Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (10-22-08 03:18 AM)

MSCI INC. CEO Henry A Fernandez bought 15000 shares on 10-10-2008 at $19.04

BUSINESS OVERVIEW

Overview

We are a leading provider of investment decision support tools to investment institutions worldwide. We produce indices and risk and return portfolio analytics for use in managing investment portfolios. Our products are used by institutions investing in or trading equity, fixed income and multi-asset class instruments and portfolios around the world. Our flagship products are our international equity indices marketed under the MSCI brand and our equity portfolio analytics marketed under the Barra brand. Our products are used in many areas of the investment process, including portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research.

Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. As of November 30, 2007, we had a client base of over 2,900 clients across 66 countries. We had 19 offices in 15 countries to help serve our diverse client base, with approximately 53% of our revenue from clients in the Americas, 33% in Europe, the Middle East and Africa (“EMEA”), 8% in Japan and 6% in Asia-Pacific (not including Japan), based on fiscal year 2007 revenues.

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of users for an annual fee paid upfront. The substantial majority of our revenues comes from these annual, recurring subscriptions. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a rapidly growing source of our revenues comes from clients who use our indices as the basis for index-linked investment products such as ETFs. These clients commonly pay us a license fee based on the investment product’s assets. We also generate a limited amount of our revenues from certain exchanges that use our indices as the basis for futures and options contracts and pay us a license fee based on their volume of trades.

History and Development of Our Company

MSCI Inc. was formed as a Delaware corporation in 1998. Our two shareholders were Morgan Stanley (“Morgan Stanley”) and Capital Group International, Inc. (“Capital Group International”). On December 1, 2004, we acquired Barra, Inc. On November 20, 2007, we completed an initial public offering of 16.1 million shares of our class A common stock, 2.1 million of which were purchased pursuant to the underwriters’ exercise of their over-allotment option. The net proceeds from the offering were $265.0 million after deducting $20.3 million of underwriting discounts and commissions and $4.5 million of other offering expenses.

We were a pioneer in developing the market for international equity index products and equity portfolio risk analytics tools. MSCI introduced its first equity index products in 1969 and Barra launched its first equity risk analytics products in 1975. Over the course of more than 30 years, our research organization has accumulated an in-depth understanding of the investment process worldwide. Based on this wealth of knowledge, we have created and continue to develop, enhance and refine sophisticated index construction methodologies and risk models to meet the growing, complex and diverse needs of our clients’ investment processes. Our models and methodologies are the intellectual foundation of our business and include the innovative algorithms, formulas and analytical and quantitative techniques that we use, together with market data, to produce our products. Our long history has allowed us to build extensive databases of proprietary index and risk data, as well as to accumulate valuable historical market data, which we believe would be difficult to replicate and which provide us with a substantial competitive advantage.

Our Products and Services

Our primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics. We also have product offerings in the areas of fixed income portfolio analytics, hedge fund indices and risk models, and energy and commodity asset valuation analytics. Our products are generally comprised of proprietary index data, risk data and sophisticated software applications. Our index and risk data are created by applying our models and methodologies to market data. For example, we input closing stock prices and other market data into our index methodologies to calculate our index data, and we input fundamental data and other market data into our risk models to produce our risk forecasts for individual securities and portfolios of securities. Our clients can use our data together with our proprietary software applications, third-party applications or their own applications in their investment processes. Our software applications offer our clients sophisticated portfolio analytics to perform in-depth analysis of their portfolios, using our risk data, the client’s portfolio data and fundamental and market data. Our products are marketed under three leading brands. Our index products are typically branded “MSCI.” Our portfolio analytics products are typically branded “Barra.” Our energy and commodity analytics products are typically branded “FEA.”

Equity Index Products

Our MSCI-branded equity index products are designed to measure returns available to investors across a wide variety of markets ( e.g. , Europe, Japan or emerging markets), size ( e.g ., small capitalization or large capitalization), style ( e.g. , growth or value) and industries ( e.g ., banks or media). As of November 30, 2007, we calculated over 100,000 equity indices daily.

Approximately 2,150 clients worldwide subscribed to our equity index products for use in their investment portfolios and for market performance measurement and analysis in fiscal 2007. In addition to delivering our products directly to our clients, as of November 30, 2007, we also had 49 third-party financial information and analytics software providers who distribute our various equity index products worldwide. The performance of our equity indices is also frequently referenced when selecting investment managers, assigning return benchmarks in mandates, comparing performance and providing market and academic commentary. The performance of certain of our indices is reported on a daily basis in the financial media.

Our primary equity index products are:




MSCI International Equity Indices

The MSCI International Equity Indices are our flagship index products. They are designed to measure returns available to international investors across a variety of public equity markets. As of November 30, 2007, the indices included 56 country indices across developed and emerging markets, as well as various regional composite indices built from the component country indices, including the well-known MSCI EAFE (Europe, Asia-Pacific (not including Japan), and Far East), MSCI World and MSCI Emerging Markets Indices. The MSCI EAFE Index is licensed as the basis of the iShares MSCI EAFE Index Fund, the second largest exchange traded fund in the world with over $50.9 billion of assets as of November 30, 2007. In addition, the International Equity Indices include industry indices, value and growth style indices and large-, mid-, and small-capitalization size segment indices.

The MSCI International Equity Indices are the most widely used international equity indices in the industry. We continue to enhance and expand this successful product offering. Recent examples include the introduction of the MSCI Global Investable Market Indices methodology, the MSCI Global Islamic Indices and the MSCI GCC Countries Indices.




MSCI Domestic Equity Indices

The MSCI Domestic Equity Indices are designed to measure the returns available to domestic investors in the U.S., Japan and China public equity markets. In addition to offering a total market index, each of these domestic country index series includes value and growth style indices, and in the case of the U.S. and Japan, large-, mid-, small- and micro-capitalization size segment indices.




