MSCI Inc. — 2015 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015, filed February 26, 2016. MSCI provides indexes, portfolio analytics, ESG research and ratings, and real estate benchmarks and analytics, primarily through recurring subscriptions and index-linked asset-based fees. The filing also presents unaudited fourth-quarter 2015 results. Segment reporting changed in 2015 to Index, Analytics, and All Other (ESG and Real Estate).
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $1,075.0 million | $996.7 million | +7.9% |
| Operating income / margin | $403.9 million / 37.6% | $337.2 million / 33.8% | Income +19.8% |
| Adjusted EBITDA / margin | $481.7 million / 44.8% | $408.8 million / 41.0% | +17.8% |
| Income from continuing operations | $230.0 million | $198.9 million | +15.6% |
| Net income | $223.6 million | $284.1 million | -21.3% |
| Diluted EPS | $2.03 | $2.43 | -16.5% |
| Cash from operating activities | $306.0 million | $305.7 million | Approximately flat |
- Revenue mix: recurring subscriptions $857.5 million (+7.0%); asset-based fees $198.0 million (+11.8%); non-recurring revenue $19.5 million (+6.1%). Asset-based fees were 18.4% of revenue.
- Segment revenue and Adjusted EBITDA: Index $559.0 million and $393.0 million; Analytics $433.4 million and $95.5 million; All Other $82.6 million and negative $6.8 million. Index revenue grew 10.9%, Analytics 4.7%, and All Other 5.0%. ESG revenue rose 32.9%, while Real Estate revenue fell 10.7%.
- Cash and cash equivalents were $777.7 million at year-end, up from $508.8 million. Investing activities used $48.9 million; financing activities provided $19.9 million.
- Debt: $1.6 billion aggregate principal of senior unsecured notes ($800 million due 2024 at 5.25% and $800 million due 2025 at 5.75%); no revolver borrowings and $200 million of undrawn commitments. Reported long-term debt, net of issuance costs, was $1,579.4 million.
- Leverage covenant ratio was 3.08x against a maximum of 3.75x; interest coverage was 8.64x against a minimum of 4.00x. The filing says the notes were rated below investment grade. 2015 interest expense was $62.4 million, versus $31.8 million.
- Annual dividend declared was $0.80 per share. The company repurchased 16.4 million shares under its programs through year-end at an average $59.22 per share; a new $1.0 billion authorization was approved in October.
Material changes versus comparable periods
- Continuing-operations earnings improved, but net income and EPS declined because 2014 included an $78.7 million after-tax gain on the ISS sale; 2015 recorded a $6.4 million out-of-period tax charge associated with that sale.
- Operating margin expanded 3.8 percentage points and Adjusted EBITDA margin expanded 3.8 points as revenue growth outpaced expense growth. Operating expenses rose 1.8% reported, but 5.8% excluding foreign-exchange effects.
- Higher debt and borrowing costs followed the August 2015 issuance of the 2025 notes. The company said annual interest expense associated with the note offerings was expected to be about $92 million.
- Average AUM in ETFs linked to MSCI indexes increased 15.5% year over year; year-end linked ETF AUM was $433.4 billion, up 16.1%. At year-end, total Run Rate was $1,089.3 million, up 8.2%.
- Aggregate Retention Rate improved to 93.4% from 93.0%, although All Other retention was 88.6%. Revenue from the ten largest clients was 26.0% of total; BlackRock alone contributed 10.3%.
- Fourth-quarter 2015 revenue was $272.9 million versus $251.1 million (+8.7%); operating income was $107.5 million versus $85.1 million (+26.4%); net income was $59.4 million versus $44.3 million. Quarterly results are unaudited.
Outlook, commentary, risks and contingencies
- Management described growth opportunities in client expansion, index licensing, managed services, product development, ESG, and acquisitions. It said 2014’s incremental investment phase was complete and 2015 achieved operating-margin expansion. The filing text does not provide a specific 2016 revenue or earnings forecast.
- Key business risks include dependence on third-party data suppliers, intense competition and client self-sourcing, market and currency changes affecting asset-based fees, and concentration in large clients—especially BlackRock and ETF-linked revenue.
- Technology availability, cybersecurity, confidentiality of client data and unreleased index changes, and accuracy or continuity of products are material operational and reputational risks. MSCI disclosed past denial-of-service attacks and service interruptions associated with data-center migrations.
- Regulatory uncertainty includes proposed European benchmark rules expected to require compliance in late 2017 or early 2018 and MiFID/MiFIR requirements expected in 2019; management said the full effects were uncertain.
- Debt covenants restrict certain borrowing, acquisitions, dividends and repurchases; leverage increases may raise revolver fees. The company also cited potential refinancing, credit-rating, foreign-currency, tax, acquisition-integration, and goodwill-impairment risks.
- Various ordinary-course legal matters were disclosed; management did not expect currently pending matters to have a material effect based on facts then available, while noting outcomes were uncertain. No material off-balance-sheet arrangements were reported. Internal controls over financial reporting were assessed as effective, and the auditor issued an unqualified opinion.
Most important facts for investors to verify
- Underlying recurring subscription growth and Run Rate, particularly whether Analytics and Real Estate trends improve and whether retention remains strong.
- BlackRock’s index licensing arrangements and the sensitivity of asset-based fees to ETF AUM, market performance, currency movements, fee rates, and client index choices.
- Debt terms, current ratings, covenant headroom, cash availability and the effect of buybacks and dividends on leverage and liquidity.
- The sustainability of margin expansion, given compensation, R&D, technology infrastructure, and data-supplier costs.
- Potential impact and implementation costs of benchmark regulation, and any developments in tax matters, litigation, data access, cybersecurity or service reliability.