MSCI Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. MSCI provides indexes, analytics, ESG research and real estate benchmarks and data, primarily through recurring subscriptions and index-linked fees. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $290.6 | $270.6 | $569.4 | $533.3 |
| Operating income | $125.7 | $98.5 | $238.8 | $187.3 |
| Operating margin | 43.3% | 36.4% | 41.9% | 35.1% |
| Net income | $67.0 | $56.0 | $127.3 | $99.8 |
| Diluted EPS | $0.69 | $0.50 | $1.29 | $0.88 |
| Adjusted EBITDA | $146.0 | $118.3 | $279.2 | $225.9 |
| Adjusted EBITDA margin | 50.3% | 43.7% | 49.0% | 42.4% |
Q2 revenue rose 7.4%; recurring subscription revenue increased 8.0%, while asset-based fees fell 3.0%. H1 revenue grew 6.8%, with recurring subscriptions up 7.1% and asset-based fees up 1.3%. Index was the largest segment; H1 Index revenue grew 8.4%, Analytics 3.8%, and All Other 10.6%. Management attributed stronger margins chiefly to subscription growth, expense control and lower Analytics costs.
H1 operating cash flow was $150.1 million, compared with $90.7 million a year earlier. Investing used $18.4 million, including $13.3 million of capital expenditures and $5.1 million of capitalized software development. Financing used $501.7 million, principally reflecting $466.7 million of treasury-share repurchases and $43.3 million of dividends. Cash fell to $404.6 million at June 30 from $777.7 million at year-end 2015; $156.0 million was held by foreign subsidiaries.
At June 30, current assets were $737.1 million and current liabilities $509.7 million. Long-term debt was $1,580.5 million, net of deferred financing fees. The company had issued $800 million of 5.25% notes due 2024 and $800 million of 5.75% notes due 2025. Its revolving facility was $200 million. Reported covenant ratios were 2.84:1 leverage (maximum 3.75:1) and 6.76:1 interest coverage (minimum 4.00:1).
Material changes and operating indicators
- Operating expenses declined 4.2% in Q2 and 4.5% in H1, mainly from lower compensation costs and Analytics cost reductions. H1 R&D expense also benefited from increased software capitalization and a $3.4 million non-cash project-termination charge recorded in the prior-year period.
- Interest expense increased $11.8 million in Q2 and $23.6 million in H1 year over year, reflecting higher debt following the 2025 notes offering. The company also recorded a $3.7 million charge for estimated losses associated with miscellaneous transactions.
- Q2 new recurring subscription sales were $28.8 million, down 2.7% year over year; cancellations increased 26.2% to $15.4 million. Net new recurring sales fell 22.9% to $13.4 million. Aggregate Retention Rate was 93.1%, versus 94.2% in Q2 2015; Analytics retention was 91.7% versus 93.8%.
- Total Run Rate reached $1.119 billion, up 5.3% year over year, including recurring-subscription Run Rate of $923.7 million, up 7.2%. Run Rate for asset-based fees declined 2.9%. AUM in ETFs linked to MSCI indexes was $439.7 billion at quarter-end, up 1.0% year over year.
- Share repurchases totaled approximately $455.5 million for H1, at an average $70.12 per share. The remaining authorization was approximately $423.8 million at June 30. Weighted-average diluted shares declined 13.1% in H1.
Outlook, risks and other notable items
- No specific revenue or earnings forecast was provided. Management said it expects domestic and foreign liquidity to cover operating needs and commitments for at least the next 12 months. On July 27, the board authorized exploration of financing options that could increase debt and interest expense; any financing remains subject to market and other conditions.
- The board declared a Q3 2016 dividend of $0.28 per share, payable August 31 to shareholders of record August 15.
- Index-linked fees are exposed to market values, investment flows, product mix and foreign exchange. Management reported 18.0% of H1 revenue subject to foreign-currency exchange risk; approximately two-thirds of securities underlying index-linked investment products are denominated in currencies other than the U.S. dollar.
- The effective tax rate declined to 33.5% for H1 from 36.0%, which management attributed to aligning the tax profile with the global operating footprint. Tax authorities, including the IRS and authorities in India and New York, were examining tax years spanning 2005–2015; the timing and amount of possible changes in unrecognized tax benefits could not be estimated.
- Management said pending legal matters were not expected to have a material effect based on currently available facts; it noted that outcomes remain uncertain. No material changes to previously disclosed risk factors were reported. PwC reviewed, but did not audit, the interim financial statements.
- Revenue from discontinued operations was zero in H1 2016; H1 2015 included a $5.8 million after-tax charge related to tax obligations triggered by the 2014 ISS sale.
Important facts for investors to verify
- Whether weaker Q2 net subscription sales and lower retention—particularly in Analytics—persist or reverse.
- How much of margin expansion is sustainable, given cost reductions and increased software capitalization.
- Effects of the proposed additional financing on leverage, interest expense, liquidity and shareholder returns.
- Future sensitivity of index-linked fees to ETF assets, market movements, currencies and product mix.
- Outcomes of tax examinations and any material changes in unrecognized tax benefits.