MSCI Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with Q1 2021 unless otherwise noted. MSCI provides indexes, analytics, ESG and climate solutions, and private-assets data and tools.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $559.9 million | $478.4 million | +17.0% |
| Operating income | $289.0 million | $254.4 million | +13.6% |
| Net income | $228.4 million | $196.8 million | +16.1% |
| Diluted EPS | $2.78 | $2.36 | +17.8% |
| Adjusted EBITDA (non-GAAP) | $318.5 million | $276.6 million | +15.2% |
| Adjusted EBITDA margin | 56.9% | 57.8% | Down 0.9 percentage points |
| Operating margin | 51.6% | 53.2% | Down 1.6 percentage points |
| Operating cash flow | $244.2 million | $215.5 million | +13.3% |
Revenue excluding acquisition and foreign-exchange impacts grew 13.7%. Recurring subscriptions rose 18.4%, asset-based fees 14.5%, and non-recurring revenue 8.2%. Operating expenses increased 20.9%, faster than revenue, reflecting higher compensation, technology and market-data costs, professional fees, and acquisition-related amortization and costs.
Revenue by reportable segment: Index $330.8 million (+13.1%); Analytics $139.8 million (+4.3%); ESG and Climate $52.0 million (+49.7%); and All Other–Private Assets $37.4 million (+117.7%). Private Assets growth primarily reflected the Real Capital Analytics (RCA) acquisition; excluding acquisition and FX impacts, segment revenue grew 11.6%. ESG and Climate growth was led by Ratings, Climate and Screening products.
Cash, debt and capital allocation
- Cash and cash equivalents were $679.3 million at March 31, down from $1.421 billion at year-end. The company generated $244.2 million from operations and used $15.3 million in investing activities; financing activities used $966.1 million, mainly reflecting share repurchases and dividends. Capitalized software costs and capital expenditures totaled $15.3 million.
- Long-term debt had a carrying value of $4.162 billion; senior notes had $4.2 billion principal outstanding. The $500 million revolving credit facility was undrawn. The facility was extended to February 2027 and transitioned from LIBOR to SOFR.
- Reported leverage and interest-coverage ratios were 3.05x and 8.11x, respectively, versus facility limits of 4.25x maximum leverage (4.50x temporarily after a material acquisition) and 4.00x minimum coverage.
- Q1 open-market repurchases totaled $772.7 million for 1.498 million shares; $816.5 million of authorization remained at quarter-end. Cash dividends paid were $87.8 million. The board subsequently declared a $1.04-per-share dividend for Q2 2022.
- Shareholders’ equity was a deficit of $879.2 million, compared with a deficit of $163.5 million at year-end, principally reflecting treasury-stock purchases.
Changes, outlook and risks
- Run Rate, a company-defined measure of annualized recurring contract revenue, increased 17.4% to $2.230 billion. Recurring subscription Run Rate rose 18.4%; asset-based fee Run Rate rose 14.5%.
- Net new recurring subscription sales increased 32.6% to $44.5 million. Total retention was 95.9%, versus 96.3%; Analytics and Private Assets retention declined, while ESG and Climate improved.
- Average AUM in ETFs linked to MSCI equity indexes grew 19.1% year over year to $1.393 trillion, but quarter-end AUM fell sequentially to $1.389 trillion, including $89.7 billion of market depreciation partly offset by $27.4 billion of inflows.
- Management said global cash, operating cash flow and available financing were expected to fund operations and commitments for at least the next 12 months and the foreseeable future. The filing provides no quantitative earnings or revenue guidance.
- The 8.2% effective tax rate included $28.1 million of favorable discrete tax items, primarily excess tax benefits on vested share-based compensation; the rate may not represent a normalized level. The company said it was reasonably possible unrecognized tax benefits could decrease by about $28.6 million over the next 12 months as audits resolve.
- RCA, acquired in September 2021 for approximately $949 million, contributed $19.2 million of Q1 2022 revenue. The quarter included $1.3 million of acquisition-related integration and transaction costs.
- Risks highlighted include market and geopolitical volatility (including Russia’s invasion of Ukraine), changes in investment trends and ETF assets affecting asset-based fees, foreign-exchange exposure, and the company’s substantial indebtedness and related refinancing and covenant risks. BlackRock accounted for 10.9% of consolidated revenue; 95.5% of its revenue came from fees tied to its MSCI-indexed ETFs.
- Ordinary-course legal claims are pending; management did not expect their disposition to have a material effect based on information available, while noting outcomes remain uncertain. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether recurring revenue and Run Rate growth continue after separating organic growth from RCA and foreign-exchange effects.
- Whether expense growth moderates and margins stabilize, particularly as headcount and acquisition-related amortization increase.
- How market performance, ETF flows and fee levels affect asset-based revenue and BlackRock-related concentration.
- Whether cash generation and liquidity remain adequate alongside debt service, buybacks and dividends; note the quarter’s substantial repurchases and negative shareholders’ equity.
- The resolution and potential financial effect of tax examinations and legal contingencies, and the extent to which favorable tax items affected reported earnings.