MSCI Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. MSCI provides indexes, analytics, ESG research and ratings, and real-estate data and analytics to the global investment industry. Comparisons below are year over year unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $409.6m (+6.2%) | $385.6m | $826.4m (+9.2%) | $756.9m |
| Operating income | $215.2m (+11.9%) | $192.4m | $423.1m (+19.2%) | $355.1m |
| Operating margin | 52.5% | 49.9% | 51.2% | 46.9% |
| Net income | $115.1m (-8.4%) | $125.7m | $263.2m (-13.4%) | $303.9m |
| Diluted EPS | $1.36 (-7.5%) | $1.47 | $3.10 (-12.7%) | $3.55 |
| Adjusted EBITDA and margin | $236.7m; 57.8% | $211.8m; 54.9% | $465.9m; 56.4% | $409.5m; 54.1% |
Revenue growth was led by recurring subscriptions (+7.2% in Q2; +7.5% for six months). Q2 segment revenue was Index $242.9m (+7.7%), Analytics $127.6m (+3.1%), and All Other $39.1m (+7.8%). ESG grew strongly; Real Estate revenue declined in Q2. Subscription cancellations increased: net new recurring subscription sales were $27.4m in Q2, down 4.3%, and $50.4m for six months, down 4.0%. Total Run Rate reached $1.647bn at June 30, up 8.5%; total retention was 93.5% for Q2 versus 95.5% a year earlier.
Six-month operating cash flow was $375.4m, versus $277.3m. Investing used $213.2m, including $190.8m for the Burgiss investment; financing used $275.1m. Cash declined $121.6m to $1.385bn. Capital expenditures were $7.6m and capitalized software costs $14.8m; the filing does not present a defined free-cash-flow measure.
At June 30, 2020, total debt principal was $3.4bn (carrying value $3.365bn), and the $400m revolving facility was undrawn. Cash exceeded current liabilities of $845.0m; shareholders’ equity was a deficit of $310.9m. The revolving-credit covenants require leverage no higher than 4.25x and interest coverage at least 4.00x; reported ratios were 3.40x and 5.98x, respectively.
Changes, outlook, and risks
- Operating margins and Adjusted EBITDA margins expanded, while net income and EPS fell, largely reflecting higher interest expense and $45m of debt-extinguishment losses in the first half.
- MSCI issued $400m of 3.625% notes due 2030 and $1bn of 3.875% notes due 2031, using proceeds in part to redeem the remaining 2024 notes and all 2025 notes. The redemptions produced approximately $10m and $35m losses, respectively.
- In January, MSCI acquired a 40% non-controlling interest in Burgiss for $190.8m. Its recognized equity earnings were immaterial in the period.
- Management said COVID-19 could moderate subscription growth, reduce new sales, increase cancellations, and affect asset-based fees through market movements and AUM. Cancellations had not deviated significantly from historical levels as of June 30. Management expected 2020 operating cash flow to decrease from 2019 and capital expenditures to increase, but believed available liquidity would fund commitments for at least 12 months. No specific revenue or earnings guidance was provided.
- Management noted that cash balances could be kept above normal operating levels during the pandemic. Cash from operations benefited from higher collections and deferred tax payments, partly offset by higher interest payments. Foreign-exchange movements, market-linked AUM and customer concentration are relevant exposures; BlackRock represented 10.9% of first-half revenue.
- The board declared a $0.78-per-share Q3 dividend, up 14.7% from the prior quarterly dividend. First-half share repurchases totaled $356.8m.
- Management reported no pending legal matter expected to have a material effect based on currently available facts. It also reported no material changes to previously disclosed risk factors and effective disclosure controls.
Key facts for investors to verify
- Whether subscription sales, cancellations, and retention stabilize as pandemic-related uncertainty continues.
- How asset-based fees respond to equity-market levels, fund flows, product mix, and foreign-exchange changes.
- The durability of margin expansion, particularly as compensation, technology investment, and ESG-related costs evolve.
- Debt service, covenant headroom, and the cash and earnings impact of the 2020 refinancing and redemption losses.
- Whether operating cash flow, capital spending, dividends, and repurchases remain consistent with management’s liquidity expectations.