Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described below. Such risks and uncertainties include, but are not limited to, those identified below and those described in “Item 1A.—Risk Factors,” within this Annual Report on Form 10-K.

Overview

For more than 40 years, MSCI’s research-based models and methodologies have helped the world’s leading investors build and manage better portfolios. Clients rely on our products and services for deeper insights into the drivers of performance and risk in their portfolios, broad asset class coverage and innovative research and can use our products to help design and implement their investment strategies. Our line of products and services includes indexes, analytical tools, data, real estate benchmarks and environmental, social and governance (“ESG”) research. MSCI serves 98 of the top 100 global asset managers, as ranked by P&I in December 2014. Our products and services address multiple markets, asset classes and geographies and are sold to a diverse client base, including asset owners such as pension funds, endowments, foundations, central banks, family offices and insurance companies; institutional and retail asset managers, such as managers of pension assets, mutual funds, exchange traded funds (“ETFs”), real estate, hedge funds and private wealth; and financial intermediaries such as banks, broker-dealers, exchanges, custodians and investment consultants. They are used in many areas of the investment process, including portfolio construction and rebalancing, performance benchmarking and attribution, risk management, regulatory and client reporting, index-linked investment product creation, asset allocation, the assessment of corporate management of ESG risks and opportunities, investment manager selection and investment research. As of December 31, 2014, we had offices in 35 cities in 22 countries to help serve our diverse client base, with 51.0% of our revenues coming from clients in the Americas, 36.5% in Europe, the Middle East and Africa (“EMEA”) and 12.5% in Asia and Australia.

Prior to March 31, 2014, MSCI reported financial results for two segments: the Performance and Risk business and the Governance business. On March 17, 2014, MSCI entered into a definitive agreement to sell ISS, which, together with the CFRA product line disposed of in March 2013, made up the Company’s Governance segment. As a result, beginning in the first quarter of 2014, the Company began operating and reporting as a single business segment. On April 30, 2014, we completed the sale of ISS.

Our principal sales model is to license annual, recurring subscriptions to our products and services for use at specified locations, often by a given number of users or for a certain volume of services, for an annual fee paid up-front. Additionally, our recurring subscriptions include our managed services offering whereby we oversee the production of risk and performance reports on behalf of our clients. Fees attributable to annual, recurring subscriptions are recorded as deferred revenues on our Consolidated Statement of Financial Condition and are recognized on our Consolidated Statement of Income as the service is rendered. Additionally, a portion of our revenues comes from clients who use our indexes as the basis for index-linked investment products such as ETFs or as the basis for passively managed funds and separate accounts. These clients commonly pay us a license fee for the use of our intellectual property based on the investment product’s assets. We generate a limited amount of our revenues from certain exchanges that use our indexes as the basis for futures and options contracts and pay us a license fee for the use of our intellectual property based on their volume of trades. We generate revenues from subscription agreements for the receipt of periodic benchmarks reports, digests, and other publications, which are most often associated with our products offered by IPD Group Limited (“IPD”), that are recognized upon delivery of such reports or data updates. We also receive revenues from one-time fees related to implementation, historical or customized reports, advisory and consulting services and from certain products and services that are designed for one-time usage.

In evaluating our financial performance, we focus on revenue growth for the Company in total and by product category as well as operating profit growth. In addition, we focus on operating metrics, including Run Rates and retention rates to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our operating profits into excess cash in the future. Our revenue growth strategy includes: (a) expanding and deepening our relationships with investment institutions worldwide; (b) developing new and enhancing existing product offerings, including combining existing product features or data derived from our products to create new products; and (c) actively seeking to acquire products, technologies and companies that will enhance, complement or expand our client base and our product offerings.

To maintain and accelerate our revenue and operating income growth, we have significantly invested in and expanded our operating functions and infrastructure, including additional product management, sales and client support staff and facilities in locations around the world and additional staff and supporting technology for our research and our data operations and technology functions (the “Enhanced Investment Program”).

The purpose of this Enhanced Investment Program is to maximize our medium-term revenue and operating income growth, while at the same time ensuring that MSCI will remain a leading provider of investment decision support tools into the future. As a result, the rate of growth of our investments have, in recent years, exceeded that of our revenues, which has slowed the growth of, or even reduced, our operating profit. For example, for the year ended December 31, 2014, our revenues grew by 9.1% but our operating income decreased by 0.9% compared to the year ended December 31, 2013 due, in part, to increased investment in our business. We have largely completed our Enhanced Investment Program and, as a result, we expect margin expansion to begin in the second half of 2015, exclusive of any non-recurring charges we may incur.

Changes in Presentation

Prior to March 31, 2014, we reported financial results for two segments: the Performance and Risk business and the Governance business. On March 17, 2014, we entered into a definitive agreement to sell Institutional Shareholder Services Inc. which, together with the CFRA product line disposed of in March 2013, made up our Governance segment. As a result, beginning in the first quarter of 2014, we began operating and reporting as a single reportable segment, and the operating results of ISS and the CFRA product line were reported as discontinued operations for all periods presented. We completed the sale of ISS on April 30, 2014.

In addition, for periods prior to March 31, 2014, we reported energy and commodity analytics products separately as its own product category for disclosures related to operating revenues, Run Rate and Aggregate and Core Retention Rates. Beginning with the three month period ended March 31, 2014, we reported the results of energy and commodity analytics products as part of the risk management analytics product category, as we view the product offerings and customer base of the energy and commodities analytics products to be similar in nature to those in the risk management analytics product category. Prior periods have also been presented to reflect this change in categorization.

Key Financial Metrics and Drivers

Revenues

Our revenues are grouped into the following three product and/or service categories:

Index, Real Estate and ESG Products

Our index, real estate and ESG products category includes subscription fees from MSCI equity index data and IPD and ESG research and analytics products, fees based on assets in investment products linked to our equity indexes, fees from non-recurring licenses of our equity index historical data and fees from real estate products. We also generate a limited amount of revenues based on the trading volume of futures and options contracts linked to our indexes.

Clients typically subscribe to equity index data modules for use by a specified number of users at a particular location. Clients may select delivery from us or delivery via a third-party vendor. We are able to grow our revenues for data subscriptions by expanding the number of client users and their locations and the number of third-party vendors the client uses for delivery of our data modules. The increasing scope and complexity of a client’s data requirements beyond standard data modules, such as requests for historical data or customized indexes, also provide opportunities for further revenue growth from an existing client. Clients who utilize our ESG research and analytics products and services pay an annual subscription fee and access these products and services via a web-based application, data feed or third-party vendor.

Revenues from our index-linked investment product licenses, such as ETFs, increase or decrease as a result of changes in value of the assets in the investment products. These changes in the value of the assets in the investment products can result from equity market price changes, investment inflows and outflows and changes in foreign currency exchange rates. In most cases, fees for these licenses are paid quarterly in arrears and are calculated by multiplying a negotiated basis point fee (which in some cases may be based on a product provider’s total expense ratio) times the average daily assets in the investment product for the most recent period. Additionally, revenues from our index-linked futures and options contracts vary based on the volume of trading.

Risk Management Analytics Products

Our risk management analytics product category includes revenues from annual, recurring subscriptions to our risk management analytics products, including our two major products, RiskManager and BarraOne. We also recognize recurring subscriptions related to our managed services offering in which our staff oversees the production of risk and performance reports on behalf of our clients. Other products in this category include HedgePlatform, Wealthbench, Credit Manager and InvestorForce. The products offer a consistent risk assessment framework for managing and monitoring investments in a variety of asset classes across an organization. We are able to grow our revenues by licensing additional users and locations as well as selling additional products and services.

RiskManager is used by clients for daily analysis, measuring and monitoring of market risk at fund and firm levels, for sensitivity and stress testing, and interactive what-if analysis. RiskManager is a highly scalable platform accessed by clients via a license to a secure, interactive web-based application service, as a fully outsourced risk reporting service or as a web service in which a client’s systems access RiskMetrics core risk elements by connecting directly to our systems.

BarraOne, powered by the Barra Integrated Model, provides clients with global, multi-asset class risk analysis using Barra fundamental factors. The product is accessed by clients via a secure, interactive web-based session, web services or on an outsourced basis.

Clients generally subscribe to the other products in this category on an annual recurring basis.

Portfolio Management Analytics Products

Our portfolio management analytics product category includes revenues from annual, recurring subscriptions to Barra Aegis and our proprietary risk data in Barra Aegis and Barra Portfolio Manager; Equity Models Direct products; and our proprietary equity risk data incorporated in third-party software application offerings (e.g., Barra on Vendors). This category also includes a limited amount of revenues from annual, recurring subscriptions to our fixed income portfolio analytics products.

