MSCI Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. MSCI provides investment indexes, analytics and risk tools, ESG research, and real estate data and benchmarks. Its principal model is recurring subscriptions, supplemented by fees tied to assets in index-linked products and other non-recurring revenue.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1,434.0 million | $1,274.2 million | +12.5% |
| Operating income | $686.9 million | $579.8 million | +18.5% |
| Operating margin | 47.9% | 45.5% | +2.4 percentage points |
| Net income | $507.9 million | $304.0 million | +67.1% |
| Diluted EPS | $5.66 | $3.31 | +71.0% |
| Adjusted EBITDA (non-GAAP) | $772.4 million | $659.8 million | +17.1% |
| Adjusted EBITDA margin (non-GAAP) | 53.9% | 51.8% | +2.1 percentage points |
| Operating cash flow | $612.8 million | $404.2 million | +$208.6 million |
Revenue comprised $1,066.5 million of recurring subscriptions (+9.6%), $336.6 million of asset-based fees (+21.9%), and $30.9 million of non-recurring revenue (+23.3%). Subscription growth was led by Index and All Other (ESG and Real Estate); asset-based growth reflected higher average ETF assets and growth in other index-linked products. Index segment revenue grew 16.2%, Analytics 4.7%, and All Other 22.3% (including ESG growth of 30.2%).
Operating expenses rose 7.6% to $747.1 million, below revenue growth. The largest increase among expense categories was general and administrative, up 13.8%; intangible amortization rose 21.6%, including a $7.9 million write-off of the IPD tradename. The filing attributes margin expansion principally to revenue growth, especially in Index.
Cash and cash equivalents were $904.2 million at year-end, versus $889.5 million a year earlier. Total debt principal was $2.6 billion; carrying value of long-term debt was $2,575.5 million. The $250 million revolving credit facility was undrawn. Interest expense was $133.1 million. The company reported a 3.13:1.00 consolidated leverage ratio and 6.59:1.00 interest coverage ratio, within stated covenant limits of 4.25:1.00 maximum leverage and 4.00:1.00 minimum coverage. Shareholders’ equity was a deficit of $166.5 million, compared with positive equity of $401.0 million in 2017.
Financing cash outflows included $949.9 million of share repurchases and $170.9 million of dividends; the company also issued $500 million of 2027 notes. It repurchased 6.2 million shares during 2018 at an average $148.34 per share. The board declared a quarterly dividend of $0.58 per share in January 2019.
Material changes versus the prior period
- Revenue growth accelerated modestly from 10.7% in 2017 to 12.5% in 2018; recurring subscription growth rose from 6.5% to 9.6%, while asset-based fee growth slowed from 31.3% to 21.9%.
- Year-end AUM in ETFs linked to MSCI indexes declined 6.5% to $695.6 billion, as $110.2 billion of market depreciation exceeded $61.5 billion of net inflows. Accordingly, Index asset-based-fee Run Rate declined 1.5%, even as annual asset-based revenue increased.
- Total Run Rate grew 4.8% to $1,431.3 million, versus 17.4% growth in 2017. Recurring subscription Run Rate rose 6.7%; Analytics Run Rate grew only 0.5% as divested businesses reduced reported growth.
- Net income benefited from a lower effective tax rate (19.4%, versus 34.9% in 2017) and gains on the FEA and InvestorForce divestitures totaling approximately $57.2 million. The 2017 tax provision included a net $34.5 million provisional Tax Reform charge; 2018 included a net $11.2 million Tax Reform benefit.
- Operating cash flow increased substantially, while financing outflows increased primarily because of higher share repurchases and dividends. The company’s share repurchases contributed to the year-end shareholders’ deficit.
Fourth quarter: Revenue was $361.7 million, versus $334.8 million in Q4 2017; net income was $152.1 million, versus $64.6 million. Q4 2018 included a $46.6 million InvestorForce divestiture gain, which is important context when assessing the year-over-year earnings comparison.
Outlook, commentary, risks and unusual items
Management describes a strategy centered on differentiated research and content, integrated client solutions, technology investment, value-added services, and selective acquisitions. It expects existing cash, operating cash flows, the undrawn credit facility, and potential market access to fund operations and commitments for at least the 12 months after filing. The filing text does not provide a clear numeric revenue or earnings forecast for 2019.
- Concentration and market exposure: The ten largest clients generated 28.6% of revenue. BlackRock represented 11.9%; 95.8% of BlackRock revenue came from fees tied to AUM in its MSCI-indexed ETFs. A material BlackRock contract was due to end in March 2020, subject to automatic annual renewal unless terminated. Asset-based fees were 23.5% of 2018 revenue and are sensitive to market prices, fund flows, product mix and fee negotiations.
- Leverage and capital allocation: $2.6 billion of debt, non-investment-grade debt ratings, restrictive covenants and significant repurchases could affect financial flexibility. Management’s liquidity outlook is its assessment, not a guarantee.
- Operational and competitive risks: MSCI relies on third-party data and software suppliers and faces cybersecurity, data confidentiality, system migration and product-error risks. Competition, fee pressure, client self-sourcing, and index-provider substitution may affect renewals and pricing.
- Regulatory and international exposure: Benchmark regulation, Brexit, privacy laws, investment-adviser rules, tax changes and foreign exchange movements may increase costs or constrain products. The company identified EU and UK benchmark authorization and implementation requirements as matters to monitor.
- Accounting and unusual items: ASC 606 adoption affected the timing of revenue recognition; the company reported 2018 revenue $6.2 million higher under the new standard than it would have been without adoption. New lease accounting effective January 1, 2019 was expected to add approximately $170–$190 million of operating lease assets and $190–$210 million of lease liabilities, with no material income-statement or cash-flow impact expected.
- Contingencies: Management said pending ordinary-course legal matters were not expected to have a material effect based on currently available facts, while noting that outcomes remain uncertain. The company also has tax audits and indemnification obligations to Morgan Stanley; management did not identify a material expected impact from pending matters.
Key facts for investors to verify
- BlackRock contract renewal terms and subsequent changes in its share of MSCI revenue and AUM-linked fees.
- Whether subscription Run Rate and retention sustain growth, and whether the 2018 decline in ETF-linked AUM reverses or persists.
- Debt covenant headroom, refinancing and interest costs, and the effect of continued repurchases and dividends on leverage and equity.
- Underlying earnings trends excluding divestiture gains and tax-rate benefits, and the effects of ASC 606 and lease-standard adoption.
- Developments in benchmark regulation, Brexit-related arrangements, cybersecurity, data-provider access, and tax or legal contingencies.