MSCI Inc. Reports First Quarter 2013 Financial Results

NEW YORK--(BUSINESS WIRE)-- MSCI Inc. (NYS: MSCI) , a leading global provider of investment decision support tools, including indices, portfolio risk and performance analytics and corporate governance services, today announced results for the first quarter ended March 31, 2013.

(Note: Percentage changes are referenced to the comparable period in 2012, unless otherwise noted.)

  • Operating revenues increased 10.0% to $251.9 million in first quarter 2013 and 5.8% on an organic basis. 1
  • Net income increased 34.1% to $58.9 million in first quarter 2013.
  • Adjusted EBITDA 2 grew by 8.0% to $110.1 million in first quarter 2013 and first quarter 2013 Adjusted EBITDA margin decreased to 43.7% from 44.5%.
  • Diluted EPS for first quarter 2013 rose 37.1% to $0.48 and first quarter 2013 Adjusted EPS 3 rose 29.5% to $0.57.
  • MSCI's run rate grew by 6.9% to $982.3 million in first quarter 2013, including organic subscription growth of 3.3%. 1

"MSCI reported 10% revenue growth in first quarter 2013, driven by a 7% increase in organic subscription revenue and aided by contributions from IPD and InvestorForce. Our Adjusted EBITDA grew by 8% and our decisions in 2012 to repay and refinance our debt and repurchase our shares helped lift Adjusted EPS by 30%," Henry A. Fernandez, Chairman and CEO, said.

"MSCI is focused on innovation as a means of driving growth and I am excited by the breadth of new products that we are launching across our business. We are also focused on deepening the links between our product lines and mobilizing our product development and sales efforts to deliver the full value of MSCI's unique data, analytics and research to our worldwide client base," added Mr. Fernandez.

                       

Table 1: MSCI Inc. Selected Financial Information (unaudited)

 
Three Months Ended Change from
March 31, March 31, March 31,
In thousands, except per share data 2013 2012 2012
Operating revenues $ 251,909 $ 229,052 10.0 %
Operating expenses $ 161,382 $ 148,073 9.0 %
Net income $ 58,937 $ 43,966 34.1 %

% Margin

23.4 % 19.2 %
Diluted EPS $ 0.48 $ 0.35 37.1 %
 
Adjusted EPS3 $ 0.57 $ 0.44 29.5 %
Adjusted EBITDA2 $ 110,093 $ 101,907 8.0 %

% Margin

43.7 % 44.5 %
 
1 For the purposes of calculating organic revenue growth, comparisons exclude revenues from the acquisitions of IPD and InvestorForce. For the purposes of calculating organic run rate growth, comparisons exclude the run rate from the acquisitions of IPD and InvestorForce as well as the run rate of the CFRA product line which was sold.

2 Net Income before income taxes, other net expense and income, depreciation, amortization, non-recurring stock-based compensation and restructuring costs. See Table 10 titled "Reconciliation of Adjusted EBITDA to Net Income (unaudited)" and information about the use of non-GAAP financial information provided under "Notes Regarding the Use of Non-GAAP Financial Measures."

3 Per share net income before after-tax impact of amortization of intangibles, non-recurring stock-based compensation, restructuring costs and debt repayment and refinancing expenses. See Table 11 titled "Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS (unaudited)" and information about the use of non-GAAP financial information provided under "Notes Regarding the Use of Non-GAAP Financial Measures."

 

Summary of Results for First Quarter 2013 compared to First Quarter 2012

Operating Revenues - See Table 4

Total operating revenues for the three months ended March 31, 2013 ("first quarter 2013") increased $22.9 million, or 10.0%, to $251.9 million compared to $229.1 million for the three months ended March 31, 2012 ("first quarter 2012"). For the purposes of analyzing revenue trends, organic growth comparisons exclude the impact of the acquisitions of IPD Group Limited ("IPD") and Investor Force Holdings, Inc. ("InvestorForce"), acquired on November 30, 2012 and January 29, 2013, respectively. On an organic basis, operating revenues grew by 5.8%.

