MSCI Reports Financial Results for Third Quarter and Nine Months 2019

NEW YORK–(BUSINESS WIRE)–MSCI Inc. (NYSE: MSCI), a leading provider of critical decision support tools and services for the global investment community, announced today the results for the three months ended September 30, 2019 (“third quarter 2019”) and nine months ended September 30, 2019 (“nine months 2019”).

Financial and Operational Highlights for Third Quarter 2019

(Note: Percentage and other changes refer to third quarter 2018 unless otherwise noted.)

• Operating revenues up 10.1%, with recurring subscription revenues up 7.8%, asset-based fees up 17.1% and non-recurring revenues up 18.5%
• Organic operating revenue growth was 11.8%, with organic recurring subscription revenue growth of 9.8%
• Diluted EPS of $1.60, up 17.6%; Adjusted EPS of $1.68, up 24.4%
• Organic subscription Run Rate growth of 10.0%, with Index up 11.1%, Analytics up 6.2% and All Other up 20.4%. ESG Run Rate at September 30, 2019 almost doubled over the past 3 years
• Third quarter 2019 Retention Rate at 95.0%
• Extended our long-term relationship with BlackRock for another 10 years beginning March 2020, as further described in Index Segment section below

“We are excited to deliver another quarter of strong results for our shareholders driven by both our core subscription offerings and asset-based fees. Additionally, our new long-term agreements with BlackRock, the Intercontinental Exchange, Eurex and Charles River Development, as well as our acquisition of Carbon Delta, align us well with key, strategic partners and provide us with important capabilities that will continue to enhance our growth and competitive differentiation,” commented Henry A. Fernandez, Chairman and CEO of MSCI.

Third Quarter 2019 and Nine Months 2019 Consolidated Results

Revenues: Operating revenues for third quarter 2019 increased $36.3 million, or 10.1%, to $394.3 million, compared to the three months ended September 30, 2018 (“third quarter 2018”). The $36.3 million increase in operating revenues was driven by a $20.7 million, or 7.8%, increase in recurring subscriptions (driven primarily by a $12.1 million, or 10.0%, increase in Index, a $4.2 million, or 22.7%, increase in ESG and a $3.3 million, or 2.7%, increase in Analytics), a $14.0 million, or 17.1%, increase in asset-based fees (which itself was driven by growth across all types of index-linked investments products) and a $1.6 million, or 18.5%, increase in non-recurring revenues. Organic operating revenue growth was 11.8%, with organic recurring subscription revenue growth of 9.8%, organic asset-based fee growth of 17.1% and organic non-recurring revenue growth of 20.1%.

For nine months 2019, operating revenues increased $78.9 million, or 7.4%, to $1,151.2 million, compared to $1,072.3 million for the nine months ended September 30, 2018 (“nine months 2018”). The $78.9 million increase was driven by a $64.7 million, or 8.1%, increase in recurring subscriptions, a $10.4 million, or 4.1%, increase in asset-based fees and a $3.8 million, or 17.0%, increase in non-recurring revenues. For nine months 2019, organic operating revenue growth was 9.5%, with organic recurring subscriptions revenue growth of 11.0%, organic asset-based fee growth of 4.2% and organic non-recurring revenue growth of 20.7%.

Run Rate: Total Run Rate at September 30, 2019 grew by $115.3 million, or 8.0%, to $1,550.6 million, compared to September 30, 2018. The $115.3 million increase was driven by an $85.5 million, or 7.7%, increase in recurring subscription Run Rate to $1,194.6 million and a $29.9 million, or 9.2%, increase in asset-based fees Run Rate to $356.0 million. Organic subscription Run Rate growth of 10.0% in third quarter 2019 was driven by strong growth in the Index and All Other segments and in the Analytics segment’s Multi-Asset Class and Equity Analytics products. Retention Rate was 95.0% in third quarter 2019, flat compared to third quarter 2018.

Non-Recurring Sales: Total non-recurring sales for third quarter 2019 increased $3.5 million, or 31.7%, to $14.4 million compared to third quarter 2018, primarily driven by increased sales in BarraOne and RiskManager product offerings and Index derivative product offerings.

