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Q3 2012 Earnings Call

November 06, 2012 11:00 am ET


Edings Thibault

Robert Qutub - Chief Financial Officer and Principal Accounting Officer

Henry A. Fernandez - Chairman, Chief Executive Officer and President


Georgios Mihalos - Crédit Suisse AG, Research Division

David Togut - Evercore Partners Inc., Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Toni Kaplan - Morgan Stanley, Research Division

Edward Ditmire - Macquarie Research



Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

Now I'd turn the conference over to Edings Thibault, Head of Investor Relations. Please begin.

Edings Thibault

Thank you, Tyrone. Good morning to everyone, and thank you for joining our third quarter 2012 earnings call. Please note that earlier this morning, we issued a press release describing our results for the third quarter 2012. A copy of that release may be viewed on our website at under the Investor Relations tab. You will also find on our website a slide presentation that we have prepared for this call.

This call 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 reflect 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 MSCI's future results, please see the description of risk factors and forward-looking statements on our Form 10-K for our fiscal year ending December 31, 2011, and other SEC filings.

Today's earnings may -- call may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Adjusted EBITDA and adjusted EPS exclude the following: the lease exit charge, restructuring costs and nonrecurring stock-based expense. Adjusted EPS also excludes the amortization of intangibles resulting from acquisitions and debt repayment and refinancing expenses. Please refer to today's earnings release in Pages 16 to 18 of the investor presentation for the required reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures.

We will be referring to run rate frequently in our discussion this morning, so let me remind you that our run rate is an approximation at a given point in time of the forward-looking fees for subscriptions and product licenses that we will record over the next 12 months, assuming no cancellations, new sales, changes in the assets and ETFs license to our indices or changes in foreign currency rates. Please refer to Table 10 in our press release for a detailed explanation.

Bob Qutub will give you a quick overview of our third quarter results, and then Henry Fernandez will add some additional comments. I will now turn the call over to Bob. Bob?

Robert Qutub

Thanks, Edings, and good morning. Before we begin our review of the third quarter results, I want to give you a quick overview of the impact of Hurricane Sandy on our operations. First and foremost, all of our employees in New York and Rockville offices are accounted for, and all of our offices are fully operational.

In fact, we are hosting this call from our New York office here at 7 World Trade Center in lower Manhattan. We owe a big round of thanks for all the emergency workers and those who are working hard to restore services to this area. I also wanted to point out that at no time were our services to our clients interrupted. Our index data was delivered to clients throughout the storm and aftermath, and our risk systems continue to operate, which is a testament to the dedication of our employees and our global platform.

Now to the quarter. Earlier this morning, MSCI reported third quarter 2012 revenues of $235 million, up 5% from third quarter 2011, and adjusted EBITDA of $108 million, up 4% year-over-year. MSCI's 2012 adjusted EPS was flat year-over-year at $0.49 per share. Our revenue growth was led by our Performance and Risk segment, which rose $9 million or 5% on higher index and ESG subscription revenue and risk management analytics revenues. Our governance segment revenues also rose by $1 million or 4%.

In the quarter, subscription revenue growth of 8% was partially offset by a decline in the more volatile non-recurring revenues. The non-recurring revenues, which tend to be more volatile, as I mentioned earlier, fell by $3 million or as a result of lower fees for unlicensed derivatives and non-recurring governance revenues. On a run-rate basis, our subscription revenues grew 6% to $800 million.

Run rate growth was fueled by an 11% increase in index and ESG subscription, 8% growth in governance and 4% growth in risk management analytics. This was partially offset by declines in portfolio management and energy and commodity analytics. The overall operating environment remains difficult, as our clients continue to defer decision-making on new products. This elongation of our sales pipeline weighed on our sales comparisons. However, our retention rate remained at 90%.

Now let us take a wholesome look at the performance of each of our major product lines, starting with our subscription index and ESG products, where revenues grew by 11% and the run rate grew also by 11% to $293 million. Index and ESG subscription sales benefited from the strong sales of ESG products, as well as modest growth in sales of benchmark products. Fast subscription growth was offset in part by a decline in non-recurring sales of unlicensed derivatives. As has been the case all year, sales in the Americas have been stronger than those in Europe. Cancelations also increased, but our overall retention remained at 94%.

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