Total first quarter 2013 recurring subscription revenues rose $22.0 million, or 11.8%, to $208.6 million and 6.9% on an organic basis. Asset-based fees increased $1.9 million, or 5.5%, to $36.5 million and non-recurring revenues fell $1.0 million to $6.8 million.

Performance and Risk segment revenues rose $21.4 million to $219.5 million, an increase of 10.8% and 6.0% on an organic basis. The increase was primarily driven by increases in index and environmental, social and governance ("ESG") products.

  • Index and ESG products: Index and ESG products revenues increased $15.2 million, or 14.3%, to $121.4 million. Subscription revenues grew by $13.2 million, or 18.5%, to $84.9 million, driven by growth in revenues of index benchmark products and the acquisition of IPD. On an organic basis, index and ESG subscription revenue growth was 7.4%.

    IPD contributed $8.0 million of revenues to first quarter 2013 index and ESG subscription revenues. IPD recognizes revenue based on the delivery of its products to clients. While the first quarter is expected to be the lowest quarter for revenues, the second quarter is expected to be the highest, reflecting when a substantial portion of its annual report product is delivered to clients.

    Revenues attributable to equity index asset-based fees rose $1.9 million, or 5.5%, to $36.5 million, largely as a result of higher assets under management in both ETFs and passive funds. Included in first quarter 2013 were revenues of $2.5 million related to the 22 Vanguard ETFs that have switched or will switch away from MSCI indices in 2013 ("the Vanguard ETFs"). The average assets under management ("AUM") in ETFs linked to MSCI indices increased 8.2% to $369.0 billion from $341.0 billion in first quarter 2012.
  • Risk management analytics: Revenues related to risk management analytics products increased $3.2 million, or 5.0%, to $67.3 million. On an organic basis, revenues grew by 2.6%. The increase in organic risk management analytics revenues was driven primarily by higher revenues from our BarraOne and RiskManager products.
  • Portfolio management analytics: Revenues related to portfolio management analytics products declined $1.4 million, or 4.9%, to $27.6 million as a result of lower sales of equity analytics products.
  • Energy and commodity analytics: Revenues from energy and commodity analytics products were $3.1 million, up $4.4 million from first quarter 2012. First quarter 2012 revenues were negatively impacted by a $5.2 million correction resulting from an error in our revenue recognition for this product category. Excluding the impact of the correction, energy and commodity analytics revenues would have declined $0.8 million.

Governance segment revenues rose $1.5 million, or 4.8%, to $32.4 million in first quarter 2013, driven by higher revenues from advisory compensation data and analytics products and higher revenues from proxy research and distribution services. Non-recurring governance revenues declined by $0.3 million to $3.5 million.

Operating Expenses - See Table 5

Total operating expenses rose $13.3 million, or 9.0%, to $161.4 million, substantially driven by higher costs from recent acquisitions.

  • Compensation costs: Total compensation costs rose $14.2 million, or 15.3%, to $106.8 million in first quarter 2013. Excluding non-recurring stock-based compensation expense, total compensation costs rose $14.8 million, or 16.0%. Compensation costs were impacted by the additions of IPD and InvestorForce and to a lesser extent an overall increase in compensation and benefits expense.
  • Non-compensation costs excluding depreciation and amortization and restructuring costs were essentially flat at $35.0 million in first quarter 2013. Higher non-compensation costs associated with IPD and InvestorForce were offset by lower expenses across many areas including professional fees, technology, market data and other expenses.
  • Depreciation and amortization: Amortization of intangibles expense totaled $14.5 million compared to $16.0 million in first quarter 2012, a decline of 9.2%, primarily due to certain intangibles becoming fully amortized since the prior period, partially offset by additional amortization related to the IPD and InvestorForce acquisitions. Depreciation and amortization of property, plant and equipment rose $0.7 million, or 15.0%, to $5.1 million.