Global Industry Classification Standard (GICS)

The Global Industry Classification Standard was developed and is maintained jointly by us and Standard & Poor’s. We designed this classification system to respond to our clients’ needs for a consistent, accurate and complete framework for classifying companies into industries. The GICS has been widely accepted as an industry analysis framework for investment research, portfolio management and asset allocation. Our equity index products classify constituent securities according to the GICS.

We also offer GICS Direct, a product developed jointly with Standard & Poor’s. GICS Direct is a database of more than 36,000 active companies and 40,000 securities classified by sector, industry group, industry and sub-industry in accordance with the proprietary GICS methodology.

Equity Portfolio Analytics Products

Our Barra-branded equity portfolio analytics products assist investment professionals in analyzing and managing risks and returns for equities at both the asset and portfolio level in major equity markets worldwide. Barra equity risk models identify and analyze the factors that influence equity asset returns and risk. Our most widely used Barra equity products utilize our fundamental multi-factor equity risk model data to help our clients construct, analyze, optimize and manage equity portfolios. Our multi-factor risk models identify common factors that influence stock price movements, such as industry group and style characteristics, based on market and fundamental data. The proprietary risk data available in our products identifies an asset’s or a portfolio’s sensitivities to these common factors. Risk not attributable to the common factors is risk unique to the asset.

Approximately 800 clients worldwide subscribed to our equity portfolio analytics products in fiscal 2007. Asset owners often request Barra risk model measurements for portfolio risk and tracking error when selecting investment managers, prescribing investment restrictions and assigning investment mandates. Our clients can use our equity portfolio analytics by installing our proprietary software applications and equity risk data in their technology platforms, by accessing our software applications and risk data via the Internet, by integrating our equity risk data into their own applications or third-party applications, like FactSet, that have incorporated our equity risk data and analytics into their offerings.

Our primary equity portfolio analytics products are:




The Barra Aegis System

Barra Aegis is our flagship equity risk management and analytics system. It is a sophisticated software application for equity risk management and portfolio analysis that is powered by our proprietary equity risk data. It is deployed by the client as a desktop application. Barra Aegis is an integrated suite of equity investment analytics modules, specifically designed to help clients actively manage their equity risk against their expected returns. It also enables clients to construct optimized portfolios based on client-specified expectations and constraints.

Barra Aegis also provides a factor-based performance attribution module which allows clients to analyze realized returns relative to risk factors by sectors, styles, currencies and regions. Barra Aegis tools also help clients identify returns attributable to stock selection skills. Additionally, using Barra Aegis’ advanced automation tools, clients can back-test their portfolio construction strategies over time.




Equity Models Direct

Our Equity Models Direct product delivers our proprietary risk data to clients for integration into their own software applications. The proprietary risk data in Equity Models Direct is also available via third-party providers. Based on their investment processes, clients select the risk data that best suits their needs. We offer proprietary risk data from the following Barra risk models:

Single Country Equity Risk Models. Our single country equity risk models identify the unique set of factors most able to explain the risk of portfolios in that market. Examples include our USE3 model (i.e., U.S. equity model, version 3) which models risk for U.S. equity assets and portfolios, and our UKE7 model which models risk for United Kingdom equity assets and portfolios. Data from the USE3 equity risk model is our most commonly licensed Barra risk data.

Global Equity Model (“GEM”). Our global equity risk model utilizes factors that best explain risks associated with multiple-country equity investing.

Barra Integrated Model (“BIM”). Our integrated model provides a detailed view of risk across markets, asset classes and currencies. It begins by identifying the factors that affect the returns of equity and fixed income securities and currencies in many countries around the world. These factors are then combined into a single global model that can forecast the risk of a multi-asset class, global portfolio.

Short-Horizon Equity Models. Our short horizon equity models, designed to forecast risk over a period of one to six months, provide portfolio managers and analysts with more responsive risk forecasts. By using daily data and placing greater emphasis on recent events, the short-horizon models adapt more quickly to changing market conditions and emerging trends.

Multi-Asset Class Portfolio Analytics Products

Our multi-asset class portfolio analytics products offer a consistent risk assessment framework for managing and monitoring investments in a variety of asset classes across an organization. The products are based on proprietary fundamental multi-factor risk models, value-at-risk methodologies and asset valuation models. They enable clients to identify, monitor, report and manage potential market risks from equities, fixed income, derivatives contracts and alternative investments, and to analyze portfolios and systematically analyze risk and return across multiple asset classes. Using these tools, clients can identify the drivers of market risk across their investments, produce daily risk reports, run pre-trade analysis and optimizations, evaluate and monitor multiple asset managers and investment teams and access correlations across a group of selected portfolios.

We have two major products in this area, which differ mainly in how they are delivered to clients and in certain functionality:




The BarraOne System . Clients access BarraOne via the Internet, using their desktop browsers. This product includes modules for risk allocation and risk budgeting, Brinson-Fachler performance attribution, and historical “as-of” analysis of portfolios.




The Barra TotalRisk System . Clients install TotalRisk on their own information technology infrastructure. This product includes simulation modules that enable clients to perform historical and Monte Carlo value-at-risk calculations.

Currently, we are actively seeking to license subscriptions only to BarraOne and related risk data for multiple asset classes. Once most of the features and functionality of Barra TotalRisk have been added to BarraOne, we plan to decommission Barra TotalRisk. We are currently offering our Barra TotalRisk clients the opportunity to transition to BarraOne.

Other Products

Our other products consist of fixed income portfolio analytics products to facilitate the investment processes of fixed income investors; hedge fund indices and risk models for use by investors in hedge funds; and energy and commodity valuation asset analytics for investors, traders and hedgers in these asset classes.