Barra Aegis is a sophisticated software application for equity risk management and portfolio analysis that is powered by our proprietary equity risk data. It is an integrated suite of equity investment analytics modules, specifically designed to help clients actively manage their equity risk against their expected returns, identify returns attributable to stock selection skills and back-test portfolio construction strategies over time. A base subscription for use in portfolio analysis typically involves a subscription to Barra Aegis and various risk data modules. A client

may add portfolio performance attribution, optimization tools, process automation tools or other features to its Barra Aegis subscription. By licensing the client to receive additional software modules and risk data, or increasing the number of permitted client users or client locations, we can increase our revenues per client further.

Barra Portfolio Manager is an integrated risk and performance platform that is designed to help fund managers and their teams gain additional portfolio insight, manage a more systematic investment process and make faster, more informed investment decisions. The hosted interactive user interface allows users to construct portfolios and back-test their strategies using the Barra Optimizer. It also allows users to decompose the risk and attribute the return of their portfolios according to Barra models. The platform supports optional data management services that allow users to outsource the loading and reconciliation of their portfolio and other proprietary data.

Our Barra Equity Models Direct risk data is distributed directly to clients who then integrate it into their own software applications or upload the risk data onto third-party applications. The proprietary risk data in Barra Equity Models Direct is also available via third-party vendors. A base subscription to our Equity Models Direct product provides equity risk data for a set fee that authorizes one to two users. By licensing the client to receive equity risk model data for additional countries, or increasing the number of permitted client users or client locations, we can further increase our revenues per client.

The Barra on Vendors product makes our proprietary risk data from our Equity Models Direct product available to clients via third party providers, such as FactSet Research Systems, Inc.

See “Item 1. Business—Business Segments, Products and Services” above for additional details of the products and services that we offer.

Operating Metrics

Run Rate

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

Because the Run Rate represents potential future revenues, there is typically a delayed impact on our operating revenues from changes in our Run Rate. In addition, the actual amount of revenues we will realize over the following 12 months will differ from the Run Rate because of:

	•		revenues associated with new subscriptions and non-recurring sales;

	•		modifications, cancellations and non-renewals of existing agreements, subject to specified notice requirements;

	•		fluctuations in asset-based fees, which may result from changes in certain investment products’ total expense ratios, market movements, including foreign currency exchange rate changes, or from investment inflows into and outflows from investment products linked to our indexes;

	•		fluctuations in fees based on trading volumes of futures and options contracts linked to our indexes;

	•		fluctuations in the number of hedge funds for which we provide investment information and risk analysis to hedge fund investors;

	•		price changes;

	•		revenue recognition differences under U.S. GAAP, including timing of implementation and report deliveries;

	•		fluctuations in foreign currency exchange rates; and

	•		the impact of acquisitions and dispositions.

Changes in Run Rate between periods may be attributable to, among other things, increases from new subscriptions, decreases from cancellations, increases or decreases, as the case may be, from the change in the value of assets of investment products linked to MSCI indexes, the change in trading volumes of futures and options contracts linked to MSCI indexes, price changes, fluctuations in foreign currency exchange rates and the impact of acquisitions and dispositions.

The following table sets forth our Run Rates and the percentage growth over the periods indicated:


							Comparison of
	December 31, 2014		December 31, 2013		December 31, 2012		December 31, 2014 to 2013			December 31, 2013 to 2012
	(in thousands)
Run Rates
Index, real estate and ESG products:
Subscriptions	$	414,490	$	371,511	$	338,006		11.6	%		9.9	%
Asset-based fees		174,558		158,305		127,072		10.3	%		24.6	%

Index, real estate and ESG products totals		589,048		529,816		465,078		11.2	%		13.9	%
Risk management analytics		310,339		301,957		275,236		2.8	%		9.7	%
Portfolio management analytics		107,338		103,125		109,836		4.1	%		(6.1	%)

Total Run Rate	$	1,006,725	$	934,898	$	850,150		7.7	%		10.0	%

Subscription total	$	832,167	$	776,593	$	723,078		7.2	%		7.4	%
Asset-based fees total		174,558		158,305		127,072		10.3	%		24.6	%

Total Run Rate	$	1,006,725	$	934,898	$	850,150		7.7	%		10.0	%

December 31, 2014 Compared to December 31, 2013

Total Run Rate grew by 7.7% to $1,006.7 million as of December 31, 2014 compared to December 31, 2013. Total subscription Run Rate grew by 7.2% to $832.2 million as of December 31, 2014 compared to December 31, 2013. Excluding the impact of foreign currency exchange rate changes and the acquisition of GMI Ratings, subscription Run Rate grew by 8.1%.

Run Rate attributable to index, real estate and ESG products grew by 11.2% to $589.0 million. Subscription Run Rate from index, real estate and ESG products grew by 11.6%, to $414.5 million. Excluding the impact of foreign currency exchange rate changes and the acquisition of GMI Ratings, subscription Run Rate rose 10.9%. The growth in index, real estate and ESG products was driven primarily by equity index benchmark and data products, and aided by strong growth in ESG and real estate products.

Asset-based fee Run Rate from index, real estate and ESG products increased 10.3% to $174.6 million at December 31, 2014 compared to December 31, 2013. The increase was primarily driven by inflows into ETFs linked to MSCI indexes and non-ETF passive funds.

As of December 31, 2014, the value of assets in ETFs linked to MSCI equity indexes was $373.3 billion, representing an increase of 12.1% from $332.9 billion as of December 31, 2013. Of the $373.3 billion of assets in ETFs linked to MSCI equity indexes as of December 31, 2014, 50.8% were linked to indexes related to developed markets outside of the U.S., 23.5% were linked to emerging market indexes, 20.0% were linked to U.S. market indexes and 5.7% were linked to other global indexes.

Risk management analytics products Run Rate increased 2.8% to $310.3 million at December 31, 2014 compared to December 31, 2013. Excluding the impact of foreign currency rate changes, Run Rate increased 5.4%, driven by growth from RiskManager, InvestorForce and HedgePlatform products.

Portfolio management analytics products Run Rate increased 4.1% to $107.3 million at December 31, 2014 from December 31, 2013. Excluding the impact of changes in foreign currency exchange rates, Run Rate grew by 5.9%.

December 31, 2013 Compared to December 31, 2012

Total Run Rate grew by 10.0% to $934.9 million as of December 31, 2013 compared to December 31, 2012. Total subscription Run Rate grew by 7.4% to $776.6 million as of December 31, 2013 compared to December 31, 2012. Excluding the impact of the acquisition of InvestorForce, total subscription Run Rate grew by 6.0% as of December 31, 2013 compared to December 31, 2012.

Subscription Run Rate from the index, real estate and ESG products grew by 9.9% to $371.5 million at December 31, 2013 relative to December 31, 2012, driven by growth in equity index benchmark and data products.

On October 2, 2012, The Vanguard Group, Inc. announced its decision to change the target benchmarks of 22 of its ETFs from MSCI’s equity indexes (the “Vanguard ETFs”). As a result of this announcement, we excluded the $138.5 billion of assets in the 22 Vanguard ETFs linked to MSCI equity indexes as of December 31, 2012 for purposes of calculating the index, real estate and ESG asset-based fee Run Rate, which resulted in a decrease of $24.8 million. The average value of assets in the 22 Vanguard ETFs linked to MSCI equity indexes was $122.1 billion for the year ended December 31, 2012 compared to the total average value of assets in ETFs linked to MSCI equity indexes of $349.1 billion.

Asset-based fee Run Rate from index, real estate and ESG products increased by 24.6% to $158.3 million at December 31, 2013 compared to December 31, 2012. The increase was primarily driven by inflows into and higher market performance by ETFs linked to MSCI indexes.

As of December 31, 2013, assets under management (“AUM”) in ETFs linked to MSCI indexes were $332.9 billion, down $69.4 billion, or 17.3%, compared to December 31, 2012. During the year ended December 31, 2013, MSCI-linked ETFs were impacted by market increases of $33.9 billion and net outflows of $103.3 billion. If the AUM related to those Vanguard ETFs which transitioned earlier in 2013 were excluded from the December 31, 2012 balance, AUM in ETFs linked to MSCI indexes would have risen $69.1 billion, or 26.2%, compared to December 31, 2012.

Risk management analytics products Run Rate increased 9.7% to $302.0 million at December 31, 2013 compared to December 31, 2012. Excluding the impact attributable to InvestorForce, Run Rate grew by 6.0%. Run Rate continued to benefit from solid growth in the RiskManager and BarraOne products. Changes in foreign currency exchange rates positively benefited Run Rate by $1.2 million compared to December 31, 2012.

Portfolio management analytics products Run Rate declined 6.1% to $103.1 million at December 31, 2013 from December 31, 2012. Year-over-year Run Rate was negatively impacted, in part, by product swaps totaling $1.1 million and by changes in foreign currency exchange rates, which lowered Run Rate by an additional $2.4 million.