Other Expense (Income), Net

Other expense (income), net for first quarter 2013 was $7.0 million, a decline of $5.8 million from first quarter 2012. Interest expense fell by $5.3 million to $7.0 million as a result of lower levels of indebtedness and lower interest rates following our second quarter 2012 refinancing. A modest gain from the sale of CFRA was offset by the impact of foreign currency translation expense.

Provision for Income Taxes

Income tax expense was $24.6 million in first quarter 2013, up 1.4% from first quarter 2012. First quarter 2013 income tax expense benefited from discrete items of $3.8 million primarily related to a reduction in state taxes and the reinstatement of the 2012 research and development credit. The effective tax rate was 29.5% in first quarter 2013, down from 35.6% in first quarter 2012.

Net Income and Earnings per Share - See Table 11

Net income rose $15.0 million, or 34.1%, to $58.9 million for first quarter 2013. The net income margin increased to 23.4% from 19.2% as a result of the higher operating profit margin, lower interest costs and a lower effective tax rate. Diluted EPS rose by $0.13, or 37.1%, to $0.48, driven by higher net income and a 1.1% decline in the number of diluted shares.

Adjusted net income, which excludes the after-tax impact of amortization of intangibles, non-recurring stock-based compensation expense and restructuring costs, rose $14.6 million, or 26.6%, to $69.2 million. Adjusted EPS, which excludes the after-tax, per share impact of amortization of intangibles, non-recurring stock-based compensation expense and restructuring costs totaling $0.09, rose $0.13, or 29.5%, to $0.57.

See Table 11 titled "Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS (unaudited)" and "Notes Regarding the Use of Non-GAAP Financial Measures" below.

Adjusted EBITDA - See Table 10

Adjusted EBITDA, which excludes income taxes, other net expense and income, depreciation, amortization, non-recurring stock-based compensation and restructuring costs, was $110.1 million, up $8.2 million, or 8.0%, from first quarter 2012. The Adjusted EBITDA margin declined to 43.7% from 44.5%.

By segment, Adjusted EBITDA for the Performance and Risk segment increased $7.8 million, or 8.3%, to $102.0 million in first quarter 2013. The Adjusted EBITDA margin for this segment fell to 46.5% from 47.5%. Adjusted EBITDA for the Governance segment increased $0.4 million, or 5.4%, to $8.1 million and the Adjusted EBITDA margin for this segment remained flat at 25.1%.

See Table 10 titled "Reconciliation of Adjusted EBITDA to Net Income (unaudited)" and "Notes Regarding the Use of Non-GAAP Financial Measures" below.

Key Operating Metrics - See Tables 7, 8, 9

Total run rate grew by $63.1 million, or 6.9%, to $982.3 million as of March 31, 2013 compared to March 31, 2012. For the purposes of analyzing changes in run rate, organic growth comparisons exclude the impact of the acquisitions of IPD and InvestorForce as well as the disposition of CFRA, which was sold on March 31, 2013. On an organic basis, total subscription run rate grew by 3.3%. Changes in foreign currency rates negatively impacted run rate by $7.5 million relative to first quarter 2012 and by $6.2 million relative to fourth quarter 2012.

Performance and Risk segment run rate grew by $65.9 million, or 8.2%, to $872.1 million. On an organic basis, Performance and Risk run rate grew by 2.1%.

  • Index and ESG products: Index and ESG subscription run rate grew by $65.7 million, or 23.6%, to $344.3 million. On an organic basis, run rate grew by 9.5%, driven by growth in equity index benchmark products and ESG products.

    Run rate attributable to asset-based fees declined by $2.8 million, or 2.0%, to $134.2 million. The decline was primarily driven by the impact of the Vanguard ETFs, partially offset by higher overall levels of AUM in ETFs linked to MSCI indices. Excluding the run rate attributable to the Vanguard ETFs at March 31, 2012, asset-based fee run rate grew by $19.9 million, or 17.4%.

    As of March 31, 2013, AUM in ETFs linked to MSCI indices were $357.3 billion, up $2.6 billion, or 0.7%, from March 31, 2012 and down $45.0 billion, or 11.2%, from December 31, 2012. Excluding the Vanguard ETFs, AUM in MSCI-linked ETFs was $285.4 billion, up $52.4 billion, or 22.5%, from March 31, 2012 and up $21.6 billion, or 8.2%, from December 31, 2012.

