MSCI Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. MSCI provides investment indexes, analytics, ESG research and real-estate benchmarks and services. Its revenue is primarily subscription-based, supplemented by asset-based index fees and non-recurring sales.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $278.8 million | $262.8 million | +6.1% |
| Operating income | $113.1 million | $88.7 million | +27.5% |
| Operating margin | 40.6% | 33.8% | +6.8 percentage points |
| Income from continuing operations | $60.4 million | $49.6 million | +21.6% |
| Net income | $60.4 million | $43.8 million | +37.7% |
| Diluted EPS | $0.60 | $0.39 | +53.8% |
| Operating cash flow | $33.0 million | $66.7 million | Down $33.7 million |
| Adjusted EBITDA and margin | $133.1 million; 47.8% | $107.7 million; 41.0% | EBITDA +23.7% |
All amounts are in U.S. dollars. Adjusted EBITDA is a non-GAAP measure defined by the company. Diluted weighted-average shares fell 11.9%, supporting per-share growth.
- Revenue mix: Recurring subscriptions were $225.3 million (+6.1%); asset-based fees were $48.7 million (+6.1%); non-recurring revenue was $4.8 million (+4.1%). Index revenue grew 8.3%, Analytics 3.2%, and All Other 7.1%.
- Profitability drivers: Operating expenses declined 4.8% to $165.7 million, with lower cost of revenues and R&D. Management cited expense discipline and lower Analytics costs; Q1 2015 included a $3.4 million non-cash charge related to terminating an Analytics technology project.
- Interest and taxes: Interest expense increased $11.8 million year over year following the 2025 notes issuance. The effective tax rate declined to 33.5% from 36.1%, primarily due to higher income in lower-tax jurisdictions.
Balance sheet, liquidity and capital allocation
- At March 31, cash and equivalents were $445.0 million, down from $777.7 million at year-end 2015. Current assets were $763.8 million and current liabilities $468.5 million.
- Long-term debt was $1.580 billion net of deferred financing fees. The company has $800 million of 5.25% notes due 2024 and $800 million of 5.75% notes due 2025, plus a $200 million revolving credit agreement. No revolver borrowing balance is specified in the provided filing text.
- Credit agreement leverage and interest coverage ratios were 2.97x and 7.50x, respectively, versus limits of no more than 3.75x and no less than 4.00x.
- Operating cash flow was $33.0 million; investing cash outflow was $5.5 million; financing cash outflow was $362.3 million. The financing outflow principally reflected $333.3 million spent repurchasing approximately 4.9 million shares. Dividends paid were $21.9 million; the declared quarterly dividend was $0.22 per share.
- Management said available cash, operating cash flows, credit capacity and access to capital markets should fund operations and commitments for at least 12 months. Some foreign-held cash may face tax, local-law or other restrictions on repatriation.
Material changes, outlook and risks
- Total Run Rate, a management operating metric and not a revenue forecast, rose 7.9% year over year to $1.112 billion; recurring-subscription Run Rate rose 8.6%. Management noted that Run Rate growth may affect reported revenue with a delay. Analytics Run Rate growth was 7.0%, while reported Analytics revenue grew 3.2%, partly due to revenue-recognition timing.
- Management said market volatility restrained growth in average AUM linked to MSCI indexes. ETF-linked AUM ended the quarter at $438.3 billion, up 4.9% year over year, but quarterly average AUM was $407.9 billion versus $392.5 million in Q1 2015; asset-based fees remain exposed to markets, fund flows, fee mix and foreign exchange.
- No specific full-year revenue or earnings guidance is provided in the filing text. Management described continued investment in growth products and client relationships, while emphasizing expense management and liquidity.
- The 2015 comparison includes a $5.8 million out-of-period tax charge related to the 2014 sale of Institutional Shareholder Services; this charge did not recur in Q1 2016. Accordingly, net-income and EPS comparisons benefit from the absence of that item, as well as from share repurchases.
- BlackRock represented 17.0% of Index segment revenue in Q1 2016, although no customer reached 10% of consolidated revenue. Foreign-currency exposure affected 17.9% of Q1 2016 revenue; the company uses foreign-exchange forwards to manage some exposures.
- The company reported ongoing tax examinations, including IRS and state and foreign reviews; it said reserves were adequate but significant changes in unrecognized tax benefits could occur within 12 months and could not be estimated. Management did not expect currently pending legal matters to have a material effect, based on information available.
- The company reported no material changes to its stated risk factors, effective disclosure controls, and no material changes in internal control over financial reporting. The interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether Run Rate growth converts into recognized revenue, particularly in Analytics, and whether subscription sales and retention support continued growth.
- How market moves, ETF flows, asset mix and currency changes affect index-linked fees and the reported results.
- Cash conversion and working-capital trends: operating cash flow fell substantially year over year, which management attributed mainly to collection timing and higher interest payments.
- Debt service, covenant headroom and the impact of ongoing share repurchases on cash, leverage and diluted share count; $546.0 million remained under the repurchase authorization at quarter-end.
- Developments in tax examinations and unrecognized tax benefits, and any change in the expected liquidity or repatriation of foreign cash.