MSCI Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparative periods ended September 30, 2019. Amounts are U.S. dollars unless noted. MSCI provides indexes, analytics, ESG research and ratings, and real estate data and benchmarks.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $425.3m (+7.9%) | $394.3m | $1,251.7m (+8.7%) | $1,151.2m |
| Operating income | $227.6m (+13.1%) | $201.2m | $650.7m (+17.0%) | $556.3m |
| Operating margin | 53.5% | 51.0% | 52.0% | 48.3% |
| Net income | $182.4m (+33.1%) | $137.0m | $445.6m (+1.1%) | $440.9m |
| Diluted EPS | $2.16 (+35.0%) | $1.60 | $5.26 (+2.1%) | $5.15 |
| Adjusted EBITDA and margin | $249.4m; 58.6% | $220.8m; 56.0% | $715.4m; 57.2% | $630.3m; 54.8% |
| Operating cash flow | Not separately presented for the quarter | $575.2m | $465.9m |
Adjusted EBITDA is a non-GAAP measure. Revenue growth reflected recurring subscriptions (+8.7% in Q3), asset-based fees (+4.5%) and non-recurring revenue (+16.2%). Q3 segment revenue growth was 7.7% for Index, 3.8% for Analytics and 24.3% for All Other. MSCI reported total Run Rate of $1.72bn, up 10.9% year over year, as of September 30.
Balance sheet, debt and liquidity
- Cash and equivalents were $1.303bn at September 30, down from $1.507bn at year-end 2019. Current assets were $1.843bn and current liabilities $834.9m.
- Senior notes totaled $3.4bn principal ($3.366bn carrying value); the $400m revolving credit facility was undrawn. Cash less note principal implies net debt of about $2.10bn.
- Debt increased from $3.072bn carrying value at year-end, following new note offerings and redemptions. The company reported leverage of 3.31x against a 4.25x maximum and interest coverage of 6.81x against a 4.00x minimum.
- Cash from operations was $575.2m; investing used $224.9m, including $190.8m for the Burgiss investment; financing used $549.5m, including $613.6m in share repurchases and $181.8m in dividends. Cash decreased by $203.7m over the nine months.
Material changes and unusual items
- Operating margins improved as revenue grew faster than expenses. Nine-month Adjusted EBITDA rose 13.5%; reported net income rose only 1.1%, in part because other expense increased.
- Nine-month other expense included $45m of debt-extinguishment losses: $35m on redemption of the 2025 notes and $10m on redemption of the 2024 notes. The company issued $400m of 2030 notes and $1bn of 2031 notes and used proceeds in part to refinance debt.
- Reported tax rates were unusually affected by discrete items: 3.5% for Q3 2020 versus 18.8% in Q3 2019, and 9.3% year to date versus 3.5%. Management cited tax benefits from equity awards, final tax regulations, foreign earnings revaluation and debt-extinguishment tax effects.
- MSCI acquired a 40% non-controlling interest in Burgiss for $190.8m; its recognized share of Burgiss earnings was immaterial through September 30.
- MSCI repurchased 2.021m shares for $563.3m during the first nine months, at an average $278.69 per share. It declared dividends of $2.14 per share during that period.
Outlook, management commentary and risks
- Management said COVID-19 could moderate recurring subscription growth and that market volatility could affect AUM and future asset-based fees. It also cautioned that new sales could moderate and cancellations could increase, although cancellations had not deviated significantly from historical levels as of September 30.
- Year-to-date net new recurring subscription sales were $76.6m, down 2.9%; cancellations rose 32.1% to $52.8m. Total retention rate was 94.3% for the nine-month period, compared with 95.2% a year earlier. All Other Run Rate grew strongly, while Analytics growth was more modest.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management stated that operating cash flows, cash balances and available credit should fund operations and commitments for at least the next 12 months. It may maintain higher cash balances while the pandemic affects markets.
- BlackRock accounted for 10.9% of consolidated revenue in the first nine months and 17.8% of Index segment revenue. MSCI identified foreign-exchange exposure, market-sensitive asset-based fees, debt covenants and tax examinations as matters to monitor. Management did not expect pending legal matters to have a material effect based on information currently available; it noted that outcomes remain uncertain.
Key facts for investors to verify
- Whether subscription sales, cancellations and retention trends improve or deteriorate, particularly amid the COVID-19 environment.
- How AUM, product mix and market movements affect Index asset-based fees and Run Rate conversion into recognized revenue.
- The sustainability of reported earnings growth after the unusually favorable tax effects and the impact of debt-refinancing charges.
- Debt levels, covenant headroom, ongoing share repurchases and dividends relative to cash generation and liquidity needs.
- Progress and financial contribution from the Burgiss investment, and any developments in tax audits or legal contingencies.