS | $0.50 | $0.30 | $0.98 | $0.66 |
| Operating cash flow | Not separately provided | Not separately provided | $156.7 | $190.1 |
- Q2 revenue grew 8.1%; operating income grew 11.5%. Net income rose 62.6%, substantially reflecting lower interest and other expense versus the prior-year quarter, which included $20.6 million of debt-refinancing costs.
- Q2 Performance and Risk revenue was $228.4 million, up 10.0%; Governance revenue was $29.5 million, down 4.9%. Performance and Risk operating income increased 8.8% to $93.6 million; Governance operating income increased to $3.6 million from $1.1 million.
- Q2 category changes: Index and ESG revenue rose 20.2% to $132.2 million, including $17.0 million from IPD; risk management analytics increased 4.0% to $67.1 million; portfolio management analytics fell 11.0% to $26.1 million; energy and commodity analytics fell 18.9% to $3.1 million; Governance fell 4.9% to $29.5 million. Excluding the named acquisitions and disposition, management reported Q2 revenue growth of 1.0% overall.
- Six-month revenue increased 9.0%, while operating expenses increased 7.5%. Recurring subscription revenue was $422.1 million, up 9.7%. Total Run Rate at June 30 was $992.6 million, up 7.9% year over year; excluding IPD, InvestorForce and CFRA effects, subscription Run Rate grew 3.7%.
- Six-month operating cash flow declined $33.4 million, primarily because of the timing of receivables collections, partly offset by higher net income. Investing activities provided $39.1 million, including proceeds from maturing investments, offset in part by the InvestorForce acquisition. Financing used $38.4 million. Cash increased $151.4 million to $334.7 million; the company held no short-term investments at quarter-end.
Balance sheet, debt and liquidity
- At June 30, cash was $334.7 million; current assets were $617.5 million and current liabilities $496.5 million. Total assets were $3.105 billion and total liabilities $1.549 billion.
- Debt was approximately $818.2 million, net of discounts, comprising $43.1 million current and $775.1 million long-term. The term loan matures in May 2017, bore interest at 2.20% at quarter-end, and had a stated effective combined rate of 2.39% for the first half. MSCI prepaid $15 million in March. A 1 percentage-point LIBOR increase on average variable-rate debt of $804.5 million would add approximately $8 million of annual interest expense.
- Credit-facility covenants require a maximum leverage ratio of 3.25:1 and minimum interest coverage of 5.00:1; reported ratios were 1.71:1 and 20.69:1, respectively. Dividend and repurchase capacity is subject to credit-agreement restrictions.
- Management said available cash, operating cash generation and credit capacity should fund operating needs and expected commitments for at least 12 months. Some foreign cash may face tax, local-law or other restrictions on repatriation.
Changes, outlook and risks
- Growth was concentrated in Index and ESG and risk products; portfolio analytics remained weak, with lower sales and elevated prior-period cancellations. Six-month portfolio management analytics revenue declined 8.0%, and its six-month aggregate retention rate fell to 84.3% from 88.0%.
- Assets in MSCI-linked ETFs were $269.7 billion at quarter-end, down 17.6% year over year and 24.5% sequentially. Q2 net outflows were $74.4 billion, including $74.8 billion associated with Vanguard ETF transitions; management cited market depreciation of $13.2 billion. These factors can pressure asset-based fees.
- IPD, acquired in November 2012, and InvestorForce, acquired in January 2013, contributed to revenue and expense growth. The CFRA product line was sold on March 31, 2013; excluding its effect, Governance revenue grew.
- No quantified company-wide earnings or revenue guidance is provided in the filing. Management described plans to invest in staff, products and infrastructure while aiming over time to grow expenses more slowly than revenue; spending may rise to pursue opportunities.
- Subsequent events: MSCI completed its prior $100 million accelerated share repurchase (ASR) on July 31, receiving an additional 762,089 shares. On August 1–2, it initiated a further $100 million ASR, paying cash and receiving approximately 1.9 million shares initially; settlement was expected by December 2013. Both were within the $300 million authorization.
- ISS, an MSCI subsidiary, settled an SEC investigation on May 23 without admitting or denying allegations, agreed to a $300,000 penalty and an independent compliance review. MSCI said it did not anticipate DOJ action and believed the matter concluded.
- Management reported no pending legal matter expected to have a material effect, but noted ordinary-course claims and contingencies have inherent uncertainty. Tax examinations continue in several jurisdictions; significant changes in unrecognized tax benefits within 12 months are possible, though the amount and rate impact could not be estimated.
- Other risks include foreign-exchange exposure, variable-rate debt, ETF flows and market levels, customer renewals and cancellations, integration of acquisitions, and reliance on estimates. A one-time $5.2 million revenue reduction was recorded in first-half 2012 to correct an immaterial revenue-recognition error; management said restatement was unnecessary.
Important facts for investors to verify
- Whether ETF asset outflows, especially the Vanguard transitions, stabilize and how they affect asset-based fees and Run Rate.
- Underlying subscription growth and retention, particularly the ongoing weakness in portfolio management analytics.
- Cash conversion and receivables collection timing, alongside debt repayment, interest-rate sensitivity and covenant headroom.
- Post-acquisition revenue contribution, expense integration and the timing and seasonality of IPD report revenues.
- Progress and final settlement of the 2013 ASR, remaining repurchase authorization, and the effect of credit-agreement restrictions.
- Developments in tax examinations, the ISS compliance review and any other material legal or regulatory contingencies.