Market Overview

MSCI Reports Financial Results for First Quarter 2018

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MSCI Inc. (NYSE:MSCI), a leading provider of indexes and portfolio
construction and risk management tools and services for global
investors, today announced results for the three months ended March 31,
2018 ("first quarter 2018").

Financial and Operational Highlights for First Quarter 2018
(Notes:
Percentage and other changes refer to first quarter 2017 unless
otherwise noted.
References to "ex-FX" reflect amounts that have
been adjusted for the impact from foreign currency exchange rate
fluctuations.)

  • 16.6% increase in operating revenues to $351.3 million.
  • 23.5% increase in Index revenues driven by a 48.6% increase in
    asset-based fees and a 10.8% increase in recurring subscription
    revenues.
  • Record increases in diluted EPS and adjusted EPS, up 55.0% and
    48.9%, respectively, on strong operating results.
  • Record quarter-end AUM of $764.9 billion in ETFs linked to MSCI
    indexes, driven by $32.3 billion of cash inflows into investment
    products linked to MSCI indexes, or nearly 30.0% of total global cash
    inflows into equity ETFs. AUM of $777.3 billion in ETFs linked to MSCI
    indexes as of May 1, 2018.
  • 16.2% increase in total Run Rate to $1,403.1 million, driven by a
    38.0% increase in asset-based fees Run Rate and a 10.8% increase in
    subscription Run Rate. Index Run Rate growth of 20.6% and Analytics
    Run Rate growth of 8.2%.
  • Continued strong retention – Aggregate Retention Rate of
    approximately 94.6%.
  • Successfully executed the divestiture of Financial Engineering
    Associates, Inc. ("FEA") on April 9, 2018, which provided a non-core
    product serving energy and commodity companies.
  • During first quarter 2018 and through May 2, 2018, a total of 1.4
    million shares were repurchased at an average price of $145.27 per
    share for a total value of $210.0 million.
  • On May 1, 2018, the Board of Directors of MSCI (the "Board")
    authorized an additional $1.0 billion repurchase of shares.
   
Three Months Ended
Mar. 31,     Mar. 31,     Dec. 31,     YoY %
In thousands, except per share data 2018 2017 2017 Change
Operating revenues $ 351,316 $ 301,207 $ 334,779   16.6 %
Operating income $ 167,166 $ 130,732 $ 154,139 27.9 %
Operating margin % 47.6 % 43.4 % 46.0 %
 
Net income $ 115,092 $ 72,951 $ 64,602 57.8 %
 
Diluted EPS $ 1.24 $ 0.80 $ 0.70 55.0 %
Adjusted EPS $ 1.31 $ 0.88 $ 1.15 48.9 %
 
Adjusted EBITDA $ 186,708 $ 150,821 $ 173,817 23.8 %
Adjusted EBITDA margin % 53.1 % 50.1 % 51.9 %
 

"We delivered another quarter of strong results, including record growth
in diluted and adjusted EPS, reflecting the significant momentum that we
have built and consistent execution that we have demonstrated over the
last several years," commented Henry A. Fernandez, Chairman and CEO of
MSCI.

"We have developed this momentum by effectively executing against our
One MSCI growth strategy with rigorous financial and operational
processes and strong discipline, which has allowed us to prioritize and
execute on our highest-returning and most strategic opportunities. We
continue to see areas of attractive growth within our core markets, and
we are increasingly confident that we have the right systems, processes
and talent to identify, evaluate, prioritize, execute and monitor these
opportunities," added Mr. Fernandez.

First Quarter 2018 Consolidated Results

Revenues:
Operating revenues for first quarter 2018 increased $50.1 million, or
16.6%, to $351.3 million, compared to $301.2 million for the three
months ended March 31, 2017 ("first quarter 2017"). The $50.1 million
increase in revenues was driven by a $28.0 million, or 48.6%, increase
in asset-based fees (driven primarily by higher revenue from exchange
traded funds ("ETFs") linked to MSCI indexes, and a $22.7 million, or
9.5%, increase in recurring subscriptions (driven primarily by an $11.0
million, or 10.8%, increase in Index products and a $7.0 million, or
6.3%, increase in Analytics products). Operating revenues ex-FX
(excluding the impact on asset-based fees) increased 16.0% in first
quarter 2018.

Run Rate: Total
Run Rate at March 31, 2018 grew by 16.2% to $1,403.1 million, compared
to March 31, 2017. The $196.0 million increase was driven by a $104.6
million, or 10.8%, increase in subscription Run Rate to $1,070.9
million, and a $91.4 million, or 38.0%, increase in asset-based fees Run
Rate to $332.2 million. Subscription Run Rate ex-FX increased 9.3% in
first quarter 2018 driven by strong growth in the Index and ESG segments
and in the Analytics segment's Multi-Asset Class and Equity Analytics
products. Aggregate Retention Rate of 94.6% in first quarter 2018 was
roughly in line with the rate of 94.7% in first quarter 2017.

