MSCI Inc. — Q2 2019 Form 10-Q
Business context and period: MSCI provides investment indexes, analytics, ESG research and ratings, and real estate data and benchmarks. This filing covers the quarter and six months ended June 30, 2019; interim statements are unaudited and were reviewed by PwC. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $385.6 (+6.2%) | $363.0 | $756.9 (+6.0%) | $714.4 |
| Operating income | $192.4 (+10.9%) | $173.5 | $355.1 (+4.2%) | $340.7 |
| Operating margin | 49.9% | 47.8% | 46.9% | 47.7% |
| Net income | $125.7 (+7.6%) | $116.8 | $303.9 (+31.0%) | $231.9 |
| Diluted EPS | $1.47 | $1.28 | $3.55 | $2.52 |
| Adjusted EBITDA (non-GAAP) | $211.8 (+5.7%) | $200.4 | $409.5 (+5.8%) | $387.1 |
| Adjusted EBITDA margin (non-GAAP) | 54.9% | 55.2% | 54.1% | 54.2% |
Q2 recurring subscription revenue rose 8.4% to $289.1 million; asset-based fees were nearly flat at $87.7 million. For the first half, subscriptions increased 8.3% to $571.5 million, while asset-based fees fell 2.1% to $169.5 million. Segment revenue growth was led by Index subscriptions and All Other (ESG and Real Estate); Analytics growth was more modest.
First-half operating cash flow was $277.3 million, down from $295.8 million; investing used $20.5 million, compared with $7.9 million provided in the prior-year period. Financing used $391.5 million, including $285.2 million of treasury-share repurchases and $107.2 million of dividends paid. Cash declined by $133.1 million to $771.1 million from year-end 2018.
At June 30, debt carrying value was $2.577 billion, representing $2.6 billion principal of senior unsecured notes due 2024–2027; the $250 million revolver was undrawn. The company reported leverage of 3.04x against a 4.25x maximum and interest coverage of 6.14x against a 4.00x minimum. Its shareholders’ equity deficit was $231.8 million. Adoption of lease accounting added $167.9 million of right-of-use assets and $187.5 million of lease liabilities.
Changes, outlook and risks
- Earnings comparability: First-half net income benefited from a $15.8 million income tax benefit, versus $63.8 million of tax expense in the prior year. The 2019 benefit reflected $78.6 million of discrete tax items, primarily $66.6 million of excess tax benefits from vesting of performance-based awards and $11.0 million from other share-based compensation. The resulting negative 5.5% effective tax rate is not a straightforward indicator of the underlying tax burden.
- Margins and costs: First-half operating expenses increased 7.5%, faster than revenue, and operating and Adjusted EBITDA margins declined year over year. Compensation and benefits rose 13.6%, including $15.4 million of payroll taxes related to vesting of the 2016 multi-year awards. Q2 operating margin improved, while Adjusted EBITDA margin edged lower.
- Revenue drivers: Index recurring subscriptions grew strongly, but first-half asset-based fees declined amid product-mix effects and lower ETF-linked fees despite higher average ETF AUM. Management reported Run Rate of $1.518 billion at June 30, up 7.5% year over year; it cautions that Run Rate is not a forecast of revenue. Subscription sales were lower year over year in Q2, while total retention rate improved to 95.5% from 94.1%.
- Outlook and liquidity: The filing gives no specific revenue or earnings guidance. Management expects cash, operating cash generation and available financing to fund operations and commitments for at least 12 months and the foreseeable future. The board declared a $0.68-per-share Q3 dividend, up 17.2% from the Q2 dividend.
- Risks and contingencies: Index-linked fees are exposed to market levels, investment flows, product mix and trading volumes; foreign-currency movements affect both revenue and costs. BlackRock accounted for 11.6% of first-half consolidated revenue. Tax examinations are ongoing in several jurisdictions; the company says it cannot estimate possible changes in unrecognized tax benefits over the next 12 months. Management believes pending legal matters are not expected to have a material effect, based on currently available facts. No material change to the previously disclosed risk factors was reported.
- Other comparability items: The 2018 comparison includes the FEA divestiture gain, while InvestorForce was divested in October 2018. MSCI adopted lease accounting in January 2019; prior-year periods were not recast.
Important facts for investors to verify
- How much of the first-half earnings increase reflects the discrete tax benefits, and what tax rate is expected absent such items?
- Whether subscription Run Rate and retention translate into recognized revenue, particularly given lower Q2 net new recurring subscription sales and pressure on asset-based fees.
- Whether expense growth—especially compensation, R&D and selling costs—can moderate enough to support margin improvement.
- Debt-service capacity and covenant headroom, considering $2.6 billion of notes, lease obligations, and the company’s share repurchases and dividends.
- Potential outcomes of tax examinations and the effect of foreign exchange, ETF product mix and market movements on revenues.