MSCI Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparative figures are for the same 2016 periods. Interim financial statements are unaudited; PwC conducted a review, not an audit.
Business context
MSCI provides indexes, analytics, ESG ratings and research, and real estate investment analysis to institutional investors. Its revenue model is primarily recurring subscriptions, supplemented by asset-based fees tied to investment products and non-recurring sales. At June 30, 2017, MSCI reported more than 6,800 clients across 88 countries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $316.1m | $290.6m | $617.3m | $569.4m |
| Operating income | $146.0m | $125.7m | $276.6m | $238.8m |
| Operating margin | 46.2% | 43.3% | 44.8% | 41.9% |
| Net income | $81.3m | $67.0m | $154.2m | $127.3m |
| Diluted EPS | $0.89 | $0.69 | $1.68 | $1.29 |
| Adjusted EBITDA and margin | $166.2m; 52.6% | $146.0m; 50.3% | $316.9m; 51.3% | $279.2m; 49.0% |
Q2 revenue rose 8.8%; six-month revenue rose 8.4%. Recurring subscription revenue increased 4.2% in Q2 and 4.9% year to date, while asset-based fees rose 35.5% and 26.9%, respectively. Q2 Index revenue increased 16.5%, Analytics 0.9%, and All Other declined 2.0%. Year-to-date, Index grew 14.8%, Analytics 1.4%, and All Other 1.8%.
Cash flow and liquidity: Six-month operating cash flow was $159.2m, compared with $155.0m. Investing activities used $15.9m, including $11.1m of capital expenditures and $5.6m of capitalized software costs. Financing activities used $190.6m, mainly reflecting $141.0m of share repurchases and $50.9m of dividends. Cash declined $41.3m to $750.6m from year-end 2016. Foreign subsidiaries held $365.0m of cash, some of which may face tax or local-law constraints on repatriation. Management said liquidity and expected cash flows should fund operating needs and commitments for at least the next 12 months.
Debt: Long-term debt was $2.077bn, net of deferred financing fees, at June 30. MSCI had $2.1bn aggregate principal amount of senior notes due in 2024, 2025, and 2026, and a $220m revolving facility with no amounts drawn. Its covenant leverage ratio was 3.25x against a 4.25x maximum; interest coverage was 6.41x against a 4.00x minimum.
Material changes and drivers
- Growth was led by Index asset-based fees: Q2 ETF-linked revenue increased 32.2%, supported by 35.6% growth in average ETF assets under management; futures and options fees also increased on higher trading volumes. ETF-linked AUM reached $624.3bn at quarter-end, up 42.0% year over year.
- Operating expenses increased 3.2% in Q2 and 3.1% for the first half, slower than revenue growth. Q2 cost of revenues rose 10.4%, partly due to compensation, technology, market-data, and occupancy costs.
- Interest expense increased $6.1m in Q2 and $12.2m year to date, primarily because of the 2026 notes issuance. The six-month effective tax rate declined to 29.6% from 33.5%, including the effect of share-based compensation tax benefits.
- Share repurchases were $127.7m for the first half versus $455.5m in the prior-year period. The company had $742.2m of authorization remaining at June 30. Dividends declared were $0.56 per share for the first half, versus $0.44.
Outlook, risks, and unusual items
- No quantified full-year revenue or earnings guidance is stated in the provided filing text. Management said prior-year elevated Analytics cancellations and implementation timing affected current-quarter growth and expected those effects to diminish in the second half of 2017.
- Management reported total Run Rate of $1.260bn at June 30, up 12.6% year over year. Run Rate is a company-defined estimate, not GAAP revenue, and actual revenue may differ due to renewals, cancellations, asset levels, markets, foreign exchange, and recognition timing.
- Asset-based fees depend in part on market values, flows, and trading activity. MSCI also cited foreign-exchange exposure; it used foreign-currency forwards with $34.1m notional amount, not designated as accounting hedges.
- BlackRock accounted for 10.7% of consolidated revenue in the first half of 2017, compared with no customer at or above 10% in the first half of 2016.
- MSCI plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. It expects changes to affect practices including timing for implementation services, licenses, and multi-year deals; the quantitative effect had not been determined.
- Management said pending legal matters were not expected to have a material effect based on currently available facts, and reported no material changes to risk factors since year-end 2016. Tax examinations include the IRS and other authorities; the company said it had reserves but could not estimate possible changes in unrecognized tax benefits over the next 12 months.
- After quarter-end, the board declared a third-quarter dividend of $0.38 per share, payable August 31, 2017.
Important facts for investors to verify
- Whether strong ETF-linked AUM, market performance, and inflows sustain asset-based fee growth.
- Whether Analytics revenue growth improves as implementation timing and prior-year cancellation effects recede, and whether segment margins recover.
- The drivers and durability of Q2 margin expansion, including compensation, technology, and market-data cost trends.
- Debt covenant headroom, interest costs, and the amount and accessibility of foreign-held cash.
- The eventual quantitative and operational impact of adopting the revenue-recognition standard.
- Customer concentration, tax examination developments, and market and currency exposures.