Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MSCI > SEC Filings for MSCI > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for MSCI INC.

Form 10-K for MSCI INC.


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Such risk and uncertainties include, but are not limited to, those identified below and those discussed in Part I, Item 1A. "Risk Factors," within this Annual Report on Form 10-K.

Overview

We are a leading global provider of investment decision support tools, including indexes, portfolio risk and performance analytics and corporate governance products and services. Our products and services address multiple markets, asset classes and geographies and are sold to a diverse client base, including asset owners such as pension funds, endowments, foundations, central banks, family offices and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds ("ETFs"), real estate, hedge funds and private wealth; financial intermediaries such as banks, broker-dealers, exchanges, custodians and investment consultants; and corporate clients. As of December 31, 2013, we had offices in 34 cities in 22 countries to help serve our diverse client base, with 52.6% of our revenue from clients in the Americas, 35.5% in Europe, the Middle East and Africa ("EMEA") and 11.9% in Asia and Australia, based on revenues for the year ended December 31, 2013.

Our principal sales model in both of our business segments is to license annual, recurring subscriptions to our products and services for use at specified locations, often by a given number of users or for a certain volume of services, for an annual fee paid up-front. Additionally, our recurring subscriptions are increasingly related to our managed services offering whereby we oversee the production of risk and performance reports on behalf of our clients. Fees attributable to annual, recurring subscriptions are recorded as deferred revenues on our Consolidated Statement of Financial Condition and are recognized on our Consolidated Statement of Income as the service is rendered.
Additionally, a portion of our revenues come from clients who use our indexes as the basis for index-linked investment products such as ETFs or as the basis for passively managed funds and separate accounts. These clients commonly pay us a license fee for the use of our intellectual property based on the investment product's assets. We generate a limited amount of our revenues from certain exchanges that use our indexes as the basis for futures and options contracts and pay us a license fee for the use of our intellectual property based on their volume of trades. We generate revenues from subscription agreements for the receipt of periodic benchmarks reports, digests, and other publications, which are most often associated with our products offered by IPD Group Limited ("IPD"), that are recognized upon delivery of such reports or data updates. We also receive revenues from one-time fees related to implementation, historical or customized reports, advisory and consulting services, overages relating to proxy research and voting services, licenses of historical data sales, fees relating to recovery of securities class action settlements and from certain products and services that are designed for one-time usage.

In evaluating our financial performance, we focus on revenue growth for the Company in total and by product category as well as operating profit growth. In addition, we focus on operating metrics, including Run Rates and retention rates, to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our operating profits into excess cash in the future. Our revenue growth strategy includes:
(a) expanding and deepening our relationships with investment institutions worldwide; (b) developing new and enhancing existing product offerings, including combining existing product features or data derived from our products to create new products; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings.

To maintain and accelerate our revenue and operating income growth, we expect to continue to invest in and expand our operating functions and infrastructure, including additional product management, sales and client support staff and facilities in locations around the world and additional staff and supporting technology for our


Table of Contents

research and our data operations and technology functions. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture.

The goal of these investments is to maximize our medium-term revenue and operating income growth, while at the same time ensuring that MSCI will remain a leading provider of investment decision support tools well into the future. As a result, the rate of growth of our investments may from time to time exceed that of our revenues, which would slow the growth of, or even reduce, our operating profit. For example, for the year ended December 31, 2013, our revenues grew by 9.0% but our operating income only grew by 7.1% compared to the year ended December 31, 2012 due, in part, to increased investment in the business. We anticipate that our increases in spending in areas such as sales, client service, information technology and product development in the year ending December 31, 2014 will continue to exceed the rate of growth of our revenues and will again slow the growth of our operating profit. However, we believe these investments will result in higher revenue and operating profit growth over the medium-term.

Operating Segments

We operate as two segments: the Performance and Risk business and the Governance business. See Note 14, "Segment Information" of the Notes to the Consolidated Financial Statements included herein for further information about MSCI's operating segments.

