Market Overview

MSCI Reports Financial Results for First Quarter 2017

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MSCI Inc. (NYSE:MSCI), a leading provider of portfolio construction and
risk management tools and services for global investors, today announced
results for the three months ended March 31, 2017 ("first quarter 2017").

Financial and Operational Highlights for First Quarter 2017
(Note:
Percentage and other changes refer to first quarter 2016 unless
otherwise noted.)

  • 8.0% increase in operating revenues to $301.2 million, up 8.9% to
    $303.7 million, adjusting for the impact of foreign currency exchange
    rate fluctuations.
  • Strong revenue generation and a 3.0% increase in operating expenses
    (up 4.8% adjusting for the impact of foreign currency exchange rate
    fluctuations), drove a 15.4% increase in operating income, which
    accompanied by the impact of share repurchases and a lower effective
    tax rate, resulted in a 33.3% and 29.4% increase in diluted EPS and
    adjusted EPS, respectively.
  • 13.0% increase in Index revenue driven by a 9.1% increase in
    recurring subscription revenues and growth of 18.1% in asset-based
    fees, on a 28.5% increase in average AUM in ETFs linked to MSCI
    indexes.
  • Record quarter-end AUM of $555.7 billion in ETFs linked to MSCI
    indexes; increase of 26.8% and 15.4% compared to first quarter and
    fourth quarter 2016, respectively.
  • Operating margin increased 280 basis points to 43.4%; adjusted
    EBITDA margin increased 220 basis points to 50.0%.
  • Total Aggregate Retention Rate at 94.7%; Index Aggregate Retention
    Rate at 96.9%.
  • 8.6% increase in total Run Rate to $1,207.1 million; asset-based
    fee Run Rate up 20.8%; subscription Run Rate up 5.9%, up 7.0% on
    organic basis and excluding the impact of foreign currency exchange
    rate fluctuations.
  • In first quarter 2017 and through April 28, 2017, a total of 1.1
    million shares were repurchased at an average price of $82.25 per
    share for a total value of $88.7 million. A total of $0.8 billion
    remains on the outstanding share repurchase authorization.
         
Three Months Ended
Mar. 31,   Mar. 31,   Dec. 31, YoY %
In thousands, except per share data 2017 2016 2016 Change
Operating revenues $ 301,207 $ 278,828 $ 292,812 8.0 %
Operating income $ 130,602 $ 113,141 $ 126,012 15.4 %
Operating margin % 43.4 % 40.6 % 43.0 %
 
Net income $ 72,951 $ 60,367 $ 68,250 20.8 %
 
Diluted EPS $ 0.80 $ 0.60 $ 0.73 33.3 %
Adjusted EPS $ 0.88 $ 0.68 $ 0.81 29.4 %
 
Adjusted EBITDA $ 150,691 $ 133,149 $ 146,957 13.2 %
Adjusted EBITDA margin % 50.0 % 47.8 % 50.2 %
 

"In the first quarter, we continued to make great strides in further
integrating the powerful franchise that we have created and remained
focused on providing our clients with mission critical investment
decision support tools," commented Henry A. Fernandez, Chairman and CEO
of MSCI.

"While we are still in the early stages of this integration within our
client activities, content, and applications and services, our efforts
are beginning to show results, as reflected in the strong financial
performance we reported this quarter across most metrics. We delivered
increases of 33% and 29% in diluted EPS and adjusted EPS, respectively,
driven by an 8% increase in revenues, a 3% increase in operating
expenses, an 8% decrease in our share count driven by repurchases and a
530 basis point reduction in our effective tax rate, reflecting in part,
accounting rule changes," added Mr. Fernandez.

"We believe that further integration of our client activities, content,
and applications and services represent significant opportunities for
growth in the quarters and years ahead," concluded Mr. Fernandez.

First Quarter 2017 Consolidated Results

Revenues: Operating revenues
for first quarter 2017 increased $22.4 million, or 8.0%, to $301.2
million, compared to $278.8 million for the three months ended March 31,
2016 ("first quarter 2016"). The $22.4 million increase in revenues was
driven by a $12.8 million, or 5.7%, increase in recurring subscriptions
(principally as a result of an $8.5 million, or 9.1%, increase in Index
recurring subscriptions), an $8.8 million, or 18.1%, increase in
asset-based fees (driven primarily by higher revenue from ETFs linked to
MSCI indexes), and a $0.8 million, or 16.9%, increase in non-recurring
revenues. Adjusting for the impact of foreign currency exchange rate
fluctuations, operating revenues (excluding the impact on asset-based
fees) would have increased 8.9% in first quarter 2017.

Run Rate: Total
Run Rate at March 31, 2017 grew by $95.1 million, or 8.6%, to $1,207.1
million, compared to March 31, 2016. The $95.1 million increase was
driven by a $53.6 million, or 5.9%, increase in subscription Run Rate to
$966.3 million, and a $41.5 million, or 20.8%, increase in asset-based
fee Run Rate to $240.8 million. Adjusting for the impact of foreign
currency exchange rate fluctuations and the divestiture of MSCI's Real
Estate occupiers business, which closed on August 1, 2016, subscription
Run Rate would have increased 7.0% in first quarter 2017. Recurring
subscriptions and asset-based fees at March 31, 2017 represented 80.0%
and 20.0% of total Run Rate, respectively. Aggregate Retention Rate of
94.7% was down slightly from 95.1% in the first quarter 2016.

