MSCI Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. MSCI provides indexes, investment analytics, ESG research and ratings, and real-estate data and analytics.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $416.8 million | $371.4 million | +12.2% |
| Operating income | $207.9 million | $162.7 million | +27.8% |
| Operating margin | 49.9% | 43.8% | +6.1 percentage points |
| Adjusted EBITDA (non-GAAP) | $229.2 million | $197.7 million | +15.9% |
| Adjusted EBITDA margin (non-GAAP) | 55.0% | 53.2% | +1.8 percentage points |
| Net income | $148.1 million | $178.2 million | -16.9% |
| Diluted EPS | $1.73 | $2.08 | -16.8% |
| Operating cash flow | $112.8 million | $87.9 million | +$24.9 million |
Revenue growth reflected recurring subscriptions (+7.8%), asset-based fees (+22.5%) and non-recurring revenue (+68.7%). Index revenue rose 16.1% to $249.3 million; Analytics rose 3.4% to $125.5 million; All Other rose 19.5% to $42.0 million. All Other includes ESG and Real Estate.
Net income fell despite higher operating income, principally because Q1 2019 included a $49.9 million income-tax benefit, while Q1 2020 recorded $14.7 million of tax expense. Q1 2020 also included a $10.0 million loss on extinguishing debt. The effective tax rates were 9.0% in 2020 and negative 38.9% in 2019, affected by favorable discrete tax items in both periods.
Cash, debt and liquidity
- Cash and cash equivalents were $1.067 billion at March 31, down $439.7 million from year-end.
- Cash used in investing was $201.6 million, including the $190.8 million Burgiss investment. Cash used in financing was $340.1 million, including $372.9 million of share repurchases and $59.4 million of dividends; debt issuance and repayment activity also affected the total.
- Senior Notes principal outstanding totaled $3.2 billion. MSCI issued $400 million of 3.625% notes due 2030 and redeemed the remaining $300 million of 5.25% notes due 2024. Long-term debt carrying value was $3.170 billion.
- The $400 million revolving credit facility had $5 million drawn at quarter-end; the amount plus accrued interest was repaid April 20. At March 31, the company reported a 3.29x consolidated leverage ratio versus a 4.25x maximum, and 6.43x interest coverage versus a 4.00x minimum.
- Shareholders’ equity was a deficit of $354.3 million. Management said available cash, operating cash flows, credit capacity and market access were expected to fund operations and commitments for at least the next 12 months.
Material changes, outlook and risks
- COVID-19 had sharply affected global equity markets. MSCI-linked equity ETF assets under management fell to $709.5 billion at quarter-end from $934.4 billion at December 31, 2019, although the quarterly average was $877.1 billion. Management cautioned that weaker markets could reduce future asset-based fees.
- Management said subscription revenue growth could moderate, new sales could slow and cancellations could rise. As of March 31, cancellations had not deviated significantly from historical levels due to the pandemic.
- MSCI expected 2020 operating cash flow to decrease from 2019 partly because of COVID-19, while capital expenditure cash flows were expected to increase. The filing provides no numerical earnings or revenue guidance.
- Subscription Run Rate was $1.604 billion, up 8.5% year over year; recurring-subscription Run Rate rose 9.9%. Net new recurring subscription sales were $23.0 million, down 3.6%; retention was 95.0%, compared with 95.2%.
- The company acquired a 40% non-controlling interest in Burgiss for $190.8 million. It elected a three-month reporting lag and expected to begin recognizing its share of earnings in the quarter ending June 30, 2020.
- COVID-19 risk disclosures include potential market-related fee declines, client budget pressure and cancellations, slower collections, operational or technology disruptions, higher mitigation costs, and constraints on financing. Management did not expect pending legal matters to have a material effect based on information then available; tax examinations were ongoing.
Most important facts to verify
- Whether market declines, fund flows and product mix continue to pressure asset-based fees and Run Rate.
- Whether subscription sales, cancellations and retention trends change as the pandemic affects clients.
- Whether cash generation and liquidity remain consistent with management’s outlook, alongside planned repurchases, dividends and investment spending.
- Debt covenant headroom and the impact of the debt refinancing and interest costs.
- The sustainability of reported earnings and margins after removing unusual tax benefits and the debt-extinguishment charge.