    During first quarter 2013, MSCI-linked ETFs attracted a total of $21.8 billion of net inflows, including $13.8 billion in those ETFs that are expected to continue to be linked to MSCI indices, and benefited from $16.0 billion of positive market performance, offset by the loss of $82.8 billion in AUM associated with those Vanguard ETFs that transitioned away from MSCI indices during the quarter. For the past twelve months, total inflows to MSCI-linked ETFs were $63.2 billion, of which $22.8 billion were into the Vanguard ETFs and $40.4 billion into all other ETFs, offset by the loss of $82.8 billion in AUM discussed above. As of March 31, 2013, $71.9 billion of AUM in 13 Vanguard ETFs remained to be transitioned.
  • Risk management analytics: Run rate related to risk management analytics products increased $16.6 million, or 6.4%, to $274.5 million. On an organic basis, risk management analytics run rate grew by 2.7%. MSCI continued to benefit from strong growth in run rate associated with its HedgePlatform products and from growth in its BarraOne and RiskManager risk management and reporting systems.
  • Portfolio management analytics: Run rate related to portfolio management analytics products declined $11.7 million, or 9.9%, to $106.1 million. Year-over-year run rate was negatively impacted by product swaps totaling $3.3 million and by changes in foreign currency rates which lowered run rate by an additional $2.3 million. The impact of product swaps and foreign currency changes reduced first quarter 2013 run rate sequentially by $1.8 million.
  • Energy and commodity analytics: Run rate from energy and commodity analytics products declined to $13.0 million, down $1.9 million, or 12.7%, from first quarter 2012. The decline was driven, in part, by weakness in demand for natural gas option pricing models.

Governance run rate declined by $2.9 million, or 2.5%, to $110.2 million. On an organic basis, which excludes CFRA in both periods, run rate grew by 5.3%, reflecting strong growth in the revenues from our advisory compensation data and analytics products, as well as gains in our proxy research and voting products.

Acquisition of Investor Force Holdings, Inc.

On January 29, 2013, MSCI completed the previously announced acquisition of InvestorForce for a purchase price of approximately $23.5 million, funded through existing cash. InvestorForce is a leading provider of performance reporting solutions to the institutional investment community in the United States, providing investment consultants with an integrated solution for daily monitoring, analysis and reporting on institutional assets. The acquisition is not expected to have a material impact on MSCI's results of operations in fiscal year 2013.

Sale of CFRA

On March 31, 2013, MSCI completed the previously announced sale of its CFRA product line, a leading provider of forensic accounting research, to a private investor for an undisclosed purchase price. The sale is not expected to have a material impact on MSCI's results of operations.

Conference Call Information

Investors will have the opportunity to listen to MSCI Inc.'s senior management review first quarter 2013 results on Wednesday, May 1, 2013 at 11:00 am Eastern Time. To listen to the live event, visit the investor relations section of MSCI's website, http://ir.msci.com/events.cfm, or dial 1-877-312-9206 within the United States. International callers dial 1-408-774-4001.

An audio recording of the conference call will be available on our website approximately two hours after the conclusion of the live event and will be accessible through May 3, 2013. To listen to the recording, visit http://ir.msci.com/events.cfm, or dial 1-855-859-2056 (passcode: 36281274) within the United States. International callers dial 1-404-537-3406 (passcode: 36281274).

About MSCI

MSCI Inc. is a leading provider of investment decision support tools to investors globally, including asset managers, banks, hedge funds and pension funds. MSCI products and services include indices, portfolio risk and performance analytics, and governance tools.