Expenses: Total
operating expenses for first quarter 2017 increased $4.9 million, or
3.0%, from first quarter 2016 to $170.6 million, driven by a $2.3
million, or 2.2%, increase in compensation and benefits expenses
(primarily higher wages and salaries) and a $2.5 million, or 6.4%,
increase in non-compensation expenses (higher information technology,
professional fees and marketing costs). From an activities perspective,
higher operating expenses were primarily driven by an increase in cost
of revenues, as well as an increase in selling and marketing, partially
offset by lower general and administrative expenses. Adjusted EBITDA
expenses, defined as operating expenses less depreciation and
amortization, increased $4.8 million, or 3.3%, from first quarter 2016
to $150.5 million. Adjusting for the impact of foreign currency exchange
rate fluctuations, total operating expenses and adjusted EBITDA expenses
for first quarter 2017 would have increased 4.8% and 5.3%, respectively,
compared to first quarter 2016. Operating margin for first quarter 2017
was 43.4%, compared to 40.6% for first quarter 2016.

Headcount: As
of March 31, 2017, there were 2,897 employees, up 5.5% from 2,746 as of
March 31, 2016, and up 1.2% from 2,862 at the end of fourth quarter
2016. As of March 31, 2017, a total of 44% and 56% of employees were
located in developed market and emerging market centers, respectively,
compared to 47% in developed market centers and 53% in emerging market
centers as of March 31, 2016.

Amortization and Depreciation Expenses:
Amortization and depreciation expenses increased $0.1 million, or 0.4%,
for first quarter 2017, compared to the same period of the prior year,
driven by a $0.7 million, or 8.2%, increase in depreciation expense,
partially offset by lower amortization expense which declined $0.6
million, or 5.0%.

Other Expense (Income), Net:
Other expense (income), net increased $6.6 million, or 29.6%,
for first quarter 2017, compared to first quarter 2016. The increase was
driven by higher interest expense resulting from the August 2016 private
offering of $500.0 million aggregate principal amount of 4.75% senior
notes due 2026 (the "4.75% senior notes").

Tax Rate: The
effective tax rate was 28.2% for first quarter 2017, compared to 33.5%
for first quarter 2016. The lower effective tax rate compared to first
quarter 2016 was driven by the positive impact of stock-based
compensation excess tax benefits (the "windfall benefit"), the ongoing
efforts to better align our tax profile with our global operating
footprint and other discrete items. The positive impact of the windfall
benefit totaled $3.1 million in the quarter and reflects a required
accounting change to income tax expense, effective in first quarter 2017
on a prospective basis. Previously, such discrete tax benefits were
recorded directly to the Company's Consolidated Statement of Financial
Condition and did not impact the "provision for income taxes" on the
Company's Consolidated Statement of Income. The impact of this
accounting change will be most significant in the first quarter of each
year when most stock-based compensation awards traditionally vest.

Net Income: Net
income increased 20.8% to $73.0 million, from $60.4 million in first
quarter 2016.

Adjusted EBITDA:
Adjusted EBITDA, defined as net income before provision for income
taxes, other expense (income), net, depreciation and amortization, was
$150.7 million in first quarter 2017, up $17.5 million, or 13.2%, from
first quarter 2016. Adjusted EBITDA margin in first quarter 2017 was
50.0%, compared to 47.8% in first quarter 2016.

Cash Balances & Outstanding Debt:
Total cash and cash equivalents as of March 31, 2017 was $697.0 million,
of which $249.5 million was held outside of the United States. MSCI
seeks to maintain minimum cash balances in the United States of
approximately $125.0 million to $150.0 million for general operating
purposes. Total outstanding debt as of March 31, 2017 was $2,100.0
million, which excludes deferred financing fees of $24.1 million. Net
debt, defined as total outstanding debt less cash and cash equivalents,
was $1,403.0 million at March 31, 2017. The total debt to operating
income ratio (based on trailing twelve months operating income) was
4.2x. The total debt to adjusted EBITDA ratio (based on trailing twelve
months adjusted EBITDA) was 3.6x, which is higher than the stated MSCI
financial policy of maintaining gross leverage within the range of 3.0x
to 3.5x. The increase in gross leverage above the stated range was due
to the August 2016 private offering of the 4.75% senior notes. MSCI's
intention is to return to within the stated range.

Cash Flow & Capex:
Net cash provided by operating activities was $37.0 million in first
quarter 2017, compared to $36.9 million in first quarter 2016 and $138.9
million in fourth quarter 2016. Capex for first quarter 2017 was $9.6
million, compared to $5.5 million in first quarter 2016 and $10.5
million in fourth quarter 2016. Free cash flow was $27.4 million in
first quarter 2017, compared to $31.4 million in first quarter 2016 and
$128.3 million in fourth quarter 2016. The decline in net cash provided
by operating activities and free cash flow, compared to fourth quarter
2016 was driven by higher cash expenses (primarily the impact of the
annual cash incentive paid in the first quarter) and higher scheduled
interest payments, partially offset by lower income tax payments and
higher collections. Both the year-over-year and quarter-over-quarter
comparisons for both net cash provided by operating activities and free
cash flow were impacted by approximately $20 million in customer
collections in fourth quarter 2016 that would normally have been
collected in first quarter 2017.

