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 Part 1, Item 1A. “Risk Factors,” within this Annual Report on Form 10-K.

Overview

We are an innovative and leading provider of mission-critical investment decision support tools, including indexes; portfolio construction and risk management products and services; ESG research and ratings; and real estate research, reporting and benchmarking offerings. Our research-derived intellectual property includes methodologies, models, derived data and algorithms (collectively, “content”), as well as applications and services, which help our clients manage their investment processes and address their investment, risk and regulatory challenges.

Our clients comprise a wide spectrum of the global investment industry and include asset owners (pension funds, endowments, foundations, central banks, sovereign wealth funds, family offices and insurance companies), asset managers (institutional, mutual funds, hedge funds, ETFs, private wealth, private banks and real estate investment trusts), private wealth managers, private banks, real estate investment trusts, financial intermediaries (banks, broker-dealers, exchanges, custodians, trust companies and investment consultants) and data distributors.

Our offerings are used by our clients across multiple asset classes to achieve a wide range of objectives, including benchmarking, index-linked product creation, portfolio construction, performance measurement and attribution, risk management, as well as investor and regulatory reporting. In addition, our clients are increasingly integrating the content developed across our company, such as factor and ESG data and indexes, into their investment processes.

As of December 31, 2017, we had over 7,000 clients across 88 countries. To calculate the number of clients, we use the shipping address of the ultimate customer utilizing the product which counts affiliates, user locations, or business units within a single organization as separate clients. If we aggregate all related clients under their respective parent entity, the number of clients would be approximately 4,000 as of December 31, 2017. We had offices in 32 cities in 21 countries to help serve our diverse client base, with 52.6% of our revenues coming from clients in the Americas, 34.9% in Europe, the Middle East and Africa (“EMEA”) and 12.5% in Asia and Australia.

Our principal business model is to license annual, recurring subscriptions to our offerings for a fee, which is, in a majority of cases, paid in advance. Fees may vary by offering, number of users or volume of services. 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. Furthermore, 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, typically in arrears, for the use of our intellectual property primarily based on the AUM in their investment product. We also generate revenues from certain exchanges that use our indexes as the basis for futures and options contracts and pay us a license fee, typically in arrears, for the use of our intellectual property based on their volume of trades. In addition, we generate revenues from subscription agreements for the receipt of periodic benchmark reports, digests and other publications, which are most often associated with our Real Estate offerings that are recognized upon delivery of such reports or data updates. Fees are primarily paid in arrears after the offering is delivered. We also realize one-time fees related to customized reports, historical data sets and certain implementation and consulting services, as well as from certain offerings that are purchased on a non-renewal basis.

In evaluating our financial performance, we focus on revenue and profit growth, including results accounted for under accounting principles generally accepted in the United States (“GAAP”) as well as non-GAAP measures, for the Company as a whole and by operating segment. In addition, we focus on operating metrics, including Run

Rate, subscription sales and Aggregate Retention Rate 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 profits into excess cash in the future. Our growth strategy includes: (a) creating broad and innovative research-driven content, (b) expanding our client base and deepening existing client relationships, (c) developing flexible and scalable technology, (d) expanding value-added service offerings and (e) executing strategic relationships and acquisitions.

Key Financial Metrics and Drivers

As discussed in the previous section, we utilize a portfolio of key financial metrics to manage the Company, including GAAP and non-GAAP measures. As detailed below, we review revenues by type and by segment, or major product line. We also review expenses by activity, which provides more transparency into how resources are being deployed. In addition, we utilize operating metrics including Run Rate, subscription sales and Aggregate Retention Rate, to analyze past performance and to provide insight into our latest reported portfolio of recurring business.

In the discussion that follows, we provide variances excluding the impact of foreign currency exchange rate fluctuations when the impact is not considered negligible. Foreign currency exchange rate fluctuations reflect 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. It should be noted that while a substantial portion of our fees for index-linked investment products are invoiced in U.S. dollars, the fees are based on the investment product’s assets, of which two-thirds are invested in underlying securities that are dominated in currencies other than the U.S. dollar. The underlying impact of such will not be reflected in the variances excluding the impact of foreign currency exchange rate fluctuations.

Revenues

Our revenues are characterized by type, which broadly reflects the nature of how they are recognized or earned. Our revenue types are recurring subscription, asset-based fees and non-recurring revenues. We also group our revenues by segment and provide the revenue type within each segment. See Part 1, Item 1. “Business—Our Operating Segments” above for additional details on the products and services that we offer.

