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Why Is MSCI (MSCI) Up 4.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for MSCI (MSCI). Shares have added about 4.1% 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 the most recent earnings report in order to get a better handle on the important drivers.

MSCI Q2 Earnings Beat, Recurring Subscription Sales Rise

MSCI reported second-quarter 2019 adjusted earnings of $1.54 per share, which beat the Zacks Consensus Estimate by a nickel and increased 18.5% from the year-ago quarter.

Operating revenues increased 6.2% year over year to $385.6 million, slightly better than the consensus mark of $381 million. The year-over-year growth was driven by 8.4% increase in recurring subscriptions.

New recurring subscription sales decreased 8.4% and subscription cancellation declined 18.2%.

Organic operating revenues (excluding the impact of acquisitions, divestitures and foreign-currency exchange rate fluctuations) increased 8.2% year over year.

Total Run Rate, as of Jun 30, 2019, grew 7.5% to $1.52 billion. Recurring subscription Run Rate grew 8.1%. Asset-based fees Run Rate increased 5.4%.

Organic subscription Run Rate increased 10.1%, 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 $819.3 billion in ETFs linked to MSCI indexes. Total retention rate was 95.5% at the end of the quarter.

Index Revenue Details

In the second quarter, Index operating revenues (58.5% of operating revenues) increased 5.9% year over year to $225.6 million, primarily driven by strong growth in recurring subscriptions (up 10.5%). The increase was driven by growth in core products, factor and ESG index products, and custom index products.

Non-recurring revenues and asset-based fees were flat on a year-over-year basis.
 
Index new recurring subscription sales decreased 6.6%. Subscription cancellation also declined 21.3%. Index retention rate was 97.1%.

Index Run Rate grew 8.8% to $876.7 million, primarily driven by 11.1% growth in recurring subscriptions Run Rate and 5.4% in asset-based fees Run Rate.

Recurring subscriptions Run Rate was driven by strong growth in core developed and emerging market modules, factor and ESG, and custom index products.

MSCI also benefited from strong growth across asset management, banking, hedge funds, asset owners and wealth-management client segments.

Asset-based fees Run Rate grew due to higher AUM in ETFs linked to MSCI indexes, an increase in non-ETF passive funds linked to MSCI indexes and higher volumes in futures and options.

Analytics Revenue Details

Analytics operating revenues (32.1% of operating revenues) increased 3.8% year over year to $123.7 million, primarily driven by non-recurring revenues (up 24.6%). Both Equity and Multi-Asset Class Analytics products witnessed growth in the quarter.

Analytics new recurring subscriptions sales decreased 21.4%. Subscription cancellation declined 24.9%. Analytics retention rate was 94.2%.

Analytics Run Rate increased 2.9% to $504 million, primarily driven by growth in both Multi-Asset Class and Equity Analytics products. Analytics organic subscription Run Rate grew 6.8% year over year.

All Other Segment Revenue Details

All Other operating revenues (9.4% of operating revenues) rose 17.2% from the year-ago quarter to $36.3 million, primarily driven by recurring subscriptions (up 19.3%).

Growth in All Other revenues was driven by a 24% increase in ESG revenues, owing to strong growth in ESG Ratings product and ESG Screening product revenues.

Real Estate operating revenues increased 8.7%, primarily owing to strong growth in MSCI’s Global Intel product.

All Other organic operating revenue growth was 21.9%, with ESG organic operating revenues increasing 27.3% and Real Estate organic operating revenues 15%.

All Other new recurring subscription sales grew 20%. Subscription cancellation increased 37.4%. All Other retention rate was 93.9%.

All Other segment Run Rate increased 18.1% to $131 million. The growth was driven by a 24.3% increase in ESG Run Rate and 8.2% in Real Estate Run Rate.

All Other segment organic subscription Run Rate increased 19.7%, with ESG Run Rate up 25.2%. Real Estate Run Rate grew 10.7% year over year.

Operating Details

Adjusted EBITDA increased 5.7% year over year to $211.8 million in the reported quarter. However, the adjusted EBITDA margin contracted 30 basis points (bps) on a year-over-year basis to 54.9%.

Total operating expenses increased 2.3% year over year to $193.8 million.

Selling & Marketing (S&M) and General & Administrative (G&A) expenses increased 8.9% and 9.7%, respectively. Research & Development (R&D) expenses were up 20%.

MSCI’s compensation and benefit costs increased 7.1%, primarily attributed to higher incentive. Non-compensation costs increased 6.3%, primarily driven by higher travel and entertainment costs, professional fees, information technology costs and miscellaneous expenses.

Operating income increased 10.9% from the year-ago quarter to $192.4 million. Operating margin expanded 210 bps to 49.9%.

Balance Sheet & Cash Flow

Total cash and cash equivalents as of Jun 30, 2019, was $771.1 million compared with $642.8 million as of Mar 31, 2019.

Long-term debt was $2.60 billion. Net debt (defined as total outstanding debt less cash and cash equivalents) was $1.83 billion as of Jun 30, 2019. 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-3.5x.

Net cash provided by operating activities was $189.5 million in second-quarter 2019 compared with $87.9 million in the previous quarter. Free cash flow was $177.1 million compared with $79.7 million in the prior quarter.

On Jul 30, 2019, the MSCI’s board declared a cash dividend of 68 cents per share for third-quarter 2019, up 17.2% from 58 cents paid in the second quarter. The increased dividend is payable on Aug 30, 2019, to shareholders of record as on Aug 16.

Guidance

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?

Estimates review followed an upward path over the past two months.

VGM Scores

At this time, MSCI has a strong Growth Score of A, though it is lagging a lot 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.

Outlook

MSCI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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