Expenses: Total operating expenses for third quarter 2019 increased $11.5 million, or 6.3%, to $193.0 million compared to third quarter 2018, driven mainly by a $5.7 million, or 4.9%, increase in compensation and benefits costs and a $5.4 million, or 11.6%, increase in non-compensation costs. The compensation and benefits costs increase is primarily attributable to higher incentive compensation and wages and salaries. The non-compensation costs increase is primarily attributable to higher professional fees, marketing costs, recruiting costs and occupancy costs.

Adjusted EBITDA expenses for third quarter 2019 increased $11.1 million, or 6.8%, to $173.5 million, compared to third quarter 2018. Total operating expenses excluding the impact of foreign currency exchange rate fluctuations (“ex-FX”) and adjusted EBITDA expenses ex-FX for third quarter 2019 increased 7.6% and 8.2%, respectively, compared to third quarter 2018.

For nine months 2019, total operating expenses increased $39.7 million, or 7.2%, to $594.9 million. Adjusted EBITDA expenses increased $31.3 million, or 6.4%, to $520.9 million compared to nine months 2018. Total operating expenses ex-FX and adjusted EBITDA expenses ex-FX for nine months 2019 increased 9.2% and 8.7%, respectively, compared to nine months 2018.

Headcount: As of September 30, 2019, there were 3,358 employees, up 7.6% from 3,121 as of September 30, 2018 and up 2.8% from 3,266 as of June 30, 2019. The 7.6% year-over-year increase in employees was primarily driven by increased headcount in emerging market centers and in areas related to technology, data and content services and in the client coverage organization. As of September 30, 2019, a total of 36.7% and 63.3% of employees were located in developed market and emerging market centers, respectively, compared to 39.9% in developed market centers and 60.1% in emerging market centers as of September 30, 2018.

Amortization and Depreciation Expenses: Amortization and depreciation expenses increased $0.4 million, or 2.3%, to $19.6 million, compared to third quarter 2018, primarily as a result of higher amortization of internally developed capitalized software, partially offset by lower amortization due to the impact of the divestiture of Investor Force Holdings, Inc. (“InvestorForce”) in October 2018 and lower software depreciation costs. For nine months 2019, amortization and depreciation expenses of $58.6 million decreased by $7.0 million, or 10.6%, compared to nine months 2018.

Other Expense (Income), Net: Other expense (income), net increased $2.9 million, or 9.9%, to $32.5 million, compared to third quarter 2018, primarily due to lower interest income driven by lower yields on lower cash balances in third quarter 2019, compared to third quarter 2018. For nine months 2019, other expense (income), net increased $25.0 million, or 33.6%, to $99.5 million, compared to nine months 2018.

Income Taxes: Income tax expense was $31.8 million for third quarter 2019, compared to $23.0 million for third quarter 2018. The effective tax rates were 18.8% and 15.7% for third quarter 2019 and third quarter 2018, respectively. The increase was primarily due to the release of a valuation allowance previously recorded on capital loss carry forwards in third quarter 2018. The release of the valuation allowance was triggered by the execution of the agreement to sell InvestorForce in July 2018. The loss was utilized in the three months ended December 31, 2018 to partially offset the capital gain realized upon the completion of the divestiture of InvestorForce that occurred on October 12, 2018. This release of the valuation allowance was excluded from adjusted net income and adjusted EPS for third quarter 2018.

For nine months 2019, the income tax expense was $15.9 million compared to $86.9 million for nine months 2018. The effective tax rates were 3.5% and 19.6% for nine months 2019 and nine months 2018, respectively. The lower effective tax rate compared to nine months 2018 was driven by the income tax benefit (the “PSU windfall benefit”) related to the vesting of multi-year restricted stock units granted in 2016 to certain senior executives that are subject to the achievement of multi-year total shareholder return targets, which are performance targets with a market condition (the “Multi-Year PSUs”), other discrete items and a beneficial geographic mix of earnings, partially offset by the release of the valuation allowance relating to the October 2018 divestiture of InvestorForce. The PSU windfall benefit total of $66.6 million was recorded in the three months ended March 31, 2019 (“first quarter 2019”) and is excluded from both the adjusted net income and adjusted EPS measures for nine months 2019. Excluding the PSU windfall benefit, nine months 2019 adjusted tax rate was 18.1%.

