Business Context and Reporting Period
Company: MSCI Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: November 30, 2008
Business Overview: MSCI is a leading global provider of investment decision support tools, including equity indices (MSCI brand), portfolio risk analytics (Barra brand), and energy/commodity analytics (FEA brand). The company serves over 3,100 clients across 64 countries, primarily asset managers, asset owners, and financial intermediaries. Revenue is derived mainly from annual recurring subscriptions and asset-based fees linked to ETFs and other investment products.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 | Change |
|---|---|---|---|
| Operating Revenues | $430.96 million | $369.89 million | +16.5% |
| Operating Income | $135.79 million | $129.96 million | +4.5% |
| Net Income | $68.27 million | $81.11 million | -15.8% |
| Diluted EPS | $0.67 | $0.96 | -30.2% |
| Operating Margin | 31.5% | 35.1% | -3.6 pts |
| Cash and Cash Equivalents | $268.08 million | $33.82 million | +692.9% |
| Total Debt (Outstanding) | $402.8 million | $425.0 million | -5.2% |
| Run Rate (Year-End) | $407.94 million | $394.96 million | +3.3% |
Note: Cash equivalents increased significantly due to the transfer of funds previously deposited with Morgan Stanley to independent bank accounts following the company's separation.
Material Changes vs. Prior Period
- Revenue Growth Drivers: Revenue increased 16.5% driven by growth in equity index subscriptions (+23.9%), multi-asset class analytics (+50.8%), and equity portfolio analytics (+9.7%). Asset-based fees from ETFs increased 10.8% despite a 37.9% decline in the value of assets in ETFs linked to MSCI indices year-over-year.
- Expense Increases: Total operating expenses rose 23.0% to $295.2 million. This was primarily due to a one-time "Founders Grant" share-based compensation expense of $25.6 million and $27.5 million in costs to replace administrative services previously provided by Morgan Stanley.
- Profitability Decline: Net income decreased 15.8% due to higher interest expense ($26.9 million vs. $9.6 million in 2007) resulting from the $500 million credit facility, increased foreign currency exchange losses ($4.3 million), and the aforementioned compensation costs.
- Retention Rates: Aggregate Retention Rate declined to 89.9% in 2008 from 91.8% in 2007, reflecting market volatility, client consolidations, and the closure of quantitative funds in the fourth quarter.
Guidance, Outlook, and Risks
Management Commentary: Management expects to continue converting a high percentage of operating profits into cash to fund internal growth and acquisitions. The company is actively transitioning clients from the client-hosted "Barra TotalRisk" system to the web-based "BarraOne" platform. While revenue growth slowed in the fourth quarter due to financial market conditions, the company maintains a strong Run Rate.
Key Risks and Contingencies:
- Market Volatility: A significant portion of revenue (16.9%) comes from asset-based fees tied to ETFs. Declines in global equity markets directly reduce these fees.
- Client Concentration: The ten largest clients accounted for 28.6% of total revenues. Barclays PLC alone accounted for 11.0% of revenues, with 89.7% of that derived from ETF asset-based fees.
- Relationship with Morgan Stanley: Morgan Stanley owns 100% of Class B stock (controlling ~65.7% of voting power). The company relies on Morgan Stanley for certain services under a transition agreement, though it is actively replacing these functions.
- Debt Covenants: The company has a $500 million credit facility with restrictive covenants, including a maximum leverage ratio of 3.75:1.0 and a minimum interest coverage ratio of 3.00:1.0. As of Nov 30, 2008, the company was in compliance (Leverage 1.9:1; Coverage 8.5:1).
Investor Verification Checklist
- Asset-Based Fee Exposure: Verify the current Assets Under Management (AUM) in ETFs linked to MSCI indices, as this is a volatile revenue driver.
- Run Rate Sustainability: Monitor the "Run Rate" metric in future filings to assess the forward-looking revenue pipeline, particularly given the decline in retention rates in Q4 2008.
- Debt Servicing: Confirm continued compliance with credit facility covenants (leverage and interest coverage ratios) as interest rates fluctuate.
- Service Transition Costs: Track the trajectory of expenses related to replacing Morgan Stanley services to ensure they stabilize as the company becomes fully stand-alone.
- Client Concentration: Assess the risk associated with the top 10 clients, specifically Barclays, representing nearly 30% of total revenue.