The Barra Cosmos System for Fixed Income Portfolio Analytics

Barra Cosmos enables global fixed income portfolio managers to manage risk and optimize return in a multi-currency, global bond portfolio. This adaptable product integrates specific bond, derivative and currency strategies to reflect each user’s investment style, while monitoring the overall risk exposure of the portfolio. Barra Cosmos is deployed by the client as a desktop application.




Hedge Fund Indices

Our hedge fund indices are designed to provide a broad representation of the hedge fund universe, and offer a consistent and granular classification of hedge funds into strategies. These indices contain over 3,300 funds and we regularly seek to include additional funds. We also calculate investable hedge fund indices that aim to reflect the overall structure of the hedge fund universe or relevant segments of that universe, but which consist solely of funds available on an identified third-party hedge fund platform. These hedge funds have agreed with the platform provider to accept investments from, and to provide liquidity to, investment vehicles such as tracker funds that are linked to the performance of our investable hedge fund indices. In total we calculate over 190 hedge fund indices.




Hedge Fund Risk Model

Our hedge fund risk model identifies the major factors driving the returns and risks of investments in hedge funds. It provides investors in hedge funds, such as managers of funds of hedge funds, with risk forecasts and profiles of their exposures to the major sources of risk. Given the lack of transparency among hedge funds, the model utilizes historical returns rather than position level information. This model is available in our BarraOne and Barra TotalRisk software applications.




Energy and Commodity Asset Valuation Analytics Products

Our energy and commodity valuation products are software applications that offer a variety of quantitative analytics tools for valuing, modeling and hedging physical assets and derivatives across a number of market segments including energy and commodity assets. These software applications are not provided with any market data or proprietary index or risk data. These products are typically branded “FEA” and include products such as @Energy, VaRworks and StructureTool.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a leading provider of investment decision support tools to investment institutions worldwide. We produce indices and risk and return portfolio analytics for use in managing investment portfolios. Our products are used by institutions investing in or trading equity, fixed income and multi-asset class instruments and portfolios around the world. Our flagship products are our international equity indices marketed under the MSCI brand and our equity portfolio analytics marketed under the Barra brand. Our products are used in many areas of the investment process, including for portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research.

Our clients include asset owners such as pension funds, endowments, foundations, central banks and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, ETFs, hedge funds and private wealth; and financial intermediaries such as broker-dealers, exchanges, custodians and investment consultants. We have a client base of over 2,900 clients across 66 countries. As of November 30, 2007, we had 19 offices in 15 countries to help serve our diverse client base, with approximately 53% of our clients in the Americas, 33% in EMEA, 8% in Japan and 6% in Asia-Pacific (not including Japan), based on fiscal year 2007 revenues.

We sell our products through a common sales force, produce them on common data and systems platforms and develop them in our global research and product management organizations. In evaluating our results, we focus on revenues and revenue growth by product category and operating margins encompassing the entire cost structure supporting all our operations. Our current financial focus is on accelerating our revenue growth to generate cash flow to expand our market position and capitalize on the many growth opportunities before us. Our revenue growth strategy includes: (a) expanding and deepening our relationships with the large and increasing number of investment institutions worldwide; (b) developing new and enhancing existing equity product offerings, as well as further developing and growing our investment tools for multi-asset class and fixed income investment institutions; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings. See “Item 1.—Business—Growth Strategy.”

To maintain and accelerate our revenue and operating income growth, we will continue to invest in and expand our operating functions and infrastructure, including new sales and client support staff and facilities in locations around the world; additional staff and supporting technology for our research and our data management and production functions; and additional personnel and supporting technology in our general and administrative functions, particularly finance and human resources personnel required to operate as a stand-alone public company. At the same time, managing and controlling our operating expenses is very important to us and a distinct part of our culture. Over time, our goal is to keep the rate of growth of our operating expenses below the rate of growth of our revenues allowing us to expand our operating margins. However, at times, because of significant market opportunities, it may be more important to us to invest in our business in order to support increased efforts to attract new clients and to develop new product offerings, rather than emphasize short-term operating margin expansion. Furthermore, in some periods our operating expense growth may exceed our operating revenue growth due to the variability of revenues from licensing our equity indices as the basis of ETFs.

We experienced growth in both revenues and expenses during fiscal years ended November 30, 2007, 2006 and 2005. Strong revenue growth continued in equity index products during all three periods. Acceleration of revenue growth in equity portfolio analytics products during fiscal 2007 resulted in part from investments made during 2006 to enhance and add features to our Barra Aegis and Equity Models Direct product offerings. Investments made in BarraOne in 2006 contributed to growth in revenues in our multi-asset class portfolio analytics products from additional subscriptions during fiscal 2007.

Our net income disclosed in this Annual Report on Form 10-K for fiscal year 2007, which is $81.1 million ($0.96 per diluted share), is lower than the net income we disclosed in our earnings release dated January 10, 2008, which was $87.1 million ($1.03 per diluted share). This reduction in net income is due to an increased income tax provision that is composed primarily of two parts. The majority reflects increased taxes for the period 1999 through 2007 as a result of a recent settlement entered into by Morgan Stanley with New York State and New York City tax authorities. As it relates to us, the settlement requires Morgan Stanley to include us in its combined New York State and City tax returns for the period 1999 through 2007. When filing as a separate taxpayer, our New York State and New York City income taxes were lower than when calculated as part of Morgan Stanley’s combined state and local income tax return over the applicable period. Consequently, we recorded an adjustment of $3.7 million for tax and interest (net of federal tax benefit) relating to tax years 1999 through 2007 to reflect the additional taxes owed. In future periods, we expect our effective tax rate to be marginally higher due to filing a combined New York State and New York City income tax return with our parent, Morgan Stanley.

The other component of the increased income tax provision is the establishment of additional tax reserves of $1.7 million related to the potential disallowance of certain Research and Experimental tax credits previously allocated to us.