Subscription Sales

The following table sets forth our net new recurring subscription sales and non-recurring sales:


	For the Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
	(in thousands)

New recurring subscription sales	$	117,643		$	110,981		$	98,136
Subscription cancellations		(54,655	)		(62,572	)		(66,549	)


Net new recurring subscription sales	$	62,988		$	48,409		$	31,587

Non-recurring sales	$	20,170		$	17,908		$	13,885

Retention Rates

Other key metrics are our “Aggregate Retention Rate” and “Core Retention Rate,” which are collectively referred to as “Retention Rates.” These metrics are important because subscription cancellations decrease our Run Rate and ultimately our operating revenues. The annual Aggregate Retention Rate represents the retained subscription Run Rate (beginning subscription Run Rate less actual cancels during the year) as a percentage of the subscription Run Rate at the beginning of the fiscal year. If a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation for purposes of calculating our Aggregate Retention Rate. Our Core Retention Rate is calculated in the same way as our Aggregate Retention Rate, except that the Core Retention Rate does not treat switches between products as a cancellation. Our Aggregate and Core Retention Rates are computed on a product-by-product basis. In addition, we treat any reduction in fees resulting from renegotiated contracts as a cancellation in the calculation to the extent of the reduction. We do not calculate Aggregate or Core Retention Rates for that portion of our Run Rate attributable to assets in investment products linked to our indexes or to trading volumes of futures and options contracts linked to our indexes. Aggregate and Core Retention Rates for a non-annual period reflect the annualization of the cancels recorded in the period.

The following table sets forth our Aggregate Retention Rates by product category for the periods indicated for the years ended December 31, 2014, 2013 and 2012:


	Index, Real Estate and ESG			Risk Management Analytics			Portfolio Management Analytics			Total
2014
Qtr Ended March 31,		94.9	%		91.0	%		90.6	%		92.8	%
Qtr Ended June 30,		94.1	%		91.6	%		94.8	%		93.2	%
Qtr Ended September 30,		95.1	%		94.4	%		93.6	%		94.6	%
Qtr Ended December 31,		93.0	%		88.6	%		93.2	%		91.3	%
Year Ended December 31,		94.2	%		91.4	%		93.0	%		93.0	%

2013
Qtr Ended March 31,		95.0	%		93.4	%		81.7	%		92.4	%
Qtr Ended June 30,		94.0	%		92.2	%		87.0	%		92.3	%
Qtr Ended September 30,		94.7	%		91.7	%		89.1	%		92.7	%
Qtr Ended December 31,		90.7	%		85.7	%		88.9	%		88.5	%
Year Ended December 31,		93.6	%		90.8	%		86.7	%		91.5	%


	Index, Real Estate and ESG			Risk Management Analytics			Portfolio Management Analytics			Total

2012
Qtr Ended March 31,		94.5	%		93.7	%		91.9	%		93.7	%
Qtr Ended June 30,		94.9	%		89.8	%		84.2	%		90.9	%
Qtr Ended September 30,		94.0	%		87.9	%		84.9	%		89.8	%
Qtr Ended December 31,		90.4	%		83.0	%		78.0	%		85.2	%
Year Ended December 31,		93.4	%		88.4	%		84.7	%		89.8	%

The following table sets forth our Core Retention Rates by product category for the periods indicated for the years ended December 31, 2014, 2013 and 2012:


	Index, Real Estate and ESG			Risk Management Analytics			Portfolio Management Analytics			Total
2014
Qtr Ended March 31,		94.9	%		91.0	%		93.4	%		93.2	%
Qtr Ended June 30,		94.1	%		91.6	%		95.8	%		93.3	%
Qtr Ended September 30,		95.2	%		94.6	%		94.8	%		94.9	%
Qtr Ended December 31,		93.2	%		89.2	%		93.4	%		91.7	%
Year Ended December 31,		94.2	%		91.6	%		94.3	%		93.2	%

2013
Qtr Ended March 31,		95.0	%		93.7	%		82.8	%		92.7	%
Qtr Ended June 30,		94.1	%		92.8	%		87.5	%		92.6	%
Qtr Ended September 30,		94.8	%		91.7	%		90.3	%		92.9	%
Qtr Ended December 31,		90.9	%		85.8	%		90.1	%		88.8	%
Year Ended December 31,		93.7	%		91.0	%		87.7	%		91.8	%

2012
Qtr Ended March 31,		94.6	%		93.8	%		92.2	%		93.8	%
Qtr Ended June 30,		95.0	%		91.7	%		87.0	%		92.2	%
Qtr Ended September 30,		94.0	%		88.6	%		86.5	%		90.5	%
Qtr Ended December 31,		90.5	%		83.1	%		83.6	%		85.2	%
Year Ended December 31,		93.5	%		89.1	%		87.3	%		90.6	%

The quarterly Retention Rates are calculated by annualizing the actual cancellations recorded during the quarter. 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 Retention Rate for the quarter.

For example, in the fourth quarter of 2014, we recorded cancellations of $17.0 million. To derive the Aggregate Retention Rate for the fourth quarter, we annualized the actual cancellations during the quarter of $17.0 million to derive $68.1 million of annualized cancellations. This $68.1 million was then divided by the $776.6 million subscription Run Rate at the beginning of the year to derive a cancellation rate of 8.7%. The 8.7% was then subtracted from 100.0% to derive an Aggregate Retention Rate of 91.3% for the fourth quarter.

For the calculation of the Core Retention Rate the same methodology was used except the amount of cancellations in the quarter was reduced by the amount of product swaps. For example, in fourth quarter 2014 we had product swaps of $0.7 million which was subtracted from the $17.0 million of actual cancels to derive core cancels of $16.3 million. This $16.3 million was annualized to derive $65.2 million of annualized cancellations which was then divided by the $776.6 million subscription Run Rate at the beginning of the year to derive a cancellation rate of 8.3%. The 8.3% was then subtracted from 100.0% to derive the Core Retention Rate of 91.7% for the fourth quarter.

For the year ended December 31, 2014, 31.1% of our cancellations occurred in the fourth quarter. Historically, Retention Rates have generally been higher during the first three quarters and lower in the fourth quarter, as the fourth quarter is traditionally the largest renewal period in the year.

Expenses

We group our operating expenses into five categories:

	•		Cost of services;

	•		Selling, general and administrative (“SG&A”);

	•		Restructuring;

	•		Amortization of intangible assets; and

	•		Depreciation and amortization of property, equipment and leasehold improvements.

Cost of Services

This category includes costs related to our research, data operations and technology, software engineering and product management functions. Costs in these areas include staff compensation and benefits, occupancy, market data fees, information technology and other miscellaneous costs. The largest expense in this category is compensation and benefits. As such, it generally contributes to a majority of our expense increases from period to period, reflecting compensation increases for current staff and increased staffing levels.

Selling, General and Administrative

This category includes, among other things, compensation and benefits costs for our sales and marketing staff, and our finance, human resources, legal and compliance, information technology and corporate administration personnel. As with cost of services, the largest expense in this category is compensation and benefits. As such, it generally contributes to a majority of our expense increases from period to period, reflecting compensation increases for current staff and increased staffing levels. Other significant expenses were for occupancy, third-party consulting costs and information technology.

Restructuring

During the year ended November 30, 2010, MSCI’s management approved, committed to and initiated a plan to restructure the Company’s operations due to its acquisition of RiskMetrics Group, Inc. (“RiskMetrics”). The plan was substantially completed by December 31, 2011. Restructuring included expenses associated with the elimination of overlapping positions and duplicative occupancy costs, the termination of overlapping vendor contracts and the discontinuance of the planned integration of a product into RiskMetrics’ standard product offering suite.

Amortization of Intangible Assets

Amortization of intangibles expense relates to the definite-lived intangible assets arising from the acquisition of Barra, Inc. (“Barra”) in June 2004, RiskMetrics in June 2010, Measurisk, LLC (“Measurisk”) in July 2010, IPD Group Limited (“IPD”) in November 2012, Investor Force Holdings, Inc. (“InvestorForce”) in January 2013 and Governance Holdings Co. (“GMI Ratings”) in August 2014, as well as capitalized software development costs. Our intangible assets consist of customer relationships, trademarks and trade names, technology and software, proprietary processes and data and non-competition agreements. We amortize definite-lived intangible assets over their estimated useful lives. Definite-lived intangible assets are tested for impairment when impairment indicators are present, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. No impairment of intangible assets has been identified during any of the periods presented. We have no indefinite-lived intangibles. The intangible assets have remaining useful lives ranging from one to 20 years.

