MSCI Q4 Earnings Beat Estimates, Operating Revenues Up Y/Y

MSCI Inc. (NYSE:MSCI) reported fourth-quarter 2018 adjusted earnings of $1.31 per share, which beat the Zacks Consensus Estimate by a penny and increased 13.9% from the year-ago quarter.

Operating revenues increased 8% year over year to $361.7 million, slightly better than the consensus mark of $361 million. Strong growth was driven by 19.9% jump in non-recurring revenues and 9% in recurring subscriptions. Asset-based fees increased 3.8% from the year-ago quarter.

New recurring subscriptions sales decreased 6.9% and subscription cancellation decreased 8.2%.

At the end of the quarter, assets under management (AUM) were $695.6 billion in ETFs linked to MSCI indexes, down 6.5% year over year. Total Retention Rate was 92.9% at the end of the quarter.

Segment Details

In the fourth quarter, Index operating revenues (58.2% of operating revenues) increased 8.6% year over year to $210.4 million, primarily driven by strong growth in recurring subscriptions, asset-based fees and non-recurring revenues.

The increase in recurring subscriptions was driven by strong growth in core products and custom, specialized index products, and ESG index products. Moreover, the increase in asset-based fees was primarily driven by strong growth in revenues from non-ETF passive funds linked to MSCI indexes, and exchange traded futures and options contracts based on MSCI indexes.

Revenues from non-ETF passive products increased 17.4%, and were driven by higher AUM and an increased contribution from higher-fee products.

Revenues from exchange traded futures and options jumped 41.4%, driven primarily by an increase in total trading volumes. Revenues from ETFs linked to MSCI indexes decreased 4%, driven by relatively flat average AUM, coupled with a decline in average basis point fees resulting primarily from a change in product mix.

Index new recurring subscriptions sales increased 16.9%. Subscription cancellation also increased 24.6%. Index retention rate was 93.2%.

Analytics operating revenues (33.7% of operating revenues) increased 3.8% year over year to $121.9 million, primarily driven by 3.8% growth in recurring subscriptions. Both Equity and Multi-Asset Class Analytics products witnessed growth in the quarter.

Analytics new recurring subscriptions sales declined 22.9%. Subscription cancellation decreased 27%. Analytics retention rate was 92.7%.

All other operating revenues (8.1% of operating revenues) rallied 24.8% from the year-ago quarter to $29.3 million, primarily driven by 27.8% growth in recurring subscriptions.

Growth in All Other revenues was driven by 30.1% increase in ESG revenues to $19.1 million and 16% increase in Real Estate revenues to $10.2 million. The increase in ESG revenues was driven by strong growth in ESG Ratings product revenues, which benefited from increased investments. Moreover, the increase in Real Estate revenues was primarily driven by growth in Enterprise Analytics and Market Information products.

All other new recurring subscriptions sales decreased 9.5%. Subscription cancellation also increased 0.3%. All Other retention rate was 92.8%.

Run Rate Details

Total Run Rate, as of Dec 31, 2018, grew 4.8% to $1.43 billion.

Organic subscription Run Rate growth was 10.0%, driven by strong growth in the Index and ESG segments, and the Analytics segment’s Multi-Asset Class and Equity Analytics products.

While total recurring subscriptions Run Rate growth was 6.7%, total asset-based fees Run Rate declined 1.5%.

Index Run Rate grew 6.1% to $814.6 million, primarily driven by 11.4% growth in recurring subscriptions Run Rate.

Analytics organic Run Rate grew 0.5%, while All Other segment Run Rate increased 15.2%.

Operating Details

Adjusted EBITDA increased 9.2% year over year to $189.8 million in the reported quarter. Adjusted EBITDA margin also expanded 500 basis points (bps) on a year-over-year basis to 52.5%.

Total operating expenses increased 6.2% year over year to $191.9 million. Selling and Marketing (S&M), and General & Administrative (G&A) expenses increased 10.9% and 7%, respectively. Research & Development (R&D) expenses declined 1.9%.

MSCI’s compensation and benefit costs increased 5.4%. The higher compensation and benefit costs were attributable to an increase in wages and salaries, benefits, and incentive compensation. Non-compensation costs increased 10.4%, primarily driven by higher costs related to professional fees, IT expenses and marketing costs.

As a result, reported operating income increased 10.2% from the year-ago quarter to $169.8 million. Operating margin expanded 900 bps to 47%.

Balance Sheet & Cash Flow

Total cash and cash equivalents as of Dec 31, 2018, was $904.2 million.

Long-term debt was $2.60 billion. Total debt to adjusted EBITDA ratio (based on trailing twelve months adjusted EBITDA) was 3.4x, which was within management’s target range of 3.0x to 3.5x.

Net cash provided by operating activities was $173.2 million in fourth-quarter 2018 compared with $143.8 million in third-quarter 2018. Free cash flow was $150.4 million compared with $130.7 million in the previous quarter.

In fourth-quarter 2018 and through Jan 25, 2019, MSCI repurchased 5.1 million shares for $754.5 million. As of Jan 25, 2019, the company had $0.7 billion remaining under the share repurchase program.

Guidance

For 2019, MSCI expects total operating expenses between $772 million and $800 million. Adjusted EBITDA expenses are expected between $685 million and $705 million.

Capex is expected to be $45-$55 million. Moreover, net cash provided by operating activities and free cash flow are expected to be $600-$630 million and $545-$585 million, respectively.

Zacks Rank & Stocks to Consider

Currently, MSCI has a Zacks Rank #3 (Hold).

Twitter (NYSE:TWTR) , ASGN Inc. (NYSE:ASGN) and Wix.com (NASDAQ:WIX) are better-ranked stocks in the broader computer and technology sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Twitter, ASGN and Wix.com are set to report quarterly results on Feb 7, 13 and 20, respectively.

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