MSCI

MSCI Inc. 10-K Summary: Fiscal Year Ended November 30, 2009

Business Context and Reporting Period

This filing covers the fiscal year ended November 30, 2009. MSCI Inc. is a leading global provider of investment decision support tools, including equity indices (MSCI brand) and portfolio risk analytics (Barra brand). The company serves over 3,100 clients across 67 countries, including asset owners, asset managers, and financial intermediaries. A significant corporate development during the period was the company's full separation from Morgan Stanley, which sold its remaining equity interest on May 22, 2009, making MSCI an independent, stand-alone public company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 2.8%, driven by a 10.9% increase in equity index subscription revenues and a 2.3% increase in asset-based fees. This growth offset a 6.9% decline in equity portfolio analytics revenues due to lower retention rates and cancellations linked to the financial crisis.
• Expense Management: Total operating expenses decreased 1.1% to $292.0 million. This reduction was primarily due to the cessation of cost allocations from Morgan Stanley ($16.5 million reduction) and lower third-party consulting costs, partially offset by increased depreciation and compensation costs.
• Asset-Based Fees: Assets in ETFs linked to MSCI indices surged to $234.2 billion as of November 30, 2009, a 96.8% increase from the prior year, driven by market appreciation and net inflows.
• Retention Rates: Aggregate retention rates declined to 85.2% in 2009 from 89.9% in 2008, reflecting client closures and consolidations during the financial crisis.

Guidance, Outlook, and Risks

Outlook and Strategy: Management anticipates continued growth through expanding client relationships, increasing product subscriptions, and growing the licensing of indices for ETFs. The company plans to invest in new product development, particularly in multi-asset class analytics (BarraOne) and emerging markets. The company does not intend to pay dividends in the foreseeable future.

Risks and Contingencies:

• Client Concentration: The ten largest clients accounted for 27.3% of revenues in 2009. Barclays PLC (including iShares) was the largest client at 9.9% of revenues.
• Market Sensitivity: A significant portion of revenue (16.3%) is derived from asset-based fees, making the company sensitive to fluctuations in global equity markets and ETF asset levels.
• Separation from Morgan Stanley: While the separation is complete, historical financial results included allocated costs from Morgan Stanley that may not reflect future stand-alone costs. The company has incurred significant costs to replace Morgan Stanley's administrative and IT services.
• Intellectual Property: The company relies heavily on proprietary models and data. Risks include potential infringement claims and the possibility that competitors or clients may develop self-sufficient analytics tools.

Key Facts for Investor Verification

• Debt Covenants: Verify compliance with the Credit Facility covenants, specifically the maximum total leverage ratio (1.69:1 as of Nov 30, 2009, well below the 3.75:1 limit) and interest coverage ratio (12.34:1).
• Run Rate Sustainability: Assess the sustainability of the 12.9% increase in Run Rate, particularly the 84.7% growth in asset-based fee Run Rate, given the volatility of ETF assets.
• Retention Trends: Monitor quarterly retention rates to determine if the decline observed in 2009 (85.2%) stabilizes or worsens as the financial crisis impacts persist.
• Client Concentration: Track revenue concentration relative to the top 10 clients, specifically the impact of the BlackRock/Barclays merger on future fee negotiations.
• Stand-Alone Cost Structure: Evaluate the trajectory of operating expenses as the company fully transitions from allocated Morgan Stanley costs to independent operational costs.