Recurring subscription revenues represent fees earned from clients primarily under renewable contracts or agreements and are recognized in most cases ratably over the term of the license or service pursuant to the contract terms. The contracts state the terms under which these fees are to be calculated. The fees are recognized as we provide the product and service to the client over the license period and are generally billed in advance, prior to the license start date. When implementation services are included, we recognize revenues ratably from the date the application is put into production through the end of the license period. Revenues associated with implementation services, which are allocated based on MSCI’s best estimated sales price for such implementation services, are recognized ratably over the useful life of those services. Revenues from subscription agreements for the receipt of periodic benchmark reports, digests, and other publications, which are most often associated with our real estate offerings, are recognized upon delivery of such reports or data updates.

Asset-based fees are principally recognized based on the estimated AUM linked to our indexes from independent third-party sources or the most recently reported information provided by the client. Asset-based fees include revenues related to futures and options contracts linked to our indexes, which are primarily based on trading volumes.

Non-recurring revenues primarily represent fees earned on products and services where we do not have renewal contracts and primarily include revenues for providing historical data, certain implementation services and other special client requests. Based on the nature of the services provided, non-recurring revenues are recognized upon delivery or over the service period.

Effective January 1, 2018, MSCI adopted the new revenue standard as set forth under ASC Subtopic 606-10, “Revenue from Contracts with Customers.” See “—Recent Accounting Standards Updates” below for additional information.

Operating Expenses

We group our operating expenses into the following activity categories:

•Cost of revenues;
•Selling and marketing;
•Research and development (“R&D”);
•General and administrative (“G&A”);
•Amortization of intangible assets; and
•Depreciation and amortization of property, equipment and leasehold improvements.

Costs are assigned to these activity categories based on the nature of the expense or, when not directly attributable, an estimate is allocated based on the type of effort involved.

Cost of Revenues

Cost of revenues consists of costs related to the production and servicing of our products and services and primarily includes related information technology costs, including data center, platform and infrastructure costs; costs to acquire, produce and maintain market data information; costs of research to support, maintain existing products; costs of product management teams; costs of client service and consultant teams to support customer needs; as well as other support costs directly attributable to the cost of revenues including certain human resources, finance and legal costs.

Selling and Marketing

Selling and marketing expenses consist of costs associated with acquiring new clients or selling new products or product renewals to existing clients and primarily includes the costs of our sales force and marketing teams, as well as costs incurred in other groups associated with acquiring new business, including product management, research, technology and sales operations.

Research and Development

R&D expenses consist of the costs to develop new or enhance existing products and the costs to develop new or improved technology and service platforms for the delivery of our products and services and primarily includes the costs of development, research, product management, project management and the technology support associated with these efforts.

General and Administrative

G&A expenses consist of costs primarily related to finance operations, human resources, office of the CEO, legal, corporate technology, corporate development and certain other administrative costs that are not directly attributed, but are instead allocated, to a product or service.

Amortization of Intangible Assets

Amortization of intangible assets expense relates to definite-lived intangible assets arising from past acquisitions and internal capitalized software projects. Intangibles arising from past acquisitions 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 acquired intangible assets has been identified during any of the periods presented. We have no indefinite-lived intangibles.

Depreciation and amortization of property, equipment and leasehold improvements

This category consists of expenses related to depreciating or amortizing the cost of furniture & 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.

Non-GAAP Financial Measures

Adjusted EBITDA

“Adjusted EBITDA,” a measure used by management to assess operating performance, is defined as net income before (1) income (loss) from discontinued operations, net of income taxes, (2) provision for income taxes, (3) other expense (income), net, (4) depreciation and amortization of property, equipment and leasehold improvements, (5) amortization of intangible assets and, at times, (6) certain other transactions or adjustments.

“Adjusted EBITDA expenses,” a measure used by management to assess operating performance, is defined as operating expenses less depreciation and amortization of property, equipment and leasehold improvements and amortization of intangible assets and, at times, certain other transactions or adjustments.

Adjusted EBITDA and Adjusted EBITDA expenses are believed to be meaningful measures of the operating performance of the Company 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 the Company’s core operating performance in the period. All companies do not calculate adjusted EBITDA and adjusted EBITDA expenses in the same way. These measures can differ significantly from company to company depending on, among other things, long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Accordingly, the Company’s computation of the Adjusted EBITDA and Adjusted EBITDA expenses measures may not be comparable to similarly titled measures computed by other companies.

