MSCI Inc. Q1 2009 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended February 28, 2009. MSCI Inc. is a leading global provider of investment decision support tools, including indices and portfolio risk and performance analytics. The company operates as a single business segment with approximately 3,100 clients across 61 countries. Morgan Stanley remains the controlling shareholder with approximately 65.7% of the voting interest.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Operating Revenues | $105.9 million | $105.0 million |
| Operating Income | $32.8 million | $35.2 million |
| Net Income | $16.7 million | $17.9 million |
| Diluted EPS | $0.16 | $0.18 |
| Operating Margin | 31.0% | 33.5% |
| Cash from Operations | $22.5 million | $20.7 million |
| Cash and Equivalents | $276.9 million | $21.9 million (end of period) |
| Total Debt Outstanding | $397.2 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenue increased 0.9% year-over-year. This growth was driven by an 8.6% increase in subscription revenues, specifically a 16.6% rise in equity index subscriptions and a 21.9% increase in multi-asset class analytics.
- Asset-Based Fees Decline: Revenues from equity index asset-based fees dropped 32.7% to $13.2 million. This decline reflects a 31.0% decrease in the average value of assets in ETFs linked to MSCI indices, falling to $126.4 billion due to market depreciation.
- Expense Increases: Total operating expenses rose 4.8% to $73.1 million. Selling, general, and administrative (SG&A) expenses increased 10.8%, primarily due to higher compensation costs and expenses associated with replacing services previously provided by Morgan Stanley. Depreciation and amortization of property increased 530.4% due to new infrastructure investments for independent operations.
- Profitability: Operating income decreased 6.8% and net income decreased 6.7% compared to the prior year quarter.
Outlook, Risks, and Management Commentary
- Run Rate: The total Run Rate (forward-looking fees for the next 12 months) was $407.9 million as of February 28, 2009, representing a 0.7% decrease year-over-year. Subscription Run Rate grew 6.9%, while asset-based fee Run Rate declined 33.4%.
- Retention Rates: Aggregate Retention Rate declined to 90.8% from 96.6% in the prior year, attributed to client budget constraints, closures, and the shutdown of quantitative funds due to market volatility.
- Liquidity and Debt: The company maintains a $500 million credit facility with $75 million currently unused. As of February 28, 2009, the Consolidated Leverage Ratio was 1.90:1 and the Interest Coverage Ratio was 9.49:1, well within covenant requirements.
- Foreign Exchange: The strengthening of the U.S. dollar reduced reported revenues by approximately $1.1 million and expenses by $3.6 million compared to the prior year.
- Risks: Key risks include continued declines in assets under management (AUM) linked to MSCI indices, foreign currency fluctuations, and the ongoing transition of administrative functions from Morgan Stanley to internal or third-party providers.
Investor Verification Checklist
- Verify the sustainability of the 16.6% growth in equity index subscription revenues amidst market volatility.
- Monitor the trajectory of ETF assets linked to MSCI indices, which declined 39.8% year-over-year, as this directly impacts asset-based fee revenue.
- Assess the impact of the transition from Morgan Stanley services on future operating expense growth, particularly in SG&A and depreciation.
- Review the company's ability to maintain retention rates above 90% given the current economic environment and client budget constraints.
- Confirm the status of the $500 million credit facility and adherence to leverage and interest coverage covenants.