July 2, 2009 / 7:02 PM / 9 years ago

UPDATE 2-MSCI Q2 profit up; sees pressure on client retention

* Q2 profit rises but retention rate slips

* Spending cuts hit asset manager, broker-dealer categories

* Plans to hire about 100 people, mostly in emerging markets (Adds details from conference call, background, updates share price)

July 2 (Reuters) - MSCI Inc MXB.N, the investment analysis and market index company, posted a 5 percent rise in quarterly profit, helped by higher revenue related to equity indexes and lower expenses, but warned that its client retention rate remains under pressure.

The core retention rate was 89.5 percent for the second quarter compared with 91.9 percent a year earlier, and the company sees the rate staying under pressure in the coming quarters.

Though it added 18 new clients on a gross basis for its equity analytics products in the period, the highest number since the third quarter of 2007, “lower retention rates are more than offsetting the new sales activities”, the company said.

Revenue related to equity portfolio analytics products fell 7 percent to $31.6 million in second quarter.

“The weakness is more evident in the asset manager category where spending cuts have continued and in the broker-dealer category where a number of firms have scaled back their proprietary trading activities,” Chief Executive Henry Fernandez said on a conference call with analysts.

The company said client cancellations totaled about $11 million in the quarter.

MSCI said the frequency of client inquiries and the “tone of client dialogue” improved during the second quarter, but this had not contributed “meaningfully” to additional subscription sales.

MSCI also said it is looking to hire about 100 people, largely in its sales organization and data factory, with about three-fourths of new employees expected in its locations in emerging markets, including Mumbai, Monterrey, Budapest and Hong Kong.

As the hiring will take place over the next several months, it may take a couple of quarters “to realize the full expense impact,” Fernandez said on the conference call.

MSCI said its global market share of equity exchange traded funds (ETFs) grew to 27 percent on June 1, from 23 percent on March 1.

The company, which was spun off from Morgan Stanley (MS.N) in 2007, said it completed its physical separation from the investment bank in May.

For the second quarter ended May 31, MSCI’s net income grew 5.3 percent to $19.6 million, or 19 cents per share.

Operating revenue rose 1 percent to $109.4 million. Revenue related to equity indexes increased 4 percent to $62.5 million.

Operating expenses fell 3 percent to $72.7 million in the quarter.

Analysts on average expected earnings of 24 cents a share, excluding special items, on revenue of $104.9 million, according to Reuters Estimates.

Shares of the New York-based company were up 4 percent at $25.01 in afternoon trade Thursday on the New York Stock Exchange. (Reporting by Brenton Cordeiro in Bangalore; Editing by Deepak Kannan)

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