MSCI (MSCI) Down 0.2% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for MSCI (MSCI). Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is MSCI due for a breakout? 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 Q1 Earnings Beat Estimates, Recurring Subscriptions Up Y/Y

MSCI Inc.’s first-quarter 2022 adjusted earnings of $2.78 per share beat the Zacks Consensus Estimate by 1.46% and increased 17.8% from the year-ago quarter.

Operating revenues improved 17% year over year to $559.9 million and beat the consensus mark by 0.17%.

This year-over-year growth was driven by 18.4% and 14.5% rise in recurring subscriptions (71.4% of revenues) and asset-based fees (25.9% of revenues), respectively. Non-recurring revenues (2.7% of revenues) increased 8.2% year over year to $15.1 million.

At the end of the reported quarter, average assets under management were $1.21 trillion in ETFs linked to MSCI indexes. Total retention rate was 95.9% in the quarter under review.

Quarter Details

In the first quarter, Index operating revenues improved 13.1% year over year to $330.8 million, driven by higher recurring subscription revenues and asset-based fees.

Growth in higher recurring subscription revenues was driven by growth from market-cap weighted index products and strong growth from factor, ESG and climate index products.

Asset-based fees’ growth was primarily driven by an increase in revenues from ETFs linked to MSCI equity indexes as a result of higher average AUM in the same. This was partially offset by a decline in average basis point fees.

Moreover, non-ETF indexed funds linked to MSCI indexes contributed to the increase in revenues.

Analytics operating revenues improved 4.3% year over year to $139.8 million. The growth was driven by higher recurring subscription revenues from both Multi-Asset Class and Equity Analytics products.

ESG and Climate segment’s operating revenues surged 49.7% from the year-ago quarter to $52 million, primarily driven by strong growth from recurring subscriptions related to Ratings, Climate and Screening products.

All Other revenues, which primarily comprise of the Real Estate operating segment, were $37.4 million, up 117.7% year over year.

Adjusted EBITDA increased 15.2% year over year to $318.5 million in the reported quarter. Adjusted EBITDA margin contracted 90 basis points (bps) on a year-over-year basis to 56.9%.

Total operating expenses increased 20.9% on a year-over-year basis to $271 million. Adjusted EBITDA expenses were $241.4 million, up 19.6%, primarily reflecting higher compensation and benefits costs related to continued investments to support growth, including increased headcount in technology, research and client coverage.

Operating income improved 13.6% from the year-ago quarter to $289 million. However, operating margin contracted 160 bps on a year-over-year basis to 51.6%.

Balance Sheet & Cash Flow

Total cash and cash equivalents, as of Mar 31, 2022, were $679.3 million compared with $1.4 billion as of Dec 31, 2021.

Total debt was $4.2 billion as of Mar 31, unchanged sequentially. Total-debt-to-adjusted-EBITDA ratio (based on trailing twelve-month-adjusted EBITDA) was 5.5 times, much higher than management’s target range of 3-3.5 times.

Net cash provided by operating activities was $244.2 million in the fourth quarter, up 13.3% year over year. Free cash flow was $228.9 million, up 11.6% year over year.

MSCI bought shares worth $772.7 million during the reported quarter. Notably, $794.4 million are outstanding under MSCI’s share-repurchase authorization as of Apr 25, 2022. The company paid out dividends worth $84.7 million in the first quarter.

Guidance

For 2022, MSCI expects total operating expenses of $1.075-$1.115 million. Adjusted EBITDA expenses are expected between $975 million and $1.005 billion.

Interest expenses are expected to be roughly $162 million.

Capex is expected to be $60-$70 million.

Net cash provided by operating activities and free cash flow are expected to be $1.120-$1.160 billion and $1.050-$1.100 billion, respectively.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, MSCI has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. 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

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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