Business context and reporting period
MSCI Inc. provides indexes, analytics, ESG ratings and analysis, and real-estate investment analysis to institutional investors. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016; balance-sheet figures are compared with December 31, 2016. The interim statements received a review, not an audit.
Financial results and key metrics
- Revenue: $301.2 million, up 8.0% year over year. Recurring subscriptions rose 5.7% to $238.1 million; asset-based fees rose 18.1% to $57.5 million; non-recurring revenue was $5.6 million.
- Profit and margins: Operating income was $130.6 million, up 15.4%; operating margin increased to 43.4% from 40.6%. Net income was $73.0 million, up 20.8%. Diluted EPS was $0.80 versus $0.60. Adjusted EBITDA was $150.7 million, up 13.2%, with a 50.0% margin versus 47.8%.
- Segments: Index revenue rose 13.0% to $163.4 million and Adjusted EBITDA rose 15.6% to $115.6 million. Analytics revenue rose 2.0% to $112.4 million, while Adjusted EBITDA fell 2.7% to $29.5 million. All Other revenue rose 5.8% to $25.4 million and Adjusted EBITDA was $5.5 million versus $2.7 million.
- Business indicators: Run Rate was $1.207 billion, up 8.6% year over year; recurring-subscription Run Rate grew 5.9% and asset-based-fee Run Rate 20.8%. ETF assets linked to MSCI indexes were $555.7 billion at quarter-end, up 26.8% year over year. Aggregate Retention Rate was 94.7%, versus 95.1% a year earlier. Net new recurring subscription sales declined 10.6% to $17.7 million.
- Cash flow: Operating cash flow was $37.0 million, broadly unchanged from $36.9 million. Investing used $9.6 million, including $7.3 million of capital expenditures. Financing used $125.2 million, including $100.4 million for treasury-share repurchases and $25.5 million for dividends. Cash declined $94.9 million to $697.0 million.
- Liquidity and debt: Current assets were $988.7 million and current liabilities $496.3 million at March 31. Long-term debt was $2.076 billion net of deferred financing fees; cash was $697.0 million. The $220 million revolving facility was undrawn. Leverage and interest-coverage ratios were 3.38x and 6.17x, respectively, against maximum and minimum covenant thresholds of 4.25x and 4.00x.
- Capital returns: The company declared a $0.28-per-share dividend for Q1, versus $0.22 a year earlier, and repurchased 1.079 million shares in open-market purchases for $88.7 million. Repurchase authorization remaining was $781.2 million. A further $0.28-per-share Q2 dividend was declared May 2, 2017.
Material changes versus the prior comparable period
- Revenue growth was led by Index, especially asset-based fees: ETF-linked revenue grew 20.5%, supported by a 28.5% increase in average linked ETF assets. Index recurring subscriptions increased 9.1%.
- Operating expenses rose 3.0%, slower than revenue growth, supporting margin expansion. Analytics revenue growth was modest and its Adjusted EBITDA declined as expenses grew faster than revenue.
- Interest expense increased $6.1 million, primarily due to the $500 million 4.75% senior-note issuance in August 2016. Total other expense, net rose 29.6% to $29.0 million.
- The effective tax rate declined to 28.2% from 33.5%. A $3.1 million excess tax benefit from adoption of share-based compensation accounting guidance increased diluted EPS by approximately $0.03; management also cited efforts to align the tax profile with global operations.
- Weighted-average basic and diluted shares fell 8.8% and 8.4%, respectively, largely reflecting share repurchases, contributing to per-share growth.
Outlook, commentary, risks and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided. Management said it expects domestic and foreign cash flows, existing cash and available funding to cover operating needs and commitments for at least the next 12 months and the foreseeable future. It also described growth priorities as deepening client relationships, developing products and pursuing acquisitions.
- Management noted that first-quarter operating cash flow is typically affected by annual discretionary compensation payments. Cash held by foreign subsidiaries was $249.5 million, some of which may face tax or local-law restrictions on repatriation; management expects foreign cash balances to grow.
- Key business sensitivities include market levels, foreign exchange, and inflows or outflows from index-linked products. About 15.7% of quarterly revenue was exposed to foreign-currency risk; approximately two-thirds of securities underlying linked-product assets were denominated in currencies other than the U.S. dollar. The company reported $0.6 million of foreign-exchange losses for the quarter.
- BlackRock represented 10.3% of consolidated revenue and 18.6% of Index revenue in Q1 2017. This customer concentration is a potential exposure.
- Pending ordinary-course legal matters were not expected by management to have a material effect, though the filing notes that outcomes are uncertain. Tax examinations include IRS, state and foreign jurisdictions; significant changes in unrecognized tax benefits within 12 months are possible, but not quantifiable from the filing.
- The company was evaluating the impact of the new revenue-recognition standard, including possible effects on timing of revenue and implementation costs; it said the quantitative impact could not yet be reasonably estimated. It did not expect certain other newly issued accounting standards to have a material effect.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting. The filing reported no material changes in risk factors since year-end 2016.
Important facts for investors to verify
- Whether Run Rate growth converts into reported revenue, particularly given lower net new recurring subscription sales and retention-rate movement.
- How much asset-based-fee growth persists if ETF market appreciation, flows, trading volumes or foreign exchange move adversely.
- Analytics segment performance, including expense growth, cancellations and its lower Adjusted EBITDA margin.
- Debt covenant headroom, interest costs and the effect of continued dividends and buybacks on cash, leverage and share count.
- Availability and potential repatriation costs of foreign-held cash, and developments in tax examinations and unrecognized tax benefits.
- The eventual accounting and disclosure impact of the revenue-recognition standard and any changes to revenue timing or contract balances.