MSCI Inc. — Q1 2011 Form 10-Q
Business context and reporting period. MSCI provides investment indices, portfolio and risk analytics, and corporate governance research and services. Following its 2010 RiskMetrics acquisition, it reports Performance and Risk and Governance segments. The quarter ended March 31, 2011. MSCI changed its fiscal year-end to December 31; the reported comparison is with the three months ended February 28, 2010, not the same calendar quarter. Results also reflect a one-month December 2010 transition period. The interim statements are unaudited and were reviewed by Deloitte.
Key financial metrics
| Metric | Three months ended March 31, 2011 | Comparable period |
|---|---|---|
| Revenue | $223.3 million | $121.7 million |
| Operating income / margin | $75.4 million / 33.8% | $47.3 million / 38.8% |
| Net income | $33.5 million | $27.5 million |
| Diluted EPS | $0.27 | $0.26 |
| Operating cash flow | $(25.9) million | $(14.8) million |
- Revenue increased 83.5% year over year, but approximately $81.1 million of the increase came from acquisitions. Against prior-period pro forma results including RiskMetrics, revenue rose 12.7% and operating income rose 24.1%; pro forma net income increased 17.5% to $33.5 million from $28.5 million.
- Growth was led by risk management analytics, up 442.1% to $58.9 million, primarily reflecting acquired RiskMetrics revenue; Index and ESG revenue rose 33.1% to $100.0 million. Portfolio management analytics fell 6.9% to $29.3 million, and energy and commodity analytics fell 7.7% to $3.9 million. Governance contributed $31.3 million.
- Reported operating margin declined to 33.8% from 38.8%, while the acquisition-adjusted comparison improved from approximately 30.7%. Higher acquired costs, amortization, and restructuring affected reported expenses.
- Operating cash use reflected compensation and tax payments, higher receivables, and deferred-revenue movements. Investing provided $18.9 million; financing used $137.1 million, primarily in connection with debt repayment and refinancing. Capital expenditures were $3.8 million.
- At March 31, cash and cash equivalents were $127.6 million and short-term investments were $50.2 million. Current assets were $449.0 million versus current liabilities of $378.0 million. Total debt carrying value was approximately $1.12 billion.
- Debt was refinanced in March: a $1.125 billion term loan matures in March 2017, with interest at LIBOR plus 2.75% subject to a leverage-based stepdown and a 1.00% LIBOR floor. The company used $87.6 million of cash alongside the new loan to repay the prior balance. The revolver provides $100 million of capacity and matures in June 2015. Reported covenant leverage and interest-coverage ratios were 2.73x and 7.58x, respectively.
Changes, outlook, risks, and unusual items
- Management cited growth in benchmark-index subscriptions, index-linked asset fees, and risk analytics. Average ETF assets linked to MSCI indices increased 41.1% year over year to $337.6 billion; quarter-end assets were $350.1 billion. Index-linked fees are exposed to market values and fund flows.
- Total Run Rate was $863.7 million, up 14.7% year over year and 4.9% sequentially. Aggregate retention was 91.8%, versus 88.1% in the prior-year comparison. Run Rate is a forward-looking measure, not recognized revenue, and can vary with renewals, market levels, flows, and currency.
- MSCI reported $4.4 million of restructuring expense, mainly for eliminating duplicative occupancy costs and positions. It estimated total costs associated with lease exits at $3 million to $5 million and expected additional restructuring costs during 2011; estimates may change.
- Intangible amortization rose to $16.7 million from $4.3 million, largely due to RiskMetrics and Measurisk. The filing estimates a further $47.7 million of amortization for the remainder of 2011.
- Other expense included $6.1 million of debt repricing fees; interest expense also increased following acquisition-related borrowing. The repricing lowered the stated loan margin, but the debt remains variable-rate. MSCI estimated that a 169-basis-point LIBOR increase would add about $7.0 million of annual interest expense under its stated debt assumption.
- No numerical company-wide revenue or earnings guidance is provided. Management said it expects to invest in growth while seeking, over time, to keep expense growth below revenue growth; actual results may vary.
- Tax authorities, including the IRS and New York authorities, were examining prior years. MSCI said further changes in unrecognized tax benefits were reasonably possible but could not be estimated; resolution could materially affect a particular period’s income tax expense. Management did not expect a material effect on overall financial condition.
- Management said pending or asserted legal matters were not expected to have a material adverse effect based on currently available facts, while noting that contingencies could affect results in a particular period. The filing also identifies foreign-exchange, market-linked fee, interest-rate, acquisition-integration, and covenant risks.
Important facts for investors to verify
- Separate organic growth from acquired RiskMetrics and Measurisk contributions; use the acquisition-adjusted comparison as context, not as reported GAAP results.
- Track recurring subscription growth, retention, Run Rate, and ETF assets and flows, including their sensitivity to markets and currencies.
- Assess cash conversion and working-capital trends, given negative quarterly operating cash flow and the decline in cash balances.
- Monitor debt service, variable-rate exposure, covenant headroom, and any future mandatory excess-cash-flow repayments.
- Follow restructuring costs, future intangible amortization, and tax examinations or litigation developments that could affect reported earnings.