Expenses: Total
operating expenses for first quarter 2018 increased $13.7 million, or
8.0%, to $184.2 million, compared to first quarter 2017, driven by a
$9.5 million, or 8.7%, increase in compensation and benefits expenses,
primarily related to higher salaries, incentive compensation and
benefits, as well as a $4.7 million, or 11.3%, increase in
non-compensation expenses, primarily reflecting increases across various
areas including $1.9 million related to other taxes and miscellaneous
fees. Adjusted EBITDA expenses for first quarter 2018 increased $14.2
million, or 9.5%, to $164.6 million compared to first quarter 2017.
Foreign exchange rate fluctuations impacted expense growth in the
quarter, mainly related to expenses denominated in the British Pound,
the Hungarian forint and the Euro, each of which strengthened versus the
U.S. dollar compared to the prior year period. Total operating expenses
ex-FX and adjusted EBITDA expenses ex-FX for first quarter 2018
increased 4.7% and 5.8%, respectively, compared to first quarter 2017.

Headcount: As
of March 31, 2018, there were 3,059 employees, up 5.6% from 2,897 as of
March 31, 2017, and up from 3,038 as of December 31, 2017. The 5.6%
year-over-year increase in employees was primarily driven by increased
headcount in emerging market centers and in areas related to data and
content services, technology and research. As of March 31, 2018, a total
of 40% and 60% of employees were located in developed market and
emerging market centers, respectively, compared to 44% in developed
market centers and 56% in emerging market centers as of March 31, 2017.

Amortization and Depreciation Expenses:
Amortization and depreciation expenses of $19.5 million decreased by
$0.5 million, or 2.7%, for first quarter 2018, compared to first quarter
2017, primarily as a result of a $0.6 million, or 7.2%, decrease in
depreciation expense reflecting certain data center assets becoming
fully depreciated. Amortization expense was essentially flat in the
quarter, reflecting higher amortization of internal capitalized software
projects of $1.4 million, largely offset by $1.3 million of lower
amortization of acquired intangibles as a result of certain assets
becoming fully amortized.

Other Expense (Income), Net:
Other expense (income), net decreased $1.4 million, or 4.7%, for
first quarter 2018, compared to first quarter 2017, as a result of
higher interest income associated with higher yields on higher cash
balances.

Tax Rate:
Income tax expense was $24.3 million for first quarter 2018, compared to
$28.7 million for first quarter 2017, and included the positive impact
of stock-based compensation tax benefits (the "windfall benefit") of
$7.5 million, which was $3.1 million for first quarter 2017. The
effective tax rate was 17.5% and 28.2% for first quarter 2018 and first
quarter 2017, respectively. The decline largely reflected the impact of
the Tax Cuts and Jobs Act that was enacted on December 22, 2017 ("Tax
Reform"). First quarter 2018 also included a benefit of $1.6 million
relating to a revision of the fourth quarter 2017 net charge of $34.5
million associated with taxes on the amount of historical profits that
were permanently reinvested overseas. Excluding the $1.6 million benefit
related to Tax Reform, the first quarter 2018 adjusted tax rate was
18.6%.

The recorded cumulative net charge of $32.9 million for Tax Reform is a
provisional amount that reflects our reasonable estimate at this time,
and is subject to adjustment during a measurement period not to exceed
one year from enactment in accordance with guidance from the Securities
and Exchange Commission. The net tax benefit of $1.6 million for Tax
Reform in first quarter 2018 was excluded from adjusted net income and
adjusted EPS consistent with the classification of the fourth quarter
2017 charge of $34.5 million. We expect that any future charges related
to Tax Reform resulting from interpretations related thereto, and
further guidance from regulatory agencies will continue to be excluded
from adjusted net income and adjusted EPS.

Net Income: Net
income increased 57.8% to $115.1 million in first quarter 2018, from
$73.0 million in first quarter 2017.

Adjusted EBITDA:
Adjusted EBITDA was $186.7 million in first quarter 2018, up $35.9
million, or 23.8%, from first quarter 2017. Adjusted EBITDA margin in
first quarter 2018 was 53.1%, compared to 50.1% in first quarter 2017.

Cash Balances & Outstanding Debt:
Total cash and cash equivalents as of March 31, 2018 was $849.8 million.
MSCI seeks to maintain minimum cash balances globally of approximately
$200.0 million to $250.0 million for general operating purposes.