Product enhancements continued throughout 2007 and included the releases of Aegis 4.1, BarraOne 1.9 and the introduction of the MSCI Global Investable Market Indices (“GIMI”) methodology.

The higher operating expenses during fiscal years 2007 and 2006 were primarily due to increased compensation and benefit expenses for existing personnel as well as an increase in compensation and benefit expenses related to staff additions that were made during the third and fourth quarters of fiscal 2006.

Key Financial Metrics and Drivers

Revenues

Our principal sales model is to license annual, recurring subscriptions to our products for use at specified locations by a given number of client users for an annual fee paid upfront. The substantial majority of our revenues come from these annual, recurring subscriptions. These fees are recorded as deferred revenues on our consolidated statement of financial condition and are recognized each month on our income statement as the service is rendered. Over time, as their needs evolve, our clients often add product modules, users and locations to their subscriptions, which results in an increase in our revenues per client. Additionally, a rapidly growing source of our revenues comes from clients who use our indices as the basis for certain index-linked investment products such as ETFs, passive mutual funds and structured products. These clients commonly pay us a license fee based on the investment product’s assets.

We group our revenues into the following four product categories:

Equity Indices

This category includes fees from MSCI equity index data subscriptions, fees based on assets in investment products linked to our equity indices, fees from one-time licenses of our equity index historical data and fees from custom MSCI indices. We also generate a limited amount of revenues based on the trading volume of futures and options contracts linked to our indices.

Clients typically subscribe to equity index data modules for use by a specified number of users at a particular location. Clients may select delivery from us or delivery via a third-party vendor. We are able to grow our revenues for data subscriptions by expanding the number of client users and their locations and the number of third-party vendors the client uses for delivery of our data modules. The increasing scope and complexity of a client’s data requirements beyond standard data modules, such as requests for historical data or customized indices, also provide opportunities for further revenue growth from an existing client.

Revenues from our index-linked investment product licenses, such as ETFs, increase or decrease as a result of changes in value of the assets in the investment products. These changes in the value of the assets in the investment products can result from equity market price changes and investment inflows and outflows. In most cases, fees for these licenses are paid quarterly in arrears and are calculated by multiplying a negotiated basis point fee times the average daily assets in the investment product for the most recent period.

Equity Portfolio Analytics

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

Barra Aegis has many uses, including portfolio risk analysis and forecasting, optimization and factor-based portfolio performance attribution. A base subscription for use in portfolio analysis typically involves a subscription to Barra Aegis and various risk data modules. A client may add portfolio performance attribution, optimization tools, process automation tools or other features to its Barra Aegis subscription. By licensing the client to receive additional software modules and risk data, or increasing the number of permitted client users or client locations, we can increase our revenues per client further.

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

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

Multi-Asset Class Portfolio Analytics

This category includes revenues from annual, recurring subscriptions to BarraOne and Barra TotalRisk together with our proprietary risk data for multiple asset classes. Currently, we are actively selling subscriptions only to BarraOne and related risk data. Once most of the features and functionality of TotalRisk have been added to BarraOne, we plan to decommission TotalRisk. As this happens, we will offer our TotalRisk clients the opportunity to transition to BarraOne. Therefore, as this transition takes place, revenues from this product group will increasingly come from BarraOne, partially offset by declines in revenues from TotalRisk.

Other Products

This category includes revenues from a number of products, including Barra Cosmos for fixed income analytics, MSCI hedge fund indices, Barra hedge fund risk model, and FEA energy and commodity asset valuation 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 fees for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts assuming all contracts that come up for renewal are renewed and assuming then-current exchange rates. For any license whose fees are linked to an investment product’s assets or trading volume, the Run Rate calculation reflects an annualization of the most recent periodic fee earned under such license. 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 at the time we receive such notice, even if the notice is not effective until a later date.

Because the Run Rate represents potential future fees, 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 one-time sales;




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




fluctuations in asset-based fees, which may result from market movements or from investment inflows into and outflows from investment products linked to our indices;




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




price changes;




timing differences under GAAP between when we receive fees and the realization of the related revenues; and




fluctuations in foreign exchange rates.

Changes in Run Rate between periods reflect increases from new subscriptions, decreases from cancellations, increases or decreases, as the case may be, from the change in the value of assets of investment products linked to MSCI indices, the change in trading volumes of futures and options contracts linked to MSCI indices, price changes and fluctuations in foreign exchange rates.

Retention Rate

Because subscription cancellations decrease our Run Rate and ultimately our operating revenues, another key metric is our “Retention Rate.” Our Retention Rate for any period represents the percentage of the Run Rate as of the beginning of the period that is not cancelled during the period. The Retention Rate is computed on a product-by-product basis. Therefore, if a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation. In addition, we treat any reduction in fees resulting from renegotiated contracts as a cancellation in the calculation to the extent of the reduction. We do not calculate Retention Rates for that portion of our Run Rate attributable to assets in investment products linked to our indices or to trading volumes of futures and options contracts linked to our indices. Retention Rates for a non-annual period are annualized.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Total operating revenues for the three months ended August 31, 2008 increased $18.0 million, or 19.5%, to $110.4 million compared to $92.4 million for the three months ended August 31, 2007. This growth was driven by an increase in our revenues related to index and analytics subscriptions and equity index asset based fees. Revenue growth was 2.0% for the three months ended August 31, 2008 compared to the three months ended May 31, 2008.

Equity Indices: Revenues from equity indices include fees from MSCI equity index subscriptions, fees based on assets in investment products linked to our equity indices, fees from one-time licenses of our equity index historical data, fees from custom MSCI indices and, to a lesser extent, revenues based on the trading volume of futures and options contracts linked to our indices.

