Earnings Highlights: GAAP results reflect the acquisition of Institutional Shareholder Services (ISS) on January 11, 2007 and the Center for Financial Research and Analysis (CFRA) acquisition on August 1, 2007. Pro forma results for the year ended December 31, 2007 are presented as if ISS and CFRA were acquired on January 1, 2007 (see Tables D and E for a reconciliation of GAAP and Pro Forma financial results).

• Fourth quarter 2008 revenues increased 11.6% to $75.5 million while revenues for the year ended December 31, 2008 increased 23.3% to $296.4 million, and 17.1% on a pro forma basis.
• Fourth quarter 2008 Adjusted EBITDA increased 35.8% to $29.2 million. Adjusted EBITDA for the year ended December 31, 2008 increased 38.9%, and 32.1% on a proforma basis, to $101.1 million, with an Adjusted EBITDA margin of 34.1%.
• GAAP fourth quarter 2008 net loss of $149.1 million, or $2.43 per diluted share and $136.9 million, or $2.28 per diluted share for the full 2008 year due to an impairment charge. Fourth quarter 2008 includes a non-cash pre-tax $160.1 million impairment charge for acquired ISS goodwill and intangible assets due to declines in industry market multiples in the second half of 2008. EPS before the impairment charge was $0.13 per diluted share for fourth quarter 2008 and $0.31 per diluted shared for the full 2008 year.
• Adjusted EPS (before amortization of intangibles, one-time costs, impairment charges and stock-based compensation) for fourth quarter 2008 was $0.20, up from $0.11 in fourth quarter 2007 and $0.65 for the full 2008 year, up from $0.31 in the prior year.

“We continue to deliver strong financial results despite unprecedented conditions in the financial markets.” said Ethan Berman, Chief Executive Officer of RiskMetrics Group. “We achieved annual revenue growth of 17.1% and expanded our EBITDA margin by 380 basis points for the year indicating the significant economies of scale in our operating model. We generated $84.8 million of cash flow from operations in 2008, nearly double 2007.”

Mr. Berman continued, “While we continue to have a strong new sales pipeline, the difficult market conditions are causing a lengthening of our sales cycle and pushing renewal rates below historical trends, leading to a slowing of revenue growth. On the other hand, our investments in technology are allowing us to continue to realize operational efficiencies and deliver greater than expected EBITDA margin improvements.”

All amounts (except share and per share information) are in thousands, unless indicated otherwise.

Selected Financial Information (unaudited)

(1) Represents cost of revenues, research and development, selling and marketing and general and administrative expenses, excluding stock-based compensation and one time charges. Refer to tables I through L for a reconciliation to the comparable GAAP measure.

(2) Represents depreciation and amortization of property and equipment, amortization of intangible assets, one-time charges, loss on disposal of property and equipment, and stock-based compensation. Refer to tables I through L for a reconciliation to the comparable GAAP measure.

(3) Represents non-cash impairment charge for the impairment of goodwill and intangible assets recorded during the three months ended December 31, 2008. Refer to other operating expenses section for further discussion.

(4) Represents net income and EPS before amortization of intangible assets, one-time costs, impairment charges and stock-based compensation. Refer to table D for a reconciliation to the comparable GAAP measure.

(5) Represents net income before interest expense, interest income, income tax expense, depreciation, amortization, non-cash stock based compensation expense, impairment, and extraordinary or non-recurring charges or expenses. Refer to table C for a reconciliation to the comparable GAAP measure.

Fourth Quarter 2008 Results Compared to Fourth Quarter 2007 Results

Fourth Quarter 2008 Revenues

Total GAAP revenues for the fourth quarter of 2008 (“Q4 2008”) were $75.5 million, up 11.6% from $67.6 million in the fourth quarter of 2007 (“Q4 2007”). Q4 2008 consolidated revenues were flat relative to the third quarter of 2008 due to a decline in renewal rates offset by increased new sales.

On a business segment level, Q4 2008 Risk GAAP revenues were $40.5 million, a 21.2% increase over Q4 2007. This was primarily driven by 23.0% growth in RiskManager revenue resulting from strong new sales in the asset management and hedge fund sectors. Americas and EMEA Risk revenue grew by over 26% and 17%, respectively for Q4 2008 compared to Q4 2007.

ISS revenues were $35.0 million in Q4 2008, a 2.3% increase over Q4 2007. On a product level, total Governance Services (mainly Proxy Research and Voting Services) GAAP revenues of $23.6 million for Q4 2008 increased 4.6% from Q4 2007. Financial Research and Analysis (“FR&A”) GAAP revenues of $11.3 million for Q4 2008 decreased 2.3% over Q4 2007 due to increased deferral of Corporate Advisory sales and lower CFRA revenues.

"Despite pressure on renewals rates across both business segments, we are encouraged by the continued new demand for our Risk and Governance products,” said Mr. Berman. “Continued new sales in the asset management and hedge fund sectors have allowed us to achieve 14.3% year over year growth in Annualized Contract Value (ACV).”

Fourth Quarter 2008 Adjusted EBITDA Expenses

Adjusted EBITDA expenses, which exclude depreciation and amortization of property and equipment, amortization of intangible assets, impairment charges, and non-cash stock-based compensation expense, interest, dividend and investment income (expense) and income tax expense, increased 0.4% to $46.3 million for Q4 2008.

Compensation expense, which accounted for 65.1% of total Adjusted EBITDA expenses, decreased by 2.1% to $30.1 million for Q4 2008 compared to Q4 2007. Compensation expenses in Q4 2008 were favorably impacted by a decline in bonus and commission expense as well as decreased foreign compensation costs due to Q4 2008 dollar appreciation compared to the British Pound.