Net Income: Net income increased 10.6% to $137.0 million in third quarter 2019, compared to $123.8 million in third quarter 2018. For nine months 2019, net income increased 23.9% to $440.9 million, compared to $355.8 million for nine months 2018.

Adjusted EBITDA: Adjusted EBITDA was $220.8 million in third quarter 2019, up $25.3 million, or 12.9%, from third quarter 2018. Adjusted EBITDA margin in third quarter 2019 was 56.0%, compared to 54.6% in third quarter 2018. For nine months 2019, adjusted EBITDA was $630.3 million, up 8.2% from nine months 2018, and adjusted EBITDA margin was 54.8% for nine months 2019, compared to 54.3% for nine months 2018.

Cash Balances and Outstanding Debt: Total cash and cash equivalents as of September 30, 2019 was $881.2 million. MSCI seeks to maintain minimum cash balances globally of approximately $200.0 million to $250.0 million for general operating purposes.

Total outstanding debt as of September 30, 2019 was $2,600.0 million, which excludes deferred financing fees of $21.8 million. The total debt to adjusted EBITDA ratio (based on trailing twelve months adjusted EBITDA) was 3.2x, which is within the stated gross leverage to adjusted EBITDA target range of 3.0x to 3.5x.

Cash Flow and Capex: Net cash provided by operating activities was $188.5 million in third quarter 2019, compared to $143.8 million in third quarter 2018 and $189.5 million in second quarter 2019. Capex for third quarter 2019 was $14.8 million, compared to $13.1 million in third quarter 2018 and $12.4 million in second quarter 2019. Free cash flow was $173.8 million in third quarter 2019, compared to $130.7 million in third quarter 2018 and $177.1 million in second quarter 2019. The slight decrease in net cash provided by operating activities compared to second quarter 2019 was driven primarily by lower cash collections from customers, higher payments of cash expenses and higher interest payments, partially offset by lower income tax payments. The decrease in free cash flow, compared to second quarter 2019, was driven by the slightly lower net cash provided by operating activities described in the preceding sentence coupled with higher Capex. The increase in net cash provided by operating activities, compared to third quarter 2018, was driven primarily by higher cash collections from customers and lower income tax payments, partially offset by higher payments of cash expenses. The increase in free cash flow, compared to third quarter 2018, was driven by the higher net cash provided by operating activities described in the preceding sentence, partially offset by higher Capex.

Net cash provided by operating activities was $465.9 million for nine months 2019, compared to $439.6 million for nine months 2018. Capex for nine months 2019 was $35.3 million, compared to $26.2 million for nine months 2018. Free cash flow was $430.6 million for nine months 2019, compared to $413.4 million for nine months 2018.

Share Count and Capital Return: The weighted average diluted shares outstanding in third quarter 2019 declined 6.4% to 85.6 million, compared to 91.4 million in third quarter 2018. In nine months 2019, a total of 0.7 million shares were repurchased at an average price of $147.97 per share for a total value of $102.1 million, with no repurchases in third quarter 2019. On October 29, 2019, the Board of Directors authorized a stock repurchase program for the purchase of up to $750.0 million worth of shares of MSCI’s common stock which will be aggregated with the $706.1 million of authorization remaining under the existing share repurchase program as of September 30, 2019. Total shares outstanding as of September 30, 2019 was 84.7 million.

On October 29, 2019, the Board of Directors (“Board”) declared a cash dividend of $0.68 per share for fourth quarter 2019. The fourth quarter 2019 dividend is payable on November 27, 2019 to shareholders of record as of the close of trading on November 15, 2019.

