S&P Global (NYSE:SPGI) Outperforms
Revenue Increased 8%, Reflects 2016 Divestitures and Acquisitions
Organic Revenue Increased 18%
Diluted EPS Increased 39% to $1.53
Adjusted Diluted EPS Increased 35% to $1.62
Operating Profit Margin Increased 640 Basis Points to 45%
Adjusted Operating Profit Margin Increased 630 Basis Points to 47%
S&P Global (NYSE: SPGI) today reported first quarter 2017 results with revenue of $1,453 million, an increase of 8% compared to the same period last year. On an organic basis, first quarter revenue increased 18% led by 29% growth in Ratings.
Net income increased 35% to $399 million and diluted earnings per share grew 39% to $1.53. Adjusted net income increased 32% to $422 million and adjusted diluted earnings per share increased 35% to $1.62. The adjustments in the first quarter of 2017 were primarily for deal-related amortization and recent acquisitions and divestitures.
“While S&P Dow Jones Indices, Market Intelligence, and Platts all delivered strong organic revenue growth, the performance by Ratings was outstanding. Issuers turned to S&P Global Ratings to provide ratings on a surge of new high-yield bonds and leveraged loans as they poured into the market to take advantage of tight interest rate spreads,” said Douglas L. Peterson, President and Chief Executive Officer of S&P Global. “Strong organic revenue growth across the Company coupled with expense control and share repurchases resulted in exceptional earnings per share growth, ushering in a great start to 2017.”
Margin Improvement: The Company’s operating profit margin improved by 640 basis points to 45% and the adjusted operating profit margin improved by 630 basis points to 47%. This improvement was due to the sale of lower margin businesses, strong organic revenue growth, and productivity initiatives.
Return of Capital: During the first quarter, the Company returned $307 million to shareholders through a combination of $106 million in dividends and $201 million in share repurchases for 1.5 million shares. The Company has authorization from the Board of Directors to repurchase up to an additional 24.2 million shares.
Ratings: Revenue increased 29% to $714 million in the first quarter. Transaction revenue increased 65% to $373 million largely as a result of a substantial increase in high-yield bond and bank loan ratings as well as improved contract terms. Non-transaction revenue increased 4% to $341 million due to higher surveillance fees, entity fees, intersegment royalties from Market Intelligence, and CRISIL.
U.S. revenue increased 27% and international revenue, led by EMEA, increased 33%. International revenue represented 41% of first quarter revenue. A 51% increase in Corporate bond revenue led the segment and almost every major ratings sector delivered revenue growth.
Operating profit increased 43% to $376 million and the operating profit margin improved 530 basis points to 53%. Adjusted operating profit increased 50% to $379 million with an adjusted operating profit margin that improved 750 basis points to 53%, driven by increased revenue.
Market and Commodities Intelligence: Revenue decreased 10% to $593 million in the first quarter of 2017 due to the divestitures of J.D. Power, the SPSE/CMA pricing businesses, and Equity and Fund Research in the fall of 2016 and QuantHouse earlier this year. Excluding revenue from these divestitures and the recent acquisitions of PIRA and RigData, organic revenue grew 7%. Quarterly operating profit increased 2% to $186 million and the operating profit margin improved 370 basis points to 31%. Adjusted operating profit decreased 3% to $223 million as the segment lost the earnings from the divested businesses. Adjusted operating profit margin increased 270 basis points to 38% primarily due to divestments of lower margin businesses, strong organic revenue growth, and SNL integration synergies.
Market Intelligence revenue decreased 1% to $402 million due to divestitures. Excluding these divestitures, organic revenue increased 9% with gains in Desktop, Risk Services, and Enterprise Solutions.
Platts revenue increased 10% to $191 million aided by the acquisitions of PIRA and RigData. Excluding these acquisitions, Platts revenue grew 4% due to modest growth in both subscriptions and Global Trading Services.
S&P Dow Jones Indices: S&P Dow Jones Indices LLC is a majority owned subsidiary. The consolidated results are included in S&P Global’s income statement and the portion related to the 27% noncontrolling interest is removed in net income attributable to noncontrolling interests.
