MSCI Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Dollar amounts below are in millions unless stated otherwise. Results are compared with the corresponding 2020 periods.
Business context and performance
MSCI provides indexes, portfolio analytics and risk-management tools, ESG and climate solutions, and real estate benchmarks and analytics. Its revenue mix includes recurring subscriptions, asset-based fees linked largely to investment products, and non-recurring revenue. Effective January 1, 2021, ESG and Climate became a separate reportable segment; prior-period segment figures were recast.
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Operating revenue | $498.2 | $409.6 | $976.6 | $826.4 |
| Operating income | $257.5 | $215.2 | $511.9 | $423.1 |
| Net income | $165.4 | $115.1 | $362.2 | $263.2 |
| Diluted EPS | $1.99 | $1.36 | $4.34 | $3.10 |
| Operating margin | 51.7% | 52.5% | 52.4% | 51.2% |
| Adjusted EBITDA (non-GAAP) | $294.9 | $236.7 | $571.5 | $465.9 |
| Adjusted EBITDA margin (non-GAAP) | 59.2% | 57.8% | 58.5% | 56.4% |
Revenue and segment trends
- Q2 revenue increased 21.6% (20.6% excluding foreign-exchange effects); H1 revenue increased 18.2% (17.3% excluding foreign-exchange effects).
- Recurring subscription revenue grew 12.3% in Q2 and 11.6% in H1. Asset-based fees rose 54.6% and 39.6%, respectively, supported by higher average ETF assets under management; average AUM in ETFs linked to MSCI equity indexes increased 66.4% in Q2 and 48.8% in H1 year over year.
- Q2 segment revenue growth: Index 26.0%, Analytics 6.5%, ESG and Climate 49.4%, and All Other—Private Assets 32.4%. H1 growth was 21.6%, 6.7%, 43.7%, and 15.3%, respectively.
- Total Run Rate, a company-defined annualized measure of recurring contracted revenue, was $1,979.6 at June 30, up 20.2% year over year. Recurring-subscription Run Rate grew 12.0%; asset-based-fee Run Rate grew 49.1%.
- Total net new recurring subscription sales were $42.5 in Q2, up 55.2%, and $76.1 in H1, up 50.9%. Total retention rate was 94.4% for Q2 and 95.3% for H1, versus 93.5% and 94.2% a year earlier.
Cash flow, debt and liquidity
- H1 operating cash flow was $440.5, versus $375.4 in H1 2020. Investing cash outflow was $22.3, compared with $213.2, primarily because the prior year included a $190.8 Burgiss investment. Financing provided $256.9, versus a $275.1 outflow in the prior-year period. Cash increased $671.5 to $1,972.0.
- At June 30, cash and cash equivalents were $1,972.0, current assets $2,558.5, and current liabilities $950.7. Long-term debt carrying value was $3,963.6; stated principal outstanding was $4,000.0. The $500.0 revolving credit facility was undrawn. Cash less stated debt principal was approximately negative $2,028.0.
- MSCI issued $500.0 of 3.625% notes due 2030 and $600.0 of 3.625% notes due 2031, and redeemed its $500.0 of 4.75% notes due 2026. The redemption resulted in a $21.8 loss on debt extinguishment. Debt increased from $3,366.8 at year-end 2020, reflecting the financing activity.
- The revolving credit agreement’s maximum leverage ratio was 4.25:1 (4.50:1 for two quarters following a qualifying material acquisition) and minimum interest coverage ratio was 4.00:1. Reported June 30 ratios were 3.45:1 and 7.55:1, respectively.
- Share repurchases totaled $187.8 in H1 cash-flow reporting; dividends paid were $130.6. A quarterly dividend of $1.04 per share was declared after quarter-end, payable August 31, 2021.
Material changes, outlook and risks
- Growth in revenue and Adjusted EBITDA exceeded expense growth, lifting the non-GAAP Adjusted EBITDA margin. GAAP operating margin declined in Q2 but improved for H1.
- Q2 intangible amortization included a $16.0 non-cash write-off of capitalized Analytics software after MSCI discontinued development and related sales of certain products and planned to transition existing customers to other offerings. This contributed to higher reported amortization expense.
- H1 effective tax rate was 12.0%, including $34.2 of favorable discrete tax items, principally share-based compensation tax benefits and the tax effect of the debt redemption loss. Management said the rate reflected these items and the level of earnings.
- Management stated that available cash, operating cash flows, revolving capacity and access to capital markets were expected to fund operations and commitments for at least the next 12 months and the foreseeable future. The filing provides no specific full-year revenue or earnings guidance.
- Risks include market movements and foreign-exchange exposure affecting index-linked AUM and fees; approximately 15.3% of H1 revenue was subject to foreign-currency exchange-rate risk. BlackRock accounted for 12.4% of H1 consolidated revenue. MSCI reported no material change in the risk factors disclosed in its 2020 Form 10-K.
- MSCI disclosed ordinary-course legal claims and proceedings; management believed pending matters would not, individually or collectively, materially affect the company based on facts then available, while noting outcomes remain uncertain. Tax examinations are ongoing in several jurisdictions; unrecognized tax benefits could decrease by approximately $30.0 in the next 12 months, management said, depending on audit resolutions.
Important facts for investors to verify
- Whether recurring subscription sales, Run Rate growth and retention continue to support reported revenue growth.
- How much future asset-based-fee growth depends on market appreciation and ETF inflows, versus fee levels; average basis-point fees declined despite higher AUM.
- The sustainability of ESG and Climate growth and the impact of its elevated expense growth on segment profitability.
- The effect of the Analytics product discontinuation and software write-off on customer retention, future revenue and expenses.
- Debt refinancing, covenant headroom, cash availability across jurisdictions, and the company’s planned use of cash for dividends and repurchases.
- The extent to which the low H1 effective tax rate reflects discrete benefits that may not recur, along with outcomes of tax examinations and legal contingencies.