Index Segment: Operating revenues for third quarter 2019 increased $27.2 million, compared to third quarter 2018. The increase was driven by a $14.0 million increase in asset-based fees, a $12.1 million increase in recurring subscriptions and a $1.1 million increase in non-recurring revenues. The increase in recurring subscriptions was driven by strong growth in factor and ESG index products and growth in core developed market modules and index level products.

Growth in revenues from asset-based fees included $8.6 million from exchange traded futures and options contracts based on MSCI indexes, $2.7 million from exchange traded funds (“ETFs”) linked to MSCI indexes and $2.7 million from non-ETF passive funds linked to MSCI indexes. The increase in revenues from futures and options was primarily driven by approximately $5.0 million in additional fees associated with prior periods attributed to a retrospective price increase from a renegotiated contract. The increase in revenues from ETFs linked to MSCI indexes was driven by a 7.3% increase in average assets under management (“AUM”), partially offset by a decline in average basis point fees resulting primarily from a change in product mix. The increase in non-ETF passive funds linked to MSCI indexes was primarily driven by an increased contribution from higher-fee products.

The adjusted EBITDA margin for Index was 74.8% for third quarter 2019, compared to 73.5% for third quarter 2018.

Operating revenues for nine months 2019 increased $52.7 million compared to nine months 2018, driven by a $39.1 million increase in recurring subscriptions, a $10.4 million increase in asset-based fees and a $3.2 million increase in non-recurring revenues. The adjusted EBITDA margin for Index was 72.9% for nine months 2019, compared to 73.3% for nine months 2018.

Index Run Rate at September 30, 2019 grew by $84.4 million, or 10.3%, compared to September 30, 2018. The increase was driven by a $54.5 million increase in recurring subscription Run Rate and a $29.9 million increase in asset-based fees Run Rate. The 11.1% increase in Index recurring subscription Run Rate was driven by strong growth in core developed and emerging market modules and factor, ESG and custom index products with strong growth across all our client segments. The increase in asset-based fees Run Rate was primarily driven by higher volumes in futures and options and an increase in non-ETF passive funds linked to MSCI indexes, as well as higher AUM in ETFs linked to MSCI indexes.

On October 30, 2019, MSCI and BlackRock executed an amendment to the two license agreements that cover all existing BlackRock ETFs based on MSCI equity indexes (the “Amendment¹”), extending the terms of such agreements by 10 years through March 17, 2030. The Amendment secures a long-term framework to expand our successful relationship and is intended to further align the interests of our organizations. BlackRock will continue to pay MSCI periodic license fees calculated based on the AUM and the total expense ratios (“TERs”) of licensed BlackRock ETFs. Pursuant to the Amendment, current license fee rates paid to MSCI will be reduced for ETFs with TERs below certain levels according to a phased implementation period with the first adjustment taking place on March 18, 2020. Based on the AUM as of September 30, 2019 and the most recently confirmed TERs of the ETFs that as of today will become subject to this adjustment during the implementation period, the aggregate reduction to asset-based fees Run Rate as of September 30, 2019 associated with these adjustments is not material. Any potential future reductions by BlackRock in the TERs of licensed BlackRock ETFs may reduce the license fee rates payable to MSCI for those ETFs. This is balanced by the potential for incremental assets to flow into licensed BlackRock ETFs and is intended to maximize the long-term revenue growth opportunity.

In addition to the above, the combined impact on asset-based fees Run Rate from certain renegotiated agreements, based on third quarter 2019 trading volumes, will add approximately $15.0 million, a portion of which is already included in the asset-based fees Run Rate for third quarter 2019 and the remainder of which is expected to be added over the course of the next six months.

^{1 The description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, which will be filed with the Securities and Exchange Commission on the Company’s Quarterly Report on Form 10-Q for third quarter 2019.}

Analytics Segment: Operating revenues for third quarter 2019 increased $3.7 million, compared to third quarter 2018, primarily driven by strong growth in Multi-Asset Class Analytics products and the timing of client implementations, partially offset by the divestiture of InvestorForce. Organic operating revenue growth was 6.9%. The adjusted EBITDA margin for Analytics was 30.6% for third quarter 2019, compared to 30.9% for third quarter 2018.