Depreciation and amortization of property, equipment and leasehold improvements

This category consists of expenses related to depreciating or amortizing the cost of furniture and fixtures, computer and related equipment and leasehold improvements over the estimated useful life of the assets.

Other Expense (Income), net

This category consists primarily of interest we pay on our outstanding indebtedness, interest we collect on cash and short-term investments, transition services income associated with our sale of ISS, foreign currency exchange rate gains and losses as well as other non-operating income and expense items.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We believe the estimates and judgments upon which we rely are reasonable based upon information available to us at the time these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. See Note 1, “Introduction and Basis of Presentation—Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included herein for a listing of our accounting policies.

Factors Affecting the Comparability of Results

Acquisition of GMI Ratings

On August 11, 2014, we completed the acquisition of GMI Ratings for $15.5 million through our subsidiary MSCI ESG Research Inc. GMI Ratings is a provider of corporate governance research and ratings on over 6,000 companies worldwide. Clients of GMI Ratings include leading institutional investors, banks, insurers, auditors, regulators and corporations seeking to incorporate ESG factors into risk assessment and decision-making.

As of December 31, 2014, the preliminary purchase price allocations for the GMI Ratings acquisition were $9.9 million for goodwill, $3.6 million for identifiable intangible assets, $6.7 million for assets other than identifiable intangible assets and $4.7 million for other liabilities. The results of GMI Ratings were included in our results of operations from its acquisition date of August 11, 2014. The GMI Ratings acquisition has not had a significant impact on our results of operations.

Acquisition of InvestorForce

On January 29, 2013, we acquired InvestorForce to enhance our position as a leader in performance analysis and risk transparency and to further our goal of providing investment decision support tools to institutional investors across all client segments and asset classes. See Note 8, “Goodwill and Intangible Assets” of the Notes to the Consolidated Financial Statements for further information. The results of InvestorForce were included in our results of operations from its acquisition date of January 29, 2013. The InvestorForce acquisition has not had a significant impact on our results of operations.

Acquisition of IPD

On November 30, 2012, we acquired IPD to expand our multi-asset class offering by integrating private real estate assets into its models, as well as adding a family of real estate benchmarks to our family of equity indexes. See Note 8, “Goodwill and Intangible Assets” of the Notes to the Consolidated Financial Statements for further information. The results of IPD were included in our results of operations from its acquisition date of November 30, 2012. The IPD acquisition has not had a significant impact on our results of operations.

Term Loan and Senior Notes Offerings

On June 1, 2010, we entered into a senior secured credit facility (the “2010 Credit Facility”). On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we amended and restated our 2010 Credit Facility (the credit agreement as so amended and restated, the “Amended and Restated Credit Facility”). The Amended and Restated Credit Facility provided for the incurrence of a new senior secured five-year Term Loan A Facility in an aggregate amount of $880.0 million (the “2012 Term Loan”) and a $100.0 million senior secured revolving facility (the “2012 Revolving Credit Facility”). The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, we entered into an agreement that extended the maturity of the Amended and Restated Credit Facility from May 2017 to December 2018 (the “2013 Amended and Restated Credit Facility”). We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the 2013 Amended and Restated Credit Facility, we were required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which was to be $658.1 million.

On November 20, 2014, we completed our private offering of $800.0 million in aggregate principal amount of 5.25% senior unsecured notes due 2024 (the “Senior Notes”) and also entered into a new $200.0 million senior unsecured revolving credit agreement (the “2014 Revolving Credit Agreement”) by and among MSCI, as borrower, certain of its subsidiaries, as guarantors (the “subsidiary guarantors”), the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. We used the net proceeds from the offering of the Senior Notes, together with cash on hand, to prepay in full the $794.8 million of outstanding indebtedness under the 2013 Amended and Restated Credit Facility.

Interest on the Senior Notes accrues at a fixed rate of 5.25% per annum and is payable semiannually in arrears on May 15 and November 15 of each year, commencing May 15, 2015; we will make interest payments to holders of record of the Senior Notes on the immediately preceding May 1 and November 1.

Share Repurchases

On December 13, 2012, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of MSCI’s common stock beginning immediately and continuing through December 31, 2014 (the “2012 Repurchase Program”).

On December 13, 2012, as part of the 2012 Repurchase Program, we entered into our first accelerated share repurchase (“ASR”) agreement to initiate share repurchases aggregating $100.0 million (the “December 2012 ASR Agreement”). As a result of the December 2012 ASR Agreement, we received 2.2 million shares on December 14, 2012 and 0.8 million shares on July 31, 2013 for a combined average purchase price of $33.47 per share.

On August 1, 2013, we entered into a second ASR agreement to initiate share repurchases aggregating $100.0 million (the “August 2013 ASR Agreement”). As a result of the August 2013 ASR Agreement, we received 1.9 million shares on August 2, 2013 and 0.5 million shares on December 30, 2013 for a combined average purchase price of $41.06 per share.

On February 6, 2014, we utilized the remaining repurchase authorization provided by the 2012 Repurchase Program by entering into a third ASR agreement to initiate share repurchases aggregating $100.0 million (the “February 2014 ASR Agreement”). As a result of the February 2014 ASR Agreement, we received 1.7 million shares on February 7, 2014 and 0.6 million shares on May 5, 2014 for a combined average purchase price of $43.10 per share.

On February 4, 2014, our Board of Directors approved a stock repurchase program authorizing the purchase of up to $300.0 million worth of shares of our common stock, which was subsequently increased to $850.0 million (the “2014 Repurchase Program”). Share repurchases made pursuant to the 2014 Repurchase Program may take place through December 31, 2016 in the open market or in privately negotiated transactions from time to time based on market and other conditions.

On September 18, 2014, as part of the 2014 Repurchase Program, we entered into a fourth ASR agreement to initiate share repurchases aggregating $300.0 million (the “September 2014 ASR Agreement”). As a result of the September 2014 ASR Agreement, on September 19, 2014, we paid $300.0 million in cash and received approximately 4.5 million shares of MSCI’s common stock. The total number of shares to be repurchased will be based primarily on an arithmetic average of the volume-weighted average prices of our common stock on each trading day during the repurchase period. This average price will be capped such that only under limited circumstances will we be required to deliver shares or pay cash at settlement. We may also receive additional shares at or prior to maturity of the September 2014 ASR Agreement in May 2015.

These share repurchase programs have effectively decreased the weighted average shares outstanding used in calculating our basic and diluted earnings per share.

Results of Operations

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

The following table presents the results of operations for the years indicated:


	For the Years Ended
	December 31, 2014			December 31, 2013			Increase/ (Decrease)
	(in thousands, except per share data)
Operating revenues	$	996,680		$	913,364		$	83,316		9.1	%
Operating expenses:
Cost of services		308,574			275,403			33,171		12.0	%
Selling, general and administrative		279,352			232,448			46,904		20.2	%
Amortization of intangible assets		45,877			44,798			1,079		2.4	%
Depreciation and amortization of property, equipment, and leasehold improvements		25,711			20,384			5,327		26.1	%

Total operating expenses		659,514			573,033			86,481		15.1	%

Operating income		337,166			340,331			(3,165	)	(0.9	%)
Other expense (income), net		28,828			27,503			1,325		4.8	%

Income from continuing operations before provision for income taxes		308,338			312,828			(4,490	)	(1.4	%)
Provision for income taxes		109,396			112,918			(3,522	)	(3.1	%)

Income from continuing operations		198,942			199,910			(968	)	(0.5	%)
Income from discontinued operations, net of income taxes		85,171			22,647			62,524		276.1	%

Net income	$	284,113		$	222,557		$	61,556		27.7	%

Earnings per basic common share:
From continuing operations	$	1.72		$	1.66		$	0.06		3.6	%
From discontinued operations		0.73			0.19			0.54		284.2	%

Earnings per basic common share	$	2.45		$	1.85		$	0.60		32.4	%

Earnings per diluted common share:
From continuing operations	$	1.70		$	1.64		$	0.06		3.7	%
From discontinued operations		0.73			0.19			0.54		284.2	%

Earnings per diluted common share	$	2.43		$	1.83		$	0.60		32.8	%

Operating margin		33.8	%		37.3	%

Operating Revenues

The following table summarizes revenue by product category for the years indicated:


	For the Years Ended
	December 31, 2014		December 31, 2013		Increase/(Decrease)
	(in thousands)
Index, real estate and ESG:
Subscriptions	$	405,490	$	366,674	$	38,816		10.6	%
Asset-based fees		177,105		149,487		27,619		18.5	%


Total index, real estate and ESG		582,595		516,161		66,435		12.9	%
Risk management analytics		309,696		291,742		17,953		6.2	%
Portfolio management analytics		104,389		105,461		(1,072	)	(1.0	%)


Total operating revenues	$	996,680	$	913,364	$	83,316		9.1	%

Recurring subscriptions		801,183		748,600		52,582		7.0	%
Asset-based fees		177,105		149,487		27,619		18.5	%
Non-recurring revenue		18,392		15,277		3,115		20.4	%


Total operating revenues	$	996,680	$	913,364	$	83,316		9.1	%

Total operating revenues for the year ended December 31, 2014 increased 9.1% to $996.7 million compared to $913.4 million for the year ended December 31, 2013. The growth was primarily comprised of increases in index, real estate and ESG subscription revenues and risk management analytics products revenues.