Our Performance and Risk business is a leading global provider of investment decision support tools, including equity indexes, real estate indexes and benchmarks, portfolio risk and performance analytics, credit analytics and environmental, social and governance ("ESG") products. Our Performance and Risk products are used in many areas of the investment process, including portfolio construction and rebalancing, performance benchmarking and attribution, risk management, regulatory and client reporting, index-linked investment product creation, asset allocation, the assessment of corporate management of ESG risks and opportunities, investment manager selection and investment research. The flagship products within our Performance and Risk business are our global equity indexes and ESG products marketed under the MSCI and MSCI ESG Research brands, our real estate indexes and analytics marketed under the IPD brand, our market and credit risk analytics marketed under the RiskMetrics and Barra brands, our performance reporting products and services offered to the investment consultant community marketed under the InvestorForce brand, our portfolio risk and performance analytics marketed under the Barra brand and our valuation models and risk management software for the energy and commodities markets marketed under the FEA brand.

Our Governance business is a leading provider of corporate governance products and services to institutional investors and corporations around the world. Among other things, the Governance business facilitates the voting of proxies by institutional investors and provides in-depth research and analysis to help inform voting decisions and identify issuer-specific risk. The Governance business offers both global equity security coverage and fully integrated products and services, including proxy voting; policy creation, application and management; research; vote recommendations; vote execution; post-vote disclosure and reporting; and data and analytical tools. It also provides securities class action monitoring and claims filing services to aid institutional investors in the recovery of funds from securities class action settlements. Within a firewall designed to separate it from the rest of the Governance business, ISS Corporate Services also provides products and services to corporate clients who may use those products and services to learn about and improve their governance and executive compensation practices. The flagship products within our Governance business are our governance research, our outsourced proxy voting and reporting services and our executive compensation analytics tools marketed under the ISS brand. On March 31, 2013, we sold our CFRA product line, which offered clients specialized financial research and analysis services.

On October 31, 2013, we announced that we had engaged Morgan Stanley to explore strategic alternatives for the Governance business, including the potential divestiture or other separation of the entire business. There can be no assurance that the process of exploring these strategic alternatives will result in a transaction or that any transaction will ultimately be consummated. In addition, an adverse outcome from the pursuit of the strategic alternatives could lead to potential future impairment charges.


Table of Contents

The Performance and Risk business is comprised of index and ESG, risk management analytics, portfolio management analytics and energy and commodity analytics products. The Governance business is comprised of the governance products.

Revenues and expenses directly associated with each respective segment are included in determining its operating results. Other expenses that are not directly attributable to a particular segment are allocated based upon allocation methodologies, including time estimates, headcount, net revenues and other relevant usage measures.

Key Financial Metrics and Drivers

Revenues

Our revenues are grouped into the following five product and/or service categories:

Index and ESG

This category includes subscription fees from MSCI equity index data and IPD and ESG research and analytics products, fees based on assets in investment products linked to our equity indexes, fees from non-recurring licenses of our equity index historical data and fees from real estate and custom indexes. We also generate a limited amount of revenues based on the trading volume of futures and options contracts linked to our indexes.

Clients typically subscribe to equity index data modules for use by a specified number of users at a particular location. Clients may select delivery from us or delivery via a third-party vendor. We are able to grow our revenues for data subscriptions by expanding the number of client users and their locations and the number of third-party vendors the client uses for delivery of our data modules. The increasing scope and complexity of a client's data requirements beyond standard data modules, such as requests for historical data or customized indexes, also provide opportunities for further revenue growth from an existing client. Clients who utilize our ESG research and analytics products and services pay an annual subscription fee and access these products and services via a web-based application, data feed or third-party vendor.

Revenues from our index-linked investment product licenses, such as ETFs, increase or decrease as a result of changes in value of the assets in the investment products. These changes in the value of the assets in the investment products can result from equity market price changes, investment inflows and outflows and changes in foreign currency exchange rates. In most cases, fees for these licenses are paid quarterly in arrears and are calculated by multiplying a negotiated basis point fee (which in some cases may be based on a product provider's total expense ratio) times the average daily assets in the investment product for the most recent period.