Run Rate

Run Rate is a key operating metric and is important because an increase or decrease in our Run Rate ultimately impacts our operating revenues over time. 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.” See “—Operating Metrics—Run Rate” below for additional information on the calculation of this metric.

Subscription Sales

Subscription sales is a key operating metric and is important because new subscription sales increase our Run Rate and ultimately our operating revenues over time. See “—Operating Metrics—Subscription Sales” below for additional information.

Aggregate Retention Rate

Another key operating metric is Aggregate Retention Rate which is important because subscription cancellations decrease our Run Rate and ultimately our operating revenues over time. See “—Operating Metrics—Aggregate Retention Rate” below for additional information on the calculation of this metric.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with 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 and Note 2, “Recent Accounting Standards Updates.”

Factors Affecting the Comparability of Results

Acquisition of Insignis

On October 16, 2015, the Company completed the purchase of Insignis for $6.5 million through its subsidiary InvestorForce. Insignis is a financial data provider, including data on positions, transactions and complex instruments such as exchange-traded futures and options, OTC swaps and foreign exchange spot and forward contracts. Financial results for Insignis are included within the Analytics segment from the time of acquisition.

The purchase price allocations for the Insignis acquisition were $4.2 million for goodwill, $2.2 million of identifiable intangible assets and $0.1 million for assets other than identifiable intangible assets. The results of Insignis were included in our results of operations from its acquisition date of October 16, 2015. The Insignis acquisition has not had a significant impact on our results of operations.

Disposition of Real Estate occupiers

On August 1, 2016, MSCI completed the sale of its Real Estate occupiers business. The value of the disposed assets and liabilities and the resulting gain on disposal were not material to the Company.

Share Repurchases

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”). On October 14, 2015, we exhausted the $850.0 million share repurchase authorization under the 2014 Repurchase Program.

On September 18, 2014, as part of the 2014 Repurchase Program, we entered into an ASR agreement to initiate share repurchases aggregating $300.0 million (the “September 2014 ASR Agreement”). As a result of the September 2014 ASR Agreement, we repurchased approximately 4.5 million shares of our common stock on September 19, 2014 and received approximately 1.2 million shares of our common stock on May 21, 2015 for a combined average price of $52.79 per share.

On October 28, 2015, our Board of Directors approved a new stock repurchase program authorizing the purchase of up to $1.0 billion worth of shares of our common stock (the “2015 Repurchase Program”). On October 26, 2016, our Board of Directors approved an additional stock repurchase program authorizing the purchase of up to $750.0 million worth of shares of our common stock (together with the $330.3 million remaining authorization under the 2015 Repurchase Program, the “2016 Repurchase Program”). Share repurchases made pursuant to the 2016 Repurchase Program may take place in the open market or in privately negotiated transactions from time to time based on market and other conditions. This authorization may be modified, suspended or terminated by our Board of Directors at any time without prior notice.

On June 2, 2015, we began purchasing shares of our common stock in the open market in accordance with SEC Rule 10b5-1.

For the year ended December 31, 2015, the Company repurchased approximately 10.7 million shares at an average price of $62.63 per share for a total value of $670.8 million pursuant to open market repurchases.

For the year ended December 31, 2016, the Company repurchased approximately 10.3 million shares at an average price of $73.71 per share for a total value of $759.4 million pursuant to open market repurchases.

For the year ended December 31, 2017, the Company repurchased approximately 1.6 million shares at an average price of $87.96 per share for a total value of $136.9 million pursuant to open market repurchases.

The weighted average shares outstanding used to calculate our diluted earnings per share for the year ended December 31, 2017 decreased by 4.8% compared to the year ended December 31, 2016, and by 12.2% for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decreases in both periods reflect the impact of the share repurchase programs, partially offset by the impact of restricted stock units and stock options that converted to shares as well as increased dilution from employee stock awards outstanding.

Senior Notes and Credit Agreement

On November 20, 2014, we completed our first private offering of $800.0 million aggregate principal amount of 5.25% senior unsecured notes due 2024 (the “2024 Senior Notes”) and also entered into a new $200.0 million senior unsecured revolving credit agreement (the “2014 Revolving Credit Agreement”). We used the net proceeds from the offering of the 2024 Senior Notes, together with cash on hand, to repay in full our outstanding term loan indebtedness of $794.8 million, which bore interest at LIBOR plus a margin of 2.25%.

