A month has gone by since the last earnings report for MSCI (MSCI - Free Report) . Shares have added about 6.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is MSCI due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
MSCI Q3 Earnings Drive on New Recurring Subscription Sales
MSCI reported third-quarter 2018 adjusted earnings of $1.35 per share, which beat the Zacks Consensus Estimate by a nickel and surged 35% from the year-ago quarter.
Operating revenues increased 11.1% year over year to $357.9 million but lagged the consensus mark of $359 million. Strong growth was driven by 46.6% jump in non-recurring revenues and 12.6% in asset-based fees. Recurring subscriptions increased 9.8% from the year-ago quarter.
New recurring subscriptions sales increased 21.2%, while subscription cancellation decreased 8%.
At the end of the quarter, assets under management (AUM) were $765.5 billion in ETFs linked to MSCI indexes, up 13.5% year over year. Total Retention Rate was 95% at the end of the quarter.
In the third quarter, Index operating revenues (58.7% of operating revenues) increased 13.9% year over year to $210.2 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, and specialized index products. Moreover, the increase in asset-based fees was primarily driven by strong growth in revenues from ETFs and non-ETF passive funds linked to MSCI indexes.
Revenues from ETFs linked to MSCI indexes increased 10%, driven by 15.5% increase in AUM. Revenues from non-ETF passive products rallied 20.7%, and were driven by higher AUM and an increased contribution from higher-fee products. Further, revenues from exchange traded futures and options contracts based on MSCI indexes grew 5.2%, driven by a solid increase in total trading volumes.
Index new recurring subscriptions sales increased 2.3%. Subscription cancellation also increased 7.6%. Index retention rate was 96.2%.
Analytics operating revenues (33.5% of operating revenues) increased 4.3% year over year to $119.9 million, primarily driven by 4.7% growth in recurring subscriptions. Both Equity and Multi-Asset Class Analytics products witnessed growth in the quarter.
Analytics new recurring subscriptions sales surged 47.9%. Subscription cancellation decreased 17%. Analytics retention rate was 94.1%.
All other operating revenues (7.8% of operating revenues) rallied 23.6% from the year-ago quarter to almost $27.8 million, primarily driven by 24.6% growth in recurring subscriptions.
Analytics new recurring subscriptions sales increased 18.1%. Subscription cancellation also increased 1%. All Other retention rate was 94.3%.
Run Rate Details
Total Run Rate, as of Sep 30, 2018, grew 10% to $1.44 billion.
Organic subscription Run Rate growth was 10.5%, driven by strong growth in the Index and ESG segments, Multi-Asset Class and Equity Analytics products, and the Analytics segment’s Multi-Asset Class and Equity Analytics products.
Index Run Rate grew 11.9% to $815.7 million, primarily driven by 12.5% increase in asset-based fees Run Rate and 11.4% growth in recurring subscriptions Run Rate.
Analytics organic Run Rate grew 7.4%, while All Other segment Run Rate increased 20.7%.
Adjusted EBITDA increased 15.9% year over year to $195.5 million in the reported quarter. Adjusted EBITDA margin also expanded 220 basis points (bps) on a year-over-year basis to 54.6%.
Total operating expenses increased 4.8% year over year to $181.5 million. Selling and Marketing (S&M), Research & Development (R&D), and General & Administrative (G&A) expenses increased 2.8%, 14.6% and 12.1%, respectively.
MSCI’s compensation and benefit costs increased 6.5%. The higher compensation and benefit costs were attributable to an increase in wages and salaries, benefits and incentive compensation. Non-compensation costs increased 4.4%, primarily driven by higher costs related to professional fees, IT expenses and market data costs.
As a result, reported operating income increased 18.6% from the year-ago quarter to $176.4 million. Operating margin expanded 310 bps to 49.3%.
Balance Sheet & Cash Flow
Total cash and cash equivalents, as of Sep 30, 2018, was $1.39 billion.
Long-term debt was $2.57 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 $143.8 million in third-quarter 2018 compared with $207.2 million in second-quarter 2018. Free cash flow was $130.7 million compared with $199.9 million in the previous quarter.
In third-quarter 2018 and through Oct 31, 2018, MSCI repurchased 1 million shares for $165.2 million. As of Oct 31, 2018, the company had $1.3 billion remaining under the share repurchase program.
For 2018, MSCI expects total operating expenses between $743 million and $750 million compared with previous guidance of $725-$750 million. Adjusted EBITDA expenses are expected between $658 million and $665 million compared with previous guidance of $645-$665 million.
Capex is expected to be in the range of $40-$50 million. Moreover, net cash provided by operating activities and free cash flow is expected to be $520-$550 million and $470-$510 million, respectively.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, MSCI has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
MSCI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.