Non-compensation expenses increased to $16.2 million, or 5.3%, for Q4 2008 from Q4 2007, due mainly to increases in foreign currency transaction expense as well as data, telecommunications and hosting costs.

Adjusted EBITDA expenses represented approximately 61.4% of total revenues during Q4 2008, compared with 68.2% in Q4 2007.

Fourth Quarter 2008 Adjusted EBITDA

Consolidated Adjusted EBITDA increased 35.8% to $29.2 million in Q4 2008 from $21.5 million in Q4 2007. EBITDA, including stock based compensation expense of $2.3 million, was $26.9 million in Q4 2008.

The Adjusted EBITDA margin expanded to 38.6% in Q4 2008, compared with 31.8% in Q4 2007 as revenues continued to grow at a higher rate than Adjusted EBITDA expenses.

Consolidated Q4 2008 Adjusted EBITDA increased $4.1 million compared to Q3 2008 and Adjusted EBITDA margins increased 560 basis points compared to Q3 2008. The sequential growth in Adjusted EBITDA resulted primarily from a $4.1 million decline in compensation costs due to lower bonus and commission expense as well as declines in marketing and travel expenses.

On a segment level, the Risk business generated Adjusted EBITDA of $17.5 million, which was a 48.6% increase over Q4 2007. The Q4 2008 Risk Adjusted EBITDA Margin was 43.2% as compared to 35.2% in Q4 2007 as revenues grew by 21.2% and Adjusted EBITDA expenses grew by 6.4%.

ISS generated Adjusted EBITDA of $11.7 million in Q4 2008 which was a 20.3% increase over Q4 2007. The Q4 2008 ISS Adjusted EBITDA Margin was 33.4% as compared to 28.4% in Q4 2007 as revenues grew by 2.3% and Adjusted EBITDA expenses decreased by 4.9%.

Goodwill and Intangible Asset Impairment Expense

In Q4 2008, the Company recorded a $160.1 million non-cash impairment charge to goodwill and intangible assets as a result of the Company’s annual goodwill and intangible asset impairment review. The impairment charge includes a $154.2 million write-down to ISS goodwill primarily as a result of the negative equity market conditions which caused a material decline in industry market multiples in the second half of 2008. In addition, the impairment charge includes a $5.9 million write down of an ISS product trade name as a result of an integration plan which reduced the expected life of that product trade name. The goodwill and intangible asset impairment charge has no impact on cash flows, debt covenants or business operations.

Fourth Quarter 2008 Other Operating Expenses and Income (Loss) from Operations

On a GAAP basis, other operating expenses (stock based compensation, depreciation, amortization, one-time charges and loss on disposal of fixed assets) of $10.4 million remained flat compared to Q4 2007.

As a result of the $160.1 million non-cash impairment charge, income from operations of $11.0 million for Q4 2007 decreased to a loss of $141.3 million in Q4 2008.

Fourth Quarter 2008 Interest, Dividend, Investment and Other Income (Expense), Net

Net interest, dividend, investment and other expense decreased to $4.9 million for Q4 2008 from $9.2 million in Q4 2007. This decrease in expense was primarily due to decreased interest expense and increased interest income as a result of reduced debt borrowings and increased cash balances during 2008.

Fourth Quarter 2008 Net Income (Loss) and EPS

As a result of the $160.1 million non-cash impairment charge in Q4 2008, GAAP net income of $1.2 million for Q4 2007 decreased to a net loss of $149.1 million for Q4 2008. GAAP EPS (diluted) decreased to a loss of $2.43 for Q4 2008 from income of $0.02 in Q4 2007.

Adjusted net income, as defined in Table D, increased to $13.7 million in Q4 2008 from $6.1 million in Q4 2007. Adjusted EPS increased to $0.20 for Q4 2008 from $0.11 in Q4 2007.

Year Ended December 31, 2008 Results Compared to Year Ended December 31, 2007 Results

Year Ended December 31, 2008 Revenues

Total GAAP revenues for the year ended December 31, 2008 were $296.4 million, up 23.3% from $240.3 million for 2007.

On a pro forma basis, revenues increased 17.1% from $253.2 million in 2007. Included in the year ended December 31, 2007 pro forma revenues are $3.3 million of revenues from the 11 day period before the ISS acquisition in January 2007 and $9.5 million of CFRA revenues for the seven months before the CFRA acquisition (refer to Table E).

On a business segment level, Risk GAAP revenues for the year ended December 31, 2008 were $154.6 million, a 27.7% increase over 2007. Results were primarily due to RiskManager^TM revenue growth of 34.4% over the year ago period resulting from strong sales to both the asset management and hedge fund sectors.

ISS GAAP revenues for the year ended December 31, 2008 were $141.8 million, a 19.0% increase from 2007. On a pro forma basis, ISS revenues grew by 7.4% with recurring revenues increasing by 8.4%. Total Governance Services (mainly Proxy Research and Voting Services) revenue of $93.1 million for the year ended December 31, 2008 increased 7.2% from the prior year pro forma period. Financial Research and Analysis (“FR&A”) revenues of $48.7 million for the year ended December 31, 2008 grew by 7.7% over the prior year pro forma period mainly due to an increase in Corporate Services revenues.

Year Ended December 31, 2008 Adjusted EBITDA Expenses

Adjusted EBITDA expenses increased 16.6% to $195.3 million for the year ended December 31, 2008. On a pro forma basis, Adjusted EBITDA expenses increased by 10.5% from $176.6 million for the year ended December 31, 2007.

Compensation expense, which accounted for 67.0% of total Adjusted EBITDA expenses, increased by 13.7% to $130.9 million for the year ended December 31, 2008. On a pro forma basis, compensation expenses increased

source: http://biz.yahoo.com/bw/090219/20090219005203.html?.v=1

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