On August 13, 2015, we completed a private offering of $800.0 million aggregate principal amount of 5.75% senior unsecured notes due 2025 (the “2025 Senior Notes”) and received $789.5 million, net of $10.5 million of debt issuance costs.

On August 4, 2016, we completed a private offering of $500.0 million aggregate principal amount of 4.75% senior unsecured notes due 2026 (the “2026 Senior Notes” and, together with the 2024 Senior Notes and the 2025 Senior Notes, the “Senior Notes”) and received $493.3 million, net of $6.7 million of debt issuance costs.

Tax Cuts and Jobs Act of 2017

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”). Tax Reform significantly revises the U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a one-time tax on deemed repatriation of historic earnings of foreign subsidiaries (the “Toll Charge”).

As part of Tax Reform, the Company recorded a provisional net charge to the provision for income taxes of $34.5 million for the year ended December 31, 2017. The net charge of $34.5 million primarily included an estimated tax charge of approximately $47.5 million related to the Toll Charge and an estimated tax charge of approximately $16.0 million related to a change in assertion that those profits were permanently reinvested overseas as of December 31, 2017, partially offset by an estimated tax benefit of approximately $29.0 million related to the revaluation of deferred taxes at the now lower statutory corporate rate.

While we believe our provisional estimates are reasonable, the changes included in Tax Reform are broad and complex. The final impacts of Tax Reform may differ from the above estimates, possibly materially, due to, among other things, changes in interpretations of Tax Reform, guidance from regulatory agencies, any legislative action to address questions that arise because of Tax Reform, any changes in accounting standards for income taxes or related interpretations in response to Tax Reform, or any updates or changes to estimates the Company has utilized to calculate the impact of Tax Reform, including the impact from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The SEC staff has issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” that allows for the provisional measurement of amounts related to the impact from Tax Reform for a period of up to one year after the enactment date of Tax Reform to finalize the recording. We currently anticipate finalizing and recording any resulting adjustments by the end of our fiscal year ending December 31, 2018. See Note 2, “Recent Accounting Standards Updates,” and Note 10, “Income Taxes,” of the Notes to Consolidated Financial Statements included herein for more information.

Results of Operations

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

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

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands, except per share data)
Operating revenues$1,274,172$1,150,669$123,50310.7%
Operating expenses:
Cost of revenues273,913252,10721,8068.6%
Selling and marketing177,297166,66610,6316.4%
Research and development75,88475,2046800.9%
General and administrative87,90387,2356680.8%
Amortization of intangible assets44,54747,033(2,486)(5.3%)
Depreciation and amortization of property, equipment and leasehold improvements35,44034,3201,1203.3%
Total operating expenses694,984662,56532,4194.9%
Operating income579,188488,10491,08418.7%
Other expense (income), net112,289102,16610,1239.9%
Income from continuing operations before provision for income taxes466,899385,93880,96121.0%
Provision for income taxes162,927125,08337,84430.3%
Income from continuing operations303,972260,85543,11716.5%
Income (loss) from discontinued operations, net of income taxes————%
Net income$303,972$260,855$43,11716.5%
Earnings per basic common share:
From continuing operations$3.36$2.72$0.6423.5%
From discontinued operations————%
Earnings per basic common share$3.36$2.72$0.6423.5%
Earnings per diluted common share:
From continuing operations$3.31$2.70$0.6122.6%
From discontinued operations————%
Earnings per diluted common share$3.31$2.70$0.6122.6%
Operating margin45.5%42.4%

Operating Revenues

Our revenues are grouped by the following types: recurring subscription, asset-based fees and non-recurring revenues. We also group revenues by major product lines as follows: Index, Analytics and All Other, which includes the ESG and Real Estate product lines.

