Investor News

NEW YORK--(BUSINESS WIRE)-- 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%

View source version on businesswire.com: https://www.businesswire.com/news/home/20180503005712/en/

MSCI Inc.
Investors
Andrew Wiechmann, + 1 212-804-3986
andrew.wiechmann@msci.com
or
Media
Samuel Wang, + 1 212-804-5244
samuel.wang@msci.com

Source: MSCI Inc.

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