MSCI Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unless noted, comparisons are with the corresponding 2014 period. MSCI provides indexes, analytics, data, real estate benchmarks and ESG products; the results presented are from continuing operations. ISS was sold in April 2014 and is reported as a discontinued operation in the comparisons.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $270.6m (+6.4%) | $254.2m | $533.3m (+8.0%) | $493.9m |
| Operating income | $98.5m (+11.3%) | $88.5m | $187.3m (+11.4%) | $168.0m |
| Operating margin | 36.4% | 34.8% | 35.1% | 34.0% |
| Continuing-operations income | $56.0m | $56.8m | $105.6m | $103.9m |
| Diluted EPS, continuing operations | $0.50 | $0.48 | $0.93 | $0.88 |
| Net income, including discontinued operations | $56.0m | $107.7m | $99.8m | $188.1m |
Q2 revenue growth was led by performance products (+8.5%), especially asset-based fees (+16.0%); analytics revenue grew 3.5%. For the first half, performance products grew 10.5% and analytics grew 4.4%. Recurring subscription revenue increased 5.0% in Q2 and 6.9% in the first half. MSCI-linked ETF assets were $435.4bn at June 30, up 15.0% year over year. Total Run Rate was $1.063bn, up 7.7% year over year.
- Cash flow: First-half operating cash flow was $90.7m, versus $94.1m. Investing used $18.3m, compared with $340.9m provided in 2014, which included $362.8m net proceeds from the ISS sale. Financing used $123.4m, including $97.6m in share repurchases and $40.8m in dividends. Cash declined $53.8m to $455.0m.
- Balance sheet and liquidity: Cash was $455.0m; current assets were $776.8m and current liabilities $458.6m at June 30. Long-term debt was $800.0m, consisting of 5.25% senior notes due 2024. The company also had a $200m revolving credit agreement. It reported leverage and interest-coverage ratios of 1.67x and 11.22x, respectively, against covenant limits of 3.75x maximum and 4.00x minimum.
- Returns to shareholders: MSCI repurchased shares under its existing authorization and paid $0.18 per share in each of Q1 and Q2. On July 28, the Board declared a Q3 dividend of $0.22 per share.
Changes, outlook and notable items
- Continuing-operations diluted EPS improved, while reported net income fell sharply because 2014 included income from the ISS disposal: $50.9m in Q2 and $84.1m for the first half. First-half 2015 discontinued operations included a $5.8m out-of-period tax charge related to the ISS sale.
- Interest expense increased $5.8m in Q2 and $11.8m in the first half, primarily reflecting the higher rate on the 5.25% notes versus the prior term loan.
- Management said the Enhanced Investment Program ended in 2014 and cited margin expansion in the first half of 2015. It expected further 2015 margin expansion, excluding non-recurring charges; no specific revenue or earnings guidance was provided.
- First-half operating expenses included a $3.4m non-cash charge tied to termination of an analytics technology project. Higher compensation costs also reflected severance, current staff costs and prior hiring; cost discipline reduced non-compensation expenses.
- On July 28, 2015, the Board authorized MSCI to explore financing options that could increase leverage and interest expense. The filing does not specify a transaction or amount.
- Risks include foreign-exchange exposure, including the effect of currency movements on index-linked asset fees; tax examinations and possible changes in unrecognized tax benefits; and ordinary-course litigation. Management said pending legal matters were not expected to have a material effect based on information then available. No material risk-factor changes were reported.
- Management redesigned 2015 executive cash bonuses toward formulaic performance measures; awards may range from 0% to 150% of target, with financial targets weighted 70% and individual goals 30%.
Investor verification points
- Separate continuing-operations performance from ISS-related discontinued-operation and disposal effects when comparing earnings.
- Track ETF-linked assets, net flows, asset-based fees, subscription Run Rate and retention trends; asset-based fees are exposed to market and currency movements.
- Assess the effect of the higher-cost notes, planned buybacks and dividends on cash, leverage and interest coverage, including any financing action following the Board’s July authorization.
- Monitor the $5.8m ISS-related tax charge, tax examinations and potential changes to unrecognized tax benefits.
- Management’s margin-expansion outlook is qualified by exclusion of non-recurring charges; the filing gives no numerical full-year guidance.
The interim financial statements were reviewed, not audited, by PricewaterhouseCoopers LLP.