The following table presents operating revenues by recurring subscriptions, asset-based fees and non-recurring revenues for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Recurring subscriptions$973,023$913,669$59,3546.5%
Asset-based fees276,092210,22965,86331.3%
Non-recurring25,05726,771(1,714)(6.4%)
Total operating revenues$1,274,172$1,150,669$123,50310.7%

Total operating revenues grew 10.7% to $1,274.2 million for the year ended December 31, 2017 compared to $1,150.7 million for the year ended December 31, 2016. Adjusted for the impact of foreign exchange rate fluctuations, total operating revenues increased 11.1% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Revenue from recurring subscriptions increased 6.5% to $973.0 million for the year ended December 31, 2017 compared to $913.7 million for the year ended December 31, 2016, primarily driven by growth in Index products, which increased $37.9 million, or 9.7%. Adjusted for the impact of foreign currency exchange rate fluctuations, recurring subscription revenues would have increased 7.0% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Revenues from asset-based fees increased 31.3% to $276.1 million for the year ended December 31, 2017 compared to $210.2 million for the year ended December 31, 2016. The increase in asset-based fees was driven by several items, including a $48.2 million, or 33.9%, growth in revenue from ETFs linked to MSCI indexes, which was driven by a 39.2% increase in average AUM, partially offset by the impact of a change in the product mix. In addition, revenue from non-ETF passive products grew $14.0 million, or 23.8%, driven by higher AUM and an increased contribution from higher fee products. Revenues from exchange traded futures and options contracts based on MSCI indexes also grew $3.7 million, or 38.8%, driven by a strong increase in total trading volumes and a more favorable product mix.

The following table presents the value of AUM 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 (1)
20162017
(in billions)March 31,June 30,September 30,December 31,March 31,June 30,September 30,December 31,
AUM in ETFs linked to MSCI indexes (2), (3)$438.3$439.7$474.9$481.4$555.7$624.3$674.3$744.3
Sequential Change in Value
Market Appreciation/ (Depreciation)$(1.7)$(2.5)$23.7$(8.7)$35.8$23.6$32.2$32.0
Cash Inflows6.63.911.515.238.545.017.838.0
Total Change$4.9$1.4$35.2$6.5$74.3$68.6$50.0$70.0

Source: Bloomberg and MSCI

(1)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 or about 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.
(2)The value of assets under management in ETFs linked to MSCI Indexes is calculated by multiplying the ETF net asset value by the number of shares outstanding.

(3) 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.

For the year ended December 31, 2017, the average value of AUM in ETFs linked to MSCI equity indexes was $621.4 billion, up $175.0 billion, or 39.2%, from $446.4 billion for the year ended December 31, 2016.

Non-recurring revenues decreased 6.4% to $25.1 million for the year ended December 31, 2017, compared to $26.8 million for the year ended December 31, 2016, primarily resulting from lower one-time sales of Analytics products.

The following table presents operating revenues by reportable segment and revenue type for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating revenues:
Index
Recurring subscriptions$427,289$389,348$37,9419.7%
Asset-based fees276,092210,22965,86331.3%
Non-recurring15,57813,9741,60411.5%
Index total718,959613,551105,40817.2%
Analytics
Recurring subscriptions452,253439,86412,3892.8%
Non-recurring6,0168,489(2,473)(29.1%)
Analytics total458,269448,3539,9162.2%
All Other
Recurring subscriptions93,48184,4579,02410.7%
Non-recurring3,4634,308(845)(19.6%)
All Other total96,94488,7658,1799.2%
Total operating revenues$1,274,172$1,150,669$123,50310.7%

Refer to the section titled, “Segment Results of Operations” for an explanation of the results.

Operating Expenses

Operating expenses increased 4.9% to $695.0 million for the year ended December 31, 2017 compared to $662.6 million for the year ended December 31, 2016. Adjusted for the impact of foreign currency exchange rate fluctuations, operating expenses increased 5.1% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

The following table presents operating expenses by activity for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating expenses:
Cost of revenues$273,913$252,107$21,8068.6%
Selling and marketing177,297166,66610,6316.4%
Research and development75,88475,2046800.9%
General and administrative87,90387,2356680.8%
Amortization of intangible assets44,54747,033(2,486)(5.3%)
Depreciation and amortization of property, equipment and leasehold improvements35,44034,3201,1203.3%
Total operating expenses$694,984$662,565$32,4194.9%

Cost of Revenues

Cost of revenues for the year ended December 31, 2017 increased 8.6% to $273.9 million compared to $252.1 million for the year ended December 31, 2016, reflecting increases across all three reporting segments. The change was driven by increases in compensation and benefit costs, primarily relating to wages and salaries, severance and incentive compensation, as well as higher non-compensation information technology costs, market data costs, occupancy costs, personnel related costs and travel and entertainment costs.