Total outstanding debt as of March 31, 2018 was $2,100.0 million, which
excludes deferred financing fees of $21.2 million. Net debt, defined as
total outstanding debt less cash and cash equivalents, was $1,250.2
million at March 31, 2018. The total debt to operating income ratio
(based on trailing twelve months operating income) was 3.4x. The total
debt to adjusted EBITDA ratio (based on trailing twelve months adjusted
EBITDA) was 3.0x, which is within the stated gross leverage to adjusted
EBITDA targeted range of 3.0x to 3.5x.

Cash Flow & Capex:
Net cash provided by operating activities was $88.6 million in first
quarter 2018, compared to $37.0 million in first quarter 2017 and $143.2
million in fourth quarter 2017. Capex for first quarter 2018 was $5.9
million, compared to $9.6 million in first quarter 2017 and $20.6
million in fourth quarter 2017. Free cash flow was $82.7 million in
first quarter 2018, compared to $27.4 million in first quarter 2017 and
$122.6 million in fourth quarter 2017. The decline in net cash provided
by operating activities and free cash flow, compared to fourth quarter
2017, was driven by higher cash expenses (primarily related to the
impact of the annual cash incentives paid in the first quarter) and
higher scheduled interest payments, partially offset by higher cash
collections and lower income tax payments. The increase in net cash
provided by operating activities and free cash flows, compared to first
quarter 2017, was primarily driven by increased cash collections,
partially offset by higher cash expenses.

Share Count & Capital Return:
The weighted average diluted shares outstanding in first quarter 2018
increased 1.1% to 92.6 million, compared to 91.6 million in first
quarter 2017. The higher share count decreased diluted and adjusted EPS
by 2 cents and 1 cent, respectively, in first quarter 2018, compared to
first quarter 2017. The higher count was primarily driven by increased
dilution from restricted stock unit awards for which the ultimate payout
is tied to a total shareholder return measure, partially offset by
buybacks under the share repurchase program.

In first quarter 2018 and through May 2, 2018, MSCI repurchased 1.4
million shares at an average price of $145.27 per share for a total
value of $210.0 million. Total shares outstanding as of March 31, 2018
was 89.0 million. On May 1, 2018, the Board authorized an additional
$1.0 billion repurchase of shares of MSCI's common stock, which will be
aggregated with the $523.1 million of authorization remaining under the
previously existing share repurchase program.

On May 1, 2018, the Board declared a cash dividend of $0.38 per share
for second quarter 2018. The second quarter 2018 dividend is payable on
May 31, 2018 to shareholders of record as of the close of trading on May
18, 2018.

Table 1: Fourth 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
Q1'18 $ 201,913 $ 145,929   72.3 % $ 118,987 $ 33,593   28.2 % $ 30,415 $ 7,187   23.6 %
Q1'17 $ 163,435 $ 115,677 70.8 % $ 112,420 $ 29,600 26.3 % $ 25,352 $ 5,544 21.9 %
% change 23.5 % 26.2 % 5.8 % 13.5 % 20.0 % 29.6 %
 
Q4'17 $ 193,774 $ 142,702 73.6 % $ 117,510 $ 31,141 26.5 % $ 23,495 $ (26 ) (0.1 %)
% change   4.2 %   2.3 %       1.3 %   7.9 %       29.5 % n/m    
 
n/m: not meaningful.
 

Index Segment:
Operating revenues for first quarter 2018 increased $38.5 million,
or 23.5%, to $201.9 million, compared to $163.4 million for first
quarter 2017. The $38.5 million increase was primarily driven by a $28.0
million, or 48.6%, increase in asset-based fees, and an $11.0 million,
or 10.8%, increase in recurring subscriptions.

The $28.0 million increase in asset-based fees was driven by strong
growth across all types of index-linked investment products. A $18.9
million, or 47.0%, increase in revenue from ETFs linked to MSCI indexes
was driven by a 48.7% increase in average assets under management
("AUM"), partially offset by the impact of a change in product mix. A
$7.4 million, or 50.1%, increase in revenue from non-ETF passive
products was driven by higher AUM and an increased contribution from
higher-fee products. In addition, revenues from exchange traded futures
and options contracts based on MSCI indexes grew $1.7 million, or 66.5%,
driven by a strong increase in total trading volumes and a more
favorable product mix.

The $11.0 million increase in recurring subscriptions was driven by
growth in core products and strong growth in factor and ESG indexes and
custom and specialized index products. The adjusted EBITDA margin for
Index was 72.3% for first quarter 2018, compared to 70.8% for first
quarter 2017.