Risk Management Analytics Products

This category includes revenues from annual, recurring subscriptions to our risk management analytics products including our two major products, RiskManager and BarraOne. We have increasing recurring subscriptions to our managed services offering in which our staff oversee the production of risk and performance reports on behalf of our clients. Other products in this category include HedgePlatform, InterSight, DataMetrics, Wealthbench, Credit Manager and InvestorForce. The products offer a consistent risk assessment framework for managing and monitoring investments in a variety of asset classes across an organization. We are able to grow our revenues by licensing additional users and locations as well as selling additional products and services.

RiskManager is used by clients for daily analyzing, measuring and monitoring of market risk at fund and firm level, for sensitivity and stress testing, and interactive what-if analysis. RiskManager is a highly scalable platform accessed by clients via a license to a secure, interactive web-based application service, as a fully

outsourced risk reporting service or as a web service in which a client's systems access RiskMetrics core risk elements by connecting directly to our systems.


Table of Contents

BarraOne, powered by the Barra Integrated Model, provides clients with global, multi-asset class risk analysis using Barra fundamental factors. The product is accessed by clients via a secure, interactive web-based session, web services or on an outsourced basis.

Clients generally subscribe to the other products in this category on an annual recurring basis.

Portfolio Management Analytics

This category includes revenues from annual, recurring subscriptions to Barra Aegis and our proprietary risk data in Barra Aegis and Barra Portfolio Manager; Equity Models Direct products; and our proprietary equity risk data incorporated in third-party software application offerings (e.g., Barra on Vendors). This category also includes revenues from annual, recurring subscriptions to our fixed income portfolio analytics products.

Barra Aegis is a sophisticated software application for equity risk management and portfolio analysis that is powered by our proprietary equity risk data. It is an integrated suite of equity investment analytics modules, specifically designed to help clients actively manage their equity risk against their expected returns, identify returns attributable to stock selection skills and back-test portfolio construction strategies over time. Barra Aegis also provides a factor-based performance attribution module, which allows clients to analyze realized returns relative to certain risk factors. A base subscription for use in portfolio analysis typically involves a subscription to Barra Aegis and various risk data modules. A client may add portfolio performance attribution, optimization tools, process automation tools or other features to its Barra Aegis subscription. By licensing the client to receive additional software modules and risk data, or increasing the number of permitted client users or client locations, we can increase our revenues per client further.

Barra Portfolio Manager is an integrated risk and performance platform that is designed to help fund managers and their teams gain additional portfolio insight, manage a more systematic investment process and make faster, more informed investment decisions. The hosted interactive user interface allows users to construct portfolios and back-test their strategies using the Barra Optimizer. It also allows users to decompose the risk and attribute the return of their portfolios according to Barra models. The platform supports optional data management services that allow users to outsource the loading and reconciliation of their portfolio and other proprietary data.

Our Barra Equity Models Direct risk data is distributed directly to clients who then integrate it into their own software applications or upload the risk data onto third-party applications. The proprietary risk data in Barra Equity Models Direct is also available via third-party vendors. A base subscription to our Equity Models Direct product provides equity risk data for a set fee that authorizes one to two users. By licensing the client to receive equity risk model data for additional countries, or increasing the number of permitted client users or client locations, we can further increase our revenues per client.

The Barra on Vendors product makes our proprietary risk data from our Equity Models Direct product available to clients via third party providers, such as FactSet Research Systems, Inc.

Energy and Commodity Analytics

Our energy and commodity analytics products consist of software applications which help users value and model physical assets and derivatives across a number of market segments including energy and commodity assets.