Revenues related to index, real estate and ESG products increased 12.9% to $582.6 million for the year ended December 31, 2014 compared to $516.2 million for the year ended December 31, 2013.

Subscription revenues from the index, real estate and ESG products increased 10.6% to $405.5 million for the year ended December 31, 2014 compared to $366.7 million for the year ended December 31, 2013. The increase was driven primarily by growth from equity index benchmark and ESG products. Excluding the impact of revenues related to the GMI Ratings acquisition, subscription revenues increased 9.8% year-over-year.

Asset-based fee revenues attributable to index, real estate and ESG products increased 18.5% to $177.1 million for the year ended December 31, 2014 compared to $149.5 million for the year ended December 31, 2013. The year-over-year difference primarily resulted from an increase of $37.5 billion, or 11.5%, to $362.5 billion in the average value of assets in ETFs linked to MSCI indexes for the year ended December 31, 2014.

The following table sets forth the value of assets in ETFs linked to MSCI indexes and the sequential change of such assets as of the end of each of the periods indicated:


	Period Ended
	2013										2014
	March 31,			June 30,			September 30,		December 31,		March 31,		June 30,		September 30,			December 31,
	(amounts in billions)
AUM in ETFs linked to MSCI Indexes	$	357.3		$	269.7		$	302.6	$	332.9	$	340.8	$	378.7	$	377.9		$	373.3

Sequential Change in Value
Market Appreciation/(Depreciation)	$	16.0		$	(13.2	)	$	20.2	$	10.9	$	1.3	$	15.2	$	(17.2	)	$	(8.3	)
Cash Inflow/(Outflow)(1)		(61.0	)		(74.4	)		12.7		19.4		6.6		22.7		16.4			3.7


Total Change	$	(45.0	)	$	(87.6	)	$	32.9	$	30.3	$	7.9	$	37.9	$	(0.8	)	$	(4.6	)

Source: Bloomberg and MSCI

(1)	Includes the loss of $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013, respectively.

The historical values of the assets in ETFs linked to our indexes as of the last day of the month and the monthly average balance can be found under the link “AUM in ETFs Linked to MSCI Indexes” on our Investor Relations homepage at http://ir.msci.com. This information is updated on the second U.S. business day of each month. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K or any other report filed with the SEC.

Revenues related to risk management analytics products increased 6.2% to $309.7 million for the year ended December 31, 2014 compared to $291.7 million for the year ended December 31, 2013. The increase in risk management analytics revenues was driven primarily by the increases in revenues attributable to our RiskManager and Hedge Platform products.

Revenues related to portfolio management analytics products decreased 1.0% to $104.4 million for the year ended December 31, 2014 compared to $105.5 million for the year ended December 31, 2013.

Operating Expenses

Operating expenses increased $86.5 million, or 15.1%, to $659.5 million for the year ended December 31, 2014 compared to $573.0 million for the year ended December 31, 2013. The increase was primarily the result of the investments we made under the Enhanced Investment Program, which was largely completed in the year ended December 31, 2014.

The following table presents operating expenses by each of the categories for the years indicated:


	Years Ended
	December 31, 2014		December 31, 2013		Increase/(Decrease)
	(in thousands)
Cost of services:
Compensation and benefits	$	229,836	$	202,518	$	27,318	13.5	%
Non-compensation expenses		78,738		72,885		5,853	8.0	%

Total cost of services		308,574		275,403		33,171	12.0	%
Selling, general and administrative:
Compensation and benefits		182,714		158,659		24,055	15.2	%
Non-compensation expenses		96,638		73,789		22,849	31.0	%

Total selling, general and administrative		279,352		232,448		46,904	20.2	%
Amortization of intangible assets		45,877		44,798		1,079	2.4	%
Depreciation of property, equipment and leasehold improvements		25,711		20,384		5,327	26.1	%

Total operating expenses	$	659,514	$	573,033	$	86,481	15.1	%

Compensation and benefits	$	412,550	$	361,177	$	51,373	14.2	%
Non-compensation expenses		175,376		146,674		28,702	19.6	%
Amortization of intangible assets		45,877		44,798		1,079	2.4	%
Depreciation of property, equipment and leasehold improvements		25,711		20,384		5,327	26.1	%

Total operating expenses	$	659,514	$	573,033	$	86,481	15.1	%

Compensation and benefits expenses represent the majority of our expenses across all of our operating functions and have typically represented more than 60% of our total operating expenses. These costs generally contribute to the majority of our expense increases from period to period, reflecting increased compensation and benefits expenses for current staff and increased staffing levels. We had 2,926 employees as of December 31, 2014 compared to 2,580 employees not related to the ISS operations as of December 31, 2013. Continued growth of our emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefit expenses. As of December 31, 2014, 50.5% of our employees were located in emerging market centers compared to 46.2% of our employees, excluding those who left as part of the ISS disposition, as of December 31, 2013.

Compensation and benefits costs for the year ended December 31, 2014, were $412.6 million, an increase of $51.4 million, or 14.2%, compared to $361.2 million for year ended December 31, 2013. The increase in compensation and benefits costs primarily reflects costs related to increased staffing levels and current staff.

Non-compensation expenses for the year ended December 31, 2014 were $175.4 million, an increase of 19.6%, compared to $146.7 million for the year ended December 31, 2013. The increase was primarily related to higher third party professional fees as well as higher information technology and marketing costs.

Cost of Services

For the year ended December 31, 2014, total cost of services increased 12.0% to $308.6 million compared to $275.4 million for the year ended December 31, 2013.

Within cost of services, compensation and benefits expenses for the year ended December 31, 2014 increased 13.5% to $229.8 million compared to $202.5 million for the year ended December 31, 2013. The increase in compensation and benefits expenses was primarily the result of increased staffing levels.

Within cost of services, non-compensation expenses for the year ended December 31, 2014 increased 8.0% to $78.7 million compared to $72.9 million for the year ended December 31, 2013. The increase was primarily related to higher third-party professional fees and information technology costs.

Selling, General and Administrative

SG&A expenses increased 20.2% to $279.4 million for the year ended December 31, 2014 compared to $232.4 million for the year ended December 31, 2013.

Within SG&A, compensation and benefits expenses increased 15.2% to $182.7 million for the year ended December 31, 2014 compared to $158.7 million for the year ended December 31, 2013. Similar to compensation and benefits expenses in cost of services, the increase was primarily the result of an increase in staffing levels.

Within SG&A, non-compensation expenses for the year ended December 31, 2014 increased 31.0% to $96.6 million compared to $73.8 million for the year ended December 31, 2013. The increase was primarily related to higher third party professional fees as well as higher information technology and marketing costs.

Within SG&A, selling expenses increased 24.3% to $116.5 million and general and administrative expenses increased 17.4% to $162.9 million for the year ended December 31, 2014.

Amortization of Intangibles

For the year ended December 31, 2014, amortization of intangibles expense totaled $45.9 million compared to $44.8 million for the year ended December 31, 2013. The 2.4% increase resulted from the increased amortization of intangible assets resulting from the amortization of our capitalized software as well as the GMI Ratings acquisition.

Depreciation and amortization of property, equipment and leasehold improvements

For the years ended December 31, 2014 and 2013, depreciation and amortization of property, equipment and leasehold improvements totaled $25.7 million and $20.4 million, respectively. The 26.1% increase primarily reflected higher depreciation of investments made in our information technology infrastructure.

Other Expense (Income), Net

Other expense (income), net for the year ended December 31, 2014 was $28.8 million, an increase of $1.3 million, or 4.8%, compared to $27.5 million for the year ended December 31, 2013. The increase primarily reflected higher interest expense related charges resulting from our refinancings, largely offset by the impact of income related to our transition services agreement with ISS. Interest expense increased by $5.6 million primarily reflecting a non-cash charge of $7.9 million in the fourth quarter of 2014 related to the accelerated amortization of deferred financing and debt discounts associated with the prepayment of our senior secured term loan facility compared to a similar $1.4 million charge recognized in the prior year associated with a credit facility extension.

Income Taxes

The provision for income tax expense was $109.4 million and $112.9 million for the years ended December 31, 2014 and 2013, respectively. These amounts reflect effective tax rates of 35.5% and 36.1% for the years ended December 31, 2014 and 2013, respectively.

