MSCI

MSCI Inc. 10-Q Summary: Quarter Ended May 31, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended May 31, 2010, for MSCI Inc., a leading global provider of investment decision support tools, including indices, portfolio risk analytics, and performance analytics. The company operates in a single business segment with clients across 66 countries. A material subsequent event occurred on June 1, 2010, when MSCI completed the acquisition of RiskMetrics Group, Inc. for approximately $1.57 billion in a cash-and-stock transaction. While acquisition-related costs are reflected in this filing, the financial results of RiskMetrics are not included in the reported periods.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 14.4% year-over-year for the quarter and 14.7% for the six-month period. This growth was driven primarily by a 68.8% increase in equity index asset-based fees (linked to ETF assets) and a 14.7% increase in equity index subscriptions.
• Expense Management: Total operating expenses rose 7.9% for the quarter. Notably, amortization of intangible assets decreased 33.5% due to the full amortization of certain assets from the prior Barra acquisition. Stock-based compensation expense declined significantly ($3.7 million decrease for the quarter) following the vesting of the first tranche of the Founders Grant Award in November 2009.
• Profitability: Operating income increased 27.4% for the quarter and 35.3% for the six-month period, expanding operating margins to 37.3% and 38.1%, respectively.
• Debt Reduction: The company prepaid approximately $297 million of its long-term debt during the quarter ended May 31, 2010, reducing total debt outstanding to $70.6 million by period end. This action triggered accelerated amortization of debt origination fees and interest rate swap losses, increasing "Other expense, net."

Outlook, Risks, and Unusual Items

• Acquisition of RiskMetrics: The June 1, 2010 acquisition significantly alters the company's capital structure and future cost base. MSCI entered into a new $1.375 billion credit facility to finance the deal. Management expects increased amortization expense from acquired intangible assets and higher interest costs, which will impact future financial results.
• Run Rate: As of May 31, 2010, the total Run Rate (forward-looking fees for the next 12 months) was $474.2 million, representing a 9.6% year-over-year increase.
• Retention Rates: Aggregate retention rates remained strong at 89.1% for the quarter, with Equity Index retention at 92.9%.
• Risks: Key risks include the successful integration of RiskMetrics, potential disruption of client relationships, increased indebtedness, and reliance on third-party data suppliers. The company also faces foreign currency risk, as approximately 40.5% of expenses for the six months ended May 31, 2010, were denominated in foreign currencies.
• Unusual Items: "Other expense, net" increased significantly due to $3.1 million in accelerated interest expense from terminating interest rate swaps and $3.1 million in accelerated recognition of deferred financing costs related to debt prepayments.

Investor Verification Checklist

• Verify the final purchase price allocation and goodwill impairment testing for the RiskMetrics acquisition in subsequent filings.
• Monitor the impact of the new $1.375 billion credit facility on interest coverage ratios and leverage covenants.
• Track the integration progress and realization of synergies between MSCI and RiskMetrics operations.
• Assess the sustainability of ETF asset-based fee growth, which is sensitive to market performance and fund inflows.
• Review future quarters for the impact of increased amortization expenses resulting from the RiskMetrics intangible assets.