MSCI Inc. Form 10-Q Summary: Quarter Ended May 31, 2009
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for MSCI Inc., a leading global provider of investment decision support tools, including indices and portfolio risk analytics. The reporting period covers the three and six months ended May 31, 2009. A significant corporate event occurred during this period: on May 22, 2009, Morgan Stanley completed the sale of its remaining economic and voting interests in MSCI, making MSCI a fully independent public company. Prior to this date, MSCI was a majority-controlled subsidiary of Morgan Stanley.
Key Financial Metrics
| Metric | Three Months Ended May 31, 2009 | Six Months Ended May 31, 2009 |
|---|---|---|
| Operating Revenues | $109.4 million | $215.3 million |
| Operating Income | $36.7 million | $69.4 million |
| Net Income | $19.6 million | $36.3 million |
| Diluted EPS | $0.19 | $0.36 |
| Operating Margin | 33.5% | 32.3% |
| Cash and Cash Equivalents | $72.8 million | $72.8 million (as of May 31) |
| Short-term Investments | $244.9 million | $244.9 million (as of May 31) |
| Total Debt Outstanding | $391.6 million | $391.6 million (as of May 31) |
| Operating Cash Flow (6 months) | N/A | $69.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 1.1% ($1.2 million) for the quarter and 1.0% ($2.1 million) for the six months compared to the prior year periods. Growth was driven by a 13.1% increase in equity index subscription revenues and an 11.3% increase in multi-asset class analytics.
- Asset-Based Fees Decline: Equity index asset-based fees decreased 16.9% for the quarter and 25.1% for the six months. This decline reflects a 27.0% drop in the average value of assets in ETFs linked to MSCI indices during the quarter, attributed to net asset depreciation offset by net cash inflows.
- Expense Management: Total operating expenses decreased 3.4% for the quarter and increased slightly (0.5%) for the six months. The decrease in the quarter was largely due to reduced costs allocated by Morgan Stanley for staffing services and lower consulting costs, partially offset by increased depreciation and amortization related to new infrastructure purchased for independence.
- Profitability: Operating income increased 11.4% for the quarter and 2.0% for the six months. Net income increased 5.3% for the quarter but decreased 0.6% for the six months.
- Liquidity Shift: Cash and cash equivalents decreased from $268.1 million at November 30, 2008, to $72.8 million at May 31, 2009. This reduction was primarily due to the purchase of $244.7 million in U.S. Treasury securities and capital expenditures of $9.5 million.
Guidance, Outlook, and Risks
Run Rate: The company's "Run Rate" (forward-looking fees for the next 12 months) was $432.7 million as of May 31, 2009, representing a 1.2% year-over-year increase and a 6.1% sequential increase. Subscription run rates grew 4.8% year-over-year, while asset-based fee run rates declined 14.5%.
Retention Rates: Aggregate retention rates declined to 87.7% for the quarter (from 90.6% in the prior year) and 89.2% for the six months (from 93.6%). Management attributes this to client budget constraints due to depressed equity values, client closures/mergers, and the shutdown of quantitative funds.
Outlook: Management expects to continue converting a high percentage of operating profits into excess cash to fund internal growth and acquisitions. The company is actively expanding operations in emerging markets (e.g., Mumbai, Budapest, Monterrey) to manage cost growth.
Risks and Contingencies:
- Market Volatility: Revenue from asset-based fees is highly sensitive to market performance and ETF asset flows.
- Foreign Exchange: Approximately 12.7% of revenues and 30.7% of expenses for the six months ended May 31, 2009, were denominated in foreign currencies. A stronger U.S. dollar negatively impacted reported revenues and expenses.
- Debt Covenants: The company maintains a $500 million credit facility with restrictive covenants. As of May 31, 2009, the company was in compliance with leverage (1.86:1) and interest coverage (10.18:1) ratios.
- Related Party Transition: While Morgan Stanley is no longer a related party, MSCI remains subject to transition agreements for certain services until November 2009.
Key Facts for Investor Verification
- Independence Status: Verify the full impact of the May 22, 2009 separation from Morgan Stanley on future cost structures, specifically the transition from allocated costs to direct replacement costs.
- ETF Asset Flows: Monitor the value of assets in ETFs linked to MSCI indices, as this directly drives the asset-based fee revenue stream, which is currently under pressure.
- Retention Trends: Track the "Run Rate" and retention rates closely, as recent declines suggest potential headwinds in the subscription business due to the broader economic environment.
- Cash Deployment: Observe the company's strategy for deploying its significant cash reserves ($317.7 million in cash and short-term investments) between debt repayment, share repurchases, and acquisitions.
- Debt Servicing: Confirm continued compliance with the credit facility covenants, particularly the leverage ratio, as the company pays down debt.