The effective tax rate of 35.5% for the year ended December 31, 2014 reflects our operating tax rate adjusted for the impact of certain discrete items. Included in the discrete items was the benefit associated with the 2014 federal research and development credit, which was reinstated into law as of December 19, 2014, which decreased our effective tax rate for the year ended December 31, 2014 by 0.9 percentage points.

The effective tax rate of 35.5% for the year ended December 31, 2014 was lower than the prior year primarily because of the inclusion of the benefits associated with a higher federal research and development credit in our provision for income tax expense for the year ended December 31, 2014 and a reduction in our state income tax rate.

Income (loss) from Discontinued Operations, Net of Income Taxes

On April 30, 2014, MSCI completed the sale of ISS for cash consideration of $367.4 million. ISS, together with the previously sold CFRA product line, is reflected as discontinued operations in our unaudited condensed consolidated financial statements. Income from discontinued operations, net of income taxes was $85.2 million for the year ended December 31, 2014 compared to $22.6 million for the year ended December 31, 2013. The results for the year ended December 31, 2014 included a net gain of $78.7 million resulting from the disposition of ISS.

Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table presents the results of operations for the years indicated:


	For the Years Ended
	December 31, 2013			December 31, 2012			Increase/(Decrease)
	(in thousands, except per share data)
Operating revenues	$	913,364		$	826,990		$	86,374		10.4	%
Operating expenses:
Cost of services		275,403			230,282			45,121		19.6	%
Selling, general and administrative		232,448			211,905			20,543		9.7	%
Restructuring		—			(33	)		33		n/m
Amortization of intangible assets		44,798			50,017			(5,219	)	(10.4	%)
Depreciation and amortization of property, equipment, and leasehold improvements		20,384			16,584			3,800		22.9	%


Total operating expenses		573,033			508,755			64,278		12.6	%

Operating income		340,331			318,235			22,096		6.9	%
Other expense (income), net		27,503			57,434			(29,931	)	(52.1	%)

Income from continuing operations before provision for income taxes		312,828			260,801			52,027		19.9	%
Provision for income taxes		112,918			96,010			16,908		17.6	%

Income from continuing operations		199,910			164,791			35,119		21.3	%
Income from discontinued operations, net of income taxes		22,647			19,447			3,200		16.5	%


Net income	$	222,557		$	184,238		$	38,319		20.8	%

Earnings per basic common share:
From continuing operations	$	1.66		$	1.34		$	0.32		23.9	%
From discontinued operations		0.19			0.16			0.03		18.8	%


Earnings per basic common share	$	1.85		$	1.50		$	0.35		23.3	%

Earnings per diluted common share:
From continuing operations	$	1.64		$	1.32		$	0.32		24.2	%
From discontinued operations		0.19			0.16			0.03		18.8	%


Earnings per diluted common share	$	1.83		$	1.48		$	0.35		23.6	%

Operating margin		37.3	%		38.5	%

Operating Revenues

The following table summarizes revenue by product category for the years indicated:


	For the Years Ended
	December 31, 2013		December 31, 2012		Increase/(Decrease)
	(in thousands)
Index, real estate and ESG:
Subscriptions	$	366,674	$	300,629	$	66,045		22.0	%
Asset-based fees		149,487		140,883		8,603		6.1	%

Total index, real estate and ESG		516,161		441,512		74,648		16.9	%
Risk management analytics		291,742		269,345		22,398		8.3	%
Portfolio management analytics		105,461		116,133		(10,672	)	(9.2	%)


Total operating revenues	$	913,364	$	826,990	$	86,374		10.4	%

Recurring subscriptions	$	748,600	$	672,489	$	76,112		11.3	%
Asset-based fees		149,487		140,883		8,603		6.1	%
Non-recurring revenue		15,277		13,618		1,659		12.2	%

Total operating revenues	$	913,364	$	826,990	$	86,374		10.4	%

Total operating revenues for the year ended December 31, 2013 increased $86.4 million, or 10.4%, to $913.4 million compared to $827.0 million for the year ended December 31, 2012. The growth was comprised of increases in index, real estate and ESG subscription revenues and risk management analytics, partially offset by a decrease in portfolio management analytics. Excluding the impact of revenues attributable to IPD from January 1, 2013 to November 30, 2013 (the “IPD Exclusion Period”) and InvestorForce, revenues grew by 4.4%.

Revenues related to index, real estate and ESG products increased $74.5 million, or 16.9%, to $516.2 million for the year ended December 31, 2013 compared to $441.5 million for the year ended December 31, 2012. Excluding the impact of revenues for the IPD Exclusion Period, revenues grew by 7.3%.

Subscription revenues from index, real estate and ESG products increased $66.0 million, or 22.0%, to $366.7 million for the year ended December 31, 2013 compared to $300.6 million for the year ended December 31, 2012. The increase in subscription revenues from index, real estate and ESG products was driven primarily by the impact of revenues attributable to the IPD acquisition, as well as by increases in revenues attributable to our equity index benchmark products. Excluding the impact of subscription revenues for the IPD Exclusion Period, revenues grew by $23.7 million, or 7.9%.

Asset-based fee revenues attributable to the index, real estate and ESG products increased $8.6 million, or 6.1% to $149.5 million for the year ended December 31, 2013 compared to $140.9 million for the year ended December 31, 2012. The year-over-year difference resulted from higher revenues from non-ETF passive funds and a change in the mix of ETFs linked to MSCI indexes, which more than offset a decline of $24.1 billion, or 6.9%, in the average value of assets in ETFs linked to MSCI indexes primarily related to the loss of the Vanguard ETFs. Included in the year ended December 31, 2013 were asset-based fees of $3.3 million related to the Vanguard ETFs, compared to $21.8 million included in the year ended December 31, 2012.

The average value of assets in ETFs linked to MSCI equity indexes in the aggregate decreased 6.9% to $325.0 billion for the year ended December 31, 2013 compared to $349.1 billion for the year ended December 31, 2012. The switching of the Vanguard ETFs was completed by the end of June 2013. The average value of assets related to the Vanguard ETFs was $122.1 billion for the year ended December 31, 2012.

As of December 31, 2013, the value of assets in ETFs linked to MSCI equity indexes was $332.9 billion, representing a decrease of 17.3% from $402.3 billion as of December 31, 2012. Of the $332.9 billion of assets in ETFs linked to MSCI equity indexes as of December 31, 2013, 53.0% were linked to indexes related to developed markets outside of the U.S., 27.7% were linked to emerging market indexes, 14.4% were linked to U.S. market indexes and 4.9% were linked to other global indexes.

The following table sets forth the value of assets in ETFs linked to MSCI indexes and the sequential change of such assets as of the end of each of the periods indicated:


	Period Ended
	2012									2013
	March 31,		June 30,			September 30,		December 31,		March 31,			June 30,			September 30,		December 31,
	(amounts in billions)
AUM in ETFs linked to MSCI Indexes	$	354.7	$	327.4		$	363.7	$	402.3	$	357.3		$	269.7		$	302.6	$	332.9

Sequential Change in Value
Market Appreciation/(Depreciation)	$	37.9	$	(27.6	)	$	21.1	$	12.7	$	16		$	(13.2	)	$	20.2	$	10.9
Cash Inflow/(Outflow)		15.2		0.3			15.2		25.9		(61.0	)(1)		(74.4	)(1)		12.7		19.4


Total Change	$	53.1	$	(27.3	)	$	36.3	$	38.6	$	(45.0	)	$	(87.6	)	$	32.9	$	30.3

Source: Bloomberg and MSCI

(1)	Includes the loss of $82.8 billion and $74.8 billion of AUM related to certain Vanguard ETFs as of March 31, 2013 and June 30, 2013, respectively.

Revenues related to risk management analytics products increased $22.4 million, or 8.3%, to $291.7 million for the year ended December 31, 2013 compared to $269.3 million for the year ended December 31, 2012. The increase in risk management analytics revenues was driven primarily by attributable to our RiskManager and HedgePlatform products, as well as by the impact of revenues attributable to InvestorForce. Excluding the impact of revenues attributable to InvestorForce during the year ended December 31, 2013, revenues grew by 5.0%.

Revenues related to portfolio management analytics products decreased 9.2% to $105.5 million for the year ended December 31, 2013 compared to $116.1 million for the year ended December 31, 2012. The decrease in revenues was the result of lower sales and elevated cancellations of equity analytics products in prior periods.