Share Count & Capital Return:
The weighted average diluted shares outstanding in first quarter 2017
declined 8.4% to 91.6 million, compared to 100.0 million in first
quarter 2016. The lower share count, driven by buybacks under the share
repurchase program, increased diluted and adjusted earnings per share by
$0.07 each, in first quarter 2017, compared to first quarter 2016. In
first quarter 2017 and through April 28, 2017, MSCI repurchased 1.1
million shares at an average price of $82.25 per share for a total value
of $88.7 million. A total of $0.8 billion remains on the outstanding
share repurchase authorization as of April 28, 2017. Total shares
outstanding as of March 31, 2017 was 90.5 million.

On May 2, 2017, the Board of Directors of MSCI declared a cash dividend
of $0.28 per share for second quarter 2017. The second quarter 2017
dividend is payable on May 31, 2017 to shareholders of record as of the
close of trading on May 19, 2017.

Table 1: First Quarter 2017 Results by Segment (unaudited)

                     
Index   Analytics   All Other  
    Adjusted     Adjusted     Adjusted
Operating Adjusted EBITDA Operating Adjusted EBITDA Operating Adjusted EBITDA
In thousands Revenues EBITDA Margin Revenues EBITDA Margin Revenues EBITDA Margin
Q1'17 $ 163,435 $ 115,637 70.8 % $ 112,420 $ 29,536 26.3 % $ 25,352 $ 5,518 21.8 %
Q1'16 $ 144,613 $ 100,049 69.2 % $ 110,263 $ 30,360 27.5 % $ 23,952 $ 2,740 11.4 %
% change

13.0

%

15.6 % 2.0

%

(2.7 %) 5.8 % 101.4 %
 
Q4'16 $ 159,070 $ 113,161 71.1 % $ 114,406 $ 33,344 29.1 % $ 19,336 $ 452 2.3 %
% change   2.7 %     2.2 %         (1.7 %)     (11.4 %)         31.1 %   n/m        
 
n/m: not meaningful.
 

Index Segment:
Operating revenues for first quarter 2017 increased $18.8 million,
or 13.0%, to $163.4 million, compared to $144.6 million for first
quarter 2016. The $18.8 million increase was driven by an $8.8 million,
or 18.1%, increase in asset-based fees, an $8.5 million, or 9.1%,
increase in recurring subscriptions, and a $1.5 million, or 65.2%,
increase in non-recurring revenues. The $8.5 million increase in
recurring subscriptions was driven by strong growth in core products,
growth in newer products, including factor, thematic and custom index
products, as well as higher usage fees. The impact from foreign currency
exchange rate fluctuations on Index revenues (excluding the impact on
asset-based fees) in first quarter 2017 was not significant.

The $8.8 million increase in asset-based fees was driven by several
items, including a $6.8 million, or 20.5%, increase in revenue from ETFs
linked to MSCI indexes, resulting from a 28.5% increase in average AUM,
partially offset by the impact of a change in the product mix as a
result of our differentiated licensing strategy, as well as a $1.7
million, or 12.9%, increase in revenue from non-ETF passive funds. In
addition, revenues from futures and options contracts based on MSCI
indexes grew $0.3 million, or 12.4%, driven by a 22.8% increase in total
trading volumes. The adjusted EBITDA margin for Index was 70.8% for
first quarter 2017, compared to 69.2% for first quarter 2016.

Index Run Rate at March 31, 2017 grew by $80.6 million, or 14.0%, to
$658.6 million, compared to March 31, 2016. The $80.6 million increase
was driven by a $41.5 million, or 20.8%, increase in asset-based fee Run
Rate, and a $39.1 million, or 10.3%, increase in subscription Run Rate.
The 10.3% increase in Index subscription Run Rate was driven by an
increase in core products, growth in newer products, including factor,
thematic and custom index products, and higher usage fees. There was a
negligible impact from foreign currency exchange rate fluctuations on
Index recurring subscription Run Rate in first quarter 2017.

Analytics Segment:
Operating revenues for first quarter 2017 increased $2.2 million, or
2.0%, to $112.4 million, compared to $110.3 million in first quarter
2016. The increase was primarily driven by higher revenues from equity
models, which was the result of the increasing use of factors by clients
to explain performance. Adjusting for the impact of foreign currency
exchange rate fluctuations, Analytics operating revenues would have
increased 3.3%. The adjusted EBITDA margin for Analytics was 26.3% for
first quarter 2017, compared to 27.5% for first quarter 2016.

Analytics Run Rate at March 31, 2017 grew by $10.2 million, or 2.3%, to
$457.2 million, compared to March 31, 2016, primarily driven by growth
in sales of equity models. Adjusting for the impact of foreign currency
exchange rate fluctuations, Analytics Run Rate at March 31, 2017 would
have increased 3.1% compared to March 31, 2016.

