MSCI

MSCI Inc. Q1 2008 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended February 29, 2008. MSCI Inc. is a leading provider of investment decision support tools, including equity indices (MSCI brand) and portfolio analytics (Barra brand). The company operates as a single business segment and is majority-owned by Morgan Stanley (approx. 81% economic interest). The company recently completed its IPO in November 2007 and is in the process of transitioning from a subsidiary of Morgan Stanley to a fully independent public company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 20.5% year-over-year, driven by a 26.4% increase in equity index revenues (subscriptions up 17.1% and asset-based fees up 50.1%) and an 84.3% surge in multi-asset class analytics.
• Expense Expansion: Total operating expenses rose 22.2% to $70.3 million. Selling, general, and administrative (SG&A) expenses jumped 66.4% due to the amortization of a $68 million "founders grant" ($4.8 million expense in Q1), increased staffing to replace Morgan Stanley services, and public company costs.
• Net Income Decline: Despite higher operating income, net income fell 17.1% to $17.9 million. This was primarily due to a $10.9 million swing in "Interest income (expense) and other, net," caused by $8.5 million in interest expense on new long-term debt and reduced interest income from lower cash balances.
• Debt Financing: The company entered a $500 million credit facility in November 2007. As of Feb 29, 2008, $419.4 million was outstanding, compared to zero debt in the prior year.

Outlook, Risks, and Management Commentary

• Run Rate: The 12-month forward "Run Rate" increased 23.4% year-over-year to $413.3 million, indicating strong underlying subscription growth despite recent market volatility.
• ETF Asset Fluctuations: Assets under management (AUM) in ETFs linked to MSCI indices decreased 6.5% sequentially to $179.2 billion due to global equity market declines, though net inflows partially offset depreciation.
• Transition Costs: Management expects operating expenses to remain elevated in the near term due to the overlap of costs while replacing services previously provided by Morgan Stanley (HR, IT, legal) and establishing independent public company infrastructure.
• Interest Rate Risk: To mitigate rising interest rates on variable-rate debt, the company entered interest rate swaps on $251.7 million of debt in February 2008, effectively fixing rates at approx. 5.65%.
• Foreign Currency: Approximately 14.7% of revenues and 20.6% of expenses are denominated in foreign currencies, exposing the company to exchange rate fluctuations.

Investor Verification Checklist

• Debt Servicing: Verify the company's ability to meet interest obligations on the $419.4 million credit facility given the recent decline in net income.
• Run Rate Realization: Monitor whether the 23.4% increase in Run Rate translates into sustained revenue growth as market volatility impacts ETF-linked asset fees.
• Expense Trajectory: Track the trend of SG&A expenses to determine when the "overlap" costs of transitioning from Morgan Stanley services will stabilize.
• Related Party Dependence: Assess the concentration risk of holding $164.1 million in cash deposits with Morgan Stanley and the reliance on Morgan Stanley for administrative services.
• Share Count Impact: Note the significant increase in weighted average shares outstanding (from 83.9M to 100.7M) following the IPO, which dilutes per-share earnings.