MSCI Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods. Financial amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Business context
MSCI provides indexes, portfolio analytics and risk-management tools, ESG and climate products, and real estate data and analytics to the global investment community. Its revenue combines recurring subscriptions, asset-based fees tied partly to investment-product assets and trading activity, and non-recurring fees. Effective January 2021, ESG and Climate became a separate reportable segment; Real Estate and the Burgiss equity-method investment are included in All Other – Private Assets.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $517.1m | $425.3m | $1,493.7m | $1,251.7m |
| Operating income | $280.2m | $227.6m | $792.1m | $650.7m |
| Operating margin | 54.2% | 53.5% | 53.0% | 52.0% |
| Net income | $169.9m | $182.4m | $532.1m | $445.6m |
| Diluted EPS | $2.03 | $2.16 | $6.38 | $5.26 |
| Adjusted EBITDA (non-GAAP) | $306.6m | $249.4m | $878.1m | $715.4m |
| Adjusted EBITDA margin (non-GAAP) | 59.3% | 58.6% | 58.8% | 57.2% |
- Q3 revenue increased 21.6% year over year (20.4% excluding acquisition and foreign-exchange effects); nine-month revenue rose 19.3% (18.3% excluding those effects). Recurring subscription revenue grew 14.2% in Q3 and 12.5% year to date; asset-based fees grew 41.2% and 40.2%, respectively.
- Q3 net income declined 6.8% and diluted EPS declined 6.0%, despite higher revenue and operating income. The increase in other expense and the tax provision more than offset operating growth. Year-to-date net income rose 19.4% and diluted EPS 21.3%.
- Q3 segment revenue growth: Index 25.7%, Analytics 6.2%, ESG and Climate 53.0%, and All Other – Private Assets 22.4%. ESG and Climate adjusted EBITDA expenses rose faster than its revenue, and its margin fell to 22.5% from 26.8%.
- MSCI’s average AUM in ETFs linked to its equity indexes was $1,361.9bn in Q3, up 52.4% year over year. Asset-based fee growth also reflected higher AUM in other index-linked funds, partly offset by lower average basis-point fees.
Cash flow, balance sheet and capital
- Cash from operations was $656.4m for the first nine months, versus $575.2m a year earlier. Investing used $985.9m, including $948.7m for the RCA acquisition; financing provided $321.2m. Cash declined $15.9m to $1,284.7m.
- At September 30, 2021, current assets were $1,847.4m and current liabilities $1,016.9m. Long-term debt carrying value was $4,160.4m; outstanding senior-note principal was $4,200.0m. Shareholders’ equity was a deficit of $280.0m.
- The $500m revolving credit facility was undrawn. Covenant ratios were 3.56:1 leverage against a maximum of 4.25:1 (temporarily 4.50:1 after a material acquisition) and 7.42:1 interest coverage against a minimum of 4.00:1.
- MSCI repurchased $134.3m of shares in the first nine months, versus $563.3m in the prior-year period. Dividends declared totaled $2.60 per share for the first three quarters. A $1.04-per-share fourth-quarter dividend was declared after period-end.
Material changes, outlook and risks
- RCA acquisition: MSCI acquired Real Capital Analytics on September 13 for $948.7m, expanding its real estate data and analytics offering. Preliminary purchase accounting included $665.1m of goodwill and substantial acquired intangible assets; RCA contributed $3.4m of post-acquisition revenue in the quarter. The purchase allocation remains subject to change.
- Debt refinancing and unusual charges: MSCI issued new notes and redeemed its $500m 2026 notes in April and $500m 2027 notes in September. The redemptions generated losses on extinguishment of $21.8m and $37.3m, respectively. These contributed to Q3 other expense of $79.6m, versus $38.6m a year earlier.
- Other unusual item: MSCI recorded a $16.0m non-cash write-off of capitalized Analytics software in the first half after discontinuing certain products and transitioning customers to other offerings.
- Tax: The nine-month effective tax rate was 13.1%, versus 9.3% in 2020, and included $49.3m of favorable discrete tax items. The filing notes ongoing tax examinations and says unrecognized tax benefits could decrease by approximately $26.7m over the next 12 months.
- Management outlook: The filing provides no specific revenue or earnings guidance. Management stated that existing cash, operating cash flows, the undrawn revolver and expected access to capital markets should fund operations and commitments for at least the next 12 months. It expected approximately $110m of additional tax payments in Q4, contingent on transactions that increase current-year tax obligations.
- Risks and contingencies: Results are exposed to market movements and investment flows affecting index-linked AUM and fees, foreign-exchange movements, client renewals, and execution and valuation risks from acquisitions. BlackRock accounted for 12.9% of nine-month consolidated revenue and 20.6% of Index segment revenue. MSCI reported ordinary-course litigation with uncertain outcomes but said pending matters were not expected, based on currently available facts, to have a material effect. It reported no material changes to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- Whether subscription growth, renewals and sales sustain the reported momentum; total Run Rate grew 21.9% to $2,096.3m, while total retention was 94.5% for Q3.
- How much future asset-based fee growth depends on market appreciation and AUM, and whether lower average fee rates continue.
- RCA’s integration, revenue contribution, final purchase-price allocation and impact on All Other – Private Assets profitability.
- Debt levels, refinancing costs and covenant headroom, alongside the planned acquisition, dividend and repurchase cash needs.
- The sustainability of reported earnings after debt-extinguishment losses, the software write-off and favorable discrete tax items.