All Other Segment:
Operating revenues for first quarter 2017 increased $1.4 million, or
5.8%, to $25.4 million, compared to $24.0 million in first quarter 2016.
The increase in All Other revenues compared to the prior year quarter
was driven by a $1.8 million, or 17.0%, increase in ESG revenues to
$12.6 million, partially offset by a $0.4 million, or 3.2%, decrease in
Real Estate revenues to $12.8 million. The increase in ESG revenues was
driven by higher ESG Ratings product revenues and the decrease in Real
Estate revenues was driven by the inclusion of the Real Estate occupiers
business in the prior period and the negative impact of foreign currency
exchange rate fluctuations which more than offset an increase in Real
Estate Market Information product revenues. Adjusting for the impact of
foreign currency exchange rate fluctuations and the divestiture of the
Real Estate occupiers business, first quarter 2017 Real Estate revenues
would have increased 7.6% and All Other operating revenues would have
increased 11.9%. The adjusted EBITDA margin for All Other was 21.8% for
first quarter 2017, compared to 11.4% in first quarter 2016. The
significant increase in All Other adjusted EBITDA margin was driven by
higher ESG revenue and lower Real Estate costs as a result of the
ongoing reorganization of the Real Estate product line.

All Other Run Rate at March 31, 2017 grew by $4.2 million, or 4.9%, to
$91.2 million, compared to March 31, 2016. The $4.2 million increase was
primarily driven by an $8.6 million, or 20.1%, increase in ESG Run Rate
to $51.6 million, partially offset by a $4.4 million, or 9.9%, decrease
in Real Estate Run Rate to $39.7 million. The increase in ESG Run Rate
was primarily driven by higher sales of the ESG Ratings product.
Adjusting for the impact of foreign currency exchange rate fluctuations
and the divestiture of the Real Estate occupiers business, Real Estate
and All Other Run Rate at March 31, 2017 would have increased 2.8% and
12.8%, respectively, compared to March 31, 2016.

Full-Year 2017 Guidance

MSCI's guidance for full-year 2017 remains as follows:

  • Total operating expenses are expected to be in the range of $690
    million to $705 million and adjusted EBITDA expenses are expected to
    be in the range of $605 million to $620 million.
  • Interest expense, including the amortization of financing fees, is
    expected to be approximately $116 million, assuming no additional
    financings.
  • Capex is expected to be in the range of $40 million to $50 million.
  • Net cash provided by operating activities and free cash flow is
    expected to be in the range of $360 million to $410 million and $310
    million to $370 million, respectively.
  • The effective tax rate is expected to be in the range of 31.5% to
    32.5%, inclusive of the accounting change related to the windfall
    benefit described above.

Conference Call Information

MSCI's senior management will review first quarter 2017 results on
Thursday, May 4, 2017 at 11:00 AM Eastern Time. To listen to the live
event, visit the events and presentations section of MSCI's investor
relations homepage, http://ir.msci.com/events.cfm,
or dial 1-877-312-9206 within the United States. International callers
dial 1-408-774-4001. This earnings release and the related investor
presentation used during the conference call will be made available on
MSCI's investor relations homepage.

An audio recording of the conference call will be available on our
investor relations website, http://ir.msci.com/events.cfm,
beginning approximately two hours after the conclusion of the live
event. Through May 6, 2017, the recording will also be available by
dialing 1-800-585-8367 passcode: 99719972 within the United States or
1-404-537-3406 passcode: 99719972 for international callers. A replay of
the conference call will be archived in the events and presentations
section of MSCI's investor relations website for 12 months after the
call.

-Ends-

About MSCI

For more than 45 years, MSCI's research-based indexes and analytics have
helped the world's leading investors build and manage better portfolios.
Clients rely on our offerings for deeper insights into the drivers of
performance and risk in their portfolios, broad asset class coverage and
innovative research.

Our line of products and services includes indexes, analytical models,
data, real estate benchmarks and ESG research.

MSCI serves 97 of the top 100 largest money managers, according to the
most recent P&I ranking.

For more information, visit us at www.msci.com.
MSCI#IR

Forward-Looking Statements

This earnings release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
including without limitation, our full-year 2017 guidance. These
forward-looking statements relate to future events or to future
financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or
implied by these statements. In some cases, you can identify
forward-looking statements by the use of words such as "may," "could,"
"expect," "intend," "plan," "seek," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," or the negative of these terms or
other comparable terminology. You should not place undue reliance on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors that are, in some cases, beyond our
control and that could materially affect our actual results, levels of
activity, performance or achievements.

Other factors that could materially affect actual results, levels of
activity, performance or achievements can be found in MSCI's Annual
Report on Form 10-K for the fiscal year ended December 31, 2016 filed
with the Securities and Exchange Commission ("SEC") on February 24, 2017
and in quarterly reports on Form 10-Q and current reports on Form 8-K
filed or furnished with the SEC. If any of these risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect,
actual results may vary significantly from what MSCI projected. Any
forward-looking statement in this earnings release reflects MSCI's
current views with respect to future events and is subject to these and
other risks, uncertainties and assumptions relating to MSCI's
operations, results of operations, growth strategy and liquidity. MSCI
assumes no obligation to publicly update or revise these forward-looking
statements for any reason, whether as a result of new information,
future events, or otherwise, except as required by law.

Website and Social Media Disclosure

MSCI uses its website and corporate Twitter account (@MSCI_Inc) as
channels of distribution of company information. The information we post
through these channels may be deemed material. Accordingly, investors
should monitor these channels, in addition to following our press
releases, SEC filings and public conference calls and webcasts. In
addition, you may automatically receive email alerts and other
information about MSCI when you enroll your email address by visiting
the "Email Alerts Subscription" section of MSCI's Investor Relations
homepage at http://ir.msci.com/alerts.cfm.
The contents of MSCI's website and social media channels are not,
however, incorporated by reference into this earnings release.

