MSCI Inc. Q1 2010 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended February 28, 2010. MSCI Inc. is a leading global provider of investment decision support tools, including indices and portfolio risk analytics. The company operates in a single business segment with clients in over 65 countries. A significant corporate development during the period was the announcement of a pending merger with RiskMetrics Group, Inc.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Operating Revenues | $121.7 million | $105.9 million |
| Operating Income | $47.3 million | $32.8 million |
| Net Income | $27.5 million | $16.7 million |
| Diluted EPS | $0.26 | $0.16 |
| Operating Margin | 38.8% | 31.0% |
| Cash and Cash Equivalents | $84.3 million | $176.0 million (Nov 2009) |
| Short-term Investments | $358.1 million | $295.3 million (Nov 2009) |
| Total Debt Outstanding | $369.9 million | N/A |
| Operating Cash Flow | ($14.8 million) used | $22.5 million provided |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 14.9% year-over-year. This was driven primarily by a 89.5% surge in equity index asset-based fees (linked to ETF assets) and a 10.8% increase in equity index subscriptions.
- Profitability: Operating income rose 44.1% and net income increased 64.5%. The operating margin expanded from 31.0% to 38.8%.
- Expense Management: Total operating expenses increased only 1.8%. This was due to a 33.5% decrease in amortization of intangible assets (as certain assets became fully amortized) and lower stock-based compensation, which offset increases in SG&A related to the pending acquisition.
- Cash Flow: Operating cash flow turned negative ($14.8 million used) compared to positive in the prior year, primarily due to a significant increase in trade receivables and a smaller decrease in deferred revenue.
- Investing Activities: Net cash used in investing activities was $65.5 million, largely due to net purchases of short-term investments ($62.2 million net outflow).
Guidance, Outlook, and Risks
- Pending Acquisition: On February 28, 2010, MSCI entered into a merger agreement to acquire RiskMetrics Group, Inc. The deal involves a combination of cash ($16.35 per share) and stock (0.1802 MSCI shares per RiskMetrics share). Financing of up to $1.375 billion has been committed.
- Run Rate: The company's "Run Rate" (forward-looking fees for the next 12 months) was $466.6 million as of February 28, 2010, representing a 14.4% increase year-over-year.
- Retention Rates: The aggregate retention rate for the quarter was 92.2%, up from 90.8% in the prior year.
- Risks: Key risks include the failure to obtain regulatory approvals for the RiskMetrics merger, potential disruption of business relationships during the merger process, and the inability to realize anticipated synergies. Additionally, the company faces foreign currency risk as a significant portion of expenses and some revenues are denominated in non-U.S. currencies.
- Subsequent Event: On April 1, 2010, the company prepaid $147.0 million of its term loan facilities to reduce interest costs.
Investor Verification Checklist
- Merger Completion: Verify the status of regulatory approvals (Hart-Scott-Rodino Act) and shareholder votes required to close the RiskMetrics acquisition.
- Debt Structure: Confirm the terms of the new $1.375 billion credit facility intended to replace the existing credit facility upon merger closing.
- Asset-Based Fee Volatility: Monitor the value of assets in ETFs linked to MSCI indices, as this drives a significant and variable portion of revenue (approx. 20.5% of Q1 2010 revenue).
- Customer Concentration: Note that BlackRock Inc. accounted for 12.7% of operating revenues in Q1 2010.
- Run Rate Realization: Track whether the reported Run Rate of $466.6 million translates into actual revenue, considering potential cancellations and asset flow fluctuations.