MSCI Reports Financial Results for Second Quarter and Six Months 2018
NEW YORK--(BUSINESS WIRE)--Aug 2, 2018--MSCI Inc. (NYSE: MSCI), a leading provider of indexes and portfolio construction and risk management tools and services for global investors, today announced results for the three months ended June 30, 2018 (“second quarter 2018”) and six months ended June 30, 2018 (“six months 2018”).
Financial and Operational Highlights for Second Quarter 2018 (Notes: Percentage and other changes refer to second quarter 2017 unless otherwise noted.)Operating revenues up 14.9%; recurring subscription revenues up 10.0%; asset-based fees up 30.4%. Diluted EPS of $1.28, up 43.8%; Adjusted EPS of $1.30, up 36.8%. Quarter‐end AUM of $744.7 billion in ETFs linked to MSCI indexes; up 19.3% compared to prior year. AUM of $763.0 billion as of July 31, 2018. Total Run Rate up 12.0% to $1,411.7 million, driven by asset-based fees Run Rate, up 21.4%, and subscription Run Rate, up 9.5%. Organic subscription Run Rate growth was 10.2%. Continued strong retention with total Retention Rate at 94.1%. Board of Directors (“Board”) approved a 52.6% increase to quarterly dividend to $0.58 per share payable in the third quarter; payout ratio target increased to a range of 40% to 50% of Adjusted EPS. Issued $500 million of senior unsecured notes due 2027, bringing total cash to $1.4 billion.
“In a dynamic and evolving investment industry, our value proposition to our clients and the strength of our franchise is as strong as ever. We are driving momentum in our key client segments such as asset owners, asset managers, wealth managers and broker dealers.
Our focus on enhancing our go-to-market strategy and more closely engaging with our clients helped us deliver exceptional gross sales and strong recurring net new sales for the first half of 2018. Our strong second quarter results reinforce our conviction in the strategic bets we have taken to deliver a more client-centric company,” commented Henry A. Fernandez, Chairman and CEO of MSCI.
Second Quarter 2018 Consolidated Results
Revenues : Operating revenues for second quarter 2018 increased $47.0 million, or 14.9%, to $363.0 million, compared to $316.1 million for the three months ended June 30, 2017 (“second quarter 2017”). The $47.0 million increase in operating revenues was driven by a $20.4 million, or 30.4%, increase in asset-based fees (which itself was driven by strong growth across all types of index-linked investment products, including an increase in revenue from exchange traded funds (“ETFs”) linked to MSCI indexes), and a $24.3 million, or 10.0%, increase in recurring subscriptions (driven primarily by a $14.0 million, or 13.2%, increase in Index products and a $5.5 million, or 4.9%, increase in Analytics products). Adjusting for the impact from foreign currency exchange rate fluctuations (“ex-FX”) in second quarter 2018, operating revenues increased 14.5%, recurring subscription revenues increased 9.7% and asset-based fees increased 30.3%. Asset-based fees ex-FX does not adjust for the impact from foreign currency exchange rate fluctuations on the underlying assets under management (“AUM”).
For six months 2018, operating revenues increased $97.1 million, or 15.7%, to $714.4 million, compared to $617.3 million for the six months ended June 30, 2017 (“six months 2017”). The $97.1 million increase was driven by a $48.4 million, or 38.8%, increase in asset-based fees and a $47.0 million, or 9.8%, increase in recurring subscriptions. For six months 2018, operating revenues ex-FX increased 15.3%, recurring subscription revenues ex-FX increased 9.2% and asset-based fees ex-FX increased 38.7%.
Run Rate : Total Run Rate at June 30, 2018 grew by $151.4 million, or 12.0%, to $1,411.7 million, compared to June 30, 2017. The $151.4 million increase was driven by a $93.7 million, or 9.5%, increase in subscription Run Rate to $1,084.4 million, and a $57.7 million, or 21.4%, increase in asset-based fees Run Rate to $327.3 million. Organic subscription Run Rate growth was 10.2% in second quarter 2018 driven by strong growth in the Index and ESG segments and in the Analytics segment’s Multi-Asset Class and Equity Analytics products. Retention Rate was 94.1% in second quarter 2018 compared to 94.9% in second quarter 2017.
