01—Abstract
Summary
Summary of the 10-K filed February 27, 2015. Cited figures are marked; the original filing is the authoritative source.
MSCI Inc. reported full-year 2014 operating revenues of $996.7 milliona, up 9.1% from $913.4 million in 2013, driven mainly by index, real estate and ESG subscription revenues and risk management analytics.
Operating income declined 0.9% to $337.2 millionb as the company increased investment under its Enhanced Investment Program, which the filing says has been largely completed; management expects margin expansion to begin in the second half of 2015, excluding non-recurring charges. Operating margin fell to 33.8% from 37.3%. Net income rose 27.7% to $284.1 million, but this included $85.2 million of income from discontinued operations, mainly the gain on the April 2014 sale of Institutional Shareholder Services Inc. (ISS) for $367.4 million.
Income from continuing operations was $198.9 millionc, down 0.5%. The company's Run Rate, a forward-looking measure of next-12-month revenues from current subscriptions and licenses, reached $1,006.7 million at December 31, 2014, up 7.7%. The Aggregate Retention Rate was 93.0%, versus 91.5% in 2013.
Assets in ETFs linked to MSCI equity indexes were $373.3 billiond at year-end, up 12.1%, and asset-based fees were 17.8% of revenues. Ten largest clients accounted for 25.8% of revenues, and BlackRock alone accounted for 10.6%. Balance-sheet and capital-return activity was significant during the year.
The company issued $800.0 million of 5.25% Senior Notes due 2024, entered a $200.0 million revolving credit agreement, and used the proceeds with cash on hand to prepay $794.8 million of term loan debt. It repurchased $409.7 million of treasury shares, and the 2014 Repurchase Program was increased to $850.0 million, with $550.0 million remaining at year-end. The company also initiated a quarterly dividend of $0.18 per share, an annual rate of $0.72, and declared the second quarterly dividend on February 3, 2015.
02—Key points
Key Highlights
- Operating revenues rose 9.1% to $996.7 million in 2014, led by index, real estate and ESG subscriptions (up 10.6% to $405.5 million) and risk management analytics (up 6.2% to $309.7 million).
- Operating income decreased 0.9% to $337.2 million and operating margin fell to 33.8% from 37.3%, reflecting increased investment under the Enhanced Investment Program; management expects margin expansion to begin in the second half of 2015.
- Net income increased 27.7% to $284.1 million, but income from continuing operations declined 0.5% to $198.9 million; the difference reflects an $85.2 million gain-driven contribution from discontinued operations after the $367.4 million sale of ISS.
- Total Run Rate grew 7.7% to $1,006.7 million at December 31, 2014, and the Aggregate Retention Rate improved to 93.0% from 91.5%.
- Assets in ETFs linked to MSCI equity indexes reached $373.3 billion at year-end, up 12.1%, and asset-based fees were 17.8% of operating revenues.
- Concentration risk remains: the ten largest clients contributed 25.8% of revenues, and BlackRock accounted for 10.6%, with 92.1% of BlackRock revenue tied to ETF asset-based fees.
- Capital allocation shifted to shareholders: the company issued $800.0 million of 5.25% Senior Notes due 2024, repurchased $409.7 million of shares, initiated a $0.18 quarterly dividend, and had $550.0 million remaining under its repurchase authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Msci kept $0.29.
- Revenue$996.7M100.0%
- Cost of revenue−$276.6M27.8%
- Gross profit$720.1M72.2%
- Operating costs−$382.9M38.4%
- Operating income$337.2M33.8%
- Interest, other & tax−$53.1M5.3%
- Net income$284.1M28.5%
Where FY2014 revenue went
$996.7M- Net income: $284.1M, 29% of revenue
- SG&A: $279.4M, 28% of revenue
- Cost of revenue: $276.6M, 28% of revenue
- R&D: $71.1M, 7.1% of revenue
- Other operating costs: $32.4M, 3.3% of revenue
- Interest, other & tax: $53.1M, 5.3% of revenue
Kept 29% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 27, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $996.68M$913.36M | +9.1% |
| Cost of Revenue | $276.62M$240.70M | +14.9% |
| Gross Profit | $720.06M$672.67M | +7.0% |
| R&D Expenses | $71.09M$61.00M | +16.5% |
| SG&A Expenses | $279.35M$232.45M | +20.2% |
| Operating Expenses | $659.51M$573.03M | +15.1% |
| Operating Income | $337.17M$340.33M | −0.9% |
| Interest Expense | $31.82M$26.26M | +21.2% |
| Net Income | $284.11M$222.56M | +27.7% |
| EPS (Basic) | $2.45$1.85 | +32.4% |
| EPS (Diluted) | $2.43$1.83 | +32.8% |
| Shares Outstanding (Basic) | 115.74M120.10M | −3.6% |
| Shares Outstanding (Diluted) | 116.71M121.07M | −3.6% |
05—Questions
Frequently Asked Questions
Why did operating income decline in 2014 despite revenue growth?
Operating expenses rose 15.1% to $659.5 million, while revenues grew 9.1%. The filing attributes the increase primarily to investments made under the Enhanced Investment Program, which the company says was largely completed in 2014. Compensation and benefits rose 14.2% and non-compensation expenses rose 19.6%, mainly from higher third-party professional fees, information technology and marketing costs.
How much of the 2014 net income came from the sale of ISS?
Income from discontinued operations, net of income taxes, was $85.2 million in 2014, which included a net gain of $78.7 million from the disposition of ISS. ISS was sold on April 30, 2014 for cash consideration of $367.4 million. Income from continuing operations was $198.9 million.
What does the company's debt position look like after the 2014 refinancing?
At December 31, 2014, long-term debt was $800.0 million, all of it 5.25% Senior Notes due 2024, and the $200.0 million 2014 Revolving Credit Agreement was undrawn. The company reported a Consolidated Leverage Ratio of 1.80:1.00 against a covenant maximum of 3.75:1.00, and a Consolidated Interest Coverage Ratio of 25.79:1.00 against a minimum of 4.00:1.00. Interest expense for 2015 is expected to increase significantly to approximately $45.0 million.
What are the main risks tied to ETF-linked revenue?
Asset-based fees depend on ETF assets, which can fluctuate with market performance and investor flows. Clients may negotiate lower fee percentages or stop using MSCI indexes; the filing notes that at least one large client has ceased using MSCI indexes for a significant number of its index funds. Fees are also affected by foreign currency movements, since a large majority of ETF assets are invested in non-U.S. dollar securities.
What is the company's capital return policy?
The company initiated a regular quarterly cash dividend in 2014, paying $0.18 per share on October 31, 2014 for a total of $20.4 million, with an anticipated annual rate of $0.72 per share. The 2014 Repurchase Program was increased to $850.0 million, with $550.0 million remaining as of December 31, 2014, and runs through December 31, 2016. Repurchases in 2014 totaled $409.7 million, including a $300.0 million accelerated share repurchase agreement in September 2014.
06—Continue