Summary of Results for First Quarter 2011 compared to First Quarter 2010
Operating Revenues – See Table 4
Total operating revenues for the three months ended March 31, 2011 (first quarter 2011) increased $101.6 million, or 83.5%, to $223.3 million compared to $121.7 million for the three months ended February 28, 2010 (first quarter 2010). The biggest driver of revenue growth was the acquisition of RiskMetrics, which closed on June 1, 2010 and contributed revenues of $78.0 million in the first quarter. Total subscription revenues rose $82.4 million, or 87.5%, to $176.7 million while asset-based fees increased $8.7 million, or 34.7%, to $33.6 million. Non-recurring revenues, which include $4.3 million of non-recurring asset-based fees, increased $10.5 million to $13.0 million.
Excluding the impact of the acquisitions of RiskMetrics and Measurisk (an acquisition completed on July 30, 2010), total operating revenues grew by $20.5 million, or 16.8%, to $142.2 million. Subscription revenues grew $7.9 million, or 8.3%, to $102.1 million in first quarter 2011. Non-recurring revenues increased $4.0 million to $6.4 million, driven by non-recurring asset-based fees.
By segment, Performance and Risk revenues rose $70.4 million, or 57.8%, to $192.0 million. The Performance and Risk segment is comprised of index and ESG (defined below) products, risk management analytics, portfolio management analytics, and energy and commodity analytics. Revenues for the Governance segment were $31.3 million.
Index and ESG products: Our index and ESG products primarily consist of index subscriptions, equity index asset based fee products and environmental, social and governance (“ESG”) products. Revenues related to index and ESG products increased $24.9 million, or 33.1%, to $100.0 million. Index and ESG subscription revenue grew by $11.9 million, or 23.8%, to $62.2 million, with $4.4 million of that coming from the addition of ESG products resulting from the acquisition of RiskMetrics. Also included in the index and ESG revenues were $5.9 million of non-recurring revenues, which rose $3.5 million largely as the result of an increase of $4.3 million of non-recurring asset-based fees.
Revenues attributable to equity index asset based fees rose $12.9 million, or 51.8%, to $37.9 million. Asset-based fees also include $4.3 million of non-recurring revenue in first quarter 2011. Recurring asset-based fees rose $8.7 million, or 34.7%, to $33.6 million. The increase in recurring asset-based fees was driven primarily by an increase in ETF asset-based fees.
The average value of assets in ETFs linked to MSCI equity indices increased 41.1% to $337.6 billion for first quarter 2011 compared to $239.3 billion for the three months ended February 28, 2010. As of March 31, 2011, the value of assets in ETFs linked to MSCI equity indices was $350.1 billion, representing an increase of 49.9% from $233.5 billion as of February 28, 2010 and $16.8 billion, or 5.0%, from $333.3 billion as of December 31, 2010. We estimate that the $16.8 billion sequential increase in first quarter 2011 was attributable to $10.1 billion of net asset appreciation and cash inflows of $6.7 billion.
The three MSCI indices with the largest amount of ETF assets linked to them as of March 31, 2011 were the MSCI Emerging Markets, EAFE (an index of stocks in developed markets outside North America) and U.S. Broad Market indices. The assets linked to these indices were $102.1 billion, $45.4 billion, and $19.5 billion, respectively.
Risk management analytics: Our risk management analytics products offer a consistent risk assessment framework for managing and monitoring investments in a variety of asset classes and are based on our proprietary integrated fundamental multi-factor risk models, value-at-risk methodologies and asset valuation models. Revenues related to risk management analytics increased $48.0 million, or 442.1%, to $58.9 million. The acquisitions of RiskMetrics and Measurisk added $45.5 million, or 419.0%, to growth in the first quarter. Excluding the impact of the acquisitions, risk management analytics revenues grew by $2.5 million, or 23.1%.
Portfolio management analytics: Our portfolio management analytics products consist of analytics tools for equity and fixed income portfolio management. Revenues related to portfolio management analytics decreased by $2.2 million, or 6.9%, to $29.3 million.
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. Revenues from energy and commodity analytics products declined by $0.3 million, or 7.7%, to $3.9 million.
