MSCI Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included. MSCI provides investment indexes, risk and performance analytics, ESG research, and corporate-governance services through its Performance and Risk and Governance businesses. About 83.1% of FY2013 revenue came from annual recurring subscriptions.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,035.7 million | $950.1 million | +9.0% |
| Operating income | $371.5 million | $346.9 million | +7.1% |
| Operating margin | 35.9% | 36.5% | Down 0.6 percentage points |
| Net income | $222.6 million | $184.2 million | +20.8% |
| Diluted EPS | $1.83 | $1.48 | +23.6% |
| Cash from operating activities | $320.4 million | $347.1 million | Down $26.6 million |
- Revenue growth was led by Index and ESG, up 16.9% to $516.2 million, and Risk Management Analytics, up 7.3% to $279.4 million. Portfolio Management Analytics declined 9.2% to $105.5 million; Governance declined 0.7% to $122.3 million.
- Recurring subscription revenue rose 9.7% to $860.7 million. Asset-based fees were $149.5 million, or 14.4% of revenue; non-recurring revenue was $25.5 million.
- Operating expenses rose 10.1% to $664.2 million, chiefly reflecting compensation and staffing growth. Employee count increased to 3,261 from 2,759. Higher expenses outpaced revenue growth, reducing the operating margin.
- At year-end, cash and equivalents were $358.4 million, with no short-term investments. Total assets were $3,134.5 million; current assets were $637.0 million and current liabilities $503.0 million.
- Debt principal was $810.0 million at year-end (reported debt carrying value was about $807.8 million). The term loan bore interest at 2.17%; cash from operations was $320.4 million. Financing activities used $145.8 million, while investing activities provided $4.1 million.
Material changes versus comparable periods
- FY2013 revenue growth was faster than FY2012’s 5.5%, while operating-income growth was 7.1% versus 7.7% in FY2012. Net income grew more quickly in 2013, aided in part by lower interest and refinancing-related expense.
- Run Rate reached $1,050.4 million, up 8.6% year over year. Subscription Run Rate increased 6.2%; asset-based fee Run Rate increased 24.6%. Portfolio Management Analytics Run Rate fell 6.1%, and Governance Run Rate fell 1.5% as reported.
- MSCI-linked ETF assets were $332.9 billion at December 31, down 17.3% from a year earlier. The Vanguard benchmark change reduced assets and fees; excluding those transitioning Vanguard assets, MSCI reported growth in ETF assets. BlackRock represented 8.8% of total FY2013 revenue, and the ten largest clients together represented 23.5%.
- MSCI acquired InvestorForce in January 2013 for $23.6 million and sold its CFRA product line in March 2013. The acquisitions of InvestorForce and IPD contributed to revenue and expense comparability.
- Fourth-quarter revenue was $267.6 million versus $247.1 million in Q4 2012; net income was $47.3 million versus $54.5 million, and diluted EPS was $0.39 versus $0.44.
Outlook, commentary, risks, and unusual items
- Management expected 2014 spending on sales, client service, information technology, and product development to grow faster than revenue, slowing operating-profit growth in the near term; it stated that these investments were intended to support medium-term growth. No quantified revenue or earnings guidance was provided.
- MSCI engaged Morgan Stanley in October 2013 to explore strategic alternatives for the Governance business, including a potential sale or separation. No transaction was assured; management noted an adverse outcome could result in future impairment charges. Goodwill and intangible assets totaled $2,394.5 million at year-end; no goodwill impairment was recorded in 2013.
- Key exposures include reliance on third-party data suppliers, market levels and flows affecting asset-based fees, customer and BlackRock concentration, competition and client cancellations, foreign-exchange and floating-rate debt exposure, technology and data-security risks, and evolving regulation of financial benchmarks and proxy advisers.
- The credit facility was extended to December 2018. It includes leverage and interest-coverage covenants; year-end ratios were 1.69:1.00 and 23.48:1.00, respectively. A 100-basis-point increase in LIBOR was estimated to add $8.0 million of annual interest expense, assuming average variable-rate debt of $802.4 million.
- MSCI disclosed a prior SEC matter involving an ISS employee’s alleged disclosure of confidential proxy-voting information. ISS settled without admitting or denying the allegations, paid a $300,000 civil penalty, and retained an independent consultant to review supervisory and compliance procedures. Management said pending ordinary-course legal matters were not expected to be material, while acknowledging outcomes remain uncertain.
- A $5.2 million non-cash revenue reduction was recorded in 2012 to correct an immaterial prior-period revenue-recognition error involving certain energy and commodity software contracts. MSCI said restatement was unnecessary and now recognizes the relevant license fees over the contract term.
Important facts for investors to verify
- Whether subscription growth and retention remain durable: FY2013 Aggregate Retention Rate was 91.3%, versus 89.7% in 2012; Core Retention Rate was 91.6%, versus 90.4%.
- How ETF asset flows, Vanguard transitions, BlackRock economics, and negotiated licensing rates affect asset-based fees and Run Rate.
- Whether 2014 investment spending delivers the medium-term growth management expects and whether margins stabilize or recover.
- The outcome of the Governance strategic review, including any sale, separation, associated costs, or impairment implications.
- Debt covenant headroom, refinancing and repayment obligations, and sensitivity to LIBOR; also confirm liquidity and restrictions on dividends and share repurchases.
- Developments in benchmark and proxy-adviser regulation, data-supplier arrangements, cybersecurity controls, and the remediation of the ISS compliance matter.