Index Run Rate at March 31, 2018 grew by $135.7 million, or 20.6%, to
$794.3 million, compared to March 31, 2017. The $135.7 million increase
was driven by a $91.4 million, or 38.0%, increase in asset-based fees
Run Rate, primarily driven by higher AUM in ETFs as well as increases in
non-ETF passive funds and futures and options contracts, all linked to
MSCI indexes, and a $44.3 million, or 10.6%, increase in recurring
subscriptions Run Rate. The 10.6% increase in Index recurring
subscriptions Run Rate was driven by growth in core products, factor and
ESG indexes and custom and specialized index products and strong growth
in the wealth management, hedge fund and banking and trading client
segments.

Analytics Segment:
Operating revenues for first quarter 2018 increased $6.6 million, or
5.8%, to $119.0 million, compared to $112.4 million for first quarter
2017, primarily driven by growth in both Equity and Multi-Asset Class
Analytics products.

The adjusted EBITDA margin for Analytics was 28.2% for first quarter
2018, compared to 26.3% for first quarter 2017.

Analytics Run Rate at March 31, 2018 grew by $37.5 million, or 8.2%, to
$494.8 million, compared to March 31, 2017, primarily driven by growth
in both Multi-Asset Class and Equity Analytics products. Analytics Run
Rate ex-FX increased 6.4% compared to March 31, 2017.

We completed the divestiture of FEA on April 9, 2018, and, as a result,
the operating results of FEA will no longer be included in the Analytics
financial results after that date. The Run Rate associated with FEA was
approximately $8.0 million as of March 31, 2018.

All Other Segment:
Operating revenues for first quarter 2018 increased $5.1 million, or
20.0%, to $30.4 million, compared to $25.4 million for first quarter
2017. The increase in All Other revenues was driven by a $3.9 million,
or 31.0%, increase in ESG revenues to $16.5 million, and a $1.2 million,
or 9.1%, increase in Real Estate revenues to $14.0 million. The increase
in ESG revenues was driven by strong growth in ESG Ratings product
revenues, which benefited from increased investments. First quarter 2018
Real Estate revenues ex-FX decreased 0.9% and All Other operating
revenues ex-FX increased 14.8%. The adjusted EBITDA margin for All Other
was 23.6% for first quarter 2018, compared to 21.9% for first quarter
2017.

All Other Run Rate at March 31, 2018 grew by $22.8 million, or 25.0%, to
$114.0 million, compared to March 31, 2017. The $22.8 million increase
was primarily driven by a $17.3 million, or 33.6%, increase in ESG Run
Rate to $68.9 million, and a $5.4 million, or 13.7%, increase in Real
Estate Run Rate to $45.1 million. The increase in ESG Run Rate was
primarily driven by strong growth in ESG Ratings products. The increase
in Real Estate Run Rate was primarily driven by growth in market
information products, which also benefited from the appreciation in
foreign currencies. ESG Run Rate ex-FX increased 29.0%, Real Estate Run
Rate ex-FX increased 4.2% and All Other Run Rate ex-FX increased 18.2%,
each compared to March 31, 2017.

Full-Year 2018 Guidance

MSCI's guidance for full-year 2018 remains as follows:

  • Total operating expenses are expected to be in the range of $725
    million to $750 million.
  • Adjusted EBITDA expenses are expected to be in the range of $645
    million to $665 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 $490 million to $540 million and $440
    million to $500 million, respectively.
  • The effective tax rate is expected to be in the range of 21% to 24%.
    This full-year effective tax rate range includes an expected windfall
    tax benefit related to stock-based compensation of approximately $8.0
    million, of which $7.5 million was realized in first quarter 2018.
    Further information is expected to be released that may impact the
    Company's current interpretation and application of Tax Reform, which
    may result in a change to our full-year guidance in subsequent periods.

The guidance provided above assumes, among other things, that MSCI
maintains its current debt levels. On May 1, 2018, the Board authorized
the Company to opportunistically explore financing options that would
increase the Company's leverage ratio and interest expense. Any
potential financing is subject to market and other conditions, and there
can be no assurance as to the timing or certainty of a transaction.

New Revenue Standard Effective January 1, 2018

Effective January 1, 2018, MSCI adopted the new revenue standard using
the modified retrospective transition method. This resulted in a
cumulative adjustment to increase retained earnings on January 1, 2018
by $16.1 million, net of tax, reflecting future period revenue from
existing contracts under the old revenue standard that would have been
recognized in prior periods under the new revenue standard, and the
application of the provisions of the new standard prospectively.

Compared to the revenue recognition method used prior to 2018, the new
revenue standard will result in more revenue being recognized up-front
or earlier in the life of new contracts for certain products and
services, including fees related to the licensing of desktop
applications, implementation and set-up services and multi-year deals.
The lost future period revenue from existing contracts as a result of
the cumulative adjustment to retained earnings is expected to be largely
offset by the acceleration of revenue from certain new contracts. As a
result, the overall impact of adopting the new revenue standard is not
expected to have a material impact on MSCI's consolidated financial
statements or the annual trend of revenue. It is possible that some
increased quarterly revenue variability may exist by segment depending
on the timing of deal closings and renewals.