Governance: Our governance products consist of corporate governance products and services, including proxy research, recommendation and voting services for asset owners and asset managers as well as governance advisory and compensation services for corporations. It also includes forensic accounting research as well as class action monitoring and claims filing services to aid institutional investors in the recovery of funds from securities litigation, all of which were acquired as part of our acquisition of RiskMetrics. Governance revenues were $31.3 million in first quarter 2011, including $5.5 million of non-recurring revenues.
Operating Expenses – See Table 5
Total operating expense increased $73.4 million, or 98.7%, to $147.9 million in first quarter 2011 compared to first quarter 2010. The increase is due mainly to the acquisition of RiskMetrics. Restructuring costs related to the ongoing integration of RiskMetrics contributed $4.4 million to operating expenses.
Compensation costs: Total compensation costs rose $43.7 million, or 97.0%, to $88.7 million in first quarter 2011. Excluding non-recurring stock-based compensation expense of $2.8 million, total compensation costs rose $42.9 million, or 99.9%, to $85.9 million.
Non-recurring stock-based compensation expenses for first quarter 2011 consisted of $1.0 million related to the founders grants awarded to certain employees at the time of MSCI’s initial public offering (“IPO”) and $1.8 million related to the performance awards granted to certain employees in connection with the acquisition of RiskMetrics. The aggregate value of the performance awards of approximately $15.9 million is being amortized through 2012 and the aggregate value of the founders grant of approximately $68.0 million is being amortized through 2011. As a result of the vesting of portions of the founders grants, the related expense decreased $1.1 million, or 51.4%, to $1.0 million.
Non-compensation costs excluding depreciation and amortization: Total non-compensation operating expenses excluding depreciation and amortization, transaction costs associated with the acquisition of RiskMetrics and restructuring costs rose $13.5 million, or 69.1%, to $32.9 million in first quarter 2011. The acquisition of RiskMetrics was the biggest driver behind the increase.
Cost of services: Total cost of services expenses rose by $40.9 million, or 139.7%, to $70.2 million. Within costs of services, compensation expenses increased by $29.8 million, or 133.4%, and non-compensation expenses increased by $11.1 million, or 160.1%. In both cases, the biggest driver behind the increase was the acquisition of RiskMetrics.
Selling, general and administrative expense (SG&A): Total SG&A expense rose $14.0 million, or 37.3%, to $51.4 million. Within SG&A, compensation expenses increased by $13.8 million, or 61.0%, and non-compensation expenses excluding transaction costs increased by $2.4 million, or 18.9%. In both cases, the biggest driver behind the increase was the acquisition of RiskMetrics.
Amortization of intangibles: Amortization of intangibles expense totaled $16.7 million compared to $4.3 million in first quarter 2010. The $12.4 million increase is associated with the acquisitions of RiskMetrics and Measurisk.
Adjusted EBITDA – See Table 13
Adjusted EBITDA, which excludes among other things the impact of non-recurring stock-based compensation and restructuring costs, was $104.5 million, an increase of $45.2 million, or 76.3%, from first quarter 2010. Adjusted EBITDA margin declined to 46.8% from 48.7% as a result of the dilutive impact of the acquisition of the lower margin RiskMetrics.
By segment, Adjusted EBITDA for the Performance and Risk segment increased $35.7 million, or 60.3%, to $95.0 million from first quarter 2010. Adjusted EBITDA margin for this segment rose to 49.4% from 48.7% in first quarter 2010. Adjusted EBITDA for the Governance segment was $9.5 million and the Adjusted EBITDA margin was 30.4%.
See Table 13 titled “Reconciliation of Adjusted EBITDA to Net Income” and “Notes Regarding the Use of Non-GAAP Financial Measures” below.
Other Expense (Income), Net
Other expense (income), net for first quarter 2011 was $22.1 million, an increase of $18.7 million from first quarter 2010. Part of the increase results from $11.9 million of higher interest expense resulting from the increased levels of indebtedness incurred in connection with the acquisition of RiskMetrics. The remaining increase in other expense (income), net primarily reflects $6.4 million of expenses resulting from the repricing of our term loan facility and the concurrent repayment of $88.0 million of our pre-existing term loan.
On March 14, 2011, MSCI completed the repricing of its pre-existing term loan. The repricing was effected through an amendment to MSCI’s credit agreement, which provided for the incurrence of a new senior secured loan with an aggregate principal amount of $1.125 billion. The proceeds from the new term loan, together with $88 million of cash on hand, were used to repay the existing $1.213 billion term loan facility in full. The amendment resulted in a decrease of the applicable margin above LIBOR to 2.75% from 3.25% as well as a decrease in the LIBOR floor to 1.00% from 1.50%. MSCI also amended certain other covenants in its senior secured loan facility.