Revenues related to Equity Indices increased 24.1% to $62.0 million in third quarter 2008 compared to the same period in 2007 and increased 3.1% compared to second quarter 2008. Revenues from equity index data subscriptions were up 30.7% to $43.7 million in third quarter 2008 reflecting growth in subscriptions across all of our MSCI Global Investable Market Indices products, including developed market, emerging market and small cap indices and sales of historical index data. The revenue growth was led by subscriptions to asset managers.

Revenues attributable to equity index asset based fees increased 10.8% to $18.3 million in third quarter 2008 from $16.5 million in the same period in 2007 led by growth in our ETF asset based fee revenues. The average value of assets in ETFs linked to MSCI equity indices was $178.3 billion for third quarter 2008 compared to $155.7 billion for third quarter 2007. As of August 31, 2008, the value of assets in ETFs linked to MSCI equity indices was $166.3 billion, representing an increase of $9.8 billion, or 6.3%, from $156.5 billion as of August 31, 2007. The year-over-year growth in value of assets in ETFs linked to MSCI equity indices was attributable to net asset inflows of $35.1 billion, offset by net asset depreciation of $25.3 billion. Equity index asset based fee revenues remained unchanged compared to the second quarter.

The largest component of equity index asset based fee revenues, ETF asset based revenues, experienced a slight decline in third quarter 2008 compared to second quarter 2008. The average value of assets in ETFs linked to MSCI equity indices was $178.3 billion for third quarter 2008 compared to $184.4 billion for second quarter 2008. As of August 31, 2008, the value of assets in ETFs linked to MSCI equity indices was $166.3 billion representing a decrease of 16.7%, or $33.3 billion, from $199.6 billion as of May 31, 2008. The $33.3 billion decrease was attributable to an outflow of the net assets as well as net asset depreciation.

The three MSCI indices with the largest amount of ETF assets linked to them as of August 31, 2008 were the MSCI EAFE, Emerging Markets and U.S. Broad Market. The values of assets linked to these indices were $40.4 billion, $31.8 billion and $10.4 billion, respectively.


Equity Portfolio Analytics: Revenues for equity portfolio analytics include annual recurring subscriptions to Barra Aegis and our proprietary risk data, Barra Equity Models Direct products and our proprietary equity risk data incorporated in third-party software application offerings (Barra on Vendors).

Revenues related to Equity Portfolio Analytics products increased 14.3% to $33.7 million in third quarter 2008 compared to the same period in 2007. The year-over-year increase reflects new subscriptions to our proprietary equity risk data accessed directly and bundled with Aegis. Compared to the second quarter 2008, revenues related to equity portfolio analytics remained flat.

Multi-Asset Class Portfolio Analytics : Revenues for multi-asset class portfolio analytics include revenues from recurring subscriptions to BarraOne and Barra TotalRisk and for our proprietary risk data for multiple asset classes. Revenues related to multi-asset class portfolio analytics increased 33.8% to $8.9 million in third quarter 2008 compared to $6.7 million in the same period in 2007 and increased 3.8% compared to the second quarter 2008. BarraOne revenue growth remained strong due to sales to existing clients as well as new client additions led by orders from asset managers and asset owners. The EMEA region was particularly strong reflecting demand for centralized risk reporting tools. We are in the process of decommissioning our client-hosted product, TotalRisk, and are providing clients the opportunity to transition to our web-based BarraOne product.


Other Products: The other products category includes revenues from Barra Cosmos for fixed income analytics, revenues from investment products linked to MSCI investable hedge fund indices and revenues from FEA energy and commodity asset valuation analytics products.

Revenues from the other products category decreased 8.0% to $5.8 million in the third quarter 2008 compared to the same period in 2007. The decline reflects a decrease in revenues of 59.0% to $0.7 million of asset based fees from investment products linked to MSCI investable hedge fund indices due to a decline in the values of assets attributable to market depreciation and investor withdrawals. We anticipate this trend to continue for the near future. The decline in revenues is partially offset by an increase of 3.6% to $1.7 million for fixed income analytics and by a 17.5% increase to $3.4 million for our energy and commodity analytics products.

CONF CALL

Michael Neborak

Please note that earlier this morning we issued a press release describing our results for the third quarter 2008, a copy of that release can be reviewed on the company’s web site at mscibarra.com under investor relations.

This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made, which reflects management’s current estimates, projections, expectations, or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of additional risks and uncertainties that may affect the future results of the company, please see the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ending November 30, 2007 and our quarterly filings and earnings releases for 2008.

Today’s earnings call may also include discussion of certain non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures.

Since we will be referring to run rates frequently in our discussion this morning, let me remind you that our run rate at a given point in time represents the forward-looking seeds for subscription and product licenses that we will record over the next 12 months assuming no cancellations, new sales, or changes in the asset and ETF license to our indices. Please refer to table 2 in our press release for a detailed explanation.

The agenda for today’s call is as follows: first Henry will summarize the third quarter, second I will review third quarter financial results in detail. Following our formal remarks we will take questions.

Henry Fernandez

In our third quarter operating revenues increased almost 20% to a record $110 million and our adjusted EBITDA increased 27% to a record $51 million. We are particularly pleased with our adjusted EBITDA margin over 46% in the quarter despite incurring duplicative expenses to replace services currently provided by Morgan Stanley. This high level of profitability in our company highlights the significant positive operating leverage of our business.

Our record results continue to demonstrate the most have mission critical nature of our products and services in the investment process. Our record results also demonstrate the balance and diversification of our revenue sources worldwide; mainly we have a diverse product line ranging from performance benchmarks, performance, and risk analytics to tools for total portfolio risk management.

We have a diverse client base from loan only asset managers to pension funds, several world funds, broker dealers, hedge funds worldwide. Our clients, over 3,100 of them, are located all over the world from the US and Canada to Europe, the Middle East, Asia and Australia. A lot of these points are to reinforce the fact that we have a very diverse and very balanced business that if one area of our business is not performing as well, the other one is.

