MSCI Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
MSCI provides investment indexes, portfolio risk and analytics products, ESG research and ratings, and real estate benchmarks and analytics. Revenue is primarily recurring subscriptions, supplemented by fees tied to assets in index-linked products and non-recurring services. Index and Analytics are its largest reporting segments; ESG and Real Estate are combined as All Other.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Operating revenue | $1,274.2 million | $1,150.7 million | +10.7% |
| Operating income | $579.2 million | $488.1 million | +18.7% |
| Operating margin | 45.5% | 42.4% | +3.1 percentage points |
| Net income | $304.0 million | $260.9 million | +16.5% |
| Diluted EPS | $3.31 | $2.70 | +22.6% |
| Adjusted EBITDA (non-GAAP) | $659.2 million | $569.5 million | +15.8% |
| Adjusted EBITDA margin (non-GAAP) | 51.7% | 49.5% | +2.2 percentage points |
| Cash from operating activities | $404.2 million | $442.4 million | −8.6% |
- Recurring subscription revenue rose 6.5% to $973.0 million; asset-based fees rose 31.3% to $276.1 million, while non-recurring revenue declined 6.4% to $25.1 million.
- Index revenue grew 17.2% to $719.0 million. Analytics revenue grew 2.2% to $458.3 million, but Analytics Adjusted EBITDA fell 2.5% to $125.3 million. All Other revenue grew 9.2% to $96.9 million, including ESG growth and a decline in Real Estate revenue.
- At year-end, cash and cash equivalents were $889.5 million, total assets $3,275.7 million, and shareholders’ equity $401.0 million. Accounts receivable rose 47.9% to $327.6 million.
- Long-term debt was $2,078.1 million, net of financing fees; the $220 million revolving facility was undrawn. 2017 interest expense was $116.1 million. The company reported a 2.98:1.00 consolidated leverage ratio and 6.27:1.00 interest coverage ratio.
Material changes and quarterly results
- Growth was led by index-related fees: average ETF assets linked to MSCI indexes rose 39.2% to $621.4 billion, and year-end ETF assets reached $744.3 billion, up 54.6% from 2016.
- Operating expenses increased 4.9%, slower than revenue growth. Compensation and benefits rose 6.4%; higher cost of revenues and selling and marketing were partly offset by lower intangible amortization.
- Operating cash flow declined mainly because accounts receivable increased by $105.6 million, alongside higher cash interest and tax payments. Management attributed the receivables increase to billing-practice changes, longer client payment approvals, and higher accrued asset-based fees.
- Fourth-quarter revenue was $334.8 million versus $292.8 million in Q4 2016. Net income was $64.6 million versus $68.3 million, with the 2017 quarter including a higher tax provision associated with Tax Reform.
- Weighted-average diluted shares fell 4.8% year over year, reflecting share repurchases partly offset by equity awards. MSCI repurchased $136.9 million of shares in 2017 and paid $119.7 million in dividends.
Outlook, risks and unusual items
- Management said operating cash flows, existing cash, available credit and potential market access should fund operations and commitments for at least the next 12 months and the foreseeable future. No specific revenue or earnings guidance is provided in the supplied filing text.
- MSCI expected its effective tax rate in 2018 to be lower than 2017 following the U.S. corporate tax rate reduction. The 2017 tax provision included a provisional $34.5 million net Tax Reform charge; the company said estimates could change as it completed its analysis.
- Recurring subscription Run Rate rose 17.4% to $1,365.7 million at year-end; annual Aggregate Retention Rate was 93.8%, compared with 92.7% in 2016. Run Rate is a company operating metric, not a revenue forecast.
- Customer concentration is material: BlackRock represented 11.5% of 2017 revenue, and the ten largest clients represented 27.8%. Asset-based fees were 21.7% of revenue and are exposed to market levels, flows, product pricing and index-provider competition.
- Other key risks include dependence on third-party data and distribution providers; cyber, service-continuity and client-data risks; competition and client self-sourcing; regulatory changes affecting benchmarks and data privacy; foreign exchange exposure; and substantial indebtedness. The company reported ordinary-course legal matters but said currently pending matters were not expected to have a material effect based on available facts.
- MSCI adopted the new revenue recognition standard effective January 1, 2018, using the modified retrospective method. Management expected no material overall impact, but noted possible quarterly revenue variability and higher accounts receivable and deferred revenue balances.
Important facts for investors to verify
- Whether ETF-linked assets, net inflows and product mix sustain asset-based fee growth, and how exposure to BlackRock evolves.
- Whether Analytics growth and profitability improve while MSCI continues investing in its platform and fixed-income and multi-asset products.
- Whether receivables normalize as billing changes are completed and collection cycles improve, supporting operating cash flow.
- Final Tax Reform accounting, the resulting 2018 effective tax rate, and any subsequent tax-authority settlements.
- Debt-service capacity, covenant headroom and capital allocation among dividends, repurchases, investment and debt.