As a result of the adoption of the new revenue standard, MSCI recorded
$2.3 million of higher revenue in first quarter 2018, as compared to
what would have been recorded if the old revenue standard was still in
effect, of which $2.1 million related to the Analytics segment and
primarily to FEA.

In addition, as a result of the adoption of the new revenue standard,
the amount of accounts receivable and deferred revenue reported on the
Company's balance sheet as of December 31, 2017 would have increased,
with no increase to net assets, by approximately $135.5 million.
Accounts receivable was $462.6 million at March 31, 2018 and $327.6
million at December 31, 2017. Deferred revenue was $503.3 million at
March 31, 2018 and $374.4 million at December 31, 2017. Under the old
revenue standard, MSCI only recorded the value of an invoice to accounts
receivable and deferred revenue once the service period began. Under the
new revenue standard, MSCI now records accounts receivable and a
corresponding offset to deferred revenue when an invoice is issued for a
non-cancellable, non-refundable contract, regardless of when the service
period begins.

There are no changes to how we calculate our operating metrics.

Conference Call Information

MSCI's senior management will review first quarter 2018 results on
Thursday, May 3, 2018 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, 2018, the recording will also be available by
dialing 1-855-859-2056 passcode: 5898855 within the United States or
1-404-537-3406 passcode: 5898855 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.

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

Total assets benchmarked to MSCI equity indexes is now over $12.4
trillion globally as of September 30, 2017.

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 2018 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, 2017 filed
with the Securities and Exchange Commission ("SEC") on February 26, 2018
and in quarterly reports on Form 10-Q and current reports on Form 8-K
filed or furnished with the SEC (herein, referred to as "Public
Filings"). 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.

Run Rate estimates at a particular point in time the annualized value of
the recurring revenues under our client license agreements ("Client
Contracts") for the next 12 months, assuming all Client Contracts that
come up for renewal are renewed and assuming then-current currency
exchange rates, subject to the adjustments and exclusions described
elsewhere in our Public Filings. For any Client Contract 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 other non-ETF products, the most recent client reported
assets. Run Rate does not include fees associated with "one-time" and
other non-recurring transactions. In addition, we add to Run Rate the
annualized fee value of recurring new sales, whether to existing or new
clients, when we execute Client Contracts, even though the license start
date may not be effective until a later date. We remove from Run Rate
the annualized fee value associated with products or services under any
Client Contract 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 products or services, even though such notice is not
effective until a later date.

Organic subscription Run Rate or revenue growth 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 currency exchange rate from the comparable
prior period to current period foreign currency denominated Run Rate or
revenue.

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 – 13
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, the impact of Tax Reform
adjustments and, at times, certain other transactions or adjustments.

"Adjusted tax rate" is defined as the effective tax rate excluding the
impact of Tax Reform.

"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 adjusted tax rate is useful to investors because it
increases the comparability of period-to-period results by adjusting for
the estimated net impact of Tax Reform.

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, adjusted tax rate, Capex 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 2018 2017(2) 2017(2) Change
Operating revenues $ 351,316 $ 301,207 $ 334,779   16.6 %
Operating expenses:
Cost of revenues 71,304 67,463 69,247 5.7 %
Selling and marketing 46,409 42,972 47,726 8.0 %
Research and development 20,707 18,970 20,709 9.2 %
General and administrative 26,187 20,981 23,280 24.8 %
Amortization of intangible assets 11,338 11,251 11,560 0.8 %
Depreciation and amortization of property,
equipment and leasehold improvements   8,205   8,838   8,118 (7.2 %)
Total operating expenses(1)   184,150   170,475   180,640 8.0 %
 
Operating income 167,166 130,732 154,139 27.9 %
 
Interest income (2,770 ) (932 ) (2,237

)

 

197.2 %
Interest expense 29,560 29,024 29,027 1.8 %
Other expense (income)   938   1,015   389 (7.6 %)
Other expense (income), net   27,728   29,107   27,179 (4.7 %)
 
Income before provision for income taxes 139,438 101,625 126,960 37.2 %
 
Provision for income taxes   24,346   28,674   62,358 (15.1 %)
Net income $ 115,092 $ 72,951 $ 64,602 57.8 %
 
           
Earnings per basic common share $ 1.28 $ 0.80 $ 0.72 60.0 %
 
           
Earnings per diluted common share $ 1.24 $ 0.80 $ 0.70 55.0 %
 
Weighted average shares outstanding used
in computing earnings per share:
 
Basic   90,075   90,708   90,130 (0.7 %)
Diluted   92,587   91,624   92,467 1.1 %
 

(1) Includes stock-based compensation expense of $9.8 million, $9.6
million and $9.3 million for the three months ended Mar. 31, 2018, Mar.
31, 2017 and Dec. 31, 2017, respectively.