Notes Regarding the Use of Operating Metrics

MSCI has presented supplemental key operating metrics as part of this
earnings release, including Run Rate, subscription sales and
cancellations, non-recurring sales and Aggregate Retention Rate.

The Aggregate Retention Rate for a period is calculated by annualizing
the cancellations for which we have received a notice of termination or
for which we believe there is an intention not to renew during the
period, and we believe that such notice or intention evidences the
client's final decision to terminate or not renew the applicable
agreement, even though such notice is not effective until a later date.
This annualized cancellation figure is then divided by the subscription
Run Rate at the beginning of the year to calculate a cancellation rate.
This cancellation rate is then subtracted from 100% to derive the
annualized Aggregate Retention Rate for the period. The Aggregate
Retention Rate is computed on a product-by-product basis. Therefore, if
a client reduces the number of products to which it subscribes or
switches between our products, we treat it as a cancellation. In
addition, we treat any reduction in fees resulting from renegotiated
contracts as a cancellation in the calculation to the extent of the
reduction.

The Run Rate at a particular point in time primarily represents the
forward-looking revenues for the next 12 months from then-current
subscriptions and investment product licenses we provide to our clients
under renewable contracts or agreements assuming all contracts or
agreements that come up for renewal are renewed and assuming
then-current currency exchange rates. For any license where fees are
linked to an investment product's assets or trading volume, the Run Rate
calculation reflects, for ETFs, the market value on the last trading day
of the period, for futures and options, the most recent quarterly
volumes and for non-ETF funds, the most recent client reported assets
under such license or subscription. The Run Rate does not include fees
associated with "one-time" and other non-recurring transactions. In
addition, we remove from the Run Rate the fees associated with any
subscription or investment product license agreement with respect to
which we have received a notice of termination or non-renewal during the
period and determined that such notice evidences the client's final
decision to terminate or not renew the applicable subscription or
agreement, even though such notice is not effective until a later date.

Organic subscription Run Rate or revenue growth ex FX is defined as the
period over period Run Rate or revenue growth, excluding the impact of
changes in foreign currency and the first year impact of any
acquisitions. It is also adjusted for divestitures. Changes in foreign
currency are calculated by applying the end of period currency exchange
rate from the comparable prior period to current period foreign currency
denominated Run Rate or revenue. This metric also excludes the impact on
the growth in subscription Run Rate or revenue of the acquisitions of
IPD, InvestorForce, and GMI for their respective first year of
operations as part of MSCI, as well as the divestiture of MSCI's Real
Estate occupiers benchmarking business which closed on August 1, 2016.

Notes Regarding the Use of Non-GAAP Financial Measures

MSCI has presented supplemental non-GAAP financial measures as part of
this earnings release. Reconciliations are provided in Tables 9 – 12
below that reconcile each non-GAAP financial measure with the most
comparable GAAP measure. The non-GAAP financial measures presented in
this earnings release should not be considered as alternative measures
for the most directly comparable GAAP financial measures. The non-GAAP
financial measures presented in this earnings release are used by
management to monitor the financial performance of the business, inform
business decision-making and forecast future results.

"Adjusted EBITDA" is defined as net income before provision for income
taxes, other expense (income), net, depreciation and amortization of
property, equipment and leasehold improvements, amortization of
intangible assets and, at times, certain other transactions or
adjustments.

"Adjusted EBITDA expenses" is defined as operating expenses less
depreciation and amortization of property, equipment and leasehold
improvements and amortization of intangible assets.

"Adjusted net income" and "adjusted EPS" are defined as net income and
diluted EPS, respectively, before the after-tax impact of the
amortization of acquired intangible assets and, at times, certain other
transactions or adjustments. For periods prior to first quarter 2017,
the amortization associated with capitalized software development costs
was included as an adjustment to adjusted net income and adjusted EPS as
it was not material.

"Capex" is defined as capital expenditures plus capitalized software
development costs.

"Free cash flow" is defined as net cash provided by operating
activities, less Capex.

We believe adjusted EBITDA and adjusted EBITDA expenses are meaningful
measures of the operating performance of MSCI because they adjust for
significant one-time, unusual or non-recurring items as well as
eliminate the accounting effects of capital spending and acquisitions
that do not directly affect what management considers to be our core
operating performance in the period.

We believe adjusted net income and adjusted EPS are meaningful measures
of the performance of MSCI because they adjust for the after-tax impact
of significant one-time, unusual or non-recurring items as well as
eliminate the accounting effects of acquisitions that do not directly
affect what management considers to be our core performance in the
period.

We believe that free cash flow is useful to investors because it relates
the operating cash flow of MSCI to the capital that is spent to continue
and improve business operations, such as investment in MSCI's existing
products. Further, free cash flow indicates our ability to strengthen
MSCI's balance sheet, repay our debt obligations, pay cash dividends and
repurchase shares of our common stock.

We believe that the non-GAAP financial measures presented in this
earnings release facilitate meaningful period-to-period comparisons and
provide a baseline for the evaluation of future results.

Adjusted EBITDA expenses, adjusted EBITDA, adjusted net income, adjusted
EPS and free cash flow are not defined in the same manner by all
companies and may not be comparable to similarly-titled non-GAAP
financial measures of other companies.