Provision for Income Taxes
The provision for income tax expense was $19.8 million for first quarter 2011, an increase of $3.5 million, or 21.5%, compared to $16.3 million for the same period in 2010. The effective tax rate was
37.2% for first quarter 2011. The effective tax rate benefited from several discrete items that lowered the rate. The effective tax rate for the first quarter of 2010 was also 37.2%. Excluding the impact of transaction costs, the effective tax rate in the first quarter of 2010 was 36.0%. The effective tax rate in the first quarter of 2010 benefited from several discrete items that lowered the rate.
Net Income and Earnings per Share – See Table 15
Net income increased $6.0 million, or 21.8%, to $33.5 million for first quarter 2011. The net income margin decreased to 15.0% from 22.6% as a result of the impact of the acquisition of the lower margin RiskMetrics business as well as the additional amortization of intangibles, restructuring costs and higher interest expense related to the same acquisition. Diluted EPS increased 3.8% to $0.27.
Adjusted net income, which excludes the after-tax impact of amortization of intangibles, non-recurring stock-based compensation expense, restructuring costs and debt repayment and refinancing expenses totaling $19.1 million, rose $19.1 million, or 56.8%, to $52.6 million. Adjusted EPS, which excludes the after-tax, per share impact of amortization of intangibles, non-recurring stock-based compensation expense, restructuring costs and debt repayment and refinancing expenses totaling $0.16, rose 38.7% to $0.43.
See table 15 titled “Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS.”
Summary of Results for First Quarter 2011 compared to Pro Forma First Quarter 2010
Operating Revenues – See Table 7
Compared to pro forma first quarter 2010, total operating revenues increased $25.1 million, or 12.7%, to $223.3 million. By segment, Performance and Risk revenues rose $26.3 million, or 15.8%, to $192.0 million. Governance revenue trends are described further below. Subscription revenues rose by $11.6 million, or 7.0%, to $176.7 million. Asset-based fees increased $8.7 million, or 34.7%, to $33.6 million. Non-recurring revenues increased $4.9 million to $13.0 million, driven by $4.3 million of non-recurring asset-based fees.
Index and ESG products: Compared to pro forma first quarter 2010, total index and ESG revenues rose $20.4 million, or 25.5%, to $100.0 million. Index and ESG subscription revenues rose by $7.4 million, or 13.6%, to $62.2 million from $54.7 million. The strong growth was driven by higher revenues from MSCI’s core benchmark indices and higher usage fees. Revenues from asset-based fees increased $12.9 million, or 51.8%, to $37.9 million, compared to pro forma first quarter 2010.
Total index and ESG revenues also include $5.9 million of non-recurring revenues, up from $2.9 million in pro forma first quarter. The increase was driven primarily by an increase of $4.3 million of non-recurring asset-based fees.
Risk management analytics: Compared to pro forma first quarter 2010, risk management analytics revenues rose $8.4 million, or 16.7%, to $58.9 million, driven by growth in revenues from both BarraOne and RiskManager products. The acquisition of Measurisk contributed $3.1 million, or 6.2%, to growth in the first quarter.
Governance: Compared to pro forma first quarter 2010, governance revenues declined $1.1 million, or 3.5%, to $31.3 million. Revenues from institutional governance and forensic accounting services
declined. Non-recurring governance revenues were $5.5 million in first quarter 2011 versus $4.4 million in the pro forma first quarter 2010.
The acquisition of RiskMetrics did not impact the revenues attributable to the asset-based fees sub-category of index and ESG products, portfolio management analytics and energy and commodity analytics and comparisons for these products are not presented. Comparisons to first quarter 2010 revenues are discussed in the Summary of Results for First Quarter 2011 compared to First Quarter 2010 above.
Operating Expenses – See Table 8
Compared to pro forma first quarter 2010, total operating expenses excluding restructuring costs rose $6.0 million to $143.4 million.
Compensation costs: Compared to pro forma first quarter 2010, compensation costs excluding non-recurring stock-based compensation expense rose $7.3 million, or 9.2%, to $85.9 million. Total non-recurring stock-based compensation expense rose by $0.7 million, or 35.9%, to $2.8 million.
