MSCI Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. MSCI provides indexes, analytics, ESG and climate solutions, and private-assets data and tools to the global investment community. Most revenue comes from recurring subscriptions; Index also earns asset-based fees linked to investment products.
Financial performance and liquidity
| Metric | Q1 2023 | Prior-year comparison |
|---|---|---|
| Revenue | $592.2 million | Up 5.8%; up 7.2% excluding foreign-exchange effects |
| Operating income | $314.6 million | Up 8.9%; operating margin was 53.1% versus 51.6% |
| Net income | $238.7 million | Up 4.5% |
| Diluted EPS | $2.97 | $2.78 |
| Adjusted EBITDA | $344.7 million | Up 8.2%; margin was 58.2% versus 56.9% |
| Operating cash flow | $264.1 million | $244.2 million |
| Cash and cash equivalents, including restricted cash | $1.081 billion at quarter-end | $993.6 million at December 31, 2022 |
| Total debt principal | $4.546 billion | Includes $4.2 billion of senior notes and $345.6 million of term loans |
Investing activities used $21.8 million, including $15.4 million for capitalized software and $6.2 million for capital expenditures. Financing activities used $158.3 million, including $112.1 million of dividends. The $500 million revolving credit facility was undrawn. The term loan carried a 6.84% interest rate at quarter-end. The company reported a 3.00x consolidated leverage ratio and 8.36x interest coverage ratio, within the stated covenant limits.
Material changes versus Q1 2022
- Recurring subscription revenue rose 11.4% to $445.2 million; asset-based fees fell 8.2% to $133.1 million, and non-recurring revenue fell 8.5% to $13.8 million.
- ESG and Climate revenue grew 28.9%, Analytics 5.2%, Index 2.6%, and All Other—Private Assets 3.6%. ESG and Climate subscription growth was particularly strong.
- Average ETF assets linked to MSCI equity indexes were down 7.5% year over year, weighing on asset-based fees. Quarter-end ETF assets were $1.305 trillion, up sequentially from $1.223 trillion.
- Total Run Rate increased 6.7% to $2.379 billion, led by recurring subscriptions, up 11.6%. In contrast, net new recurring subscription sales declined 22.2% and total net sales declined 20.5%.
- Total operating expenses increased 2.5%. Higher market-data, technology and compensation costs were partly offset by lower general and administrative expenses, including the absence of prior-year acquisition integration costs.
Outlook, commentary and risks
- The filing provides no formal revenue, earnings or margin guidance. Management said existing cash, operating cash flows and available financing are expected to fund operating needs and commitments for at least the next 12 months and the foreseeable future.
- Management described recurring subscription growth as strong, while asset-based fees remained exposed to investment-product assets, market movements and fund flows. Retention Rate was 95.2%, down from 95.9% a year earlier.
- The effective tax rate was 13.6%, compared with 8.2% in Q1 2022. Both periods benefited from favorable discrete tax items; benefits were $16.5 million in 2023 versus $28.1 million in 2022, making year-over-year tax comparisons less representative of underlying performance. The company said unrecognized tax benefits could decrease by approximately $24 million over the next 12 months as matters are resolved.
- BlackRock accounted for 10.2% of consolidated revenue, with most of its MSCI revenue tied to ETF assets linked to MSCI indexes. Foreign exchange is another exposure: 17.2% of Q1 revenue was subject to currency risk, and 43.5% of operating expenses were denominated in foreign currencies.
- MSCI had ordinary-course legal proceedings whose ultimate liability could not be determined; management did not expect currently pending matters to have a material effect based on information available. The filing reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
Investor facts to verify
- Whether recurring subscription growth and Run Rate continue to translate into revenue, particularly given lower sales and retention.
- How ETF assets, fund flows, market performance and currencies affect Index asset-based fees.
- Debt-service capacity, variable-rate term-loan costs, covenant headroom and the company’s use of its undrawn revolving facility.
- Whether favorable discrete tax items, including potential resolution of prior-year tax matters, affect future reported tax rates.
- BlackRock concentration and any material developments in legal proceedings or other contingencies.