It has been about a month since the last earnings report for MSCI (MSCI). Shares have added about 0.9% 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 Q4 Earnings Beat, Recurring Subscription Revenues Rise
MSCI reported fourth-quarter 2019 adjusted earnings of $1.67 per share, which beat the Zacks Consensus Estimate by 2.5% and increased 27.5% from the year-ago quarter.
Operating revenues increased 12.4% year over year to $406.6 million, beating the consensus mark by 0.7%. The year-over-year growth was driven by an increase of 8.4% and 18.3% in recurring subscriptions (72.4% of revenues) and asset-based fees (23.7% of revenues), respectively.
Non-recurring revenues (3.9% of revenues) surged 83% year over year to $15.8 million. The solid growth was primarily driven by increased sales in BarraOne and RiskManager product offerings.
Organic operating revenues (excluding the impact of acquisitions, divestitures and foreign currency exchange rate fluctuations) rose 12.5% year over year.
Organic recurring subscription, asset-based fee and non-recurring revenues grew 8.5%, 18.3% and 82.3%, respectively.
At the end of the quarter, average assets under management (AUM) were $934.4 billion in ETFs linked to MSCI indexes. Total retention rate was 92.9% in the quarter.
Index Revenue Details
In the fourth quarter, Index operating revenues (59.8% of operating revenues) improved 15.6% year over year to $243.2 million, primarily driven by strong growth in recurring subscriptions (up 11.5%) and asset-based fees (up 18.3%).
The increase in recurring subscriptions was driven by growth in factor and ESG index products, core developed market modules and index level products.
Index net new recurring subscription sales increased 14%.
Analytics Revenue Details
Analytics operating revenues (31.5% of operating revenues) improved 5.1% year over year to $128.2 million. While recurring subscription revenues increased 2.2%, non-recurring revenues jumped 162.5%. Multi-Asset Class Analytics products also witnessed growth in the quarter.
Analytics net new recurring subscription sales grew 50.1%.
All Other Segment Revenue Details
All Other operating revenues (8.7% of operating revenues) rose 20.1% from the year-ago quarter to $35.2 million, primarily driven by recurring subscriptions (up 20.8%).
All Other organic operating revenue growth was 19.9%, with ESG organic operating revenues increasing 29.8% and Real Estate organic operating revenues 1.3%.
All Other net new recurring subscription sales grew 33.7%.
Adjusted EBITDA grew 16% year over year to $220.2 million in the reported quarter. Moreover, adjusted EBITDA margin expanded 170 basis points (bps) on a year-over-year basis to 54.2%.
Total operating expenses increased 12.4% year over year to $406.6 million, primarily due to higher compensation and benefit costs.
Selling & Marketing (S&M) and General & Administrative (G&A) expenses rose 12.3% and 19.1%, respectively. Research & Development (R&D) expenses were up 33.4%.
Operating income improved 17.4% from the year-ago quarter to $199.4 million. Operating margin expanded 210 bps to 49%.
Balance Sheet & Cash Flow
Total cash and cash equivalents, as of Dec 31, 2019, were $1.51 billion compared with $881.2 million, as of Sep 30, 2019.
Total debt was $3.1 billion, as of Dec 31. Total debt to adjusted EBITDA ratio (based on trailing twelve months adjusted EBITDA) was 3.6x, which was higher than management’s target range of 3.0x-3.5x.
Net cash provided by operating activities was $243.6 million in fourth-quarter 2019 compared with $188.5 million in the previous quarter. Free cash flow was $225.2 million compared with $173.8 million in the prior quarter.
On Jan 29, MSCI declared a cash dividend of 68 cents per share for first-quarter 2020, payable on Mar 6 to shareholders of record as of Feb 21.
For 2020, MSCI expects total operating expenses of $840-$860 million. Adjusted EBITDA expenses are expected between $750 million and $770 million.
Capex is expected to be $60-$70 million.
Moreover, net cash provided by operating activities and free cash flow is expected to be $650-$700 million and $580-$640 million, respectively.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months.
Currently, MSCI has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
MSCI has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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