MSCI Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are against December 31, 2011. MSCI provides investment decision-support products and services through its Performance and Risk and Governance segments. Financial statements are unaudited interim statements.
Financial performance and position
| Metric | Q1 2012 | Prior comparable period / change |
|---|---|---|
| Revenue | $229.1 million | $223.3 million; up 2.6% |
| Operating income and margin | $81.0 million; 35.4% | $75.4 million; 33.8% |
| Net income | $44.0 million | $33.5 million; up 31.2% |
| Diluted EPS | $0.35 | $0.27 |
| Operating cash flow | $69.5 million | Used $25.9 million |
| Investing cash flow | Used $57.9 million | Provided $18.9 million |
| Financing cash flow | Used $0.5 million | Used $137.1 million |
- Operating expenses were nearly flat at $148.1 million, up 0.1%. SG&A rose 7.8% to $55.4 million, while the prior-year period included $4.4 million of restructuring expense; Q1 2012 recorded a $29,000 restructuring benefit.
- Interest expense was $12.4 million versus $16.6 million. Other expense was $0.6 million versus $5.6 million, including $6.1 million of prior-year loan repricing fees. The effective tax rate was 35.6%, down from 37.2%.
- Cash and cash equivalents were $266.0 million and short-term investments were $194.2 million at quarter-end. Current assets were $713.1 million versus current liabilities of $421.2 million.
- Total debt carrying value was approximately $1.074 billion, including current maturities. The company reported covenant ratios of 2.41x maximum leverage and 8.96x interest coverage, within the stated limits of 3.25x and at least 5.00x.
Changes, business trends, and outlook
- Performance and Risk revenue grew 3.1% to $198.1 million; Governance revenue declined 0.9% to $31.0 million. Risk management analytics revenue rose 8.9%, and index and ESG revenue rose 6.2%; Governance revenue was broadly flat.
- Index and ESG subscription revenue increased 15.3%, but asset-based fees fell 8.6%, partly because Q1 2011 included $4.3 million of non-recurring revenue. Average assets in ETFs linked to MSCI indices increased 1.0% year over year to $341.0 billion.
- Total Run Rate, a company-defined measure of renewable subscription and investment-product license fees expected over the following 12 months, was $919.2 million, up 6.4% year over year and 4.2% sequentially. Aggregate retention was 93.0%, versus 91.8% a year earlier.
- Operating cash flow improved by $95.4 million year over year, primarily due to better receivable collections and lower income-tax payments. The prior-year comparison also reflected large first-quarter cash compensation payments. Management said liquidity should be sufficient for domestic and foreign operating needs and planned commitments for at least the next 12 months.
- On May 4, 2012, after quarter-end, MSCI refinanced its existing term loan with an $880 million secured Term Loan A and a $100 million revolving facility, both maturing May 2017. The new term loan initially bears interest at LIBOR plus 2.25%; existing swaps were terminated. MSCI expects $18–20 million of related expense in Q2 2012 from accelerated amortization or recognition of financing fees.
- The company commenced a long-term lease for approximately 126,000 square feet at 7 World Trade Center. It expects about $22 million in build-out costs, a $9 million lease inducement, and up to $4.6 million in charges associated with vacating 88 Pine Street during the second half of 2012. No formal earnings guidance is provided in the filing.
Risks, contingencies, and unusual items
- Revenue-recognition correction: MSCI recorded a one-time $5.2 million cumulative revenue reduction in Q1 to correct prior recognition of certain energy and commodity analytics licenses. Reported category revenue was negative $1.3 million; excluding the adjustment, management said it would have been largely unchanged year over year. The amount was deferred and will be recognized ratably over contract terms. Management deemed the prior-period error immaterial and said restatement was unnecessary.
- MSCI relies on third-party data and software suppliers; supplier termination, data errors or delays, higher licensing fees, or restricted access could affect products and results. The filing specifically describes a data-access dispute risk involving Brazil’s BVMF exchange and dependence on a Broadridge data-feed agreement for proxy services.
- Foreign-currency exposure includes revenue, expenses, and index-linked fees affected by currency movements. MSCI recorded a $1.6 million foreign-exchange loss in Q1 2012. The May refinancing and termination of swaps may increase sensitivity to interest-rate movements.
- Tax authorities were examining MSCI in multiple jurisdictions. The company had an $8.4 million reserve related to a potential indemnification to Morgan Stanley for New York tax matters; the final settlement amount was not known. Management did not expect currently pending legal matters to have a material effect, while noting outcomes remain uncertain.
- MSCI reported compliance with its financial covenants at March 31, 2012. Its secured facilities contain restrictive covenants and are secured by substantially all domestic assets, subject to stated exceptions. The interim financial statements received an independent accountant’s review, not an audit.
Important facts for investors to verify
- How the revised ratable-recognition policy affects energy and commodity analytics revenue and deferred revenue in subsequent quarters.
- Whether subscription growth and Run Rate translate into reported revenue, and whether asset-based fees recover or remain sensitive to ETF assets, flows, and currency movements.
- The final economics and covenant terms of the May 2012 refinancing, including actual Q2 financing charges and interest-rate exposure after swap termination.
- Execution and total costs of the new headquarters lease, including build-out, inducement, and exit-related charges.
- Developments in supplier access and licensing, open tax examinations, and the reserved New York tax indemnification.