Notes Regarding Adjusting for the Impact of Foreign Currency Exchange
Rate Fluctuations

Foreign currency exchange rate fluctuations are calculated to be the
difference between the current period results as reported compared to
the current period results recalculated using the foreign currency
exchange rates in effect for the comparable prior period.

Table 2: Condensed Consolidated Statements of Income (unaudited)

         
Three Months Ended
Mar. 31,   Mar. 31,   Dec. 31, YoY %
In thousands, except per share data 2017 2016 2016 Change
Operating revenues $ 301,207 $ 278,828 $ 292,812 8.0 %
Operating expenses:
Cost of revenues 67,521 63,172 63,819 6.9 %
Selling and marketing 43,014 41,689 41,609 3.2 %
Research and development 18,977 18,928 18,960 0.3 %
General and administrative 21,004 21,890 21,467 (4.0 %)
Amortization of intangible assets 11,251 11,840 11,498 (5.0 %)
Depreciation and amortization of property,
equipment and leasehold improvements   8,838   8,168   9,447 8.2 %
Total operating expenses(1)   170,605   165,687   166,800 3.0 %
 
Operating income 130,602 113,141 126,012 15.4 %
 
Interest income

(932

)

(621 ) (901 ) 50.1 %
Interest expense 29,024 22,904 29,039 26.7 %
Other expense (income)   885   81   779 992.6 %
Other expenses (income), net   28,977   22,364   28,917 29.6 %
 

Income before provision for income taxes

101,625 90,777 97,095 12.0 %
 
Provision for income taxes   28,674   30,410   28,845 (5.7 %)
Net income $ 72,951 $ 60,367 $ 68,250 20.8 %
 
           
Earnings per basic common share $ 0.80 $ 0.61 $ 0.73 31.1 %
 
           
Earnings per diluted common share $ 0.80 $ 0.60 $ 0.73 33.3 %
 
Weighted average shares outstanding used
in computing earnings per share:
 
Basic   90,708   99,425   93,327 (8.8 %)
Diluted   91,624   99,998   93,845 (8.4 %)

(1)

 

Includes stock-based compensation expense of $9.6 million,
$7.2 million and $8.5 million for the three months ended Mar. 31,
2017, Mar. 31, 2016 and Dec. 31, 2016, respectively.

 

Table 3: Selected Balance Sheet Items (unaudited)

     
As of
Mar. 31,   Dec. 31,
In thousands 2017 2016
Cash and cash equivalents $696,972 $791,834
Accounts receivable, net of allowances $262,289 $221,504
 
Deferred revenue $378,422 $334,358
Long-term debt(1) $2,075,924 $2,075,201

(1)

 

Consists of gross long-term debt, net of deferred financing
fees. Gross long-term debt at both Mar. 31, 2017 and Dec. 31, 2016
was $2.1 billion.

 

Table 4: Selected Cash Flow Items (unaudited)

         
Three Months Ended
Mar. 31,   Mar. 31,   Dec. 31, YoY %
In thousands 2017 2016(1) 2016(1) Change
Cash provided by operating activities $ 37,015 $ 36,887 $ 138,853 0.3 %
Cash used in investing activities (9,629 ) (5,520 ) (10,535 ) 74.4 %
Cash used in financing activities (125,226 ) (366,166 ) (301,141 ) (65.8 %)
Effect of exchange rate changes   2,978   2,107   (9,405 ) 41.3 %
Net increase (decrease) in cash and cash equivalents $ (94,862 ) $ (332,692 ) $ (182,228 ) (71.5 %)
 
        (1)   Excess tax benefits related to share-based compensation are now
included in operating cash flows rather than financing cash flows in
accordance with the adoption of recent accounting guidance. This
change has been applied retrospectively and resulted in increases of
$3.9 million and $1.1 million in net cash provided by operating
activities for first quarter 2016 and fourth quarter 2016,
respectively, with a matching decrease in net cash used in financing
activities in those same periods.
 

Table 5: Operating Results by Segment and Revenue Type (unaudited)

         
Index Three Months Ended
Mar. 31,   Mar. 31,   Dec. 31, YoY %
In thousands 2017 2016 2016 Change
Operating revenues:
Recurring subscriptions $ 102,178 $ 93,645 $ 99,939 9.1 %
Asset-based fees 57,508 48,699 55,774 18.1 %
Non-recurring   3,749   2,269   3,357 65.2 %
Total operating revenues 163,435 144,613 159,070 13.0 %
Adjusted EBITDA expenses   47,798   44,564   45,909 7.3 %
Adjusted EBITDA $ 115,637 $ 100,049 $ 113,161 15.6 %
Adjusted EBITDA margin % 70.8 % 69.2 % 71.1 %
 
Analytics Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2017 2016 2016 Change
Operating revenues:
Recurring subscriptions $ 111,269 $ 108,630 $ 111,228 2.4 %
Non-recurring   1,151   1,633   3,178 (29.5 %)
Total operating revenues 112,420 110,263 114,406 2.0 %
Adjusted EBITDA expenses   82,884   79,903   81,062 3.7 %
Adjusted EBITDA $ 29,536 $ 30,360 $ 33,344 (2.7 %)
Adjusted EBITDA margin % 26.3 % 27.5 % 29.1 %
 