The company's flagship product offerings are: the MSCI indices with approximately USD 7 trillion estimated to be benchmarked to them on a worldwide basis1; Barra multi-asset class factor models, portfolio risk and performance analytics; RiskMetrics multi-asset class market and credit risk analytics; IPD real estate information, indices and analytics; MSCI ESG (environmental, social and governance) Research screening, analysis and ratings; ISS governance research and outsourced proxy voting and reporting services; and FEA valuation models and risk management software for the energy and commodities markets. MSCI is headquartered in New York, with research and commercial offices around the world. MSCI#IR

1 As of September 30, 2012, as published by eVestment, Lipper and Bloomberg in December 2012

For further information on MSCI, please visit our web site at www.msci.com

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue", or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.

Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in MSCI's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission (SEC) on March 1, 2013, and in quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement in this release reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.

Notes Regarding the Use of Non-GAAP Financial Measures

MSCI has presented supplemental non-GAAP financial measures as part of this earnings release. A reconciliation is provided that reconciles each non-GAAP financial measure with the most comparable GAAP measure. The presentation of non-GAAP financial measures should not be considered as alternative measures for the most directly comparable GAAP financial measures. These measures are used by management to monitor the financial performance of the business, inform business decision making and forecast future results.

Adjusted EBITDA is defined as net income before provision for income taxes, other net expense and income, depreciation and amortization, non-recurring stock-based compensation expense and restructuring costs.

Adjusted net income and Adjusted EPS are defined as net income and EPS, respectively, before provision for non-recurring stock-based compensation expenses, amortization of intangible assets, restructuring costs and the accelerated amortization or write off of deferred financing and debt discount costs as a result of debt repayment (debt repayment and refinancing expenses), as well as for any related tax effects.

We believe that adjustments related to the restructuring costs and debt repayment and refinancing expenses are useful to management and investors because it allows for an evaluation of MSCI's underlying operating performance. Additionally, we believe that adjusting for non-recurring stock-based compensation expenses, debt repayment and refinancing expenses and depreciation and amortization may help investors compare our performance to that of other companies in our industry as we do not believe that other companies in our industry have as significant a portion of their operating expenses represented by these items. We believe that the non-GAAP financial measures presented in this earnings release facilitate meaningful period-to-period comparisons and provide a baseline for the evaluation of future results.

Adjusted EBITDA, Adjusted net income and Adjusted EPS are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies.

       
Table 2: MSCI Inc. Consolidated Statement of Income (unaudited)
 
Three Months Ended
March 31, March 31, December 31,
In thousands, except per share data       2013 2012 2012
 
Operating revenues $ 251,909 $ 229,052 $ 247,080
 
Operating expenses

Cost of services

80,185 72,291 74,191

Selling, general and administrative

61,631 55,436 57,172

Restructuring costs

- (29 ) -

Amortization of intangible assets

14,486 15,959 15,421

Depreciation and amortization of property,

equipment and leasehold improvements

  5,080     4,416     4,989  
Total operating expenses $ 161,382   $ 148,073   $ 151,773  
 
Operating income $ 90,527 $ 80,979 $ 95,307
Operating margin 35.9 % 35.4 % 38.6 %
 
Interest income (268 ) (223 ) (242 )
Interest expense 7,020 12,355 7,178
Other expense (income)   224     608     56  
Other expenses (income), net $ 6,976   $ 12,740   $ 6,992  
 
Income before taxes 83,551 68,239 88,315
 
Provision for income taxes   24,614     24,273     33,863  
Net income $ 58,937   $ 43,966   $ 54,452  
Net income margin 23.4 % 19.2 % 22.0 %
 
Earnings per basic common share $ 0.49   $ 0.36   $ 0.44  
Earnings per diluted common share $ 0.48   $ 0.35   $ 0.44  
 

Weighted average shares outstanding used in computing earnings per share

 
Basic   120,746     121,754     122,082  
Diluted   121,702     123,113     122,995  
 

Table 3: MSCI Inc. Selected Balance Sheet Items (unaudited)

 
                  As of
March 31,     December 31,
In thousands                   2013     2012
Cash and cash equivalents $ 263,029 $ 183,309
Short-term investments - 70,898
Trade receivables, net of allowances 166,915 153,557
 
Deferred revenue $ 350,470 $ 308,022
Current maturities of long-term debt 43,106

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