Governance

Our governance offerings consist of corporate governance products and services, including proxy research, data and analytics, recommendation and voting services for asset owners and asset managers, as well as data and


Table of Contents

advisory services for corporations. It also includes securities class action monitoring and claims filing services to aid institutional investors in the recovery of funds from securities class action settlements. The substantial majority of the revenues are annual, subscription-based revenues. The largest portion of our non-recurring revenues is included in this category as a result of advisory and consulting services and overages relating to the proxy research and voting services.

See Part I, Item 1. "Business-Business Segments, Products and Services" for additional details regarding the products and services that we offer.

Operating Metrics

Run Rate

At the end of any period, we generally have subscription and investment product license agreements in place for a large portion of our total revenues for the following 12 months. We measure the fees related to these agreements and refer to this as our "Run Rate." The Run Rate at a particular point in time represents the forward-looking revenues for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts or agreements assuming all contracts or agreements that come up for renewal are renewed and assuming then-current currency exchange rates. For any license where fees are linked to an investment product's assets or trading volume, the Run Rate calculation reflects for ETF fees, the market value on the last trading day of the period, and for non-ETF funds and futures and options, the most recent periodic fee earned under such license or subscription. The December 31, 2012 Run Rate for IPD products was approximated using the trailing 12 months of revenues primarily adjusted for estimates for non-recurring sales, new sales and cancellations. The Run Rate does not include fees associated with "one-time" and other non-recurring transactions. In addition, we remove from the Run Rate the fees associated with any subscription or investment product license agreement with respect to which we have received a notice of termination or non-renewal during the period and determined that such notice evidences the client's final decision to terminate or not renew the applicable subscription or agreement, even though such notice is not effective until a later date.

Because the Run Rate represents potential future revenues, there is typically a delayed impact on our operating revenues from changes in our Run Rate. In addition, the actual amount of revenues we will realize over the following 12 months will differ from the Run Rate because of:

revenues associated with new subscriptions and non-recurring sales;

modifications, cancellations and non-renewals of existing agreements, subject to specified notice requirements;

fluctuations in asset-based fees, which may result from changes in certain investment products' total expense ratios, market movements or from investment inflows into and outflows from investment products linked to our indexes;

fluctuations in fees based on trading volumes of futures and options contracts linked to our indexes;

fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;

price changes;

revenue recognition differences under U.S. GAAP;

fluctuations in foreign exchange rates; and

the impact of acquisitions and dispositions.


Table of Contents

The following table sets forth our Run Rates and the percentage growth over the periods indicated:

                                                            As of                                            Comparison of
                                    December 31,         December 31,         December 31,        December 31,          December 31,
                                        2013                 2012                 2011            2013 to 2012          2012 to 2011
                                                        (in thousands)
Run Rates
Index and ESG products:
Subscriptions                      $      371,511       $      338,006       $      269,780                 9.9 %                25.3 %
Asset-based fees                          158,305              127,072              119,706                24.6 %                 6.2 %

Index and ESG products totals             529,816              465,078              389,486                13.9 %                19.4 %
Risk management analytics                 290,655              262,108              250,967                10.9 %                 4.4 %
Portfolio management analytics            103,125              109,836              118,354                (6.1 %)               (7.2 %)
Energy and commodity analytics             11,302               13,128               14,928               (13.9 %)              (12.1 %)
Governance                                115,482              117,261              108,251                (1.5 %)                8.3 %


Total Run Rate                     $    1,050,380       $      967,411       $      881,986                 8.6 %                 9.7 %


Subscription total                 $      892,075       $      840,339       $      762,280                 6.2 %                10.2 %
Asset-based fees total                    158,305              127,072              119,706                24.6 %                 6.2 %

Total Run Rate                     $    1,050,380       $      967,411       $      881,986                 8.6 %                 9.7 %

December 31, 2013 Compared to December 31, 2012

Total Run Rate grew by $83.0 million to $1,050.4 million as of December 31, 2013 compared to December 31, 2012. Total subscription Run Rate grew by $51.7 million to $892.1 million as of December 31, 2013 compared to December 31, 2012. Excluding the impact of the acquisition of Investor Force Holdings, Inc. ("InvestorForce") as well as the disposition of the CFRA product line, total subscription Run Rate grew by $50.4 million as of December 31, 2013 compared to December 31, 2012.