Expenses : Total operating expenses for second quarter 2018 increased $19.5 million, or 11.5%, to $189.5 million compared to second quarter 2017, driven by a $7.9 million non-cash charge related to the write-off of the IPD tradename used by the Real Estate segment, reflecting the rebranding of the product line as MSCI Real Estate to better leverage and incorporate it into global company initiatives. In addition, compensation and benefits costs increased $8.5 million, or 7.9%, on higher salaries, incentive compensation, severance and benefits, and non-compensation costs increased $4.4 million, or 10.4%, primarily on higher non-income tax costs, professional fees, occupancy expenses and marketing costs. Adjusted EBITDA expenses for second quarter 2018 increased $12.9 million, or 8.6%, to $162.6 million compared to second quarter 2017. Total operating expenses ex-FX and adjusted EBITDA expenses ex-FX for second quarter 2018 increased 10.3% and 7.4%, respectively, compared to second quarter 2017.
For six months 2018, total operating expenses increased $33.2 million, or 9.8%, to $373.7 million. Adjusted EBITDA expenses increased $27.1 million, or 9.0%, to $327.2 million compared to six months 2017. Total operating expenses and adjusted EBITDA expenses ex-FX for six months 2018 increased 7.5% and 6.6%, respectively, compared to six months 2017.
Headcount : As of June 30, 2018, there were 3,062 employees, up 3.1% from 2,970 as of June 30, 2017, and almost flat compared to 3,059 employees as of March 31, 2018. The 3.1% year-over-year increase in employees was primarily driven by increased headcount in emerging market centers and in areas related to data and content services, technology and research. As of June 30, 2018, a total of 40% and 60% of employees were located in developed market and emerging market centers, respectively, compared to 43% in developed market centers and 57% in emerging market centers as of June 30, 2017.
Amortization and Depreciation Expenses : Amortization and depreciation expenses of $26.9 million increased by $6.6 million, or 32.7%, for second quarter 2018, compared to second quarter 2017, primarily as a result of an $8.4 million, or 75.7%, increase in amortization expense primarily reflecting a $7.9 million non-cash charge in second quarter 2018 related to the write-off of the IPD tradename used by the Real Estate segment as well as higher amortization of internal capitalized software projects, partially offset by lower amortization of acquired intangibles, and by a $1.8 million, or 19.5%, decrease in depreciation expense reflecting certain data center assets becoming fully depreciated. For six months 2018, amortization and depreciation expenses of $46.5 million increased by $6.1 million, or 15.1%, compared to six months 2017.
Other Expense (Income), Net : Other expense (income), net was $17.2 million which decreased $11.4 million, or 39.9%, for second quarter 2018, compared to second quarter 2017, primarily as a result of the gain realized from the divestiture of Financial Engineering Associates, Inc. (“FEA”) on April 9, 2018. For six months 2018, other expense (income), net was $44.9 million which decreased $12.8 million, or 22.2%, compared to six months 2017.
Tax Rate : Income tax expense was $39.5 million for second quarter 2018, compared to $36.2 million for second quarter 2017. The effective tax rate was 25.3% and 30.8% for second quarter 2018 and second quarter 2017, respectively. The decline largely reflected the impact of the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (“Tax Reform”) and the release of a valuation allowance previously recorded on capital loss carry forwards utilized in second quarter 2018.
Income tax expense was $63.8 million for six months 2018, compared to $64.9 million for six months 2017. The effective tax rate was 21.6% and 29.6% for six months 2018 and six months 2017, respectively. Six months 2018 included a benefit of $1.6 million relating to a revision of the fourth quarter 2017 net charge of $34.5 million associated with taxes on the amount of historical profits that were permanently reinvested overseas. Excluding the $1.6 million benefit related to Tax Reform, the six months 2018 adjusted tax rate was 22.1%.
