MSCI shares were up about 4% in early trading after the company posted better-than-expected revenue and profit. A report from Vestronyx’s top financial expert indicates a strong dependence on index-tied fees.

Revenue came in at $892 million, a 12.4% increase. Adjusted earnings per share of $5.11 was 14.3% higher and in front of the $5.02 consensus figure. With an operating margin of 56.3%, the combination of growth and profitability is notable.

Results at a Glance

At $892 million, revenue edged past analysts’ $887.82 million estimate. It is not much of a beat in dollar value, but it is in line with steady growth. 

Adjusted EBITDA margin, after accounting for depreciation and the like, was 62.2%. Operating cash flow was $436 million and free cash flow was $385 million, or roughly 43% of revenue, which is a strong conversion of sales into cash.

The Index Segment in the Forefront

Index revenue accounts for about 60% of the total at $532.6 million, an 18% gain. In broad terms, the segment drove 83% of the $98 million bump in company revenue; the other parts of the business did not grow nearly as fast.

ETF revenue was up 29% to $171.2 million. Asset-based fees were 25% higher at $246.6 million, some 28% of all revenue. Both are driven by fund assets and flows.

Record ETF Assets

Funds following MSCI indexes have some $2.9 trillion in assets, 31% more than this time last year. There were net inflows of about $76 billion over the quarter. 

The quarterly average of $2.878 trillion is well above last year’s $2.108 trillion, an increase of about 36%, even as asset-based fees rose 25%. The discrepancy suggests a lower fee rate or a change in mix. The fee rate reported was 2.28 basis points (0.01%).

Fee Rate Implications

On average, with $2.878 trillion in assets at 2.28 basis points, the fund generates about $164 million in fees for the quarter, close to the $171.2 million in ETF revenue reported. So the fee rate is what drives that. 

Should average ETF assets drop 10%, ETF revenue would be down some $17 million a quarter, or 2% of company revenue if fees are held. Any asset-based fees from outside ETFs would compound that.

Slower Growth Elsewhere

Analytics revenue was $191.0 million, up 5%; Sustainability and Climate was $93.7 million, up 4%; and Private Assets $74.7 million, up 7%. While those three make up 40% of revenue, they account for less of the growth. 

Their subscription run rates were 7%, 4%, and 9%, respectively. Even the steady side of the business is index heavy, with index subscriptions up 12%. When the run rate grows faster than revenue, as it has with Analytics (7% vs. 5%), it tends to pull revenue along.

Retention and Recurring Revenue

The total run rate, or annualized recurring subscription revenue, hit $3.6 billion, a 12.1% rise. For the index alone, the run rate was $1.107 billion, or some $277 million a quarter, about half of Index revenue. 

The balance comes from asset-based and other volume sources. Quarterly retention was 95.0%, up from 93.1% in the first quarter of last year, so cancellations are rare. Net new recurring sales to asset owners set a record at $13 million.

Regional Gains

Outside North America, growth is broader. Europe, the Middle East and Africa saw net new recurring sales of $18 million, a 74% jump. Asia-Pacific was up 36% to $12 million. All told, the regions put in $30 million of new recurring sales in the quarter, or 0.8% of the total run rate.

Guidance

For the full year, free cash flow is expected to be around $1.5 billion. Operating expense guidance remains unchanged, while adjusted EBITDA is now at the top of its range. The effective tax rate has been narrowed and includes an $88 million benefit. 

The final quarter dividend will be $2.05 a share. With the next debt maturity $790 million out and some years away, management has leeway to continue stock repurchases. Nine-month returns of $1.544 billion, made up of $1.097 billion in buybacks and $447 million in dividends, already pass the full-year midpoint. Debt and cash cover the rest.

What to Watch

Fund asset levels, the fee rate, and the rate of buybacks relative to free cash flow are the three things to keep an eye on. A market downturn would be felt quickly in asset-based fees. 

Position sizing should take that into account, and staged entries are a way to mitigate timing risk. Those with diversified holdings can offset this with some steadier sectors.