MSCI Inc. 10-Q Summary: Quarter Ended August 31, 2009
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for MSCI Inc., a leading global provider of investment decision support tools including indices and portfolio risk analytics. The report covers the three and nine-month periods ended August 31, 2009. A significant corporate event occurred during this period: on May 22, 2009, Morgan Stanley sold its remaining shares, ceasing to be a related party and ending the allocation of corporate service costs (HR, IT, legal) from Morgan Stanley to MSCI.
Key Financial Metrics
| Metric | Three Months Ended Aug 31, 2009 | Nine Months Ended Aug 31, 2009 |
|---|---|---|
| Operating Revenues | $108.9 million | $324.2 million |
| Operating Income | $37.8 million | $107.2 million |
| Net Income | $20.9 million | $57.3 million |
| Diluted EPS | $0.20 | $0.56 |
| Operating Margin | 34.7% | 33.1% |
| Cash from Operations (9mo) | $120.8 million | |
| Total Debt Outstanding | $386.1 million | |
| Cash & Short-term Investments | $361.8 million ($111.7M cash + $250.1M investments) |
Material Changes vs. Prior Period
- Revenue: Three-month revenue decreased 1.4% to $108.9 million, while nine-month revenue increased 0.2% to $324.2 million. The decline in the quarter was driven by a $3.3 million one-time revenue adjustment (correcting foreign exchange amortization) and lower subscription revenues, partially offset by growth in equity index asset-based fees.
- Expenses: Operating expenses decreased 2.5% in the quarter and 0.5% over nine months. This reduction was primarily due to the elimination of costs allocated by Morgan Stanley and lower third-party consulting fees, offset by increased depreciation (due to new independent infrastructure) and higher stock-based compensation.
- Profitability: Net income increased 10.8% in the quarter and 3.3% over nine months compared to the prior year periods, driven by expense reductions and improved operating margins.
- Balance Sheet: Cash and cash equivalents decreased from $268.1 million to $111.7 million, largely due to the purchase of $409.2 million in short-term U.S. Treasury securities.
Guidance, Outlook, and Risks
- Run Rate: The company's "Run Rate" (forward-looking fees for the next 12 months) was $443.5 million as of August 31, 2009, representing a 3.9% year-over-year increase. Equity index asset-based fees showed strong growth (16.6% YoY), while equity portfolio analytics declined (10.6% YoY).
- Retention: Aggregate retention rates declined to 80.6% in the quarter (from 91.6% prior year), attributed to client budget constraints, closures/mergers, and shutdowns of quantitative funds.
- Debt Covenants: MSCI is in compliance with its $500 million credit facility. The leverage ratio was 1.82:1.0 (limit 3.75:1.0) and interest coverage was 10.91:1.0 (minimum 3.00:1.0).
- Risks: Key risks include foreign currency fluctuations (approx. 12.6% of revenue and 33.5% of expenses are in foreign currencies), market volatility affecting asset-based fees, and the transition of operating functions previously managed by Morgan Stanley.
Investor Verification Checklist
- Revenue Adjustment Impact: Verify the long-term impact of the $3.3 million revenue correction related to foreign exchange rate amortization errors.
- Post-Morgan Stanley Costs: Monitor if the elimination of allocated Morgan Stanley costs is fully offset by new independent IT, HR, and legal expenses in future quarters.
- Asset-Based Fee Volatility: Track the $199.2 billion in ETF assets linked to MSCI indices, as this drives a significant portion of revenue and is sensitive to market performance and fund flows.
- Retention Trends: Assess whether the decline in retention rates (80.6%) is a temporary market reaction or a structural shift in client behavior.
- Debt Servicing: Confirm continued compliance with debt covenants as the company transitions to full independent operations.