While the ongoing turbulence within the financial market has created headwinds for our asset based fees and our equity portfolio analytics products, sales of our equity and data subscription and our multi-asset classed portfolio analytic remains strong; again, demonstrating the balance in revenues in our business.

Our run rate of $430 million in Q3 increased 15% year-over-year, but went flat sequentially due to an 11% decline in our asset-based fees, mostly a changed credit fund fee, offset by a 2.5% increase in our subscription run rate.

On the second quarter call in July we cited several factors that weighed on our run rate. Those factors persisted during the current quarter and had an even pronounced impact on our Q3 run rate. Let us go over those factors again.

First, market conditions: as we all know all too well, the conditions in the financial market through out the world deteriorated in recent months. The impact on our business is evident in our asset-based fees, even the decline in the value of assets in ECS link to our indices. The impact was also felt in our equity portfolio analytics as a result of the closure of a few quantitative funds among both hedge funds and loan only managers.

Secondly, is the thorough [ph] of sales of our proprietary equity rich data either sold directly to customers or bundled with our proprietary software Aegis. Those products, where it affects some sales of those products were, to be fair, ahead of the launch of our new un-enhanced mobile equity risk model GEM2.

Third, reallocation of resources: as we discussed on our second quarter call, we believe new sales and new product development have been hampered by the reallocation of resources in our company towards the separation from Morgan Stanley. Therefore, we believe we have not operated at an optimal capacity and have not maximized the revenue opportunities available to us. For example, nearly 80 of the 96 new hires over the last year are focused on the replacement of Morgan Stanley services. In addition, over 60 existing full-time equivalent employees have been reassigned to work on these replacement efforts. All told, currently nearly 20% of our employees are currently working on the separation from Morgan Stanley. As these people r free up over the next three to six months they will return to focusing solely on growing our business. We therefore expect a positive impact on productivity starting in early 2009.

Let me now explain why we continue to be enthusiastic about our business and we maintain our medium term financial target of revenue growth in the mid-teens on adjusted EBITDA margin in the low 40s, even in this negative climate in the investment world.

First our diverse product offerings and global client base should help to insulate us from any particular segment of the financial market. For example, while the run rate for equity portfolio analytics slowed in Q3 our equity index data subscriptions accelerated and our multi-asset class portfolio had another solid quarter.

On EPS there is not much we can do in the near term to offset the impact from the decline to the values of assets in ETF linked to our indices. However, what we can do is to continue to work with our EPS managers to license indices for new EPS which will gather assets over time and mitigate, somewhat, the decline in assets in existing EPS. We also believe that we are well positioned to benefit from an up turn in the equity markets whenever they occur.

Third, on equity portfolio analytics we believe the recent launches of our second-generation global equity risk model GEM2, and the launch of Aegis 4.2 the analytic software which can be used to access GEM2, they should all contribute to an increase in subscriptions in the coming quarters. The launch of GEM2 data platform would also help accelerate the time to market of our new enhanced models to Europe, Australia, US, and other markets we plan to launch over the next year.

On investment initiative during Q3 we approved the hiring of approximately 100 people in the business, but not related to the replacement of Morgan Stanley services. These new hires, many of them in emerging market sensors, will help us accelerate our sales growth and instill new product introductions, or at a minimum, they will help us mitigate the impact of a slow down in new sales.

As previously discussed, we have been short staffed, especially in sales, in recent quarters and we are now taking very proactive steps to alleviate this resource constraint and try to minimize the many revenue opportunities we see in the market place today, while maintaining our EBITDA margin in the ranges that we have described before.

I will now turn to more details of our performance in pro-categories and in client segments during the quarter. In my remarks, when I discuss top line numbers, I will be referring only to run rate, while Mike will focus on accounting numbers later.

Run rates serves as a general and directional indication of future revenue, however I caution that they are only at snap shot of our business at a given point in time and do not have a corresponding one-to-one relationship with accounting revenues quarter-to-quarter. Please note that the run rate growth rates that I will refer to represent the percentage change from the run rate as of August 31, 2008, compared to the run rate as of August 31, 2007, unless otherwise specified.

In terms of major product categories the run rate and equity indices increased almost 20% year-over-year. Our equity data subscriptions had an excellent quarter. Our run rate grew 23.6% year-over-year and 5% sequentially from May 31, 2008.

We had a strong subscription sales across a broad range of products within our global invest able market index series and growth and usage fees for access to our index data as well. Growth was across all regions and particularly within our largest client segment, the loan only asset managers.

Equity in the asset based fees increased 11% year-over-year, but they decreased 11.6% sequentially due to a decline in the value of assets in ETFs linked to our indices. So in the third quarter nine new ETFs were launched, which brings the total for the first nine months of the year to 37, compared to 29 for all of ’07. Our pipeline of new ETFs remains full, although market conditions may impact the actual launch date in each particular ETF.

The run rate for equity portfolio analytics increased 10.5% year-over-year, but went flat sequentially. Excluding the negative impact of foreign currency translation during the quarter the run rate for equity portfolio analytics increased slightly to 0.7%. The run rate for Aegis within equity portfolio analytics declined 2.3% from Q2. Excluding the negative impact of foreign currency translation, the decline was a bit less at 1%. The run rate for equity risk data sold directly to customers increased 4.6%.

The closing of our BarraOne at some of our hedge fund clients and loan only clients during the quarter weigh on equity portfolio analytics results. As I said before, on the positive side we may see a gradual pick up in new sales in equity portfolio analytics in this next few quarters as a result of the launch of GEM2 an Aegis 4.2 last week. As previously discussed, new subscriptions in recent quarters have been negatively impacted by the deferral of purchases by our clients ahead of the launch of GEM2 and Aegis 4.2.

