MSCI : Reports Financial Results for Third Quarter 2014

MSCI Inc. (NYSE:MSCI), a leading global provider of investment decision support tools, including indexes and portfolio risk and performance analytics products and services, today announced results for the third quarter and nine months ended September 30, 2014. As a result of the sale of Institutional Shareholder Services Inc. (“ISS”), results of MSCI’s former Governance business are reflected as discontinued operations in its financial statements. Financial results and operating metrics presented below and in the accompanying tables have been restated to reflect this classification.

(Note: Percentage changes refer to the comparable period in 2013, unless otherwise noted.)

• Operating revenues increased 10.1% to $251.7 million for third quarter 2014.
• Income from continuing operations increased 3.6% to $51.7 million for third quarter 2014 and Diluted EPS from continuing operations increased 4.8% to $0.44.
• Net income declined 6.5% to $51.7 million for third quarter 2014, and Diluted EPS decreased 4.3% to $0.44.
• Adjusted EBITDA¹ increased 1.4% to $102.0 million for third quarter 2014.
• Adjusted EPS² increased 6.4% to $0.50 for third quarter 2014.
• Run Rategrew 9.7% to $1,001.2 million for third quarter 2014.
• MSCI’s Board declared the company’s first regular quarterly cash dividend, of $0.18 per share of common stock.
• MSCI increased its share repurchase authorization to $850 million. As part of that authorization, MSCI entered into a $300 million accelerated share repurchase agreement and received an initial delivery of 4.5 million shares of common stock.

“We are pleased with the strong operating results MSCI generated in the third quarter of 2014, reflecting solid execution of our strategy and the investments we have been making in product development, sales and marketing, and client service,” said Henry A. Fernandez, Chairman and CEO. “MSCI is benefiting from market leading flows into MSCI-linked ETFs, which we attribute to our decision to increase our focus on ETF providers. Another driver of our growth is the increase in retention rates, which reflects our investments in client service.”

“MSCI is focused intently on capital efficiency,” Fernandez continued. “During the quarter, we announced a plan to return $1 billion to shareholders by 2016 via a regular dividend and a stepped up buy-back program. We took the first step in implementing that program with a $300 million ASR that lowered our share count immediately by 4.5 million shares.”

Operating Revenues – See Table 4

Operating revenues for the three months ended September 30, 2014 (“third quarter 2014”) increased $23.1 million, or 10.1%, to $251.7 million compared to $228.6 million for the three months ended September 30, 2013 (“third quarter 2013”). Third quarter 2014 recurring subscription revenues rose $10.7 million, or 5.6%, to $199.9 million, asset-based fees increased $9.9 million, or 26.8%, to $46.7 million and non-recurring revenues rose $2.5 million to $5.1 million.

Operating Expenses – See Table 6

Total operating expenses from continuing operations rose $22.9 million, or 15.8%, to $167.6 million from third quarter 2013. Much of the increase in MSCI’s operating expenses was the result of its ongoing investment program.

• Compensation costs: Total compensation costs rose 17.9% to $105.9 million for third quarter 2014, driven by an increase in overall headcount of 16.0%. Employees located in emerging market centers represent 50% of the workforce, up from 45% at the end of third quarter 2013.
• Non-compensation costs excluding depreciation and amortization: Non-compensation costs rose 14.6% to $43.8 million for third quarter 2014 primarily reflecting increases in professional services, information technology and occupancy costs, among other items.
• Depreciation and amortization: Amortization of intangible assets totaled $11.6 million for third quarter 2014, an increase of 3.4% compared to third quarter 2013. Depreciation and amortization of property, equipment and leasehold improvements rose 16.5% to $6.3 million, primarily reflecting higher depreciation associated with investment in information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for third quarter 2014 was $4.0 million, a decline of $2.1 million from third quarter 2013, driven primarily by an increase in non-recurring income.

Provision for Income Taxes – Continuing Operations

The provision for income tax expense was $28.3 million for third quarter 2014, compared with $27.8 million for third quarter 2013. The effective tax rate for third quarter 2014 was 35.3% versus 35.8% a year ago.

Income and Earnings per Share from Continuing Operations – See Table 12

Income from continuing operations increased $1.8 million, or 3.6%, to $51.7 million for third quarter 2014. Diluted EPS from continuing operations was $0.44, up 4.8%, aided in part by a 2.8% decline in weighted average shares outstanding.

Adjusted Net Income, which excludes the after-tax impact of discontinued operations and the amortization of intangible assets, increased $2.1 million, or 3.6%, to $59.2 million. Adjusted EPS, which excludes the after-tax, per diluted share impact of discontinued operations and the amortization of intangible assets, increased 6.4%, to $0.50.

See Table 12 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 11

Adjusted EBITDA, which excludes income from discontinued operations, net of income taxes, provision for income taxes, other expense (income), net, and depreciation and amortization was $102.0 million, up 1.4% from third quarter 2013. The Adjusted EBITDA margin decreased to 40.5% from 44.0%.

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

Acquisition of GMI

On August 11, 2014, MSCI completed the previously announced acquisition of Governance Holdings Co. (“GMI”) for a purchase price of $15.5 million. Results from the acquisition are now reported as part of the Index and ESG product lines. The acquisition is not expected to have a material impact on MSCI’s results of operations.

Net Income and Earnings per Share

Net income was $51.7 million for third quarter 2014, down 6.5% from third quarter 2013. Diluted EPS was $0.44 for third quarter 2014, down from $0.46 for third quarter 2013. The decline was driven by the disposition of ISS, which was sold in second quarter 2014 and contributed $5.4 million to third quarter 2013 net income.

