The Indexing Business Is HOT

January 14, 2008

MSCI reports its fiscal fourth-quarter and 2007 results.
MSCI recently reported "record" results at the end of its first quarter as a publicly traded company, and by any stretch, they were impressive. Indexing, it would seem, can be a pretty lucrative business. The company's adjusted EBITDA more than tripled to $48.7 million in fourth quarter 2007 from $15.5 million in the prior-year quarter; for fiscal 2007, it increased 40.3% to $158.5 million. Operating expenses declined 18% in the quarter.

"In any given quarter, we estimate that our level of profitability may fall within a range of 40% to 50% depending on the rate of revenue growth, particularly by our high-margin exchange-traded fund (ETF) fees, and the pace of investment in important initiatives for continued growth," said MSCI Chairman and CEO Henry A. Fernandez in a statement.

Net income was up 54.6% to $24.2 million year-over-year for the quarter and 21.9% to $87.1 million for fiscal 2007; that works out to diluted earnings per share of $0.28 for the quarter and $1.03 for the year. Operating revenues increased 24.6% to $101.7 million in fourth quarter 2007 and 19.1% to $369.9 million in fiscal year 2007.

Fourth Quarter Revenues

Much of the fourth quarter's growth in operating revenues was driven by increases in subscriptions and equity index asset-based fees. The former was up 18.1%, with 31 clients added in the quarter—for a total of 217 new clients for fiscal 2007, bringing the total to more than 2,900. Meanwhile, operating revenues from fees were up an impressive 64.9% to $18.7 million.

MSCI says much of the revenue growth was the result of growth in ETF assets linked to its indexes, increased business from existing clients in the area of indexes and analytics products, strong growth in clients and subscriptions for its analytics products and continued headway in Europe.

Although fourth-quarter revenues for the company's multi-asset class portfolio analytics were up a strong 73% from the prior year to $7.7 million, the lion's share of MSCI's revenue was, of course, generated by its equity index business. The segment was up 32.5% to $56.0 million, with revenues from index subscriptions, specifically, up 20.7% to $37.3 million. According to MSCI, much of that increase was due to the positive customer response to the MSCI Global Investable Market Indices (GIMI) launched this year and to its small-cap and emerging market series, in particular.

Fiscal 2007 Revenues

Operating revenues for the Equity Indices segment were up about 28% to $200 million, or about 54% of MSCI's total for fiscal 2007. Equity index subscriptions were up 16.4% to more than $137 million, or nearly 70% of the equity index segment's operating revenues. Asset-based index fees represented the remainder, just about 30% of the total, but they grew a strong 61.2% in 2007.

Run rates for asset-based index fees were up 61.5% for the year, according to MSCI's reported results. However, this number includes fees from MSCI's hedge fund indexes as well as its equity indexes. Although the hedge fund indexes achieved run rates of nearly $5 million, that figure was down 28% from the prior year. Asset-based fees from equity indexes alone were up an impressive 75.6% year-over-year to roughly $77 million. Run rates for subscription fees were up 19.4% to about $316 million.

ETFs: A Key Revenue Source

Is anyone surprised by the fact that ETFs are a large part of the equity index segment's revenue? But with MSCI's latest financial release, we have confirmation and some real numbers. As it stands, ETF assets tied to MSCI indexes stood at $191.7 billion as of the end of fiscal 2007—that's a 70.9% rise from the prior year. And $35.2 billion of that—more than one-fifth of the total—was added in the fourth quarter. Of the roughly $80 billion in accumulated assets added in 2007, $57 billion was due to new money coming into the ETFs, while about $23 billion was the result of asset appreciation. In the company conference call, Fernandez said 28 new ETFs based on MSCI indexes had been launched in fiscal 2007 in addition to a number of cross listings.

At the end of fiscal 2007, the top three indexes accounted for well over 50% of the total ETF assets tracking MSCI indexes: MSCI EAFE represented $51.5 billion in assets, the MSCI Emerging Markets Index was tied to $36.4 billion, and the MSCI Japan Index represented $13.1 billion.

Looking Forward: Plans And Products

And of course, MSCI has plans for the future and they don't include scaling back. Fernandez said in the conference call that in 2008, MSCI would continue to focus its efforts on three major client segment initiatives. The company will focus on growing its revenue base from asset managers, especially those in the U.S. and Europe. It will also focus on increasing its penetration into hedge funds, particularly long-short hedge funds. Finally, it will work on increasing its reach among asset owners such as pension funds by increasing sales of its multi-asset class portfolio analytics.

Fernandez said the company had signed some new ETF licenses already in 2008, and was expecting to sign more throughout the year. It also will focus on selling new index subscriptions, in particular for the MSCI GIMI. MSCI is also focused on the recent launch of its frontier indexes and the APEX Asia 50 Index, Fernandez said. Most intriguingly, he added that in 2008, MSCI plans to launch currency indexes as well as short and leveraged equity indexes. Things could get very interesting with the short and leveraged indexes given that S&P just launched the first inverse performance index and has plans to launch an entire family.

The company will also concentrate on further developing and expanding its analytics business and products.

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