MSCI Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing was signed February 12, 2021. Amounts are U.S. dollars unless noted.
Business context
MSCI provides indexes, portfolio analytics and risk-management tools, ESG and climate research, and real estate data and analytics to institutional investors and other financial-market participants. Its revenue model is predominantly recurring subscriptions, supplemented by asset-based index fees and non-recurring services. MSCI served more than 4,400 clients in over 95 countries. BlackRock accounted for 11.0% of 2020 revenue.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1.695 billion | $1.558 billion | +8.8% |
| Operating income / margin | $884.8 million / 52.2% | $755.7 million / 48.5% | Income +17.1% |
| Net income | $601.8 million | $563.6 million | +6.8% |
| Diluted EPS | $7.12 | $6.59 | +8.0% |
| Adjusted EBITDA / margin (non-GAAP) | $971.5 million / 57.3% | $850.5 million / 54.6% | EBITDA +14.2% |
| Operating cash flow | $811.1 million | $709.5 million | +14.3% |
| Cash and cash equivalents at year-end | $1.301 billion | $1.507 billion | Down $206.0 million |
| Long-term debt, carrying value | $3.367 billion | $3.072 billion | Up $294.9 million |
Revenue growth was led by Index (+10.4%), All Other (+18.0%, including ESG and Real Estate), and Analytics (+3.4%). Recurring subscription revenue increased 8.2%; asset-based fees increased 10.5%. Average AUM in equity ETFs linked to MSCI indexes rose 8.9% to $886.7 billion, while year-end AUM reached $1.104 trillion.
Other expense, net, rose 30.3% to $198.5 million, including $45.0 million of losses on debt extinguishments. The effective tax rate increased to 12.3% from 6.6%, reflecting fewer favorable discrete tax benefits than in 2019. The filing reports fourth-quarter 2020 revenue of $443.7 million, net income of $156.2 million and diluted EPS of $1.87, versus $406.6 million, $122.8 million and $1.44, respectively, in fourth-quarter 2019.
Cash used in investing was $241.8 million, primarily reflecting the $190.8 million Burgiss investment. Cash used in financing was $779.0 million, reflecting share repurchases, debt redemptions, dividends and debt issuance activity. MSCI repurchased $727.3 million of shares in the open market during 2020 and declared dividends of $2.92 per share. At year-end it had $3.4 billion principal amount of senior notes outstanding and an undrawn $400 million revolver. Revolver covenant ratios were within limits: leverage 3.21x versus a 4.25x maximum; interest coverage 6.29x versus a 4.00x minimum.
Total shareholders’ deficit was $443.2 million at year-end, compared with a $76.7 million deficit in 2019. The balance sheet included $675.9 million of deferred revenue and $558.6 million of net accounts receivable.
Material changes and outlook
- Run Rate, MSCI’s annualized recurring-revenue indicator, increased 12.1% to $1.832 billion. Recurring subscription Run Rate grew 10.5%; asset-based-fee Run Rate grew 17.2%.
- Subscription cancellations increased 26.6%; annual retention declined to 93.9% from 94.7%. Fourth-quarter retention was 92.6%, and the fourth quarter represented 30.4% of annual cancellations.
- Management said MSCI was not materially impacted by COVID-19 in 2020, maintained operations and did not delay index rebalancings. It noted continued uncertainty around the pandemic and market conditions.
- The filing provides no specific quantitative 2021 revenue or earnings guidance. Management stated that operating cash flow, cash balances, credit capacity and access to capital markets should be sufficient for commitments for at least 12 months after filing and for the foreseeable future.
- Effective January 1, 2021, ESG and Climate became a separate reportable segment; All Other was renamed All Other—Private Assets and includes Real Estate and Burgiss.
- MSCI acquired a 40% non-controlling interest in Burgiss for $190.8 million. Its 2020 equity-method earnings were immaterial.
Risks, contingencies and unusual items
- Revenue exposure includes market-sensitive asset-based fees, client fee pressure and concentration: BlackRock generated 11.0% of revenue, with most of its revenue tied to ETF assets linked to MSCI indexes.
- COVID-19, capital-market volatility, client cancellations, competition and growth in self-indexing could affect demand, renewals and asset-based fees.
- MSCI relies on third-party data and distribution, and faces operational, cybersecurity, confidentiality and product-error risks that could harm service continuity or reputation.
- Regulatory and legal risks include benchmark and ESG oversight, privacy rules, Brexit-related uncertainty, intellectual-property disputes and possible changes to index-licensing practices.
- Debt, foreign-exchange movements, tax examinations and changes in credit ratings may affect financial flexibility. Gross unrecognized tax benefits were $16.6 million; management said approximately $14.8 million could decrease over the next 12 months depending on audit resolutions.
- Ordinary-course litigation and claims are pending or may arise; management did not expect currently pending matters to have a material effect based on information available, though outcomes remain uncertain.
- Debt refinancing included redemptions of the 2025 and remaining 2024 notes, producing $45.0 million in combined extinguishment losses. The audited statements received an unqualified opinion; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether subscription cancellations and retention stabilize, particularly in Analytics and during the fourth-quarter renewal season.
- How much future revenue growth depends on ETF AUM and asset-based fees, and whether lower average fee rates or product mix offset AUM growth.
- BlackRock’s ongoing contribution, contract economics and sensitivity to changes in its MSCI-linked products.
- Debt maturities, interest costs, covenant headroom and the effect of capital returns on the shareholders’ deficit and liquidity.
- Tax-audit outcomes, the timing and amount of any unrecognized-tax-benefit releases, and subsequent segment reporting for ESG and Private Assets.