Revenue increased 14% to $171 million in the first quarter of 2017 compared to the same period last year primarily due to growth in asset-linked fees. S&P Dow Jones Indices is at the forefront of the trend from active to passive investing. This trend was evident in the first quarter of 2017 which, versus the first quarter of 2016, recorded a 39% increase in average ETF AUM associated with the Company’s indices driving a 26% increase in asset-linked fees. Quarter ending ETF AUM associated with our indices reached a new record of $1,116 billion, surpassing the $828 billion on March 31, 2016 and the prior quarter ending record of $1,023 billion set on December 31, 2016.
Operating profit increased 14% to $115 million and the operating profit margin increased 30 basis points to 67%. Adjusted operating profit increased 14% to $116 million and the adjusted operating profit margin increased 20 basis points to 68%. Operating profit attributable to the Company increased 14% to $85 million. Adjusted operating profit attributable to the Company increased 13% to $86 million.
Unallocated Expense: Unallocated expense includes corporate center functions and certain non-allocated items such as excess real estate. Unallocated expense decreased 13% to $29 million.
Provision for Income Taxes: The Company’s effective tax rates in the first quarter of 2017 and 2016 were 29.5% and 31.5%, respectively. The Company’s adjusted effective tax rate decreased to 30.3% in the first quarter of 2017 compared to 31.7% in the prior period due primarily to the discrete tax benefit from stock option exercises through March.
Balance Sheet and Cash Flow: Cash and cash equivalents at the end of the first quarter were $2.4 billion, of which approximately $1.8 billion was held outside the United States. In the first three months of 2017, cash provided by operating activities was $353 million. Free cash flow was $306 million, an increase of $170 million from the same period in 2016 due to increased net income and reduced litigation settlement payments. Free cash flow, excluding the after-tax payments associated with legal settlements, was $307 million.
Outlook: The Company is increasing its reported revenue guidance from flat growth to low single-digit growth. Excluding the impact of recent divestitures and acquisitions, organic revenue has increased from mid single-digit growth to mid-to-high single-digit growth. On a GAAP basis, diluted EPS was expected to be $5.65 to $5.90 and is increased to $5.72 to $5.92. Adjusted diluted EPS was expected to be $5.90 to $6.15 and has been increased to $6.00 to $6.20.
Comparison of Adjusted Information to U.S. GAAP Information: The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company also refers to and presents certain additional non-GAAP financial measures, within the meaning of Regulation G under the Securities Exchange Act of 1934. These measures are: adjusted diluted earnings per share, adjusted net income, adjusted operating profit and margin, adjusted unallocated expense, adjusted effective tax rates, adjusted diluted EPS guidance, free cash flow and free cash flow excluding certain items. The Company has included reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with GAAP on Exhibits 5, 7 and 8. The Company’s non-GAAP measures include adjustments that reflect how management views our businesses. The Company believes these non-GAAP financial measures provide useful supplemental information that, in the case of non-GAAP financial measures other than free cash flow and free cash flow excluding certain items, enables investors to better compare the Company’s performance across periods, and management also uses these measures internally to assess the operating performance of its business, to assess performance for employee compensation purposes and to decide how to allocate resources. The Company believes that the presentation of free cash flow and free cash flow excluding certain items allows our investors to evaluate the cash generated from our underlying operations in a manner similar to the method used by management and that such measures are useful in evaluating the cash available to us to prepay debt, make strategic acquisitions and investments, and repurchase stock. However, investors should not consider any of these non-GAAP measures in isolation from, or as a substitute for, the financial information that the Company reports.
Conference Call/Webcast Details: The Company’s senior management will review the first quarter 2017 earnings results on a conference call scheduled for today, April 25, at 8:30 a.m. ET. Additional information presented on the conference call may be made available on the Company’s Investor Relations Website at http://investor.spglobal.com.
The Webcast will be available live and in replay at https://www.snl.com/IRW/CustomPage/4023623/Index?KeyGenPage=1073751596&event=1073749051. (Please copy and paste URL into Web browser.)
Telephone access is available. U.S. participants may call (888) 391-6568; international participants may call +1 (415) 228-4733 (long distance charges will apply). The passcode is “S&P Global” and the conference leader is Douglas Peterson. A recorded telephone replay will be available approximately two hours after the meeting concludes and will remain available until May 25, 2017. U.S. participants may call (888) 485-0041; international participants may call +1 (203) 369-1613 (long distance charges will apply). No passcode is required.