(2) As a
result of the adoption of recent accounting guidance, the Company has
restated its Condensed Consolidated Statements of Income by reclassing
$0.1 million and $0.2 million of non-service related pension costs out
of Operating Expenses and into Other expense (income) for the three
months ended Mar. 31, 2017 and Dec. 31, 2017, respectively.

 

Table 3: Selected Balance Sheet Items (unaudited)

    As of
Mar. 31,     Dec. 31,
In thousands 2018 2017
Cash and cash equivalents $849,828 $889,502
Accounts receivable, net of allowances(1) $462,577 $327,597
 
Deferred revenue(2) $503,298 $374,365
Long-term debt(3) $2,078,816 $2,078,093
 

(1) Accounts receivable, net of allowances would have been $473.4
million at Dec. 31, 2017 under the new revenue standard.

(2)
Deferred revenue would have been $494.6 million at Dec. 31, 2017 under
the new revenue standard.

(3) Consists of gross
long-term debt, net of deferred financing fees. Gross long-term debt at
Mar. 31, 2018 and Dec. 31, 2017 was $2.1 billion

   

Table 4: Selected Cash Flow Items (unaudited)

 
Three Months Ended
Mar. 31,     Mar. 31,     Dec. 31,     YoY %
In thousands 2018 2017 2017 Change
Cash provided by operating activities $ 88,597 $ 37,015 $ 143,153   139.4 %
Cash used in investing activities (5,872 ) (9,629 ) (20,600 ) (39.0 %)

Cash used in financing activities

(126,058 ) (125,226 ) (33,668 ) 0.7 %
Effect of exchange rate changes   3,659   2,978   1,602 22.9 %
Net increase (decrease) in cash and cash equivalents $ (39,674 ) $ (94,862 ) $ 90,487 (58.2 %)
 

   

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

 
Index Three Months Ended
Mar. 31,     Mar. 31,     Dec. 31,   YoY %
In thousands 2018 2017(1) 2017(1) Change
Operating revenues:  
Recurring subscriptions $ 113,205 $ 102,178 $ 111,503 10.8 %
Asset-based fees 85,483 57,508 78,493 48.6 %
Non-recurring   3,226   3,749   3,778 (14.0 %)
Total operating revenues 201,913 163,435 193,774 23.5 %
Adjusted EBITDA expenses   55,984   47,758   51,072 17.2 %
Adjusted EBITDA $ 145,929 $ 115,677 $ 142,702 26.2 %
Adjusted EBITDA margin % 72.3 % 70.8 % 73.6 %
 
Analytics Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2018 2017(1) 2017(1) Change
Operating revenues:
Recurring subscriptions $ 118,244 $ 111,269 $ 115,349 6.3 %
Non-recurring   744   1,151   2,161 (35.4 %)
Total operating revenues 118,987 112,420 117,510 5.8 %
Adjusted EBITDA expenses   85,395   82,820   86,369 3.1 %
Adjusted EBITDA $ 33,593 $ 29,600 $ 31,141 13.5 %
Adjusted EBITDA margin % 28.2 % 26.3 % 26.5 %
 
All Other Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2018 2017(1) 2017(1) Change
Operating revenues:
Recurring subscriptions $ 29,367 $ 24,652 $ 22,225 19.1 %
Non-recurring   1,048   700   1,270 49.7 %
Total operating revenues 30,415 25,352 23,495 20.0 %
Adjusted EBITDA expenses   23,228   19,808   23,521 17.3 %
Adjusted EBITDA $ 7,187 $ 5,544 $ (26 ) 29.6 %
Adjusted EBITDA margin % 23.6 % 21.9 % (0.1 %)
 
Consolidated Three Months Ended
Mar. 31, Mar. 31, Dec. 31, YoY %
In thousands 2018 2017(1) 2017(1) Change
Operating revenues:
Recurring subscriptions $ 260,815 $ 238,099 $ 249,077 9.5 %
Asset-based fees 85,483 57,508 78,493 48.6 %
Non-recurring   5,018   5,600   7,209 (10.4 %)
Operating revenues total 351,316 301,207 334,779 16.6 %
Adjusted EBITDA expenses   164,607   150,386   160,962 9.5 %
Adjusted EBITDA $ 186,708 $ 150,821 $ 173,817 23.8 %
Adjusted EBITDA margin %   53.1 %   50.1 %   51.9 %
Operating margin %   47.6 %   43.4 %   46.0 %
 

(1) As a result of the adoption of recent accounting guidance, the
Company has restated its adjusted EBITDA by reclassing $0.1 million and
$0.2 million of non-service related pension costs out of adjusted EBITDA
expenses for the three months ended Mar. 31, 2017 and Dec. 31, 2017,
respectively.

