MSCI Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. MSCI changed its year-end from November 30 to December 31, so the primary comparison is with the year ended November 30, 2010; the filing also reports a separate one-month transition period for December 2010. The periods are not calendar-year aligned.
Business context
MSCI provides global investment decision-support products, including equity indexes, risk and portfolio analytics, ESG research, proxy voting and corporate governance services. Its two segments are Performance and Risk and Governance. About 6,200 clients in 82 countries were served at year-end. Annual recurring subscriptions generated $732.5 million, or 81.3% of FY 2011 revenue.
Financial performance and liquidity
| Metric | FY 2011 | Comparison / context |
|---|---|---|
| Revenue | $900.9 million | Up 35.9% versus FY 2010 ended November 30; about $170.5 million of the increase came from acquisitions, with remaining growth of $67.5 million. Management reported 13.4% revenue growth excluding RiskMetrics and Measurisk. |
| Operating income / margin | $322.0 million / 35.7% | Operating income up 56.2%; margin was 31.1% in the comparison period. |
| Net income | $173.5 million | Up 88.2% versus $92.2 million. |
| Diluted EPS | $1.41 | Up from $0.81. |
| Operating cash flow | $255.0 million | Up from $183.4 million. |
| Cash and short-term investments | $392.7 million | $252.2 million cash and $140.5 million short-term investments at year-end. |
| Debt | $1,077.8 million | $11.3 million current maturities and $1,066.5 million long-term debt; $35 million prepaid in December 2011. |
FY 2011 investing cash outflow was $90.6 million and financing cash outflow was $178.0 million. Capital expenditures were $23.1 million. The company reported covenant ratios of 2.43x leverage against a 3.25x maximum and 8.43x interest coverage against a 5.00x minimum.
Fourth-quarter 2011 revenue was $226.1 million, operating income $81.6 million, net income $44.5 million and diluted EPS $0.36. Fourth-quarter Aggregate Retention Rate was 84.5%, versus 81.8% in the comparable 2010 quarter; the full-year 2011 rate was 89.8%, versus 86.8%.
Material changes versus the prior period
- RiskMetrics and Measurisk, acquired in 2010, substantially increased reported revenue and expenses; the year-over-year comparison includes a fuller period of their operations in 2011.
- Risk management analytics revenue rose 81.1% to $243.6 million, largely reflecting acquisitions. Governance revenue rose 104.1% to $119.6 million, also reflecting the acquired business.
- Index and ESG revenue increased 22.5% to $404.6 million. Asset-based fees increased 32.6% to $140.2 million, driven by higher average ETF assets, although year-end ETF assets linked to MSCI indexes fell 3.0% to $301.6 billion versus November 2010.
- Portfolio management analytics revenue declined 3.5% to $118.9 million; energy and commodity analytics revenue declined 12.1% to $14.3 million.
- Operating expenses increased 26.7% to $578.9 million, including higher acquisition-related costs and amortization. Amortization of acquired intangibles rose to $65.8 million. The RiskMetrics-related restructuring plan was described as substantially completed by year-end.
- Effective tax rate declined to 34.2% from 40.0%; the 2011 provision included $4.2 million of benefits related to prior tax periods and a change in the company’s reinvestment intention for certain foreign earnings.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects to invest in product development, sales, client support, research and infrastructure, while aiming over time for operating expense growth below revenue growth; it cautions that investment opportunities and variable revenue streams can affect margins.
- Management stated that operating cash flows, cash and short-term investments were expected to fund operations and commitments for at least the next 12 months. The company also intends to pursue acquisitions and does not plan to pay cash dividends in the foreseeable future.
- Key business exposures include market-driven changes to ETF-linked asset fees, client concentration and renewals, financial-sector weakness, competition, foreign exchange movements, reliance on third-party data, cybersecurity and service continuity, and potential conflicts of interest around ISS’s investor and corporate-client services.
- BlackRock and affiliates generated 8.1% of FY 2011 revenue; 83.9% of BlackRock revenue came from asset-based fees. The ten largest clients together represented 25.8% of revenue.
- Significant investigation disclosure: MSCI reported that, after a media inquiry alleging an ISS employee provided client voting data to proxy solicitors for cash and gifts, it placed the employee on administrative leave, opened an internal investigation and was cooperating with SEC and Department of Justice investigations. The filing does not state an outcome or quantify potential exposure.
- Goodwill and intangible assets totaled approximately $2.35 billion; no impairment was recorded. The new World Trade Center headquarters lease carries approximately $170.1 million of aggregate rent over its initial term, and management expected about $22 million of build-out costs.
- Management said routine pending legal matters were not expected to have a material effect based on information available, while noting outcomes remain uncertain. The filing also describes tax audits and possible additional tax liabilities.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects acquired businesses versus sustainable organic growth.
- Whether recurring subscription growth and retention remain resilient, particularly given the weaker fourth-quarter retention rates in several product categories.
- ETF-linked assets, market performance, client flows and BlackRock’s index and fee arrangements, including the potential impact of BlackRock developing its own indexes.
- The status and potential financial, regulatory and reputational consequences of the ISS voting-data investigation.
- Debt repayment capacity, interest-rate exposure, covenant headroom and the effect of future lease and headquarters costs on cash flow.
- Any developments in tax examinations, goodwill impairment indicators, or proposed regulations affecting index licensing and proxy-advisory services.