MSCI Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018, compared with Q1 2017. MSCI provides investment indexes, analytics and risk-management products, ESG research, and real-estate data and services. Results are unaudited interim financial information reviewed by the independent accountant.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $351.3 million | $301.2 million | +16.6% |
| Operating income | $167.2 million | $130.7 million | +27.9% |
| Operating margin | 47.6% | 43.4% | +4.2 percentage points |
| Adjusted EBITDA | $186.7 million | $150.8 million | +23.8% |
| Adjusted EBITDA margin | 53.1% | 50.1% | +3.0 percentage points |
| Net income | $115.1 million | $73.0 million | +57.8% |
| Diluted EPS | $1.24 | $0.80 | +55.0% |
| Cash from operations | $88.6 million | $37.0 million | +$51.6 million |
Recurring subscription revenue rose 9.5% to $260.8 million; asset-based fees grew 48.6% to $85.5 million, while non-recurring revenue declined 10.4% to $5.0 million. Index revenue rose 23.5%, Analytics 5.8%, and All Other 20.0%. Management attributed asset-based fee growth chiefly to higher AUM and trading volumes in products linked to MSCI indexes. Average AUM in ETFs linked to MSCI indexes was $779.5 billion, up 48.7% year over year.
Cash, debt and liquidity
- Cash and cash equivalents were $849.8 million at March 31, down from $889.5 million at year-end. Q1 cash declined $39.7 million.
- Operating cash flow was $88.6 million; investing activities used $5.9 million, mainly for capital expenditures and software development; financing activities used $126.1 million, including $91.3 million of share repurchases and $34.9 million of dividends.
- Long-term debt was $2.079 billion, net of deferred financing fees; the $220 million revolving credit facility was undrawn. Approximate net debt, using reported debt less cash, was $1.23 billion.
- Management said available cash, operating cash flow, credit capacity and access to capital markets should be sufficient for operating and cash commitments for at least 12 months and the foreseeable future. On May 1, the board authorized management to explore financing options that could increase debt and interest expense; no transaction was assured.
Material changes, outlook and risks
- Revenue accounting: MSCI adopted ASC 606 on January 1, 2018 using the modified retrospective method. The standard changes the timing of recognition for certain fees and records receivables and deferred revenue earlier for qualifying advance billings. For Q1, adoption reduced reported revenue by $2.3 million and net income by $1.8 million versus the estimated results without adoption. It materially increased reported receivables and deferred revenue at adoption, without a corresponding initial change in net assets. Comparisons with earlier periods are therefore affected by the new standard.
- Tax: The effective tax rate fell to 17.5% from 28.2%, primarily reflecting U.S. tax reform and discrete benefits, including $7.5 million of excess share-based compensation tax benefits. Tax accounting remained provisional; the cumulative Tax Reform accrual was $32.9 million, and final effects could differ, possibly materially.
- Growth indicators: Run Rate reached $1.403 billion, up 16.2% year over year. Aggregate retention was 94.6%, compared with 94.7%. Net new recurring subscription sales were $17.8 million, essentially flat year over year. Run Rate is a management metric, not a revenue forecast, and actual revenue may vary.
- Capital returns and subsequent events: MSCI repurchased 492,000 shares for $68.3 million in Q1. Through May 2 it repurchased a further 1.0 million shares for $141.7 million. On May 1, the board approved an additional $1.0 billion repurchase authorization and declared a $0.38-per-share Q2 dividend. MSCI completed the sale of Financial Engineering Associates (FEA) on April 9; the company said the divestiture was not material overall, and FEA’s reported Run Rate was approximately $8 million.
- Exposure and contingencies: BlackRock accounted for 12.9% of consolidated Q1 revenue, up from 10.3%. MSCI cited foreign-currency exposure, including sensitivity of index-linked fees to asset values and fund flows. Tax examinations were ongoing in multiple jurisdictions; management considered reserves adequate but said unrecognized tax benefits could change. Management did not expect pending legal matters to have a material effect based on currently available facts, while noting that outcomes remain uncertain.
No specific full-year revenue, earnings or cash-flow guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of revenue and earnings growth is durable subscription expansion versus market-driven asset-based fees, and how ETF AUM and product mix evolve.
- Whether retention and subscription-sales trends improve, particularly in Analytics, and whether the elevated growth in ESG continues.
- The final financial-statement effects of ASC 606 and the completion of provisional tax accounting, including potential changes to the effective tax rate and tax accruals.
- Whether continued buybacks, dividends or potential new borrowing change leverage, interest costs and liquidity; debt covenants included a 4.25:1 maximum leverage ratio, versus 2.83:1 at quarter-end.
- The consequences of FEA’s divestiture for Analytics results and any material outcomes from tax examinations, legal proceedings or foreign-exchange movements.