All Other Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2017 2016 2016 Change
Operating revenues:
Recurring subscriptions $ 24,652 $ 23,063 $ 17,924 6.9 %
Non-recurring   700   889   1,412 (21.3 %)
Total operating revenues 25,352 23,952 19,336 5.8 %
Adjusted EBITDA expenses   19,834   21,212   18,884 (6.5 %)
Adjusted EBITDA $ 5,518 $ 2,740 $ 452 101.4 %
Adjusted EBITDA margin % 21.8 % 11.4 % 2.3 %
 
Consolidated Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2017 2016 2016 Change
Operating revenues:
Recurring subscriptions $ 238,099 $ 225,338 $ 229,091 5.7 %
Asset-based fees 57,508 48,699 55,774 18.1 %
Non-recurring   5,600   4,791   7,947 16.9 %
Operating revenues total 301,207 278,828 292,812 8.0 %
Adjusted EBITDA expenses   150,516   145,679   145,855 3.3 %
Adjusted EBITDA $ 150,691 $ 133,149 $ 146,957 13.2 %
Adjusted EBITDA margin % 50.0 % 47.8 % 50.2 %
Operating margin % 43.4 % 40.6 % 43.0 %
 

Table 6: Sales and Aggregate Retention Rate by Segment (unaudited)

     
Three Months Ended
Mar. 31,   Dec. 31,   Sep. 30,   Jun. 30,   Mar. 31,
In thousands 2017 2016 2016 2016 2016
Index
New recurring subscription sales $ 14,193 $ 17,220 $ 11,758 $ 13,139 $ 13,162
Subscription cancellations   (3,165 )   (6,071 )   (3,840 )   (4,096 )   (3,410 )
Net new recurring subscription sales $ 11,028 $ 11,149 $ 7,918 $ 9,043 $ 9,752
Non-recurring sales $ 4,374 $ 3,461 $ 5,468 $ 5,379 $ 3,542
Total gross sales(1) $ 18,567 $ 20,681 $ 17,226 $ 18,518 $ 16,704
Total Index net sales $ 15,402 $ 14,610 $ 13,386 $ 14,422 $ 13,294
 
Index Aggregate Retention Rate(2) 96.9 % 93.4 % 95.8 % 95.6 % 96.3 %
 
Analytics
New recurring subscription sales $ 11,874 $ 18,617 $ 13,131 $ 11,149 $ 12,358
Subscription cancellations   (7,611 )   (13,749 )   (10,530 )   (9,015 )   (5,911 )
Net new recurring subscription sales $ 4,263 $ 4,868 $ 2,601 $ 2,134 $ 6,447
Non-recurring sales $ 2,163 $ 3,215 $ 2,330 $ 1,429 $ 1,856
Total gross sales(1) $ 14,037 $ 21,832 $ 15,461 $ 12,578 $ 14,214
Total Analytics net sales $ 6,426 $ 8,083 $ 4,931 $ 3,563 $ 8,303
 
Analytics Aggregate Retention Rate(2) 93.3 % 87.4 % 90.4 % 91.7 % 94.6 %
 
All Other
New recurring subscription sales $ 4,121 $ 6,364 $ 3,877 $ 4,481 $ 5,256
Subscription cancellations   (1,683 )   (2,526 )   (1,903 )   (2,243 )   (1,616 )
Net new recurring subscription sales $ 2,438 $ 3,838 $ 1,974 $ 2,238 $ 3,640
Non-recurring sales $ 609 $ 1,139 $ 774 $ 1,132 $ 1,202
Total gross sales(1) $ 4,730 $ 7,503 $ 4,651 $ 5,613 $ 6,458
Total All Other net sales $ 3,047 $ 4,977 $ 2,748 $ 3,370 $ 4,842
 
All Other Aggregate Retention Rate(2) 92.4 % 87.8 % 90.8 % 89.2 % 92.2 %
 
Consolidated
New recurring subscription sales $ 30,188 $ 42,201 $ 28,766 $ 28,769 $ 30,776
Subscription cancellations   (12,459 )   (22,346 )   (16,273 )   (15,354 )   (10,937 )
Net new recurring subscription sales $ 17,729 $ 19,855 $ 12,493 $ 13,415 $ 19,839
Non-recurring sales $ 7,146 $ 7,815 $ 8,572 $ 7,940 $ 6,600
Total gross sales(1) $ 37,334 $ 50,016 $ 37,338 $ 36,709 $ 37,376
Total net sales $ 24,875 $ 27,670 $ 21,065 $ 21,355 $ 26,439
 
Total Aggregate Retention Rate(2) 94.7 % 89.9 % 92.7 % 93.1 % 95.1 %
 
       

(1)

  Total gross sales equal recurring subscription sales plus
non-recurring sales.
(2) See "Notes Regarding the Use of Operating Metrics" for details
regarding the definition of Aggregate Retention Rate.
 

Table 7: ETF Assets Linked to MSCI Indexes (unaudited)(1)

     
Three Months Ended
Mar. 31,     Dec. 31,   Sep. 30,     Jun. 30,   Mar. 31,
In billions 2017 2016 2016 2016 2016
Beginning Period AUM in ETFs linked to
MSCI indexes $ 481.4 $ 474.9 $ 439.7 $ 438.3 $ 433.4
Market Appreciation/(Depreciation) 35.8 (8.7 ) 23.7 (2.5 ) (1.7 )
Cash Inflows 38.5 15.2 11.5 3.9 6.6
Period-End AUM in ETFs linked to                    
MSCI indexes $ 555.7 $ 481.4 $ 474.9 $ 439.7 $ 438.3
 
Period Average AUM in ETFs linked to
MSCI indexes $ 524.1 $ 471.1 $ 467.3 $ 438.8 $ 407.9
 
Avg. Basis Point Fee(2) 3.08 3.10 3.11 3.12 3.24
 

Source: Bloomberg and MSCI

(1)

 

ETF assets under management calculation methodology is ETF
net asset value multiplied by shares outstanding.