Non-compensation costs excluding depreciation and amortization: Compared to pro forma first quarter 2010, total non-compensation costs excluding depreciation and amortization, transaction expenses related to the acquisition of RiskMetrics and restructuring costs decreased $2.1 million, or 5.9%, to $32.9 million, led by declines in market data expense, occupancy costs and travel and entertainment expenses.
Cost of services: Compared to pro forma first quarter 2010, total cost of services rose $4.6 million, or 7.0%, to $70.2 million. Compensation expenses excluding non-recurring stock-based compensation expense rose $2.9 million, or 6.1%, to $51.1 million. Non-compensation expenses rose by $1.2 million, or 7.2%, to $18.0 million, driven by higher market data and information technology expenses.
Selling, general and administrative expense (SG&A): Compared to pro forma first quarter 2010, total SG&A expense rose $1.3 million, or 2.7%, to $51.4 million. Within SG&A, compensation expenses excluding non-recurring stock-based compensation rose $4.3 million, or 14.2%, to $34.8 million. Non-compensation expenses fell $3.3 million, or 18.1%, to $14.9 million. The decrease in non-compensation expenses was driven by lower information technology expenses and lower taxes and license fees.
Adjusted EBITDA – See Table 14
Compared to pro forma first quarter 2010, Adjusted EBITDA increased $20.0 million, or 23.6%, to $104.5 million and the margin expanded to 46.8% from 42.6%. Performance and Risk segment Adjusted EBITDA grew by $19.1 million, or 25.1%, to $95.0 million and the margin increased to 49.4% from 45.8%. Governance Adjusted EBITDA rose by $0.9 million, or 10.7%, to $9.5 million and the margin increased to 30.4% from 26.5%.
Compared to pro forma first quarter 2010, net income increased $5.0 million, or 17.4%, to $33.5 million from $28.5 million.
See Table 14 titled “Reconciliation of Pro Forma Adjusted EBITDA to Pro Forma Net Income” and “Notes Regarding the Use of Non-GAAP Financial Measures” below.
Conference Call Information
Investors will have the opportunity to listen to MSCI Inc.'s senior management review first quarter 2011 results on Thursday, May 5, 2011 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 19, 2011. To listen to the recording, visit http://ir.msci.com/events.cfm, or dial 1-800-642-1687 (passcode: 60691003) within the United States. International callers dial 1-706-645-9291 (passcode: 60691003).
About MSCI Inc.
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 which include more than 145,000 daily indices covering more than 70 countries; Barra portfolio risk and performance analytics covering global equity and fixed income markets; RiskMetrics market and credit risk analytics; ISS governance research and outsourced proxy voting and reporting services; MSCI environmental, social and governance research; FEA valuation models and risk management software for the energy and commodities markets; and CFRA forensic accounting risk research, legal/regulatory risk assessment, and due-diligence. MSCI is headquartered in New York, with research and commercial offices around the world. MSCI#IR
For further information on MSCI Inc. or our products please visit www.msci.com.
MSCI Inc. Contact:
| Edings Thibault, MSCI, New York | + 1.866.447.7874 |
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| For media inquiries please contact: | |
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| Kenny Suarez | Patrick Clifford, Abernathy MacGregor, New York | + 1.212.371.5999 |
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| Sally Todd | Kristy Fitzpatrick, MHP Communications, London | + 44.20.3128.8100 |
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Forward-Looking Statements
This press release contains forward-looking statements. 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 November 30, 2010 and filed with the Securities and Exchange Commission (SEC) on January 31, 2011, 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 below 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, restructuring costs, and third party transaction costs related to the acquisition of RiskMetrics.
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, third party transaction costs related to the acquisition of RiskMetrics, restructuring costs, and the accelerated interest expense resulting from the termination of an interest rate swap and the accelerated amortization of deferred financing and debt discount costs (debt repayment expenses), as well as for any related tax effects.
We believe that adjustments related to transaction costs and debt repayment expenses are useful to management and investors because it allows for an evaluation of MSCI’s underlying operating performance by excluding the costs incurred in connection with the acquisition of RiskMetrics. Additionally, we believe that adjusting for non-recurring stock-based compensation expenses and the amortization of intangible assets 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 one-time non-recurring stock-based compensation expenses and amortization of intangible assets. 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.