The run rate for multi-asset class analytics increased 22% year-over-year and 2.5% sequentially. Excluding the impact of foreign currency translation the sequential growth rate in multi-asset class analytics was a much higher 5.5%.

The run rate for BarraOne, the main component of multi-asset class analytics increased 39.4% year-over-year and 6.6% sequentially during the quarter. Again, excluding the negative impact from foreign currency translation the sequential growth rate of BarraOne during the quarter was a much higher 9.3%. About half of the sales of BarraOne are in currencies other than the US dollar.

We continue to add new BarraOne clients rapidly during the quarter including a flagship sale to the California State Teachers Retirement System.

In terms of our major client segment as in prior quarters we continued to grow our run rate by up selling to existing clients, adding new clients, and implementing some price increases even in this difficult environment. This quarter we added 65 net new clients for a total now, worldwide, of almost 3,100 clients.

Excluding asset based fees approximately 20% of our gross sales during the quarter came from new clients. This was a decrease from the 23% we experienced in the second quarter and a decrease also from ’07. We have seen a continued gradual decline in our gross sales to new clients as the shortage of staff in our sales force has forced them to constant trade on existing clients and therefore we intend to see an increase in this over the next few quarters. We intend to reverse this trend in the coming quarters as we add more staff to our sales and product management organization.

We saw growth in our run rate for all of our major client categories. Growth rates year-over-year were as follows: 11% to $288 million for asset managers; 28% to $45 million for broker/dealers; 27% to $22 million for hedge fund; 17% to $20 million for asset owners, mostly pension funds and several world funds; and 22% to $54 million for all other client categories.

In terms of the outlook, as I said at the beginning, we remain cautiously optimistic that our business model will hold up well despite a tremendous turmoil in financial markets worldwide. We are still comfortable with our medium term financial targets of revenue growth in the mid- teens and adjusted EBITDA in the low 40s. As previously noted, our level of profitability may fall within a range of 40% to 50% in any given quarter depending on the rate and the mix of revenue growth at a base of investment spending and the duplicative expenses that we’re incurring related to the replacement of services currently provided by Morgan Stanley.

In conclusion and in summary, while the turmoil in the financial market creates headwinds for us, we believe the company is very well positioned for the future and the investments we’re currently making to help us to offset and mitigate the impact on our business from the current financial turmoil.

Michael Neborak

I am going to discuss, in more detail, our financial performance. Please note that unless otherwise specified the fed change figures represents the comparison between Q3 2008 and Q3 2007.

First our operating revenues: For the third quarter 2008 operating revenues increased 19.5% to $110.4 million. Assuming exchange rates are unchanged from Q3 2007, Q3 2008 operating revenues increased 17.9%. The performance was led by a 21.4% increase in our subscription revenues. Growth in asset based fee revenues was 10.8%.

Now I will comment on some specifics around revenue performance by products.

Revenues from equity indices, our largest product category, this is approximately 56% of our total revenues, increased 24.1% to $62 million.

Within equity indices, revenues from equity index data subscription, this is about 4% of our revenue base, were up 30.7% to $43.7 million, reflecting growth in subscriptions across a broad range of products within our global invest able market index series.

Revenues attributable to equity index asset based fee products, this is about 17% of our total revenues, increased 10.8% to $18.3 million in the third quarter of 2008. In the third quarter 2008 approximately 78% of the revenues included in this product category relate to exchange traded funds. The other 22% includes fees on institutional index funds, transaction volume based fees for futures and options traded on certain MSCI indices and other of structured products.

Compared to the second quarter of 2008 equity index asset based fee revenue was flat at $18.3 million, reflecting a 1% decline in our ETF asset based fee revenues, which was offset by an increase in fees from other products in this category. The average value of assets in ETF linked MSCI equity indices was $178.3 billion for the third quarter 2008 compared to $184.4 billion for the second quarter of 2008.

At August 31, 2008 the value of assets in ETF linked MSCI equity indices was $166.3 billion. US lifted ETF accounted for 85% of our AUM balance, a difference of between 185% was ETFs primarily listed in Europe.

As disclosed in the earnings release we did experience a $2.1 billion decrease in AUMs in the quarter attributable to asset out flows. While this is the first time we experienced a net asset out flow in a quarter, we believe the $2.1 billion figure is quite modest in the context of the equity market turmoil we experienced recently. The out flows were most significant in EFA and emerging market ETFs.

We believe we remain well positioned within the global ETF industry. Our market share remains in the mid-20s. We currently have 156 ETFs including 32 with AUM balances greater than $1 billion licensed to our indices.

Our second largest product revenue category is equity portfolio analytics; this is about 31% total revenues. Revenues for this category increased 14.3% to $33.7 million. The year-over-year increase reflects new subscriptions to our proprietary equity risk data accessed directly and followed with Aegis.

Multi asset-backed portfolio analytics had another strong quarter. Revenues increased 33.8% to $8.9 million. The year-over-year increase is largely attributable to strong new subscriptions to BarraOne.

Before I talk about expenses I am going to talk a little bit more about foreign currency and how that impacted our quarter number 3 results.

First is our run rate: When comparing our run rate on August 31, 2008 to our run rate on May 31, 2008 currency had a negative $3.3 million impact due to the depreciation of the tower during the quarter. Please note that approximately $62 million or 14% of our run rate on August 31 was nominated in non-US dollars.

In terms of accounting revenues, when comparing our quarter #3 2008 accounting revenues to the same quarter in 2007, currency was a positive $1.4 million dollars due primarily to the depreciation of the dollar versus the euro, between the third quarter 2007 and the end of the third quarter 2008. Approximately $15 million or 14\% of our Q3 revenues are denominated in non-US dollars.

