MSCI Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are identified where relevant. Amounts are U.S. dollars.
Business context
MSCI provides indexes, investment risk and portfolio analytics, ESG research, and real estate benchmarks and analytics to institutional investors. Revenue is primarily recurring subscriptions, supplemented by fees tied to assets or trading volumes and non-recurring services. Reportable segments are Index, Analytics, and All Other (ESG and Real Estate).
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $1,150.7 million | $1,075.0 million | +7.0% |
| Operating income | $488.1 million | $403.9 million | +20.8% |
| Operating margin | 42.4% | 37.6% | +4.8 percentage points |
| Net income | $260.9 million | $223.6 million | +16.6% |
| Diluted EPS | $2.70 | $2.03 | +33.0% |
| Adjusted EBITDA (non-GAAP) | $569.5 million | $481.7 million | +18.2% |
| Adjusted EBITDA margin (non-GAAP) | 49.5% | 44.8% | +4.7 percentage points |
| Cash from operating activities | $434.7 million | $306.0 million | +42.1% |
Revenue mix was $913.7 million recurring subscriptions (+6.5%), $210.2 million asset-based fees (+6.2%), and $26.8 million non-recurring revenue (+37.2%). Index revenue was $613.6 million (+9.8%); Analytics was $448.4 million (+3.4%); and All Other was $88.8 million (+7.4%). ESG revenue rose 19.6% to $45.0 million, while Real Estate revenue declined 2.7% to $43.8 million, partly reflecting the divestiture of the Real Estate occupiers business.
Cash and cash equivalents were $791.8 million at year-end, versus $777.7 million a year earlier. Capital expenditures were $32.3 million and capitalized software development costs were $10.3 million. Cash used in investing activities was $42.0 million; cash used in financing activities was $365.3 million, including $774.6 million of treasury-share repurchases and $96.2 million of dividends paid.
Long-term debt was $2.075 billion, net of financing fees, compared with $1.579 billion in 2015. Interest expense was $101.7 million. The $220 million revolving credit facility was undrawn. The reported consolidated leverage ratio was 3.50:1.00 and interest coverage ratio was 6.74:1.00; the company stated its leverage ratio placed it at the facility’s highest applicable pricing margin. Total shareholders’ equity fell to $317.6 million from $901.5 million.
Material changes versus the prior year
- Revenue growth and lower operating expenses lifted operating income and margins. Cost of revenues fell 5.8%, while total operating expenses declined 1.3%.
- Interest expense increased by $39.3 million, contributing to an 88.0% rise in other expense, net, and reducing the benefit of higher operating income.
- Operating cash flow increased to $434.7 million, helped by higher customer billings and collections, lower cash expenses, and lower income-tax payments.
- Diluted weighted-average shares fell 12.2%, largely due to repurchases; the company repurchased approximately 10.3 million shares for $759.4 million at an average $73.71 per share.
- Aggregate Retention Rate declined to 92.7% from 93.4%. Fourth-quarter 2016 retention was 89.9%; the filing notes that the fourth quarter is typically the largest renewal period.
- ETF assets linked to MSCI indexes ended the year at $481.4 billion, up 11.1% year over year. Despite higher average ETF assets, ETF-linked revenue was essentially flat for the full year, with product mix offsetting asset growth.
Outlook, management commentary, and risks
Management emphasized expanding client relationships, growing index licensing and managed services, developing and enhancing products, investing in technology and research, and pursuing complementary acquisitions. The filing does not provide a clear numerical FY 2017 earnings or revenue guidance value. Management stated that domestic and foreign cash flows, existing cash, and available financing were expected to fund operating needs and commitments for at least the next 12 months.
- Revenue and client exposure: Asset-based fees represented 18.3% of revenue and fluctuate with markets, fund flows, foreign exchange, product expense ratios, and client fee negotiations. The ten largest clients accounted for 25.7% of revenue; BlackRock accounted for 9.4%, with most BlackRock revenue tied to ETF asset-based fees.
- Retention and competition: Clients can cancel or renegotiate subscriptions and index licenses. The company cited growing competition, client self-sourcing, proprietary indexes, and pricing pressure.
- Data, technology, and execution: MSCI relies on more than 200 third-party data suppliers and identifies cyberattacks, data privacy breaches, system interruptions, product errors, and implementation failures as risks.
- Debt and capital allocation: Debt covenants constrain certain actions, and the company reported non-investment-grade ratings on its Senior Notes. Continued dividends and buybacks are discretionary and subject to cash needs, covenants, and market conditions.
- Foreign exchange and regulation: The company cited currency exposure, including the impact of sterling weakness after the Brexit vote, and uncertainty around evolving benchmark, financial, and data-privacy regulation. EU benchmark regulation was scheduled to take effect in 2018.
- Unusual items and contingencies: MSCI sold its Real Estate occupiers business in August 2016; the filing says the disposal impact was not material. The 2015 comparison includes a $6.4 million discontinued-operations tax charge related to the 2014 ISS sale. Management said pending legal matters were not expected to have a material effect based on currently available facts, while noting that outcomes remain uncertain.
Important facts for investors to verify
- Whether recurring subscription growth and the 6.8% increase in year-end Run Rate translate into recognized revenue, particularly given weaker retention in Analytics and the fourth quarter.
- How ETF-linked assets, client fee negotiations, product mix, and BlackRock concentration affect asset-based revenue and margins.
- Debt-service capacity and covenant headroom, including the implications of the 3.50:1.00 leverage ratio, rising interest expense, and capital returns.
- Whether operating cash flow remains strong after working-capital and tax timing effects, and how foreign-held cash can be used or repatriated.
- The impact and implementation costs of new revenue-recognition and lease accounting standards, and of benchmark regulation and other regulatory changes.
- Any material developments in litigation, tax examinations, third-party data access, cybersecurity, or operational continuity.