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MSCI > SEC Filings for MSCI > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for MSCI INC.

Form 10-Q for MSCI INC.


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the "Form 10-K"). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in "Item 1A.-Risk Factors," in our Form 10-K for the fiscal year ended December 31, 2013.

Overview

We are a leading global provider of investment decision support tools, including indexes, portfolio risk and performance analytics. 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 March 31, 2014, we had offices related to continuing operations in 34 cities in 22 countries in order to help serve our diverse client base, with 50.1% of our revenue from clients in the Americas, 37.0% in Europe, the Middle East and Africa ("EMEA") and 12.9% in Asia and Australia based on revenues for the three months ended March 31, 2014.

Our principal sales model 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 Unaudited Condensed Consolidated Statement of Financial Condition and are recognized on our Unaudited Condensed 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 also receive revenues from one-time fees related to implementation, historical or customized reports, advisory and consulting services 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 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 purpose of these investments is to maximize our medium-term revenue and operating income growth, while at the same time ensuring that we will remain a leading provider of investment decision support tools 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 three months ended March 31, 2014, our revenues grew by 9.2% but our operating income decreased by 4.1% compared to 2013 due, in part, to increased investment in our business. We anticipate that our increases in spending in areas such as sales, client service, information technology and product development in 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.

Changes in Presentation

On March 17, 2014, we entered into a definitive agreement to sell Institutional Shareholder Services Inc. ("ISS") which, together with the previously disposed of CFRA product line, made up our Governance segment. The sale of ISS was completed on April 30, 2014 for approximately $367.4 million, subject to final working capital adjustments. As a result, we now operate as a single business segment and the operating results of ISS and the CFRA product line are reported as discontinued operations for all periods presented. Prior to March 31, 2014, we operated under two segments: the Performance and Risk business and the Governance business. Our Performance and Risk business is a leading global provider of investment decision support tools, including indexes and portfolio risk and performance analytics, credit analytics and environmental, social and governance ("ESG") products. Our Governance business was a leading provider of corporate governance products and services and specialized financial research and analysis services to institutional investors and corporations around the world.


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In addition, we had previously reported energy and commodity analytics products separately as its own product category for disclosures related to operating revenues, Run Rate and Aggregate and Core Retention Rates. Beginning with the three months ended March 31, 2014, we reported the results of energy and commodity analytics products as part of the risk management analytics product category as we view the product offerings and customer base of energy and commodity analytics products to be similar in nature to those in the risk management analytics product category. Prior periods have also been presented to reflect this change in categorization.

Factors Affecting the Comparability of Results

Term Loan Repricing

On June 1, 2010, we entered into a senior secured credit agreement comprised of
(i) a six-year term loan facility (the "2010 Term Loan") and (ii) a five-year revolving credit facility (the "2010 Revolving Credit Facility," together with the 2010 Term Loan, the "2010 Credit Facility").

On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility ("Amendment No. 2"). Amendment No. 2 provided for the incurrence of a new senior secured term loan (the "2011 Term Loan"). The proceeds of the 2011 Term Loan, together with cash on hand, were used to repay the remaining outstanding balance of the 2010 Term Loan in full. The 2011 Term Loan would have matured in March 2017.

On May 4, 2012, we amended and restated our 2010 Credit Facility (the credit agreement as so amended and restated, the "Amended and Restated Credit Facility"). The Amended and Restated Credit Facility provided for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the "2012 Term Loan") and a $100.0 million senior secured revolving facility (the "2012 Revolving Credit Facility"). The proceeds of the Amended and Restated Credit Facility, together with cash on hand, were used to repay the remaining outstanding principal of the then-existing 2011 Term Loan. Prior to the amendment to the Amended and Restated Credit Facility discussed below, the 2012 Term Loan and the 2012 Revolving Credit Facility were to mature on May 4, 2017.

At March 31, 2014, the 2012 Term Loan bore interest of LIBOR plus 2.00%, or 2.15%.

Share Repurchase

On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI's common stock beginning immediately and continuing through the year ended December 31, 2014 (the "2012 Repurchase Program").

On December 13, 2012, as part of the 2012 Repurchase Program, we entered into an accelerated share repurchase ("ASR") agreement with a financial institution to initiate a repurchase aggregating $100.0 million (the "December 2012 ASR Program"). As a result of the December 2012 ASR Program, we received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

On August 1, 2013, we entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the "August 2013 ASR Program"). As a result of the August 2013 ASR Program, we received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, we utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a new ASR agreement to initiate share repurchases aggregating $100.0 million (the "February 2014 ASR Program"). The February 2014 ASR Program is structured as a capped ASR in which, on February 7, 2014, we paid $100.0 million and received 1.7 million shares, representing the minimum number of common shares to be repurchased based on a calculation using a specific capped price per share. This price is capped such that only under limited circumstances may we be required to deliver shares or pay cash at settlement. We anticipate that all repurchases under the February 2014 ASR Program will be completed no later than the final repurchase date in May 2014, although settlement may be accelerated under certain circumstances. Additionally, depending on the average share price through the completion date in May 2014, we may receive additional shares under the February 2014 ASR Program.