Operating Expenses

The following table shows operating expenses by each of the categories for the years indicated:


	Years Ended
	December 31, 2013		December 31, 2012			Increase/(Decrease)
	(in thousands)
Cost of services:
Compensation and benefits	$	202,518	$	171,855		$	30,663		17.8	%
Non-compensation expenses		72,885		58,427			14,458		24.7	%

Total cost of services		275,403		230,282			45,121		19.6	%
Selling, general and administrative:
Compensation and benefits		158,659		140,435			18,224		13.0	%
Non-compensation expenses		73,789		71,470			2,319		3.2	%

Total selling, general and administrative		232,448		211,905			20,543		9.7	%
Restructuring		—		(33	)		33		n/m
Amortization of intangible assets		44,798		50,017			(5,219	)	(10.4	%)
Depreciation of property, equipment and leasehold improvements		20,384		16,584			3,800		22.9	%

Total operating expenses	$	573,033	$	508,755		$	64,278		12.6	%


Compensation and benefits		361,177		312,290			48,887		15.7	%
Non-compensation expenses		146,674		129,897			16,777		12.9	%
Restructuring		—		(33	)		33		n/m
Amortization of intangible assets		44,798		50,017			(5,219	)	(10.4	%)
Depreciation of property, equipment and leasehold improvements		20,384		16,584			3,800		22.9	%

Total operating expenses	$	573,033	$	508,755		$	64,278		12.6	%

Compensation and benefits costs for the year ended December 31, 2013, were $361.2 million, an increase of $48.9 million, or 15.7%, compared to $312.3 million for year ended December 31, 2012. The increase in compensation and benefits costs primarily reflects $52.7 million of increased costs related to staffing levels, partially offset by $3.2 million of decreased severance costs, $0.4 million of lower equity compensation and $0.3 million of post-retirement and other expenses.

Non-compensation expenses for the year ended December 31, 2013 were $146.7 million, an increase of 12.9%, compared to $129.9 million for the year ended December 31, 2012. The increased costs associated with the IPD and InvestorForce acquisitions, were partially offset by lower transaction-related and non-recurring expenses, information technology, other taxes and occupancy costs. The impact of the $3.8 million lease exit charge associated with vacating our 88 Pine Street office space in New York (the “lease exit charge”) recognized in the year ended December 31, 2012 compared to a corresponding benefit recognized in the year ended December 31, 2013 also decreased non-compensation expenses year over year.

Cost of Services

For the year ended December 31, 2013, total cost of services increased 19.6% to $275.4 million compared to $230.3 million for the year ended December 31, 2012.

Within cost of services, compensation and benefits expenses for the year ended December 31, 2013 increased $30.7 million, or 17.8%, to $202.5 million compared to $171.9 million for the year ended

December 31, 2012. The increase in compensation and benefits was primarily impacted by the acquisitions of IPD and InvestorForce and an increase in staffing levels. Partially offsetting this were lower severance costs and lower post-retirement and other expenses.

Within cost of services, non-compensation expenses for the year ended December 31, 2013 increased $14.5 million, or 24.7%, to $72.9 million compared to $58.4 million for the year ended December 31, 2012. The increase was primarily driven by the acquisitions of IPD and InvestorForce, partially offset by the impact of the Lease Exit Charge recognized in the year ended December 31, 2012 compared to a corresponding benefit recognized in the year ended December 31, 2013.

Selling, General and Administrative

SG&A expenses increased $20.5 million, or 9.7%, to $232.4 million for the year ended December 31, 2013 compared to $211.9 million for the year ended December 31, 2012.

Within SG&A, compensation and benefits expenses increased $18.2 million, or 13.0%, to $158.7 million for the year ended December 31, 2013 compared to $140.4 million for the year ended December 31, 2012. Similar to compensation and benefits expenses in cost of services, the increase was primarily impacted by the acquisition of IPD and InvestorForce and an overall increase in staffing levels. Partially offsetting this were lower severance costs and lower equity compensation costs.

Within SG&A, non-compensation expenses for the year ended December 31, 2013 increased $2.3 million, or 3.2%, to $73.8 million compared to $71.5 million for the year ended December 31, 2012. The increase was primarily the result of increased costs associated with the IPD and InvestorForce acquisitions, partially offset by the lower transaction-related and non-recurring expenses, the impact of the lease exit charge recognized in the year ended December 31, 2012 compared to a corresponding benefit recognized in the year ended December 31, 2013 and other taxes.

Within SG&A, selling expenses increased 12.6% to $93.7 million and general and administrative expenses increased 7.7% to $138.7 million for the year ended December 31, 2013.

Amortization of Intangibles

For the year ended December 31, 2013, amortization of intangibles expense totaled $44.8 million compared to $50.0 million for the year ended December 31, 2012. The 10.4% decrease was the result of a portion of the intangible assets becoming fully amortized since the prior period, partially offset by the increase amortization of intangible assets resulting from the IPD and InvestorForce acquisitions.

Depreciation and amortization of property, equipment and leasehold improvements

For the years ended December 31, 2013 and 2012, depreciation and amortization of property, equipment and leasehold improvements totaled $20.4 million and $16.6 million, respectively. The 22.9% increase was related to the impact of increased depreciation from the IPD and InvestorForce acquisitions, as well as the depreciation of hardware and software assets acquired to build out data centers in the second half of the year ended December 31, 2012.

Other Expense (Income), Net

Other expense (income), net for the year ended December 31, 2013 was $27.5 million, a decrease of $29.9 million compared to $57.4 million for the year ended December 31, 2012. For the year ended December 31, 2012, $20.6 million of expense was recognized related to the accelerated amortization of existing fees and the immediate recognition of new fees associated with our May 2012 debt refinancing compared to $1.4 million of expense recognized in the year ended December 31, 2013 associated with our December 2013 debt extension. The remaining difference was primarily the result of the impact on interest expense of lower average outstanding principal on our debt and lower associated interest rates.

Income Taxes

The provision for income tax expense was $112.9 million and $96.0 million for the years ended December 31, 2013 and 2012, respectively. These amounts reflect effective tax rates of 36.1% and 36.8% for the years ended December 31, 2013 and 2012, respectively.

The effective tax rate of 36.1% for the year ended December 31, 2013 reflects our operating tax rate adjusted for the impact of certain discrete items, the effect of which was to decrease our operating tax rate by 1.5 percentage points. Included in the discrete items was the benefit associated with the 2012 federal research and development credit, which was reinstated into law as of January 2, 2013, and which decreased our effective tax rate for the year ended December 31, 2013 by 0.4 percentage points.

The effective tax rate of 36.1% for the year ended December 31, 2013 was lower than the prior year primarily because of the inclusion of the benefits associated with the federal research and development credit in our provision for income tax expense for the year ended December 31, 2013.

Income (loss) from Discontinued Operations, Net of Income Taxes

Income from discontinued operations, net of income taxes was $22.6 million for the year ended December 31, 2014 compared to $19.4 million for the year ended December 31, 2013.

Liquidity and Capital Resources

We require capital to fund ongoing operations, internal growth initiatives and acquisitions. Our primary sources of liquidity are cash flows generated from our operations, existing cash and cash equivalents and credit capacity under our credit facilities. We intend to use these sources of liquidity to service our existing and future debt obligations and fund our working capital requirements, capital expenditures, investments, acquisitions and repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.

Debt Offerings

On June 1, 2010, we entered into the 2010 Credit Facility. On March 14, 2011, we completed the repricing of the 2010 Credit Facility pursuant to Amendment No. 2 to the 2010 Credit Facility. On May 4, 2012, we entered into the Amended and Restated Credit Facility. The Amended and Restated Credit Facility provided for the incurrence of the 2012 Term Loan in an aggregate amount of $880.0 million and the 2012 Revolving Credit Facility in an aggregate amount of $100.0 million. The Amended and Restated Credit Facility also amended certain negative covenants, including financial covenants.

In March 2013, we made a $15.0 million prepayment on the 2012 Term Loan.

On December 12, 2013, we entered into the New Amended and Restated Credit Facility. We also amended the amortization schedule of required debt payments under the 2012 Term Loan. Pursuant to the New Amended and Restated Credit Facility, we were required to repay $5.1 million in quarterly payments over the first two years and $10.1 million in quarterly payments over the following three years, with the exception of the final payment in December 2018, which would have been $658.1 million (assuming no further prepayments).

On November 20, 2014, we completed a private offering of $800.0 million in aggregate principal amount of 5.25% senior unsecured notes due 2024 and also entered into a new $200.0 million senior unsecured revolving credit agreement by and among MSCI, as borrower, several of our subsidiaries, as guarantors (the “subsidiary guarantors”), the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent. We used the net proceeds from the offering of the Senior Notes, together with cash on hand, to prepay in full $794.8 million of outstanding indebtedness under the New Amended and Restated Credit Facility.

