MSCI Inc. — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2013; comparisons are generally with the three months ended March 31, 2012. Financial statement amounts below are in millions of dollars, except per-share data. MSCI provides investment decision-support tools and operates Performance and Risk and Governance businesses.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $251.9 | $229.1 | +10.0% |
| Operating income | $90.5 | $81.0 | +11.8% |
| Operating margin | 35.9% | 35.4% | +0.5 percentage points |
| Net income | $58.9 | $44.0 | +34.1% |
| Diluted EPS | $0.48 | $0.35 | +37.1% |
| Cash from operating activities | $71.0 | $69.5 | +$1.5 |
Revenue excluding the contributions from IPD and InvestorForce grew 5.8%. Performance and Risk revenue increased 10.8% (6.0% excluding those acquisitions); Governance revenue rose 4.8%. Recurring subscription revenue grew 11.8%, while asset-based fees rose 5.5% and non-recurring revenue declined 13.3%.
By product category, index and ESG revenue increased 14.3% (6.8% excluding IPD), risk management analytics rose 5.0% (2.6% excluding InvestorForce), portfolio management analytics fell 4.9%, and Governance rose 4.8%. Energy and commodity analytics revenue was $3.1 million versus negative $1.3 million, but the comparison is distorted by a $5.2 million prior-year revenue correction.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $263.0 million, up from $183.3 million at year-end; the company had no short-term investments, versus $70.9 million at December 31, 2012.
- Total assets were $3.032 billion and total liabilities were $1.543 billion. Current assets were $523.3 million and current liabilities $482.9 million.
- Debt carrying value was approximately $829.0 million, including $43.1 million of current maturities; cash less debt was approximately $566 million. The $100 million revolving facility matures in 2017; the filing does not state a drawn balance in the supplied text.
- The term loan’s stated interest rate was 2.45% at quarter-end. MSCI prepaid $15 million in March, anticipating a 0.25 percentage-point margin reduction beginning in the second quarter. A hypothetical 1 percentage-point LIBOR increase was estimated to add about $8.2 million of annual interest expense.
- Credit-facility covenant ratios were within stated limits: leverage ratio 1.74 versus a maximum 3.25, and interest coverage 15.35 versus a minimum 5.00.
- Operating cash flow was $71.0 million; investing activities provided $42.9 million, primarily reflecting redemption of short-term investments, partly offset by the InvestorForce acquisition; financing activities used $30.5 million, including $26 million of debt repayment and $9.4 million of treasury-share repurchases. Cash increased $79.7 million during the quarter.
Material changes and operating indicators
- MSCI acquired InvestorForce for $23.5 million in cash in January 2013 and sold its CFRA product line on March 31; the CFRA sale and results were described as immaterial. IPD, acquired in November 2012, contributed $8.0 million to Q1 index and ESG revenue.
- Total Run Rate was $982.3 million, up 6.9% year over year and 1.5% sequentially. Excluding acquisitions and the CFRA disposition, subscription Run Rate grew 3.3%. Run Rate is a company-defined forward-looking measure, not reported revenue.
- Aggregate retention was 92.1%, down from 93.0%; portfolio management analytics retention fell to 81.7% from 91.9%. The company attributed the product category’s Run Rate decline partly to product swaps and foreign exchange.
- MSCI-linked ETF assets were $357.3 billion at quarter-end, up 0.7% year over year but down 11.2% from year-end. The quarter included $82.8 billion of outflows associated with Vanguard ETF transitions; $71.9 billion of Vanguard-linked ETF assets remained to transition. Excluding Vanguard ETFs, MSCI-linked ETF assets rose 22.5% year over year.
- Revenue and net income growth benefited from acquisitions, lower interest expense after the 2012 debt refinancing, and a lower effective tax rate. Q1 2013’s 29.5% effective tax rate included $3.8 million of discrete items that reduced the rate by 5.7 percentage points; the prior-year rate was 35.6%.
Outlook, risks and unusual items
No specific quarterly or full-year earnings guidance is provided in the supplied filing text. Management expects operating cash flows, cash balances and other available liquidity to fund operations and commitments for at least the next 12 months. It intends to invest in product development, staff and global infrastructure while seeking to keep expense growth below revenue growth over time; management cautions that investment opportunities and variable revenues can cause expenses to grow faster in some periods.
- Vanguard transitions and market exposure: ETF-linked fees depend on assets and market levels; the announced index transitions reduced linked assets and Run Rate. The company also identifies foreign-currency movements and fund flows as risks to these fees.
- Retention and product trends: Portfolio management analytics showed notably lower retention and Run Rate. Energy and commodity analytics Run Rate also declined, partly reflecting weak demand for natural gas option pricing models.
- Tax matters: Tax authorities, including the IRS and authorities in the UK and New York, are examining certain years. Management says reserves are adequate, but notes that significant changes in unrecognized tax benefits may occur within 12 months and cannot be reasonably estimated.
- Legal matters: The company is involved in ordinary-course claims and proceedings. Management does not expect pending matters to have a material effect based on currently available facts, while acknowledging that outcomes are uncertain.
- Accounting item: A $5.2 million cumulative revenue reduction recorded in Q1 2012 corrected an immaterial prior-period error in energy and commodity subscription revenue recognition. Management said restatement was not necessary.
- Capital allocation constraints: The credit agreement restricts dividends and other payments, including share repurchases. The 2012 repurchase authorization was $300 million through 2014; the filing describes a $100 million accelerated repurchase and $200 million remaining authorization.
Most important facts for investors to verify
- Whether recurring organic growth and Run Rate growth continue after separating acquisition contributions and the CFRA disposition.
- The pace and effect of Vanguard ETF transitions, remaining Vanguard-linked assets, and subsequent MSCI-linked ETF flows and asset-based fees.
- Whether portfolio management analytics retention and Run Rate stabilize or continue to weaken.
- Debt repayment, floating-rate exposure, covenant headroom, and any use of the revolving facility.
- The sustainability of Q1 earnings growth after accounting for the lower tax rate, discrete tax benefits, lower interest expense and acquisition-related costs.