MSCI Inc. — Q3 2016 Form 10-Q
Business and period: MSCI provides indexes, analytics, ESG research and real-estate data and analytics to institutional investors. This unaudited quarterly report covers the three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $288.4m | $268.8m | $857.9m | $802.1m |
| Operating income | $123.3m | $109.1m | $362.1m | $296.4m |
| Operating margin | 42.7% | 40.6% | 42.2% | 36.9% |
| Net income | $65.3m | $64.4m | $192.6m | $164.2m |
| Diluted EPS | $0.68 | $0.59 | $1.98 | $1.47 |
| Adjusted EBITDA | $143.3m | $128.9m | $422.5m | $354.8m |
| Adjusted EBITDA margin | 49.7% | 47.9% | 49.3% | 44.2% |
Cash flow and liquidity: Nine-month operating cash flow was $297.0m, up from $224.7m; investing cash outflow was $31.5m. Financing used $65.3m, including $498.9m of treasury-share repurchases and $69.9m of dividends, partly offset by $500m of borrowing proceeds. Cash rose to $974.1m at September 30, 2016, from $777.7m at year-end 2015. The company reported $187.6m of cash held by foreign subsidiaries, some of which may face tax or local-law restrictions on repatriation.
Debt: Long-term debt, net of deferred financing fees, was $2.074bn, versus $1.579bn at December 31, 2015. MSCI issued $500m of 4.75% senior notes due 2026 in August. Its amended revolving facility permits commitments up to $220m; none had been drawn. At quarter-end, the consolidated leverage ratio was 3.62x against a 4.25x maximum, and interest coverage was 6.26x against a 4.00x minimum.
Changes and operating trends
- Q3 revenue increased 7.3%; operating income grew 13.0%, while net income increased only 1.4%, reflecting higher interest and other expense. Interest expense rose $9.5m year over year in the quarter.
- For the first nine months, revenue grew 6.9%, operating income 22.2%, and net income 17.3%. Diluted EPS also benefited from a 13.0% year-over-year reduction in weighted-average diluted shares, largely from buybacks.
- Index was the main growth engine: Q3 segment revenue rose 11.4%, including 10.6% growth in recurring subscriptions. Analytics revenue grew 2.7% in Q3 and 3.5% year to date. All Other includes ESG and Real Estate; the Real Estate occupiers business was disposed of during Q3.
- Q3 asset-based fee revenue increased 10.6%, supported by growth in non-ETF passive funds and futures/options fees. MSCI-linked ETF assets under management were $474.9bn at quarter-end, up 21.7% year over year. Nine-month ETF fee revenue nevertheless declined 1.5%, with product mix offsetting higher average assets.
- Q3 new recurring subscription sales were $28.8m, but cancellations rose 49.1% year over year to $16.3m; net new recurring sales fell 14.4% to $12.5m. Total retention was 92.7% for the quarter versus 94.8%; Analytics retention was 90.4% versus 95.3%.
Outlook, commentary and risks
- No formal revenue or earnings guidance is provided in the supplied filing text. Management said domestic and foreign cash flows, existing cash, available credit and market access should be sufficient for operations and expected commitments for at least the next 12 months.
- Management estimated interest expense of approximately $102m for full-year 2016 and approximately $116m annually in future years, reflecting the increased debt level.
- On October 26, 2016, the board declared a $0.28-per-share fourth-quarter dividend and authorized an additional $750m share-repurchase program, alongside remaining authorization under the prior program.
- Unusual/comparability items include a $6.3m investment-sale gain in Q3 2015, which increased the year-over-year comparison in other expense; a $3.7m charge for estimated losses from miscellaneous transactions in the first nine months of 2016; and the 2015 discontinued-operations tax charge related to the earlier ISS sale. Q3 2016 included a gain on disposal of the Real Estate occupiers business; the filing does not provide a clear amount for that gain.
- Risks include foreign-exchange exposure, market and fund-flow effects on asset-based fees, tax examinations and possible changes in unrecognized tax benefits, and ordinary-course legal matters. Management did not expect pending matters to have a material effect based on facts then available. No material changes to previously disclosed risk factors were reported.
Investor facts to verify
- Whether recurring subscription growth and retention stabilize, particularly in Analytics, given the higher Q3 cancellations and lower net new subscription sales.
- How much future asset-based revenue depends on ETF market performance, fund flows, product mix and trading volumes.
- Debt-service capacity and covenant headroom as interest expense increases; compare reported leverage and coverage with covenant thresholds.
- The sustainability of buybacks and dividends alongside debt, including the timing and funding of the newly authorized repurchase program.
- The eventual outcome of tax examinations and the impact, if any, of foreign-cash repatriation constraints or currency movements.