MSCI Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2023. MSCI provides indexes, analytics, ESG and climate solutions, and private-assets data and analytics to the global investment community. It reported approximately 6,600 clients in more than 95 countries.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Operating revenue | $621.2 | $551.8 | $1,213.4 | $1,111.8 |
| Operating income | $346.0 | $300.4 | $660.6 | $589.4 |
| Net income | $246.8 | $210.6 | $485.6 | $439.0 |
| Diluted EPS | $3.09 | $2.59 | $6.05 | $5.37 |
| Adjusted EBITDA (non-GAAP) | $377.3 | $331.1 | $722.0 | $649.7 |
| Adjusted EBITDA margin (non-GAAP) | 60.7% | 60.0% | 59.5% | 58.4% |
Margins and growth. Q2 revenue grew 12.6%, operating income 15.2%, net income 17.2%, and diluted EPS 19.3%. GAAP operating margin rose to 55.7% from 54.4%; net margin was approximately 39.7% versus 38.2%. H1 revenue grew 9.1%, operating income 12.1%, and net income 10.6%; GAAP operating margin increased to 54.4% from 53.0%, and net margin was approximately 40.0% versus 39.5%.
Revenue mix and segments. Q2 recurring subscriptions increased 12.0% to $455.7 million; asset-based fees rose 4.5% to $138.2 million; non-recurring revenue increased 117.7% to $27.3 million. ESG and Climate revenue grew 29.2% to $71.2 million, Index 12.9% to $362.3 million, Analytics 5.8% to $149.9 million, and All Other—Private Assets 10.9% to $37.7 million. H1 recurring subscriptions grew 11.7%, while asset-based fees declined 2.2%. ESG and Climate was the fastest-growing segment in H1, up 29.0%.
Cash flow and liquidity. For H1, operating cash flow was $555.9 million, versus $456.9 million; investing cash outflow was $48.4 million, versus $34.4 million; and financing cash outflow was $712.1 million, versus $982.9 million. Cash and restricted cash totaled $792.3 million at June 30, down from $993.6 million at year-end 2022. The company said available liquidity and expected cash flows should fund operating and cash commitments for at least the next 12 months.
Debt and capital returns. Total debt carrying value was $4.51 billion, including $4.20 billion of senior notes and $343.4 million of term loans; the $500 million revolving facility was undrawn. The term loan carried a 7.19% interest rate at quarter-end. Credit-agreement leverage and interest-coverage ratios were 2.88x and 8.39x, respectively, against limits of no more than 4.25x and at least 4.00x. H1 share repurchases were $485.4 million and dividends paid were $222.3 million. The company reported a shareholders’ deficit of $1.19 billion, compared with a $1.01 billion deficit at year-end, principally reflecting treasury-stock repurchases and dividends.
Material changes and management commentary
- Recurring subscription growth remained strong, but sales measures were mixed: H1 net new recurring subscription sales fell 18.2% to $82.5 million, and total net sales fell 4.7% to $131.1 million. Total Run Rate grew 10.7% to $2.45 billion at June 30.
- Q2 non-recurring revenue growth was driven primarily by one-time license fees related to prior periods and non-recurring licensed data products. These items contributed to reported growth and may not recur at the same level.
- H1 asset-based fees were pressured by lower average AUM in non-ETF index-linked funds and lower futures and options exchange fees and volumes. ETF-linked MSCI equity-index AUM was $1.37 trillion at June 30; quarterly average AUM rose 3.8% year over year, while the H1 average was down 2.1%.
- Operating expenses increased 9.5% in Q2 and 5.8% in H1. Management cited compensation, technology, market-data and recruiting costs; H1 expense growth also benefited from the absence of prior-period acquisition integration and transaction costs.
- H1 effective tax rate was 16.8%, compared with 13.7%, and included $16.4 million of favorable discrete tax items, principally share-based compensation tax benefits and prior-year items.
Outlook, risks and contingencies
- The filing provides no specific quantitative revenue, earnings or margin guidance. Management describes its liquidity as sufficient for the foreseeable future, subject to risks and uncertainties.
- Key exposures include foreign exchange movements, market levels and fund flows affecting index-linked fees, trading volumes, client renewals and cancellations, and execution of growth initiatives. BlackRock represented 10.0% of H1 consolidated revenue; 95.3% of its revenue to MSCI was based on assets in funds linked to MSCI indexes.
- MSCI uses foreign-exchange forward contracts to reduce certain currency-related income-statement volatility; it reported H1 foreign-exchange losses of $3.9 million, compared with gains of $2.4 million in H1 2022.
- Ordinary-course lawsuits and claims are pending; management believes their disposition will not materially affect the company based on currently available facts, although outcomes remain uncertain. The filing reports no material changes to previously disclosed risk factors.
- The company stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong subscription and Run Rate growth translates into sales and recognized revenue, given lower H1 net new recurring subscription sales and increased cancellations.
- How much reported revenue and earnings growth depended on non-recurring prior-period license fees and favorable discrete tax benefits.
- Whether asset-based fees recover with AUM and market conditions, and how concentrated index-linked revenue remains, including BlackRock exposure.
- Debt servicing capacity and capital allocation: debt levels, variable-rate term-loan exposure, ongoing dividends and repurchases, and the negative shareholders’ equity position.
- Potential outcomes of tax examinations and legal contingencies; the filing does not provide a clear quantified estimate of possible legal exposure.