MSCI Earnings: Subscription Sales, Which Can Be Lumpy, Are a Bit Soft

MSCI MSCI reported a decent third quarter in our view. Revenue of $626 million finished in line with the FactSet consensus estimate while expense control and a low tax rate resulted in adjusted EPS of $3.45 edging out the consensus estimate by 4%. However, sales activity which can be a bit lumpy finished a bit below our expectations and we believe this factor explains the modest negative investor reaction to MSCI’s shares. Overall, we will maintain our wide moat rating and fair value estimate of $440 on MSCI’s shares.

Index recurring subscription revenue continued to grow at a healthy double-digit pace. Asset-based revenue was up 2% from the second quarter as average assets in the firm’s ETF were up 3% in the quarter. However, the negative market movements in September and October will weigh on fourth-quarter results and we model for a 2% sequential decline for fourth-quarter asset-based revenue. The firm’s ending basis point fee of 2.51 basis points compares with 2.52 basis points at the beginning of the quarter and the year-ago quarter, a healthy result in our view especially as emerging market ETFs, which generally have higher fees, experienced net outflows. Net recurring sales of $17 million fell a bit shy of our $20 million estimate but overall, this is not too concerning to us.

MSCI’s ESG and climate segment continues to be its fastest grower but is decelerating. Constant-currency revenue growth was 20%, down from 29% in the second quarter. Net new recurring sales of $9 million were below our expectation of $14 million. Retention of 96% was still solid but we note that there was a slight uptick in cancellations. MSCI is seeing the Americas as a more challenging sales environment for ESG compared with Europe and Asia, a trend we expect to continue. We acknowledge a wide range of trajectories for the firm’s ESG business.