MSCI profit falls as subscription renewals decline

Tue Nov 6, 2012 1:46pm EST

(Reuters) - Market index provider MSCI Inc's (MSCI.N) third-quarter profit fell more than expected as fewer customers renewed subscriptions and the company both hired more staff and paid more in severance.

MSCI, which lost a big chunk of its business last month with the defection of some Vanguard Group index funds, said new recurring subscription sales fell 14 percent to $27.1 million.

"The company's business is challenged in the near term because they mainly sell to asset managers and asset owners who are facing a challenging environment and market," said Christopher Shutler, an analyst with William Blair & Co.

Shares of MSCI, which has a market value of about $3.32 billion, were down about 6 percent at $25.59 in early afternoon trading on the New York Stock Exchange.

Overall subscription revenue rose 8 percent to $197.6 million as the company sold more index and environmental, social and governance (ESG) products.

Equity index asset-based fees fell 3 percent to $34 million.

"I am especially pleased that our index and ESG run rate grew by 6 percent year-over-year, even after taking into account the impact of the Vanguard announcement," Chief Executive Henry Fernandez said in a statement.

Vanguard Group, the largest U.S. mutual fund manager, said last month it would switch 22 of its biggest index funds away from benchmarks provided by MSCI to cut costs.

MSCI, which also offers risk and investment analysis, has said the switch is expected to be phased-in over several months from January. The affected funds generate about $24 million in annual revenue and operating income.

Assets under management in ETFs linked to MSCI's indexes increased 25 percent to $363.7 billion, at the end of the third quarter, from a year earlier.

MSCI has grown rapidly, thanks to licensing fees paid by ETF fund managers such as Vanguard that pay it to track indexes at rates calculated as a small percentage of each fund's assets.

The company's workforce increased by 6 percent to 2,416 at the end of the quarter compared with a year earlier, MSCI said in its quarterly results statement on Tuesday.

Headcount and severance costs reflect MSCI's shift to a lower-cost model that involves moving more jobs offshore, said David Togut, an analyst at Evercore Partners.

Net income fell to $48.3 million, or 39 cents per share, in the third quarter, from $50 million, or 40 cents per share, a year earlier.

On an adjusted basis, the company earned 49 cents per share. Analysts on average had expected earnings of 51 cents per share, according to Thomson Reuters I/B/E/S.

Operating revenue rose 5 percent to $235.4 million, missing analysts' average forecast of $240 million.

MSCI said operating expenses increased 6 percent to $152 million on higher compensation costs and a lease exit charge.

(Reporting by Tanya Agrawal in Bangalore; Editing by Supriya Kurane and Ted Kerr)