The recorded cumulative net charge of $32.9 million for Tax Reform is a provisional amount that reflects our reasonable estimate at this time and is subject to adjustment during a measurement period not to exceed one year from enactment in accordance with guidance from the Securities and Exchange Commission. The net tax benefit of $1.6 million for Tax Reform in six months 2018 was excluded from adjusted net income and adjusted EPS consistent with the classification of the fourth quarter 2017 charge of $34.5 million. We expect that any future charges related to Tax Reform resulting from interpretations related thereto, and further guidance from regulatory agencies will continue to be excluded from adjusted net income and adjusted EPS.
Net Income : Net income increased 43.8% to $116.8 million in second quarter 2018, from $81.3 million in second quarter 2017. For six months 2018, net income increased 50.4% to $231.9 million, compared to $154.2 million for six months 2017.
Adjusted EBITDA : Adjusted EBITDA was $200.4 million in second quarter 2018, up $34.0 million, or 20.5%, from second quarter 2017. Adjusted EBITDA margin in second quarter 2018 was 55.2%, compared to 52.6% in second quarter 2017. For six months 2018, adjusted EBITDA was $387.1 million, up 22.0% from six months 2017, and adjusted EBITDA margin was 54.2% for six months 2018, compared to 51.4% for six months 2017.
Cash Balances & Outstanding Debt : Total cash and cash equivalents as of June 30, 2018 was $1,367.6 million. MSCI seeks to maintain minimum cash balances globally of approximately $200.0 million to $250.0 million for general operating purposes.
A private offering of $500.0 million aggregate principal amount of 5.375% Senior Notes due 2027 was completed during second quarter 2018 (the “2027 Notes Offering”). Total outstanding debt as of June 30, 2018 was $2,600.0 million, which excludes deferred financing fees of $26.3 million. Net debt, defined as total outstanding debt less cash and cash equivalents, was $1,232.4 million at June 30, 2018. The total debt to operating income ratio (based on trailing twelve months operating income) was 4.0x. The total debt to adjusted EBITDA ratio (based on trailing twelve months adjusted EBITDA) was 3.6x, which is slightly above the stated gross leverage to adjusted EBITDA targeted range of 3.0x to 3.5x.
Cash Flow & Capex : Net cash provided by operating activities was $207.2 million in second quarter 2018, compared to $122.2 million in second quarter 2017 and $88.6 million in first quarter 2018. Capex for second quarter 2018 was $7.2 million, compared to $7.0 million in second quarter 2017 and $5.9 million in first quarter 2018. Free cash flow was $200.0 million in second quarter 2018, compared to $115.2 million in second quarter 2017 and $82.7 million in first quarter 2018. The increase in net cash provided by operating activities and free cash flow, compared to first quarter 2018, was driven by lower cash expenses (primarily related to the impact of the annual cash incentives paid in the first quarter), higher cash collections and lower scheduled interest payments, partially offset by higher income tax payments. The increase in net cash provided by operating activities and free cash flows, compared to second quarter 2017, was primarily driven by increased cash collections, partially offset by higher income tax payments.
Net cash provided by operating activities was $295.8 million for six months 2018, compared to $159.2 million for six months 2017. Capex for six months 2018 was $13.1 million, compared to $16.7 million for six months 2017. Free cash flow was $282.7 million for six months 2018, compared to $142.6 million for six months 2017. The increase in both net cash provided by operating activities and free cash flow for six months 2018 compared to the same period of the prior year was primarily driven by higher cash collections, partially offset by higher payments of cash expenses and higher income tax payments.
Share Count & Capital Return : The weighted average diluted shares outstanding in second quarter 2018 declined 0.1% to 91.6 million, compared to 91.7 million in second quarter 2017. In second quarter 2018 MSCI repurchased 1.0 million shares at an average price of $148.52 per share for a total value of $154.9 million. A total of $1.5 billion remains on the outstanding share repurchase authorization as of July 27, 2018. Total shares outstanding as of June 30, 2018 was 88.8 million.
On July 31, 2018, the Board declared a cash dividend of $0.58 per share for third quarter 2018, representing an increase of 52.6% from $0.38 per share in the previous quarter. The third quarter 2018 dividend is payable on August 31, 2018 to shareholders of record as of the close of trading on August 17, 2018.
Table 1: Second Quarter 2018 Results by Segment (unaudited)
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