MSCI Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited; PwC conducted a review, not an audit.
Business context
MSCI provides indexes, analytics and risk-management tools, ESG research and ratings, and real estate data and analytics to the global investment community. Its revenue is primarily recurring subscriptions, supplemented by asset-based fees tied to index-linked products and non-recurring fees.
Financial performance
| Metric | Q3 2019 | Change vs. Q3 2018 | Nine months 2019 | Change vs. 2018 |
|---|---|---|---|---|
| Revenue | $394.3 million | +10.1% | $1,151.2 million | +7.4% |
| Operating income | $201.2 million | +14.1% | $556.3 million | +7.6% |
| Operating margin | 51.0% | 49.3% prior year | 48.3% | 48.2% prior year |
| Net income | $137.0 million | +10.6% | $440.9 million | +23.9% |
| Diluted EPS | $1.60 | +17.6% | $5.15 | +33.1% |
| Adjusted EBITDA (non-GAAP) | $220.8 million | +12.9% | $630.3 million | +8.2% |
| Adjusted EBITDA margin (non-GAAP) | 56.0% | 54.6% prior year | 54.8% | 54.3% prior year |
Q3 revenue growth included recurring subscriptions (+7.8%), asset-based fees (+17.1%) and non-recurring revenue (+18.5%). Index revenue rose 13.0%, Analytics 3.1%, and All Other, including ESG and Real Estate, 19.3%. Management cited strength in Index, ESG and index-linked products; Analytics growth was partly offset by the InvestorForce divestiture. Q3 asset-based fees included approximately $5 million of prior-period fees from a retrospective price increase following contract renegotiation.
For the first nine months, operating cash flow was $465.9 million, versus $439.6 million a year earlier. Investing activities used $35.3 million, including $17.2 million of capital expenditures and $18.1 million of capitalized software costs. Financing activities used $450.3 million, including $286.3 million for treasury shares and $165.1 million of dividends. Cash declined $23.0 million to $881.2 million.
At September 30, cash was $881.2 million, long-term debt was $2,578.2 million, and the $250 million revolving facility was undrawn. The company reported a consolidated leverage ratio of 2.96x against a 4.25x maximum and interest coverage of 6.30x against a 4.00x minimum. Shareholders’ equity was a deficit of $147.9 million.
Material changes and unusual items
- Nine-month net income growth substantially exceeded operating-income growth, reflecting a 3.5% effective tax rate versus 19.6% in 2018. The 2019 rate included $82.7 million of favorable discrete tax items, principally $66.6 million of excess tax benefits on vesting performance-based share units and $10.8 million of other share-based compensation tax benefits. These items are not a measure of recurring tax performance.
- Operating expenses rose 7.2% for the first nine months. Compensation and benefits increased 10.7%, including $15.4 million of payroll taxes associated with vesting of the 2016 multi-year performance units.
- MSCI adopted lease accounting guidance on January 1, 2019, recognizing right-of-use assets of $164.9 million and operating lease liabilities of $184.4 million at September 30. The company reported $21.7 million of lease expense for the nine-month period.
- Average ETF assets linked to MSCI indexes increased 7.3% year over year in Q3, but nine-month average assets rose 3.3%; product mix affected asset-based fee growth.
- BlackRock represented 11.5% of consolidated revenue for the first nine months. An October 2019 amendment extended key BlackRock ETF index license agreements through March 2030 and revises fees for certain funds over time.
Outlook, risks and subsequent events
No numerical earnings or revenue guidance is provided in the filing. Management stated that operating cash flows, existing cash, available credit and potential capital-market access should be sufficient for operating needs and commitments for at least the next 12 months. September 30 Run Rate, a management operating metric rather than recognized revenue, was $1.551 billion, up 8.0% year over year; management cautioned that realized revenue can differ because of renewals, asset levels, market movements, trading volumes, currency and timing of revenue recognition.
Risks and sensitivities include market-driven changes to index-linked assets and fees, foreign exchange exposure, customer concentration, and ongoing tax examinations. The company reported $3.2 million of foreign-currency losses for the first nine months. Management said pending legal matters were not expected, based on information then available, to have a material effect; outcomes remain uncertain. No material changes to the previously disclosed risk factors were reported.
After quarter-end, MSCI completed an approximately $18 million Carbon Delta acquisition, described as immaterial to the company. The board authorized an additional $750 million share repurchase program and declared a $0.68-per-share quarterly dividend.
Investor verification priorities
- Assess the sustainability of earnings growth apart from the $82.7 million of favorable nine-month tax items and the resulting unusually low effective tax rate.
- Verify the contribution and future fee effects of the BlackRock agreement amendment, including its phased pricing changes and long-term renewal terms.
- Track asset-based revenue sensitivity to ETF assets, product mix, market returns and futures/options trading; Q3 fees included approximately $5 million attributable to prior periods.
- Monitor recurring subscription growth, retention (95.0% for Q3 overall; 93.6% in Analytics) and the comparatively slower Analytics Run Rate growth.
- Review cash deployment, debt and covenant headroom alongside continued dividends and repurchases; confirm the impact of the newly authorized buyback.