MSCI Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. MSCI provides indexes, analytics, ESG and climate solutions, and private-assets data and tools. Unless otherwise stated, figures below are in U.S. dollars.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $560.6 million | $517.1 million | +8.4% |
| Operating income | $309.5 million | $280.2 million | +10.5% |
| Net income | $216.6 million | $169.9 million | +27.5% |
| Diluted EPS | $2.68 | $2.03 | +32.0% |
| Adjusted EBITDA (non-GAAP) | $341.0 million | $306.6 million | +11.2% |
| Adjusted EBITDA margin (non-GAAP) | 60.8% | 59.3% | +1.5 percentage points |
| Operating margin | 55.2% | 54.2% | +1.0 percentage point |
- For the first nine months, revenue was $1.672 billion (+12.0%), operating income $898.9 million (+13.5%), net income $655.6 million (+23.2%) and diluted EPS $8.05 (+26.2%). Adjusted EBITDA was $990.6 million (+12.8%), with a 59.2% margin versus 58.8%.
- Q3 recurring-subscription revenue rose 17.5% to $420.2 million; asset-based fees fell 11.4% to $125.6 million and non-recurring revenue declined 16.4% to $14.8 million.
- Q3 segment revenue: Index $322.2 million (+0.2%); Analytics $144.9 million (+6.3%); ESG and Climate $57.6 million (+31.8%); All Other—Private Assets $35.9 million (+130.0%, primarily reflecting RCA acquisition contribution).
- Operating cash flow for the nine months was $779.9 million, up from $656.4 million. Investing used $52.4 million, compared with $985.9 million in 2021, when the RCA acquisition drove substantial outflow. Financing used $1.253 billion, primarily reflecting $1.327 billion of share repurchases and $272.8 million of dividends.
- Cash and equivalents were $867.1 million at September 30, down from $1.421 billion at year-end 2021. Debt principal totaled $4.550 billion: $4.2 billion of senior notes and $350 million of variable-rate term loans. The $500 million revolving facility was undrawn. Total liabilities exceeded assets, leaving a shareholders’ deficit of $1.077 billion.
Changes versus the comparable period
- Recurring subscriptions were the main growth driver. Q3 revenue growth was 4.9% excluding acquisitions and 10.7% excluding foreign-exchange effects, as reported separately by the company.
- Index revenue was nearly flat in Q3: subscription growth was offset by lower asset-based fees. Average AUM in ETFs linked to MSCI equity indexes fell 11.2% year over year in Q3, and period-end AUM was $1.081 trillion, down from $1.337 trillion a year earlier.
- ESG and Climate continued strong growth, while Private Assets growth included RCA, acquired in September 2021. RCA contributed $21.3 million of Q3 2022 revenue.
- Q3 operating expenses rose 6.0%; nine-month expenses rose 10.3%. Intangible amortization increased materially, primarily because of RCA-related acquired assets. The Q3 effective tax rate was 19.5%, compared with 15.3%, while nine-month rates were 15.8% and 13.1%, respectively; favorable discrete tax benefits were larger in the 2021 nine-month period.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management said available cash, operating cash flows and financing access should be sufficient for operating needs and commitments for at least the next 12 months and foreseeable future.
- Run Rate, a company-defined recurring-revenue indicator, was $2.203 billion at September 30 (+5.1% year over year): recurring-subscription Run Rate rose 11.5%, while asset-based-fee Run Rate fell 12.9%. Net new recurring-subscription sales increased 25.7% in Q3 to $46.7 million; total retention was 96.4%.
- MSCI cited market movements and AUM, foreign exchange, client renewals, sales execution, costs and competition among factors that can affect results. Foreign currencies represented 15.8% of nine-month revenue exposure; roughly three-fifths of index-linked AUM was invested in non-U.S.-dollar securities. BlackRock generated 10.5% of nine-month consolidated revenue.
- Credit Agreement covenants require a maximum leverage ratio of 4.25:1 and minimum interest coverage of 4.00:1. At quarter-end, reported ratios were 3.14:1 and 8.73:1, respectively. The term loan’s stated interest rate was 4.29%.
- The board authorized a $1.539 billion repurchase program; $1.375 billion remained at quarter-end. MSCI repurchased $1.215 billion of shares in the first nine months. After quarter-end, it repurchased a further $70.1 million through October 24 and declared a $1.25-per-share Q4 dividend.
- On October 21, MSCI and BlackRock entered a consolidated ETF index license agreement effective October 1, 2022 through March 31, 2030, with automatic three-year renewals unless terminated. MSCI expected any revenue impact to be insignificant.
- Management reported no goodwill impairment in its July 2022 annual test and no material change in disclosed risk factors. Ordinary-course legal matters were pending; management did not expect them to have a material effect based on information then available. The Inflation Reduction Act was not expected to materially affect the tax provision.
Important facts for investors to verify
- Whether recurring-subscription sales and Run Rate growth continue to offset pressure on index-linked asset-based fees and market-driven AUM declines.
- The extent to which Private Assets growth and margins reflect RCA acquisition effects versus organic performance.
- Debt cost and covenant headroom, particularly as the $350 million term loan bears a variable rate, and liquidity after substantial repurchases and dividends.
- BlackRock’s continuing revenue contribution and the economic effect, if any, of the new license agreement.
- How currency movements, tax discrete items, and higher staffing and technology costs affect reported growth and margins.