On the expense side, when you compare our quarter #3 2008 expenses to Q3 2007, currency increased our expected $151.4 million primarily due to the depreciation of the dollar versus the Swiss frank, between the third quarter of 2007 and the third quarter of 2008. Approximately $20 million or 27% of our third quarter 2008 expenses were denominated in non-US dollars. And, on the balance sheet, the re-measurement of our balance sheet at the end of the third quarter 2008 versus the second quarter of 2008 resulted in a foreign currency loss of $3 million due to the strengthening of the US dollar which is recognized in the non-operating other expense line.

Operating expenses increased 23.2% to $72.9 million. This increase is primarily due to two factors: Founders grant expenses and set up in duplicate costs related to the replacement of services provided by Morgan Stanley; if we exclude the founders grant expense of $5.8 million, operating expenses increased by 14.2% to $67.5 million. If we take this one step further and strip out transition expenses that we incurred in the quarter equal to $7.8 million, now again this relates to the replacement of Morgan Stanley services, and we also strip out the Morgan Stanley allocation in the quarter of $3.9 million and we strip $7 million out in the third quarter of 2007, expenses were up 7% compared to the third quarter of 2007.

Our head count was 723 people at the end of the quarter representing an increase of 96 or 15.15 from the end of the third quarter of 2007.

On August 31 2008 approximately 26% of our employees were located in emerging market centers, which is up from 185 at the beginning of the fiscal year.

I will talk a little bit now about our capital structure. Because we achieved certain leverage thresholds defined in our credit agreement, the LIBOR spreads on both our term loan A and term loan B debt stepped down another 25 basis points during the third quarter. The LIBOR spread on our term A loan is now at 200 basis points, down from 225 basis points and the LIBOR spread on our term loan B decreased to 250 basis points from 275 basis points.

For the quarter ended August 31, 2008 our effective all in interest rate, including our interest rates locked, was approximately 5.16%. For the fourth quarter we expect our effective all in interest rate to be between 5.1% and 5.15%.

Please note that the net income EPS for the third quarter in 2008 are not comparable to the third quarter 2007, primarily because of founders grant expense and changes in our capital structure as well as our initial public offering.

Net income in the third quarter 2008 declined 11.7% to $18.9 million from the third quarter of 2007. The decline primarily reflects founders grant expense and higher interest expense offset in part by the increase in adjusted EBITDA.

On a diluted EPS basis for the third quarter of 2008 that figure was $0.19, a decline of 24% from the third quarter of 2007, reflecting a higher number of shares outstanding.

Adjusted EBITDA increased 26.9% to $51.3 million for the third quarter of 2008. I refer you to Table 9 in our press release for the reconciliation of adjusted EBITDA to net income, an adjusted EBITDA margin expanded to 46.4% in the third quarter of 2008 from 43.7% in the third quarter of 2007. The increase reflects the positive operating leverage in the business.

Our cash earnings for the third quarter 2008 were $26.7 million or $0.26 on a diluted per share basis compared to $25.7 million or $0.31 per diluted share in the third quarter of 2007. The decline in cash EPS reflects a lack of comparability due to the increase in the number of shares outstanding resulting from our IPO and the increase in interest expense resulting from changes in our capital structure during 2007. We calculate cash earnings of $26.7 million by taking our net income for the quarter, which is $18.9 million and adding back the after tax impact of the founders grant and that after tax figure is $3.3 million and then adding back the after tax impact of amortization of intangibles, that figure is $4.5 million.

We have already touched on a number of our operating metrics, the details of which can be seen in Table 2 of the press release. I did want to however, provide a little bit more color around our retention rate.

Our aggregate retention rate was unchanged at 92% for the third quarter 2008 compared to the third quarter of 2007, however our full retention rate, which eliminates product slots, declined to 94% from 95% in the third quarter of 2007. This decline was largely attributable to lower retention in Barra Aegis and in the total risk component of multi-asset class.

I am going to spend a little bit of time now talking about the transition away from Morgan Stanley services.

In the third quarter of 2008 the allocation of these costs from Morgan Stanley declined by $1.9 million to $3.9 million from the $5.8 million figure that we incurred in quarter 2, 2008 and this was principally because we took over certain administrative HR and finance functions and we continue to do that. As I have said before, our goal is to be self sufficient for a vast majority of all the services that we received from Morgan Stanley, by the end of this fiscal year, and with the profits fully completed by May 2009.

We expect the allocations in the fourth quarter to be largely from IT as the allocations were HR, finance, and other corporate functions run off during the fourth quarter. As such we expect the Morgan Stanley allocations to decline by approximately $0.5 million in the fourth quarter to about $3.4 million. In fiscal 2009 we expect the Morgan Stanley allocation to be approximately $6 million, largely reflecting IT expenses. Again, we expect Morgan Stanley charges to peak after May 2009.

For the full year fiscal 2008 we expect the Morgan Stanley allocation to total approximately $19 million. That compares to $26.4 million of allocation expense in fiscal 2007. In the third quarter 2008 the initial set up costs as well as duplicate costs we incurred related to establishing the infrastructure to replace these Morgan Stanley services totaled $7.8 million, including approximately $2.3 million of non-recurring expenses. For the full year 2008 these duplicate transition expenses should total approximately $21 to $22 million.

In summary, if you take the total cost of the Morgan Stanley allocation and the duplication transition expenses that we expect for all of 2008, the total of those two items should be approximately $40 to $42 million. The equivalent expense for 2007 was $28 million.

Let me touch a little bit on capital expenditures. Capital expenditures for the third quarter totaled $13.5 million, including approximately $4 million paid to Morgan Stanley for assets purchased such as leasehold improvement to our offices, PCs and other communication equipment and office furniture. Excluding the payment to Morgan Stanley, capital expenditures year-to-date were $15 million.

We will now take your questions.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1348 Views