(2)

Based on period-end Run Rate for ETF's linked to MSCI indexes
using period-end AUM.

AUM: Assets under management.

 

Table 8: Run Rate by Segment and Type (unaudited)(1)

           
As of
Mar. 31,     Mar. 31,     Dec. 31, YoY %
In thousands 2017 2016 2016 Change
Index
Recurring subscriptions $ 417,765 $ 378,622 $ 406,729 10.3 %
Asset-based fees   240,834   199,330   216,982 20.8 %
Index Run Rate   658,599   577,952   623,711 14.0 %
 
Analytics Run Rate   457,249   447,024   451,533 2.3 %
 
All Other Run Rate   91,239   86,990   88,074 4.9 %
 
Total Run Rate $ 1,207,087 $ 1,111,966 $ 1,163,318 8.6 %
 
Total recurring subscriptions $ 966,253 $ 912,636 $ 946,336 5.9 %
Total asset-based fees   240,834   199,330   216,982 20.8 %
Total Run Rate $ 1,207,087 $ 1,111,966 $ 1,163,318 8.6 %
 
(1)  

See "Notes Regarding the Use of Operating Metrics" for
details regarding the definition of Run Rate.

 

Table 9: Reconciliation of Adjusted EBITDA to Net Income (unaudited)

     
Three Months Ended
Mar. 31,     Mar. 31,     Dec. 31,
In thousands 2017 2016 2016
Index adjusted EBITDA $ 115,637 $ 100,049 $ 113,161
Analytics adjusted EBITDA 29,536 30,360 33,344
All Other adjusted EBITDA   5,518   2,740   452
Consolidated adjusted EBITDA   150,691   133,149   146,957
Amortization of intangible assets 11,251 11,840 11,498
Depreciation and amortization of property,
equipment and leasehold improvements   8,838   8,168   9,447
Operating income 130,602 113,141 126,012
Other expense (income), net 28,977 22,364 28,917
Provision for income taxes   28,674   30,410   28,845
Net income $ 72,951 $ 60,367 $ 68,250
 

Table 10: Reconciliation of Adjusted Net Income and Adjusted EPS to
Net Income and EPS (unaudited)

     
Three Months Ended
Mar. 31,   Mar. 31,   Dec. 31,
In thousands, except per share data 2017 2016 2016
Net income $ 72,951 $ 60,367 $ 68,250
Plus: Amortization of acquired intangible assets 10,530 11,840 11,498
Less: Income tax effect   (2,972 )   (3,966 )   (3,403 )
Adjusted net income $ 80,509 $ 68,241 $ 76,345
 
Diluted EPS $ 0.80 $ 0.60 $ 0.73
Plus: Amortization of acquired intangible assets 0.11 0.12 0.12
Less: Income tax effect   (0.03 )   (0.04 )   (0.04 )
Adjusted EPS $ 0.88 $ 0.68 $ 0.81
 

Table 11: Reconciliation of Adjusted EBITDA Expenses to Operating
Expenses (unaudited)

         
Three Months Ended Full-Year
Mar. 31,     Mar. 31,     Dec. 31, 2017
In thousands 2017 2016 2016 Outlook(1)
Index adjusted EBITDA expenses $ 47,798 $ 44,564 $ 45,909
Analytics adjusted EBITDA expenses 82,884 79,903 81,062
All Other adjusted EBITDA expenses   19,834   21,212   18,884  
Consolidated adjusted EBITDA expenses   150,516   145,679   145,855 $605,000 - $620,000
Amortization of intangible assets 11,251 11,840 11,498
Depreciation and amortization of property, 85,000
equipment and leasehold improvements   8,838   8,168   9,447  
Total operating expenses $ 170,605 $ 165,687 $ 166,800 $690,000 - $705,000
 

(1) We have not provided a line-item reconciliation for
adjusted EBITDA expenses to total operating expenses for this
future period because we do not provide guidance on the individual
reconciling items between total operating expenses and adjusted
EBITDA expenses.

 

Table 12: Reconciliation of Free Cash Flow to Net Cash Provided by
Operating Activities (unaudited)

       
Three Months Ended Full-Year
Mar. 31,   Mar. 31,   Dec. 31, 2017
In thousands 2017 2016 2016 Outlook(1)
Net cash provided by operating activities $ 37,015 $ 36,887 $ 138,853 $360,000 - $410,000
Capital expenditures (7,322 ) (3,135 ) (8,140 )
Capitalized software development costs   (2,307 )   (2,325 )   (2,395 )  
Capex   (9,629 )   (5,460 )   (10,535 ) (50,000 - 40,000)
Free cash flow $ 27,386 $ 31,427 $ 128,318 $310,000 - $370,000
 
(1) We have not provided a line-item reconciliation for free
cash flow to net cash from operating activities for this future
period because we do not provide guidance on the individual
reconciling items between net cash from operating activities and
free cash flow.

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