   

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

 
Three Months Ended
Mar. 31,     Dec. 31,     Sep. 30,     June 30,     Mar. 31,
In thousands 2018 2017 2017 2017 2017
Index
New recurring subscription sales $ 15,195 $ 17,980 $ 15,499 $ 13,636 $ 14,193
Subscription cancellations   (4,115 )   (6,180 )   (4,605 )   (3,045 )   (3,165 )
Net new recurring subscription sales $ 11,080 $ 11,800 $ 10,894 $ 10,591 $ 11,028
Non-recurring sales $ 3,459 $ 3,677 $ 3,704 $ 4,555 $ 4,374
Total gross sales(1) $ 18,654 $ 21,657 $ 19,203 $ 18,191 $ 18,567
Total Index net sales $ 14,539 $ 15,477 $ 14,598 $ 15,146 $ 15,402
 
Index Aggregate Retention Rate(2) 96.4 % 93.9 % 95.5 % 97.0 % 96.9 %
 
Analytics
New recurring subscription sales $ 11,356 $ 25,217 $ 15,036 $ 12,050 $ 11,874
Subscription cancellations   (8,578 )   (11,679 )   (7,444 )   (6,940 )   (7,611 )
Net new recurring subscription sales $ 2,778 $ 13,538 $ 7,592 $ 5,110 $ 4,263
Non-recurring sales $ 1,346 $ 3,742 $ 2,792 $ 1,609 $ 2,163
Total gross sales(1) $ 12,702 $ 28,959 $ 17,828 $ 13,659 $ 14,037
Total Analytics net sales $ 4,124 $ 17,280 $ 10,384 $ 6,719 $ 6,426
 
Analytics Aggregate Retention Rate(2) 93.0 % 89.7 % 93.4 % 93.9 % 93.3 %
 
All Other
New recurring subscription sales $ 5,468 $ 8,391 $ 4,576 $ 5,456 $ 4,121
Subscription cancellations   (1,531 )   (1,954 )   (2,050 )   (2,030 )   (1,683 )
Net new recurring subscription sales $ 3,937 $ 6,437 $ 2,526 $ 3,426 $ 2,438
Non-recurring sales $ 694 $ 1,479 $ 829 $ 958 $ 609
Total gross sales(1) $ 6,162 $ 9,870 $ 5,405 $ 6,414 $ 4,730
Total All Other net sales $ 4,631 $ 7,916 $ 3,355 $ 4,384 $ 3,047
 
All Other Aggregate Retention Rate(2) 94.4 % 91.1 % 90.7 % 90.8 % 92.4 %
 
Consolidated
New recurring subscription sales $ 32,019 $ 51,588 $ 35,111 $ 31,142 $ 30,188
Subscription cancellations   (14,224 )   (19,813 )   (14,099 )   (12,015 )   (12,459 )
Net new recurring subscription sales $ 17,795 $ 31,775 $ 21,012 $ 19,127 $ 17,729
Non-recurring sales $ 5,499 $ 8,898 $ 7,325 $ 7,122 $ 7,146
Total gross sales(1) $ 37,518 $ 60,486 $ 42,436 $ 38,264 $ 37,334
Total net sales $ 23,294 $ 40,673 $ 28,337 $ 26,249 $ 24,875
 
Total Aggregate Retention Rate(2) 94.6 % 91.6 % 94.0 % 94.9 % 94.7 %
 

(1) Total gross sales equal new 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: AUM in ETFs Linked to MSCI Indexes (unaudited)(1)(2)

 
Three Months Ended
Mar. 31,     Dec. 31,       Sep. 30,       June 30,       Mar. 31,
In billions 2018 2017 2017 2017 2017
Beginning Period AUM in ETFs linked to
MSCI indexes $ 744.3 $ 674.3 $ 624.3 $ 555.7 $ 481.4
Market Appreciation/(Depreciation) (11.7 ) 32.0 32.2 23.6 35.8
Cash Inflows 32.3 38.0 17.8 45.0 38.5
Period-End AUM in ETFs linked to                    
MSCI indexes $ 764.9 $ 744.3 $ 674.3 $ 624.3 $ 555.7
 
Period Average AUM in ETFs linked to
MSCI indexes $ 779.5 $ 712.3 $ 654.4 $ 595.0 $ 524.1
 
Avg. Basis Point Fee(3) 3.02 3.04 3.05 3.07 3.08
 

Source: Bloomberg and MSCI

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

(2) The
AUM in ETFs numbers also include AUM in Exchange Traded Notes, the value
of which is less than 1.0% of the AUM amounts presented.

