A month has gone by since the last earnings report for MSCI (MSCI - Free Report) . Shares have added about 0.7% 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 catalysts.
MSCI Q1 Earnings Beat, New Recurring Subscription Sales Rise
MSCI reported first-quarter 2019 adjusted earnings of $1.55 per share, which beat the Zacks Consensus Estimate by 14 cents and increased 18.3% from the year-ago quarter.
Operating revenues increased 5.7% year over year to $371.4 million, slightly better than the consensus mark of $370 million. The year-over-year growth was driven by 43.7% jump in non-recurring revenues and 8.3% in recurring subscriptions. Asset-based fees decreased 4.3% from the year-ago quarter.
New recurring subscriptions sales increased 16.5% and subscription cancellation decreased 5.2%.
Organic operating revenues (excluding impact of acquisitions, divestures and foreign currency exchange rate fluctuations) increased 8.6% year over year.
Total Run Rate, as of Mar 31, 2019, grew 5.3% to $1.48 billion. Recurring subscription Run Rate grew 6.7%. Asset-based fees Run Rate also increased 0.9%.
Organic subscription Run Rate growth was 10.4%, driven by strong growth in the Index and ESG segments, and the Analytics segment’s Multi-Asset Class and Equity Analytics products.
At the end of the quarter, average assets under management (AUM) were $802.2 billion in ETFs linked to MSCI indexes, up 4.9% year over year. Total Retention Rate was 95.2% at the end of the quarter.
Index Revenue Details
In the first quarter, Index operating revenues (57.8% of operating revenues) increased 6.4% year over year to $214.8 million, primarily driven by strong growth in recurring subscriptions (up 12.8%) and non-recurring revenues (up 64%), negated by weakness in asset-based fees (down 4.3%).
The increase in recurring subscriptions was driven by strong growth in core products, factor and ESG index products, and custom and specialized index products. Growth in non-recurring revenues was primarily driven by higher volume of deep historical content deals.
However, asset-based fees declined due to lower revenues from exchange traded funds (ETFs) linked to MSCI indexes (down 5.5%), exchange traded futures and options contracts based on MSCI indexes (down 5.8%), and revenues from non-ETF passive funds linked to MSCI indexes (down 0.8%).
The decline in revenues from ETFs linked to MSCI indexes was primarily attributed to a 1.7% decline in AUM coupled with a decline in average basis-point fees resulting primarily from a change in product mix.
Moreover, the decrease in revenues from futures and options reflected lower net fees charged by certain exchanges, which more than offset an increase in total trading volumes.
Index new recurring subscription sales increased 14%. Subscription cancellation also increased 6.1%. Index retention rate was 96.5%.
Index Run Rate grew 7.1% to $850.9 million, primarily driven by 11.6% growth in recurring subscriptions Run Rate. Strong growth in core developed and emerging market modules, factor and ESG, and custom and specialized index products drove recurring subscriptions Run Rate.
MSCI also benefited from strong growth across asset management, banking, asset owners and wealth management client segments.
Asset-based fees Run Rate grew due to an increase in non-ETF passive funds linked to MSCI indexes and higher volume in futures and options.
Analytics Revenue Details
Analytics operating revenues (32.7% of operating revenues) increased 2.1% year over year to $121.4 million, primarily driven by non-recurring revenues (up 78.3%). Both Equity and Multi-Asset Class Analytics products witnessed growth in the quarter.
Analytics new recurring subscriptions sales increased 12.3%. Subscription cancellation decreased 9.5%. Analytics retention rate was 93.7%.
Analytics Run Rate grew 0.3% to $496.2 million, primarily driven by growth in both Multi-Asset Class and Equity Analytics products. Analytics organic subscription Run Rate grew 7% year over year.
All Other Segment Revenue Details
All Other operating revenues (9.5% of operating revenues) rallied 15.6% from the year-ago quarter to $35.2 million, primarily driven by recurring subscriptions (up 17.8%).
Growth in All Other revenues was driven by 31% increase in ESG revenues. The increase in ESG revenues was driven by strong growth in ESG Ratings products and ESG Screening product revenues.
Real Estate operating revenues declined 2.5% due to adverse foreign currency.
All Other organic operating revenue growth was 20.9%, with ESG organic operating revenues up 34.3% and Real Estate organic operating revenues up 5.0%.
All Other new recurring subscription sales surged 31.9%. Subscription cancellation decreased 16.7%. All Other retention rate was 95.9%.
All Other segment Run Rate increased 14.9% to $131 million. The increase was driven by 22% increase in ESG Run Rate and 4.1% in Real Estate Run Rate.
All Other segment organic subscription Run Rate increased 19.3%, with ESG Run Rate increasing 25%. Real Estate Run Rate was up 10.6% year over year.
Adjusted EBITDA increased 5.9% year over year to $197.7 million in the reported quarter. Adjusted EBITDA margin also expanded 10 basis points (bps) on a year-over-year basis to 53.2%.
Total operating expenses increased 13.3% year over year to $208.7 million. Selling and Marketing (S&M), and General & Administrative (G&A) expenses increased 20.8% and 11.9%, respectively. Research & Development (R&D) expenses were up 11.9%.
MSCI’s compensation and benefit costs increased 7%. The higher compensation and benefit costs were attributable to an increase in wages and salaries, benefits, and incentive compensation. Non-compensation costs increased 1.7%, primarily driven by higher costs related to professional fees.
As a result, reported operating income declined 2.7% from the year-ago quarter to $162.7 million. Operating margin contracted 380 bps to 43.8%.
Balance Sheet & Cash Flow
Total cash and cash equivalents as of Mar 31, 2019, was $642.8 million compared with $904.2 million as on Dec 31, 2018.
Long-term debt was $2.58 billion, down almost $2 billion sequentially. Total debt to adjusted EBITDA ratio (based on trailing twelve months adjusted EBITDA) was 3.3x, which was within management’s target range of 3.0x to 3.5x.
Net cash provided by operating activities was $87.9 million in first-quarter 2019 compared with $173.2 million in fourth-quarter 2018. Free cash flow was $79.7 million compared with $150.4 million in the previous quarter.
In first-quarter 2019, MSCI repurchased 0.7 million shares for $102.1 million. Under the current program, almost $0.7 billion remains as on Apr 30, 2019.
On May 1, 2019, the MSCI’s board declared a cash dividend of 58 cents per share for second-quarter 2019. The dividend is payable on May 31, 2019, to shareholders of record as on May 17, 2019.
For 2019, MSCI expects total operating expenses between $775 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.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, MSCI has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, 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.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise MSCI has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.