MSCI Earnings: Good Sales Quarter and Few Negatives Result in Positive Market Reaction

Wide-moat MSCI MSCI had a relatively strong second quarter. Revenue grew 13% to $621 million, which beat FactSet consensus of $602 million and our estimate of $614 million. MSCI benefited from rising equity markets, boosting asset-based fees. In addition, nonrecurring index subscription revenue was surprisingly strong. As we update our model, we are raising our fair value estimate for MSCI to $430 from $412 to account for market appreciation having a positive effect on asset-based fees and modestly higher subscription revenue across the firm’s other segments. While there are many positive attributes to MSCI’s business model, we believe these attributes are well understood by the market and regard shares as pricey.

MSCI’s index subscription business grew 19% to $224 million. Recurring subscription revenue grew 12%, a similar pace to the 13% seen in the first quarter. Net new recurring subscription sales of $23 million compared favorably with the $21 million seen in the year-ago period, and the firm’s index retention rate of 95.8% was relatively steady. The surprise in the quarter was the firm’s nonrecurring index subscription revenue of $23 million, which we believe is a quarterly record, and higher than the $9 million-$14 million range seen over the past several quarters. MSCI saw a one-time contribution from license fees related to prior periods, as well as strong sales from its free-float data product. While acknowledging that nonrecurring sales are by their nature lumpy, MSCI is hoping that some of its nonrecurring sales turn into recurring sales. ETF asset-based fees were up 6% amid a 4% increase in average assets, and the firm continues to hold its fees. We attribute this to flows into some ETFs such as factor and ESG ETFs that have higher expense ratios. With the index segment representing 58% of the firm’s revenue and 73% of the firm’s adjusted EBITDA, it is by far the firm’s largest profit driver.