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Morningstar | MSCI's Exceptional Performance Continues

Wide-moat MSCI had a strong quarter across all of its businesses. For the second quarter, the company generated revenue of $363 million, which represents year-over-year growth of 14.9% and sequential growth of 3.3%. MSCI’s growth in index subscription revenue was the biggest contributor to this quarter’s growth, increasing 5.7% from the previous quarter. Asset-based fees grew 2.5% from the previous quarter, finally cooling off from the white-hot pace witnessed over the past 18 months. Nevertheless, MSCI’s $87.6 million in asset-based fees is still more than 30% greater than this time last year. Currently, MSCI’s run rate suggests it will modestly beat our estimate of $1.4 billion in revenue. For the second quarter, MSCI earned $1.28 per diluted share, nearly 44% higher than year-ago earnings. The company’s exceptional growth has driven improvements in operating leverage. During the quarter, GAAP pretax margins were 43.1%, a nearly 600-basis-point increase from the previous year. For now, we are maintaining our near-term estimates and our fair value estimate of $118 per share. We continue to believe MSCI is an exceptional company that currently has an exceptional price. We’d wait for a market pullback before investing.

What makes this quarter’s gain in pretax margins so impressive is that it happened despite an 11% increase in operating expenses, which included a $7.9 million write-off of a brand asset. Excluding the one-off impairment item, pretax margins would have been another 200 basis points higher. It would appear that pricing is playing a key role in MSCI’s growth, which we believe demonstrates the company’s wide moat. In addition, during the call, CEO Henry Fernandez said, "We clearly have been doing price increases on our, particularly, ESG and factor indices for what we call an institutional passive self-prove approach." Given that ESG is a newer product for MSCI, it’s encouraging that the company is already able to realize better pricing in addition to winning new business. Last quarter, we saw exceptional growth in MSCI’s other segment, which we attributed to growth in ESG. This quarter, total other revenue was up 21% but increased only 1.9% from the previous quarter. Though growth in ESG may have moderated from the previous quarter, we continue to think MSCI has a long runway in the environmental, social, and governance arena.

There was really only one negative for the company in the second quarter: Assets under management linked to MSCI indexes fell 2.6% from the previous quarter. This ends MSCI’s streak of 10 quarters with increasing assets under management. As investors should expect, MSCI’s AUM is more sensitive to performance and flows in emerging-market and international exchange-traded funds. We would view this as a short-term bump in the road for MSCI, and while we believe markets are expensive and are concerned about a downturn, we believe MSCI will continue to benefit from investors' continued preference for passive investments.