The discussion of our results of operations for the three months ended March 31, 2014 and 2013 are presented below. The results of operations for interim periods may not be indicative of future results.


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Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Results of Operations

The following table presents the results of operations for the three months
ended March 31, 2014 and 2013:



                                               Three Months Ended
                                                    March 31,
                                              2014            2013             Increase/(Decrease)
                                                      (in thousands, except per share data)
Operating revenues                          $ 239,688       $ 219,469       $    20,219           9.2 %
Operating expenses:
Cost of services                               75,427          65,300            10,127          15.5 %
Selling, general and administrative            67,658          55,515            12,143          21.9 %
Amortization of intangible assets              11,270          11,166               104           0.9 %
Depreciation and amortization of
property, equipment, and leasehold
improvements                                    5,828           4,597             1,231          26.8 %

Total operating expenses                      160,183         136,578            23,605          17.3 %

Operating income                               79,505          82,891            (3,386 )        (4.1 %)
Other expense (income), net                     5,974           8,701            (2,727 )       (31.3 %)

Income from continuing operations before
provision for income taxes                     73,531          74,190              (659 )        (0.9 %)
Provision for income taxes                     26,385          21,232             5,153          24.3 %

Income from continuing operations              47,146          52,958            (5,812 )       (11.0 %)
Income from discontinued operations, net
of income taxes                                33,253           5,979            27,274         456.2 %

Net income                                  $  80,399       $  58,937       $    21,462          36.4 %

Earnings per basic common share:
From continuing operations                  $    0.40       $    0.44       $     (0.04 )        (9.1 %)
From discontinued operations                     0.28            0.05              0.23         460.0 %

Earnings per basic common share             $    0.68       $    0.49       $      0.19          38.8 %

Earnings per diluted common share:
From continuing operations                  $    0.40       $    0.43       $     (0.03 )        (7.0 %)
From discontinued operations                     0.28            0.05              0.23         460.0 %

Earnings per diluted common share           $    0.68       $    0.48       $      0.20          41.7 %

Operating margin                                 33.2 %          37.8 %

Operating Revenues

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

Index and ESG

Risk management analytics

Portfolio management analytics


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The following table summarizes the revenue by product category for the three months ended March 31, 2014 compared to the three months ended March 31, 2013:

                                        Three Months Ended
                                             March 31,
                                                                       Increase /
                                        2014          2013             (Decrease)
                                                       (in thousands)
     Index and ESG:
     Subscriptions                    $  97,343     $  84,888     $ 12,455        14.7 %
     Asset-based fees                    40,900        36,515        4,385        12.0 %

     Total index and ESG products       138,243       121,403       16,840        13.9 %
     Risk management analytics           75,580        70,420        5,160         7.3 %
     Portfolio management analytics      25,865        27,646       (1,781 )      (6.4 %)

     Total operating revenues         $ 239,688     $ 219,469     $ 20,219         9.2 %

     Recurring subscriptions          $ 194,972     $ 179,663     $ 15,309         8.5 %
     Asset-based fees                    40,900        36,515        4,385        12.0 %
     Non-recurring revenue                3,816         3,291          525        16.0 %

     Total operating revenues         $ 239,688     $ 219,469     $ 20,219         9.2 %

Our index and ESG products primarily consist of equity and real estate index subscriptions, equity index asset-based fees products and ESG products. Our index and ESG products are used to benchmark investment performance, as a basis for index-linked investment products, the assessment of corporate management of ESG risks and opportunities, investment manager selection and investment research. We derive revenues from our index and ESG products through index data and ESG subscriptions, fees based on assets in investment products linked to our indexes and non-recurring licenses of our index historical data. Revenues related to index and ESG products increased $16.8 million, or 13.9%, to $138.2 million for the three months ended March 31, 2014 compared to $121.4 million for the three months ended March 31, 2013.

Subscription revenues from the index and ESG products were up 14.7% to $97.3 million for the three months ended March 31, 2014 compared to $84.9 million for the three months ended March 31, 2013. The increase was primarily driven by growth in revenues from equity index benchmark products, in addition to the impact of the timing of revenue recognition related to IPD products, which contributed to an increase in revenues of $5.2 million relative to the three months ended March 31, 2013.

Asset-based fee revenues attributable to index and ESG products increased $4.4 million, or 12.0%, to $40.9 million for the three months ended March 31, 2014 compared to $36.5 million for the three months ended March 31, 2013. The year-over-year difference resulted from higher fees from non-ETF passive funds and ETFs linked to MSCI indexes, in addition to a change in the mix of ETFs linked to MSCI indexes, which more than offset a decline of $38.2 billion, or 10.4%, in the average value of assets in ETFs linked to MSCI indexes. The decrease in the average value of assets in ETFs linked to MSCI indexes was primarily related to the decision of The Vanguard Group, Inc. to change the target benchmarks of 22 of its ETFs from MSCI's equity indexes (the "Vanguard ETFs"). The transition of the Vanguard ETFs was completed by the end of June 2013. Excluding the $2.5 million of asset-based fees related to the Vanguard ETFs included in the three months ended March 31, 2013, asset-based fees would have grown by 20.3%.