Enhanced Capital Return Plan

On September 17, 2014, MSCI's Board of Directors approved a plan to initiate a quarterly cash dividend and significantly increased the company’s share repurchase authorization to $850 million from $300 million. This enhanced capital return plan is expected to return approximately $1 billion to MSCI shareholders by the end of 2016.

• Declaration of Dividend: The Board of Directors of MSCI declared a regular quarterly cash dividend, the first in the company’s history, of $0.18 per share of common stock payable on October 31, 2014 to shareholders of record as of the close of trading on October 15, 2014. MSCI expects the initial annual dividend rate to be $0.72 per share.
• Share Repurchase Activity: As part of the share repurchase authorization discussed above, MSCI entered into an accelerated share repurchase (“ASR”) agreement with Goldman Sachs. Under this ASR agreement, MSCI paid Goldman Sachs $300 million in cash and received delivery of 4.5 million shares of its common stock. Additional shares may be delivered to MSCI at or prior to maturity of the ASR agreement in second quarter 2015.

Potential Refinancing of Existing Debt

MSCI is exploring refinancing its existing $795 million of variable rate, senior secured, long-term debt due December 2018. The goal of the potential refinancing would be to increase our financial flexibility, take advantage of the current low interest rate environment and decrease our exposure to interest rate changes. Assuming current market rates and that MSCI refinances all of its outstanding debt, the Company expects its annual interest expense to significantly increase from its third quarter 2014 annualized expense of $22 million. Any such refinancing is subject to market and other conditions, and there can be no assurance that MSCI will be able to refinance on terms and conditions acceptable to the Company.

Key Operating Metrics – See Tables 8, 9, 10

Total Run Rate grew by $88.3 million, or 9.7%, to $1,001.2 million as of September 30, 2014 compared to September 30, 2013. Total subscription Run Rate grew by $57.5 million, or 7.5%, to $823.4 million as of September 30, 2014 compared to September 30, 2013. Excluding the impact of foreign currency changes and GMI, subscription Run Rate grew by 7.6% as the negative impact of changes in foreign currency were offset by the acquisition of GMI.

Business Outlook

The following forward-looking statements reflect MSCI's expectations as of today's date. Given the number of risk factors, uncertainties and assumptions discussed below, actual results may differ materially from those presented. The Company does not intend to update its forward-looking statements until its next quarterly results announcement, other than in publicly available statements.

MSCI’s forward looking guidance for fiscal year 2014 remains unchanged from the previous guidance.

• Full year 2014 Adjusted EBITDA Expenses, which include all operating expenses except amortization of intangible assets and depreciation and amortization of property, equipment and leasehold improvements, are expected to be in the range of $595 million to $605 million. (See Table 13 titled “Reconciliation of Adjusted EBITDA Expenses to Operating Expenses (unaudited)” and “Notes Regarding the Use of Non-GAAP Financial Measures”.)
• The effective tax rate for full year 2014 is expected to be approximately 36%.
• Full year 2014 capital expenditures, including software capitalization, are expected to be in the range of $50 million to $55 million.
• Full year 2014 cash flow from operations is expected to be in the range of $275 million to $325 million.
• Annual rate of Adjusted EBITDA Expenses growth is expected to decline in 2015 versus the 17-19% growth implied by our 2014 Adjusted EBITDA Expenses guidance.

Conference Call Information

Investors will have the opportunity to listen to MSCI Inc.'s senior management review third quarter 2014 results on Thursday, October 30, 2014 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 November 1, 2014. To listen to the recording, visit http://ir.msci.com/events.cfm, or dial 1-800-585-8367 (passcode: 20929993) within the United States. International callers dial 1-404-537-3406 (passcode: 20929993).

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 and portfolio risk and performance analytics.

For equity investors, MSCI’s flagship performance and risk tools include: the MSCI indexes with over $9 trillion estimated to be benchmarked to them on a worldwide basis¹; Barra factor models, portfolio risk and performance analytics; and ESG (environmental, social and governance) Research screening, analysis and ratings. MSCI is also a leading provider of multi-asset class risk management tools including RiskMetrics multi-asset class market and credit risk analytics and Barra multi-asset class factor models, portfolio risk and performance analytics to investors in multi-asset class portfolios. MSCI also provides IPD real estate information, indexes and analytics for investors in and managers of commercial real estate. MSCI also offers 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

¹As of March 31, 2014, as reported on June 25, 2014 by eVestment, Lipper and Bloomberg

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

Forward-Looking Statements

This earnings release may contain 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, 2013 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2014, 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 MSCI projected. Any forward-looking statement in this release reflects MSCI’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to MSCI’s operations, results of operations, growth strategy and liquidity. MSCI assumes 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, except as required by law.

Website and Social Media Disclosure

MSCI uses its website and corporate Twitter account (@MSCI_Inc) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about MSCI when you subscribe to the notification service available through our website by visiting the “Email Alert Subscription” webpage at http://ir.msci.com/alerts.cfm. The contents of MSCI’s website and social media channels are not, however, incorporated by reference into this earnings release.

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 income from discontinued operations, net of income taxes, provision for income taxes, other expense (income), net, depreciation and amortization and the lease exit charge.

Adjusted Net Income and Adjusted EPS are defined as net income and EPS, respectively, before income from discontinued operations, net of income taxes, and the after-tax impact of the amortization of intangible assets and the lease exit charge.

Adjusted EBITDA Expenses represent operating expenses, less depreciation and amortization and the lease exit charge.

We believe that adjusting for 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. Additionally, we believe that adjusting for income from discontinued operations, net of income tax, provides investors with a meaningful trend of results for our continuing operations. Finally, we believe that adjusting for one time and non-recurring expenses such as the lease exit charge is useful to management and investors because it allows for an evaluation of MSCI’s underlying operating performance. 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 EBITDA Expenses, 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.