(3)
Based on period-end Run Rate for ETFs 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 2018 2017 2017 Change
Index
Recurring subscriptions $ 462,097 $ 417,765 $ 451,048 10.6 %
Asset-based fees   332,240   240,834   316,812 38.0 %
Index Run Rate   794,337   658,599   767,860 20.6 %
 
Analytics Run Rate   494,779   457,249   489,451 8.2 %
 
All Other Run Rate   114,015   91,239   108,413 25.0 %
 
Total Run Rate $ 1,403,131 $ 1,207,087 $ 1,365,724 16.2 %
 
Total recurring subscriptions $ 1,070,891 $ 966,253 $ 1,048,912 10.8 %
Total asset-based fees   332,240   240,834   316,812 38.0 %
Total Run Rate $ 1,403,131 $ 1,207,087 $ 1,365,724 16.2 %
 

(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 2018 2017(1) 2017(1)
Index adjusted EBITDA $ 145,929 $ 115,677 $ 142,702
Analytics adjusted EBITDA 33,593 29,600 31,141
All Other adjusted EBITDA   7,187   5,544   (26 )
Consolidated adjusted EBITDA   186,708   150,821   173,817
Amortization of intangible assets 11,338 11,251 11,560
Depreciation and amortization of property,
equipment and leasehold improvements   8,205   8,838   8,118
Operating income 167,166 130,732 154,139
Other expense (income), net 27,728 29,107 27,179
Provision for income taxes   24,346   28,674   62,358
Net income $ 115,092 $ 72,951 $ 64,602
 

(1) As a result of the adoption of recent accounting guidance, the
Company has restated its adjusted EBITDA by reclassing $0.1 million and
$0.2 million of non-service related pension costs out of adjusted EBITDA
expenses for the three months ended Mar. 31, 2017 and Dec. 31, 2017,
respectively.

   

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 2018 2017 2017
Net income $ 115,092 $ 72,951 $ 64,602
Plus: Amortization of acquired intangible assets 9,207 10,530 9,238
Plus: Tax Reform adjustments (1,601 ) 34,500
Less: Income tax effect   (1,608 )   (2,972 )   (1,922 )
Adjusted net income $ 121,090 $ 80,509 $ 106,418
 
Diluted EPS $ 1.24 $ 0.80 $ 0.70
Plus: Amortization of acquired intangible assets 0.10 0.11 0.10
Plus: Tax Reform adjustments (0.02 ) 0.37
Less: Income tax effect   (0.01 )   (0.03 )   (0.02 )
Adjusted EPS $ 1.31 $ 0.88 $ 1.15
 
       

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

 
Three Months Ended Full-Year
Mar. 31,     Mar. 31,     Dec. 31, 2018
In thousands 2018 2017(2) 2017(2) Outlook(1)
Index adjusted EBITDA expenses $ 55,984 $ 47,758 $ 51,072
Analytics adjusted EBITDA expenses 85,395 82,820 86,369
All Other adjusted EBITDA expenses   23,228   19,808   23,521  
Consolidated adjusted EBITDA expenses   164,607   150,386   160,962 $645,000 - $665,000
Amortization of intangible assets 11,338 11,251 11,560
Depreciation and amortization of property, 82,000
equipment and leasehold improvements   8,205   8,838   8,118  
Total operating expenses $ 184,150 $ 170,475 $ 180,640 $725,000 - $750,000
 

(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.

(2)
As a result of the adoption of recent accounting guidance, the Company
has restated its adjusted EBITDA by reclassing $0.1 million and $0.2
million of non-service related pension costs out of adjusted EBITDA
expenses for the three months ended Mar. 31, 2017 and Dec. 31, 2017,
respectively.

       

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, 2018
In thousands 2018 2017 2017 Outlook(1)
Net cash provided by operating activities $ 88,597 $ 37,015 $ 143,153 $490,000 - $540,000
Capital expenditures (1,512 ) (7,322 ) (15,736 )
Capitalized software development costs   (4,360 )   (2,307 )   (4,863 )  
Capex   (5,872 )   (9,629 )   (20,599 ) (50,000 - 40,000)
Free cash flow $ 82,725 $ 27,386 $ 122,554 $440,000 - $500,000
 

(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.

   

Table 13: Reconciliation of Effective Tax Rate to Adjusted Tax
Rate (unaudited)

 
Three Months Ended
Mar. 31,     Mar. 31,     Dec. 31,
2018 2017 2017
Effective tax rate 17.46% 28.22% 49.12%
Less: Tax Reform impact on effective tax rate 1.15% —% (27.18%)
Adjusted tax rate 18.61% 28.22% 21.94%
 

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