Operating revenues for nine months 2019 increased $10.7 million compared to nine months 2018. Organic operating revenue growth was 8.2%. The adjusted EBITDA margin for Analytics was 30.7% for nine months 2019, compared to 29.9% for nine months 2018.

Analytics Run Rate at September 30, 2019 grew by $10.0 million compared to September 30, 2018, primarily driven by strong growth in both Multi-Asset Class and Equity Analytics products, partially offset by the removal of Run Rate associated with InvestorForce, which was divested in October 2018. Analytics organic subscription Run Rate growth was 6.2% compared to September 30, 2018.

All Other Segment: Operating revenues for third quarter 2019 increased $5.4 million, compared to third quarter 2018. The increase in All Other operating revenues was driven by a $4.2 million increase in ESG operating revenues, coupled with a $1.2 million increase in Real Estate operating revenues. The increase in ESG operating revenues was driven by strong growth in ESG Ratings products and ESG Screening product revenues, as we continue to see strong demand across all client segments and new use cases. The increase in Real Estate operating revenues was primarily driven by strong growth in our Enterprise Analytics products. Third quarter 2019 All Other organic operating revenue growth was 23.3%, with ESG organic operating revenue growth of 26.1% and Real Estate organic operating revenue growth of 17.8%. The adjusted EBITDA margin for All Other was 16.0% for third quarter 2019, compared to 14.4% for third quarter 2018.

Operating revenues for nine months 2019 increased $15.5 million, compared to nine months 2018. The increase in All Other revenues was driven by a $13.4 million increase in ESG revenues, coupled with a $2.0 million increase in Real Estate revenues. All Other organic operating revenue growth for nine months 2019 was 22.0%, with ESG organic operating revenue growth of 29.1% and Real Estate organic operating revenue growth of 12.0%. The adjusted EBITDA margin for All Other was 22.2% for nine months 2019, compared to 19.9% for nine months 2018.

All Other Run Rate at September 30, 2019 grew by $20.9 million, compared to September 30, 2018. The increase was driven by a $17.9 million increase in ESG Run Rate, coupled with a $3.0 million increase in Real Estate Run Rate. The increase in ESG Run Rate was primarily driven by strong growth in ESG Ratings products and ESG Screening products. The increase in Real Estate Run Rate was primarily driven by growth in Global Intel products. All Other organic subscription Run Rate increased 20.4%, with ESG Run Rate increasing 25.8% and Real Estate Run Rate up 11.4%, each compared to September 30, 2018.

Full-Year 2019 Guidance

MSCI’s guidance for full-year 2019 is as follows:

• Total operating expenses are expected to be toward the high end of the guidance range of $775 million to $800 million.

• Adjusted EBITDA expenses¹ are expected to be toward the high end of the guidance range of $685 million to $705 million.

• Interest expense, including the amortization of financing fees, is expected to be approximately $144 million, assuming no additional financings.

• Capex is expected to be toward the high end of the guidance range of $45 million to $55 million.

• Net cash provided by operating activities and free cash flow are expected to be at, or slightly above, the high end of the guidance ranges of $600 million to $630 million and $545 million to $585 million, respectively.

• The effective tax rate² is now expected to be in the range of 6.0% to 9.0%.

^{1 Excludes the payroll tax impact from the vesting in first quarter 2019 of the Multi-Year PSUs.
2 Includes the PSU windfall benefit which is expected to reduce the 2019 effective tax rate by ~11 percentage points.}

The guidance provided above assumes, among other things, that MSCI maintains its current debt levels.

Contacts

MSCI Inc. Contacts
Investor Inquiries
Salli Schwartz [email protected] + 1 212 804 5306

Media Inquiries
[email protected]
Sam Wang +1 212 804 5244

Melanie Blanco +1 212 981 1049

Laura Hudson +44 20 7336 9653

Rachel Lai +852 2844 9315

Read full story here