MSCI Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. MSCI provides indexes, investment analytics, ESG and climate solutions, and private-asset data and analytics. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Operating revenue | $551.8 | $498.2 | +10.8% |
| Operating income | $300.4 | $257.5 | +16.6% |
| Net income | $210.6 | $165.4 | +27.3% |
| Diluted EPS | $2.59 | $1.99 | +30.2% |
| Adjusted EBITDA | $331.1 | $294.9 | +12.3% |
| Adjusted EBITDA margin | 60.0% | 59.2% | +0.8 percentage points |
| Operating margin | 54.4% | 51.7% | +2.7 percentage points |
For the six months ended June 30, revenue was $1,111.8 million (+13.8%), operating income $589.4 million (+15.1%), net income $439.0 million (+21.2%) and diluted EPS $5.37 versus $4.34. Adjusted EBITDA was $649.7 million (+13.7%); its margin was 58.4% versus 58.5%.
Q2 recurring subscription revenue grew 16.9% to $407.0 million; asset-based fees fell 2.9% to $132.2 million, and non-recurring revenue declined 9.8% to $12.5 million. Segment revenue growth was strongest in ESG and Climate (+40.2%) and All Other—Private Assets (+100.2%, primarily reflecting the RCA acquisition); Index grew 4.9% and Analytics 4.3%. RCA contributed $19.3 million of Q2 revenue.
Cash flow, debt and liquidity
- Six-month operating cash flow was $456.9 million, compared with $440.5 million a year earlier. Investing used $34.4 million, including $29.7 million of capitalized software development and $4.7 million of capital expenditures.
- Financing used $982.9 million, primarily reflecting $1,158.5 million of share repurchases and $171.9 million of dividend payments, partly offset by $355.0 million of borrowing proceeds. Cash declined $579.1 million to $842.3 million from year-end 2021.
- Debt principal outstanding was $4.55 billion: $4.20 billion of senior notes and $350 million of variable-rate term loans. The $500 million revolving facility was undrawn. The term loan rate was 3.28% at June 30.
- Reported debt carrying value was $4.512 billion, versus cash of $842.3 million. Consolidated leverage ratio was 3.23:1.00 and interest coverage was 8.74:1.00; covenant limits are 4.25:1.00 maximum leverage (with specified acquisition flexibility) and 4.00:1.00 minimum coverage.
- Management said cash, operating cash flows and available financing were expected to meet operating and other cash needs for at least the next 12 months. The company reported $539.5 million of remaining repurchase authorization.
Material changes and management commentary
- Subscription growth drove overall revenue gains. Six-month recurring subscriptions rose 17.6%; reported Run Rate at June 30 was $2.213 billion, up 11.8% year over year, including 17.6% growth in subscription Run Rate.
- Market declines weighed on index-linked fees: MSCI equity ETF AUM ended Q2 at $1.190 trillion, down $199.8 billion sequentially, including $207.3 billion of market depreciation partly offset by $7.5 billion of inflows. Q2 asset-based fees declined, though they grew 5.5% for the first half.
- Q2 net new recurring subscription sales increased 32.6% to $56.4 million. Total retention rate was 95.5% for the quarter, compared with 94.4% a year earlier.
- Operating expenses rose 4.5% in Q2 and 12.4% in the first half. Management cited higher technology, market-data and professional costs, headcount growth and RCA integration costs; Q2 G&A rose 21.7%. Headcount increased 15.4% year over year to 4,513.
- Foreign currency movements affected reported results. For the first half, 15.8% of revenue and 43.3% of operating expenses were subject to foreign-currency exposure. MSCI cited the potential for currency weakness to reduce asset-based fees and affect investment-product flows.
Outlook, risks and unusual items
The filing provides no specific full-year revenue or earnings guidance. Management’s liquidity outlook is described above. Forward-looking statements are subject to risks including market and AUM movements, foreign exchange, client renewals and cancellations, and execution of growth initiatives and acquisitions.
- BlackRock represented 10.8% of first-half consolidated revenue; 95.5% of its revenue came from fees tied to assets in its MSCI-linked ETFs.
- MSCI reported ordinary-course lawsuits and proceedings whose ultimate liability cannot be determined; management did not expect currently pending matters, individually or in aggregate, to have a material effect based on information then available.
- Tax authorities were examining or could examine multiple years and jurisdictions. MSCI said unrecognized tax benefits could decrease by approximately $29.4 million over the next 12 months as examinations are resolved.
- The company repurchased $1.050 billion of shares in the first half, versus $134.3 million in the prior-year period. The board declared a subsequent quarterly dividend of $1.25 per share, a 20.2% increase over the Q2 dividend.
- The first-half effective tax rate was 13.7%, including favorable discrete items of $27.2 million, primarily excess tax benefits on share-based compensation. Q2’s effective tax rate was 19.0%.
Investor verification priorities
- Check the durability of subscription growth, sales and retention, particularly across ESG and Climate, Analytics and private assets.
- Track equity-market levels, ETF AUM, fee rates, flows and resulting asset-based revenue.
- Assess RCA’s contribution, integration costs and underlying private-assets growth excluding the acquisition.
- Monitor debt, variable-rate borrowing costs, leverage covenant headroom, cash levels and the pace of buybacks and dividends.
- Review customer concentration, currency exposure, tax examination outcomes and developments in pending legal matters.