The Senior Notes are scheduled to mature and be paid in full on November 20, 2024. At any time prior to November 15, 2019, we may redeem all or part of the Senior Notes upon not less than 30 nor more than 60 days’ prior notice at a redemption price equal to the sum of (i) 100% of the principal amount thereof, plus (ii) a make-whole premium as of the date of redemption, plus (iii) accrued and unpaid interest and additional interest, if any, thereon, to the date of redemption. In addition, we may redeem all or part of the Senior Notes on or after November 15, 2019, at redemption prices set forth in the indenture governing the Senior Notes, together with accrued and unpaid interest. At any time prior to November 15, 2017, we may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the Senior Notes, including any permitted additional notes, at a redemption price equal to 105.25% of the principal amount.

The 2014 Revolving Credit Agreement replaced the 2012 Revolving Credit Facility. The 2014 Revolving Credit Agreement has an initial term of five years that may be extended up to twice, at our request, by one additional year.

Interest on the Senior Notes accrues at a fixed rate of 5.25% per annum, and is payable semiannually in arrears on May 15 and November 15 of each year, commencing May 15, 2015; we will make interest payments to holders of record of the Senior Notes on the immediately preceding May 1 and November 1. Interest expense for the full year ending December 31, 2015, including the amortization of financing fees, will increase significantly to approximately $45.0 million compared to the $31.8 million recognized in the year ended December 31, 2014.

The obligations under the 2014 Revolving Credit Agreement are guaranteed by each of our material direct and indirect wholly-owned domestic subsidiaries, subject to limited exceptions.

The 2014 Revolving Credit Agreement contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to:

	•		incur liens and further negative pledges;

	•		incur additional indebtedness or prepay, redeem or repurchase indebtedness;

	•		make loans or hold investments;

	•		merge, dissolve, liquidate, consolidate with or into another person;

	•		enter into acquisition transactions;

	•		issue disqualified capital stock;

	•		sell, transfer or dispose of assets;

	•		pay dividends or make other distributions in respect of our capital stock or engage in stock repurchases, redemptions and other restricted payments;

	•		create new subsidiaries;

	•		permit certain restrictions affecting our subsidiaries;

	•		change the nature of our business, accounting policies or fiscal periods;

	•		enter into any transactions with affiliates other than on an arm’s length basis; and

	•		amend our organizational documents or amend, modify or change the terms of certain agreements relating to our indebtedness.

The 2014 Revolving Credit Agreement also contains customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, bankruptcy and insolvency events, invalidity or impairment of loan documentation or collateral, change of control and customary ERISA defaults. None of the restrictions above are expected to impact our ability to effectively operate the business.

The 2014 Revolving Credit Agreement also requires us and our subsidiaries to achieve financial and operating results sufficient to maintain compliance with the following financial ratios on a consolidated basis through the termination of the 2014 Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the 2014 Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall not exceed 3.75:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the 2014 Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As of December 31, 2014, our Consolidated Leverage Ratio (as defined in the 2014 Revolving Credit Agreement) was 1.80:1.00 and our Consolidated Interest Coverage Ratio (as defined in the 2014 Revolving Credit Agreement) was 25.79:1.00.

Our non-guarantor subsidiaries of the Senior Notes consist of: (i) domestic subsidiaries of the Company that account for 5% or less of consolidated assets of the Company and its subsidiaries and (ii) any foreign or domestic subsidiary of the Company that is deemed to be a controlled foreign corporation within the meaning of Section 957 of the Internal Revenue Code of 1986, as amended. Our non-guarantor subsidiaries accounted for approximately $192.0 million, or 19.3%, of our total revenue for the twelve months ended December 31, 2014, approximately $35.7 million, or 10.6%, of our consolidated operating income for the twelve months ended December 31, 2014 and approximately $380.2 million, or 13.1%, of our total assets and $148.9 million, or 10.2%, of our total liabilities, in each case as of December 31, 2014.

Cash Dividend

On September 17, 2014, the Board of Directors approved a plan to initiate a regular quarterly cash dividend. Accordingly, the Board of Directors declared a quarterly dividend of $0.18 per share of common stock on October 31, 2014 to shareholders of record as of the close of trading on October 15, 2014. We expect the initial annual dividend rate to be $0.72 per share. On October 31, 2014, we paid $20.4 million for the cash dividend.

On February 3, 2015, the Board of Directors declared a quarterly dividend of $0.18 per share of common stock to be paid on March 13, 2015 to shareholders of record as of the close of trading on February 20, 2015.

Cash flows


	As of
	December 31, 2014		December 31, 2013
	(in thousands)
Cash and cash equivalents	$	508,799	$	358,434

Cash Provided by (Used In) Operating, Investing, and Financing Activities


	For the Years Ended
	December 31, 2014			December 31, 2013			December 31, 2012
	(in thousands)
Net cash provided by operating activities	$	305,673		$	321,183		$	347,075
Net cash provided by (used in) investing activities	$	297,037		$	4,121		$	(94,361	)
Net cash used in financing activities	$	(442,328	)	$	(146,584	)	$	(322,976	)
Effect of exchange rates on cash and cash equivalents	$	(10,017	)	$	(3,595	)	$	1,360

Net increase (decrease) in cash and cash equivalents	$	150,365		$	175,125		$	(68,902	)

Cash and Cash Equivalents

Cash and cash equivalents were $508.8 million and $358.4 million as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, $102.3 million and $95.6 million, respectively, of the cash and cash equivalents were held by foreign subsidiaries, which could be subject to U.S. federal income taxation on repatriation to the U.S. and some of which could be subject to local country taxes if repatriated to the U.S. In addition, repatriation of some foreign cash is further restricted by local laws.

We believe that domestic cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect existing foreign cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter.

Cash Flows From Operating Activities

Cash flows from operating activities consist of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was $305.7 million and $321.2 million for the years ended December 31, 2014 and 2013, respectively. The year-over-year decrease primarily reflects higher cash expenses recognized during the year ended December 31, 2014.

Cash provided by operating activities was $321.2 million and $347.1 million for the years ended December 31, 2013 and 2012, respectively. The year-over-year decrease primarily reflects a change in the timing of collections of our accounts receivable relative to the prior year, partially offset by higher net income adjusted for certain non-cash items.

Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.

Cash Flows From Investing Activities

Cash provided by investing activities was $297.0 million and $4.1 million for the years ended December 31, 2014 and 2013, respectively. The $292.9 million year-over-year increase in cash provided by investing activities primarily reflects net cash inflows resulting from the disposition of ISS during the year ended December 31, 2014. Partially offsetting this were the cash inflows from the maturation of short-term investments received during the year ended December 31, 2013. In the year ended December 31, 2013, we began investing excess cash in money market funds and other similar cash equivalents rather than U.S. Treasury securities and other short-term investments as we had in prior periods.

Cash provided by investing activities was $4.1 million and cash used in investing activities was $94.4 million for the years ended December 31, 2013 and 2012, respectively. The $98.5 million year-over-year increase in cash provided by investing activities primarily reflects a decrease in net cash outflows resulting from acquisitions during the year ended December 31, 2013 compared to the year ended December 31, 2012.

Cash Flows From Financing Activities

Cash used in financing activities was $442.3 million and $146.6 million for the years ended December 31, 2014 and 2013, respectively. The year-over-year increase primarily reflects increased purchases of treasury shares and the first dividend payment made, partially offset by lower repayments on our debt.

Cash used in financing activities was $146.6 million and $323.0 million for the years ended December 31, 2013 and 2012, respectively. The year-over-year decrease primarily reflects lower repayments on our debt, partially offset by higher purchases of treasury shares.

Contractual Obligations

Our contractual obligations consist primarily of leases for office space, leases for equipment and other operating leases, obligations to vendors arising out of market data contracts and our debt obligations arising from the issuance of the Senior Notes. The following table summarizes our contractual obligations for the periods indicated:


			For The Years Ended December 31,
	Total		2015		2016		2017		2018		2019		Thereafter
(in thousands)
Operating leases	$	287,874	$	30,511	$	29,890	$	26,633	$	25,142	$	20,662	$	155,036
Vendor obligations		70,572		40,555		14,936		11,841		2,690		550		—
Senior Notes (1)		1,220,000		42,000		42,000		42,000		42,000		42,000		1,010,000

Total contractual obligations	$	1,578,446	$	113,066	$	86,828	$	80,474	$	69,832	$	63,212	$	1,165,036

(1)	Includes payments for Senior Notes principal plus interest based on the 5.25% coupon interest rate.

The obligations related to MSCI’s uncertain tax positions have been excluded from the table above because of the uncertainties surrounding the timing and final values of the settlement, if any.

Off-Balance Sheet Arrangements

At December 31, 2014 and 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recent Accounting Pronouncements

See Note 2, “Recent Accounting Standards Updates,” of the Notes to the Consolidated Financial Statements included herein for a listing.

Previous: Item 6. Selected Consolidated Financial Data · Next: Item 7A. Qualitative and Quantitative Disclosures About Market Risk

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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