As of March 31, 2014, the value of assets in ETFs linked to MSCI equity indexes was $340.8 billion, representing a decrease of $16.5 billion, or 4.6%, from $357.3 billion as of March 31, 2013. Of the $340.8 billion of assets in ETFs linked to MSCI equity indexes as of March 31, 2014, 54.5% were linked to indexes related to developed markets outside of the U.S., 24.2% were linked to emerging market indexes, 16.4% were linked to U.S. market indexes and 4.9% were linked to other global indexes.

The following table sets forth the value of assets in ETFs linked to MSCI indexes and the sequential change of such assets under management ("AUM") as of the periods indicated:

                                                                                         Period Ended
                                                March 31,             June 30,             September 30,        December 31,         March 31,
(in billions)                                     2013                  2013                   2013                 2013               2014
AUM in ETFs linked to MSCI Indexes             $     357.3           $    269.7           $         302.6       $       332.9       $     340.8

Sequential Change ($ in Billions)
Market Appreciation/(Depreciation)             $      16.0           $    (13.2 )         $          20.2       $        10.9       $       1.3
Cash Inflow/Outflow                                  (61.0 )(1)           (74.4 )(1)                 12.7                19.4               6.6

Total Change                                   $     (45.0 )         $    (87.6 )         $          32.9       $        30.3       $       7.9

Source: Bloomberg and MSCI

(1) Includes $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013, respectively.


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The following table sets forth the average value of assets in ETFs linked to MSCI indexes for the periods indicated:

                                                                    Quarterly Average
                                                                     2013                             2014
(in billions)                                  March       June        September       December       March
AUM in ETFs linked to MSCI Indexes            $ 369.0     $ 324.1     $     286.2     $    321.5     $ 330.8

Source: Bloomberg and MSCI

The historical values of the assets in ETFs linked to our indexes as of the last day of the month and the monthly average balance can be found under the link "AUM in ETFs Linked to MSCI Indexes" on our website at http://ir.msci.com. This information is updated on the second U.S. business day of each month. Information contained on our website is not incorporated by reference into this Quarterly Report on Form 10-Q or any other report filed with the Securities and Exchange Commission.

Our risk management analytics products offer risk and performance assessment frameworks for managing and monitoring investments in organizations globally. These products allow clients to analyze investments in a variety of asset classes and are based on our proprietary integrated fundamental multi-factor risk models, value-at-risk methodologies, performance attribution frameworks and asset valuation models. We also offer products for monitoring, analyzing and reporting on institutional assets. Additionally, we provide products consisting of software applications which help users value, model and hedge physical assets and derivatives across a number of market segments including energy and commodity assets.

Revenues related to risk management analytics products increased $5.2 million, or 7.3%, to $75.6 million for the three months ended March 31, 2014 compared to $70.4 million for the three months ended March 31, 2013. The increase in risk management analytics revenues was driven primarily by higher revenues from our RiskManager and BarraOne products, as well as from one additional month of revenues from InvestorForce products totaling $0.9 million, which were acquired on January 29, 2013.

Our portfolio management analytics products consist of equity portfolio analytics tools and fixed income portfolio analytics tools. Revenues related to portfolio management analytics products decreased 6.4% to $25.9 million for the three months ended March 31, 2014 compared to $27.6 million for three months ended March 31, 2013. The decrease in revenues was the result of lower sales of equity analytics products in prior periods, as well as lower revenue from fixed income analytics products.

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 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;


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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.

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

                                                       As of
                                                                                       Year-Over-
                                   March 31,       March 31,        December 31,          Year             Sequential
                                      2014            2013              2013           Comparison          Comparison
                                                   (in thousands)
Run Rates
Index and ESG products
Subscription                       $  382,383      $  344,267      $      371,511             11.1 %               2.9 %
Asset-based fees                      161,882         134,186             158,305             20.6 %               2.3 %

Index and ESG products total          544,265         478,453             529,816             13.8 %               2.7 %
Risk management analytics             307,460         287,554             301,957              6.9 %               1.8 %
Portfolio management analytics        103,531         106,091             103,125             (2.4 %)              0.4 %

Total Run Rate                     $  955,256      $  872,098      $      934,898              9.5 %               2.2 %

Subscription total                 $  793,374      $  737,912      $      776,593              7.5 %               2.2 %
Asset-based fees total                161,882         134,186             158,305             20.6 %               2.3 %

Total Run Rate                     $  955,256      $  872,098      $      934,898              9.5 %               2.2 %

Total Run Rate grew by $83.2 million, or 9.5%, to $955.3 million as of March 31, 2014 compared to $872.1 million as of March 31, 2013. Changes in foreign currency rates positively impacted Run Rate by $5.5 million relative to March 31, 2013.

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