MSCI Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended November 30, 2010 (December 1, 2009–November 30, 2010). The filing also reports unaudited fourth-quarter results. FY 2010 includes RiskMetrics from its June 1 acquisition and Measurisk from its July 30 acquisition, so reported growth is not fully comparable with the prior year.
Business context
MSCI provides investment indices, portfolio risk and performance analytics, ESG research, proxy voting and governance services, and financial research. Following the RiskMetrics acquisition, it reported two segments: Performance and Risk, and Governance. Approximately 81.1% of FY 2010 revenue came from annual recurring subscriptions. The company served about 5,800 clients in 78 countries.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Operating revenue | $662.9 million | $442.9 million |
| Operating income | $206.1 million | $151.0 million |
| Operating margin | 31.1% | 34.1% |
| Net income | $92.2 million | $81.8 million |
| Diluted EPS | $0.81 | $0.80 |
| Cash from operating activities | $183.4 million | $130.9 million |
| Cash and cash equivalents | $226.6 million | $176.0 million |
| Short-term investments | $73.9 million | $295.3 million |
Q4 results: Revenue was $213.3 million, operating income $70.7 million, and net income $30.3 million, compared with $118.8 million, $43.8 million, and $24.5 million, respectively, in Q4 2009. FY 2010 quarterly figures include acquired operations from their respective closing dates.
Debt and liquidity: At November 30, 2010, debt under the new credit facility was approximately $1.269 billion principal (about $1.263 billion carrying value, net of discount). Cash plus short-term investments totaled about $300.5 million. The revolving facility provides up to $100 million of additional capacity; the filing does not state that it was drawn. The company reported a 3.20:1 consolidated leverage ratio and 6.28:1 interest coverage ratio. An approximately $56 million excess-cash-flow payment was due in Q1 2011.
Material changes versus prior period
- Revenue rose 49.7% and operating income 36.5%; management attributed about $156.7 million of revenue growth to acquisitions. Excluding RiskMetrics and Measurisk, revenue and operating income grew 14.3% and 22.5%, respectively.
- Index and ESG revenue increased 26.8%, supported by subscription growth and higher ETF-linked asset fees. Assets in ETFs linked to MSCI indices reached $311.0 billion at year-end, up 32.8% from 2009.
- Risk management analytics revenue increased substantially, primarily because of RiskMetrics. Portfolio management analytics revenue declined 4.7%; Governance contributed $58.6 million from the acquisition date.
- Operating expenses increased 56.5%, including acquired costs, $21.2 million of RiskMetrics transaction costs, and $8.9 million of restructuring expense. Higher interest expense from acquisition financing contributed to other expense rising to $52.6 million.
- Aggregate retention improved to 87.2% from 83.7%; core retention rose to 88.1% from 84.3%. Both remained below pre-financial-crisis peaks.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expected retention and new-sales trends to continue improving over time, while planning investment in product development, sales, managed services and integration.
- Management anticipated significant FY 2011 product innovation. It expected the RiskMetrics merger to be accretive to EPS in the first full calendar year after the merger, but characterized that expectation as based on preliminary estimates and subject to execution, market and integration risks.
- Integration was ongoing; further restructuring costs were expected, including an estimated $2–$3 million for certain lease exits in FY 2011. FY 2010 restructuring and integration-related expense was $8.9 million.
- Key exposures include acquisition integration and elevated debt; dependence on financial-services clients and capital markets; revenue concentration in ETF-linked asset fees and major clients (BlackRock represented 9.9% of FY 2010 revenue); data-supplier access and pricing; competition and retention; foreign-exchange movements; regulatory changes affecting proxy services; and potential conflicts of interest.
- Goodwill and intangible assets totaled $2.423 billion at year-end, increasing impairment risk if acquired businesses underperform. The filing reported no goodwill or intangible-asset impairment for the periods presented.
- Management said cash from operations, cash balances and investment maturities should meet operating and debt-service needs for at least the next 12 months. The company had no dividend plan for the foreseeable future, and its credit agreement restricts dividends.
- Pending ordinary-course legal matters were not expected by management to have a material adverse effect, based on information available; ultimate liability could not be determined with certainty.
Investor verification priorities
- Separate organic growth from acquired revenue and assess the sustainability of ETF-linked fees, market appreciation and fund inflows.
- Track integration progress, realized synergies, restructuring charges, and the effect of acquired intangibles on amortization and margins.
- Monitor debt reduction, the required excess-cash-flow payment, covenant headroom, interest costs and refinancing or rate exposure.
- Review retention by product category, particularly portfolio analytics and Governance, and the renewal concentration noted for December.
- Assess BlackRock and other large-client exposure, data-provider arrangements, proxy-related regulatory developments, and goodwill impairment indicators.