Subscription Run Rate from the index and ESG products grew by $33.5 million to $371.5 million at December 31, 2013 relative to December 31, 2012, driven by growth in equity index benchmark and data products.

On October 2, 2012, The Vanguard Group, Inc. announced its decision to change the target benchmarks of 22 of its ETFs from MSCI's equity indexes (the "Vanguard ETFs"). As a result of this announcement, we excluded the $138.5 billion of assets in the 22 Vanguard ETFs linked to MSCI equity indexes as of December 31, 2012 for purposes of calculating the index and ESG asset-based fee Run Rate, which resulted in a decrease of $24.8 million. The average value of assets in the 22 Vanguard ETFs linked to MSCI equity indexes was $122.1 billion for the year ended December 31, 2012 compared to the total average value of assets in ETFs linked to MSCI equity indexes of $349.1 billion.

Asset-based fee Run Rate from index and ESG products increased by $31.2 million to $158.3 million at December 31, 2013 compared to December 31, 2012. The increase was primarily driven by inflows into and higher market performance by ETFs linked to MSCI indexes. The asset-based fee Run Rate at December 31, 2012 excludes the Vanguard ETFs that later switched benchmarks.

As of December 31, 2013, assets under management ("AUM") in ETFs linked to MSCI indexes were $332.9 billion, down $69.4 billion, or 17.3%, compared to December 31, 2012. During the year ended December 31, 2013, MSCI-linked ETFs were impacted by market increases of $33.9 billion and net outflows of $103.3 billion. If the AUM related to those Vanguard ETFs which transitioned earlier in 2013 were excluded from the December 31, 2012 balance, AUM in ETFs linked to MSCI indexes would have risen $69.1 billion, or 26.2%, compared to December 31, 2012.


Table of Contents

Risk management analytics products Run Rate increased $28.5 million to $290.7 million at December 31, 2013 compared to December 31, 2012. Excluding the impact attributable to InvestorForce, Run Rate grew by $18.2 million. Run Rate continued to benefit from solid growth in the RiskManager and BarraOne products. Changes in foreign currency positively benefited Run Rate by $1.2 million compared to December 31, 2012.

Portfolio management analytics products Run Rate declined $6.7 million to $103.1 million at December 31, 2013 from December 31, 2012. Year-over-year Run Rate was negatively impacted, in part, by product swaps totaling $1.1 million and by changes in foreign currency exchange rates, which lowered Run Rate by an additional $2.4 million.

Energy and commodity analytics products Run Rate declined to $11.3 million at December 31, 2013, down $1.8 million from December 31, 2012.

Governance products Run Rate declined by $1.8 million to $115.5 million at December 31, 2013 compared to December 31, 2012. Excluding the impact of the sale of the CFRA product line from December 31, 2012, Run Rate grew by $7.2 million reflecting strong growth in the Run Rate of executive compensation data and analytics products and services.

December 31, 2012 Compared to December 31, 2011

Total Run Rate grew by $85.4 million to $967.4 million as of December 31, 2012 compared to December 31, 2011. The December 31, 2012 Run Rate includes $39.5 million that was associated with the IPD acquisition. The Run Rate for IPD was approximated using the trailing 12 months of revenues primarily adjusted for estimates for non-recurring sales, new sales, and cancellations. Excluding the impact of the acquisition of IPD, total Run Rate grew by $45.9 million. Total subscription Run Rate grew by $78.1 million to $840.3 million as of December 31, 2012 compared to December 31, 2011. Changes in foreign currency rates reduced Run Rate by $0.9 million as of December 31, 2012 relative to December 31, 2011.

Subscription Run Rate from the index and ESG products grew by $68.2 million to $338.0 million at December 31, 2012 relative to December 31, 2011. Excluding the . . .

  Add MSCI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MSCI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.