MSCI Inc. — Q2 2018 Form 10-Q
Business and period: MSCI provides investment indexes, analytics and risk-management tools, ESG research and ratings, and real-estate research and benchmarking. This unaudited quarterly report covers the three and six months ended June 30, 2018; comparisons are with the same periods in 2017 unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $363.0m | $316.1m | $714.4m | $617.3m |
| Operating income | $173.5m | $146.1m | $340.7m | $276.8m |
| Net income | $116.8m | $81.3m | $231.9m | $154.2m |
| Diluted EPS | $1.28 | $0.89 | $2.52 | $1.68 |
| Operating margin | 47.8% | 46.2% | 47.7% | 44.8% |
| Adjusted EBITDA / margin | $200.4m / 55.2% | $166.4m / 52.6% | $387.1m / 54.2% | $317.2m / 51.4% |
- Q2 revenue increased 14.9%; six-month revenue increased 15.7%. Six-month net income rose 50.4%, with lower effective taxes and the FEA divestiture gain contributing alongside operating growth.
- Q2 revenue by segment: Index $212.9m (+20.2%), Analytics $119.1m (+5.1%), and All Other $31.0m (+21.2%). Index growth was led by asset-based fees; recurring subscription revenue grew 10.0% overall.
- Six-month operating cash flow was $295.8m, versus $159.2m. Management attributed the increase primarily to higher cash collections, partly offset by higher operating and tax payments. Investing activities provided $7.9m, including FEA sale proceeds; financing activities provided $178.4m, including $500m of new-note proceeds, partly offset by share repurchases and dividends.
- Cash and equivalents were $1.368bn at June 30, 2018, up from $889.5m at year-end 2017. Long-term debt was $2.574bn, net of deferred financing fees, compared with $2.078bn at year-end. The $250m revolving facility was undrawn. The reported leverage ratio was 3.3x against a 4.25x maximum; interest coverage was 6.9x against a 4.0x minimum.
- Six-month dividends declared were $0.76 per share, versus $0.56 a year earlier. MSCI repurchased $223.2m of shares in the first half. Shareholders’ equity was $346.4m at June 30, versus $401.0m at December 31, 2017.
Material changes and notable items
- MSCI adopted ASC 606 on January 1, 2018 using the modified retrospective method. The standard changed timing and balance-sheet presentation for certain contracts. It reduced reported Q2 revenue and net income by $2.2m and $1.7m, respectively, and six-month revenue and net income by $4.5m and $3.6m, respectively, versus the amounts estimated without adoption. It also materially increased receivables and deferred revenue at adoption.
- On April 9, MSCI sold Financial Engineering Associates for $21.0m cash, recording a $10.6m gain; its operating results were not material. In Q2, MSCI also wrote off the $7.9m remaining IPD trade name value as it rebranded the Real Estate business as MSCI Real Estate.
- The May 2018 issuance of $500m of 5.375% senior notes due 2027 increased debt. The revolving-credit amendment raised commitments to $250m, extended the term to May 2023 (with a one-year extension option), and reduced applicable borrowing and commitment rates.
- The six-month effective tax rate was 21.6%, compared with 29.6% in 2017. Tax Reform accounting remained provisional; MSCI reported a cumulative Tax Reform accrual of $32.9m and noted that final amounts could differ, potentially materially.
Outlook, management commentary and risks
- MSCI gave no specific full-year revenue or earnings guidance in the provided filing. Management said cash from operations, existing cash and available credit were expected to fund operations and commitments for at least the next 12 months and the foreseeable future.
- Run Rate was $1.412bn at June 30, up 12.0% year over year (recurring subscriptions +9.5%; asset-based fees +21.4%). Run Rate is a management metric, not a revenue forecast, and MSCI cautioned that realized revenue can vary with renewals, asset values and flows, trading volumes, pricing, foreign exchange, implementation timing, and acquisitions or dispositions.
- Remaining performance obligations on contracts longer than one year were $403.9m; approximately $230.0m was expected to be recognized over the next 12 months. The company excluded contracts of one year or less from this disclosure under a practical expedient.
- Index-linked fees depend partly on AUM, markets, product mix and investor flows. Average ETF AUM linked to MSCI indexes rose 30.5% in Q2 year over year, but period-end AUM fell from $764.9bn at March 31 to $744.7bn at June 30. MSCI also disclosed foreign-currency exposure: 13.2% of first-half revenue was subject to currency risk, and 41.4% of operating expenses were denominated in foreign currencies.
- BlackRock accounted for 12.6% of first-half consolidated revenue, up from 10.7%; it represented 21.3% of Index revenue. Total retention rate was 94.1% for Q2, down from 94.9% a year earlier; Analytics retention was 92.1% versus 93.9%.
- MSCI reported no material change in risk factors and no pending legal matter it believed would materially affect the company, though it noted ordinary-course litigation and unresolved tax examinations. Management stated disclosure controls were effective. The interim financial statements received a review, not an audit.
- Subsequent events: MSCI agreed on July 25 to sell InvestorForce for approximately $62m, subject to customary closing conditions; its net assets were approximately $14m at June 30. On July 31, the board declared a $0.58-per-share Q3 dividend.
Key facts for investors to verify
- How much reported growth reflects durable subscription expansion versus market- and AUM-sensitive index fees, and whether period-end AUM and flows support continued asset-based growth.
- Whether subscription retention, especially in Analytics, stabilizes and how new sales translate into recognized revenue and Run Rate.
- The effects of ASC 606 on revenue timing, receivables, deferred revenue and comparability with prior periods.
- Debt-service capacity and capital allocation after the 2027 note issuance, buybacks, dividends and the InvestorForce sale; monitor compliance with credit covenants.
- Final Tax Reform accounting and outcomes of tax examinations, along with the value and timing of the InvestorForce transaction.