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2017 increased 6.4% to $177.3 million compared to $166.7 million for the year ended December 31, 2016, reflecting increases in the Index and All Other segments. The change was driven by an overall increase in compensation and benefit costs, relating to incentive compensation, severance, wages and salaries and benefits, as well as higher non-compensation marketing costs and travel and entertainment costs.

Research and Development

R&D expenses for the year ended December 31, 2017 increased 0.9% to $75.9 million compared to $75.2 million for the year ended December 31, 2016, reflecting higher investments in the Analytics segment and ESG within the All Other segment, offset by decreases in the Index segment. The change was driven by higher non-compensation information technology costs partially offset by lower occupancy costs.

General and Administrative

G&A expenses for the year ended December 31, 2017 increased 0.8% to $87.9 million compared to $87.2 million for the year ended December 31, 2016, driven by higher costs in the Index segment partially offset by lower costs in Real Estate within the All Other segment. The change was driven by an increase in compensation and benefits costs, primarily relating to an increase in wages and salaries and benefits, partially offset by a decrease in severance, as well as the impact of lower non-compensation professional fees.

The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Compensation and benefits$440,888$414,322$26,5666.4%
Non-compensation expenses174,109166,8907,2194.3%
Amortization of intangible assets44,54747,033(2,486)(5.3%)
Depreciation and amortization of property, equipment and leasehold improvements35,44034,3201,1203.3%
Total operating expenses$694,984$662,565$32,4194.9%

Compensation and benefits costs are our most significant expense and typically represent more than 60% of our operating expenses or more than 70% of the combined total of the cost of revenues, selling and marketing, R&D and G&A expense categories. We had 3,038 employees as of December 31, 2017 compared to 2,862 employees as of December 31, 2016. Our continued growth in emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefits expenses. As of December 31, 2017, 59.0% of our employees were located in emerging market centers compared to 56.2% of our employees as of December 31, 2016.

Compensation and benefits costs for the year ended December 31, 2017 increased 6.4% to $440.9 million compared to $414.3 million for the year ended December 31, 2016, primarily driven by increases in wages and salaries, incentive compensation, severance and benefits.

Non-compensation expenses for the year ended December 31, 2017 increased 4.3% to $174.1 million compared to $166.9 million for the year ended December 31, 2016, primarily driven by higher information technology, marketing, travel and entertainment and market data costs, partially offset by lower professional fees and recruiting costs.

Amortization of Intangibles

Amortization of intangible asset expense for the year ended December 31, 2017 decreased 5.3% to $44.5 million compared to $47.0 million for the year ended December 31, 2016. The decrease during the year was due to $5.5 million of lower amortization from intangibles associated with past acquisitions primarily related to certain intangible assets associated with the RiskMetrics Group, LLC acquisition becoming fully amortized, partially offset by $3.0 million of increased amortization of capitalized software development costs relating to new internally developed software implementations.

Depreciation and amortization of property, equipment and leasehold improvements

Depreciation and amortization of property, equipment and leasehold improvements for the year ended December 31, 2017 increased 3.3% to $35.4 million compared to $34.3 million for the year ended December 31, 2016. The increase was primarily the result of increased depreciation associated with continued investment in our data centers as well as increased software amortization relating to new system implementations.

Other Expense (Income), Net

Other expense (income), net for the year ended December 31, 2017 increased 9.9% to $112.3 million compared to $102.2 million for the year ended December 31, 2016, primarily driven by $14.4 million of higher interest expense resulting from the increased level of indebtedness associated with the 2026 Senior Notes offering, partially offset by higher interest income associated with higher cash balances as well as the impact of a $3.7 million charge in 2016 related to estimated losses associated with miscellaneous transactions.

Income Taxes

The provision for income tax expense increased 30.3% to $162.9 million for the year ended December 31, 2017 compared to $125.1 million for the year ended December 31, 2016 as a result of a net charge of $34.5 million related to Tax Reform discussed above and higher income before provision for income taxes. These amounts reflect effective tax rates of 34.9% and 32.4% for the years ended December 31, 2017 and 2016, respectively.

Included in the effective tax rate of 34.9% for the year ended December 31, 2017 is 7.4 percentage points related to Tax Reform, with the remaining 27.5 percentage points related to the operating tax rate and other miscellaneous favorable discrete items. The ongoing efforts to better align our tax profile with our global operating footprint helped improve our operating tax rate. The discrete items included $5.7 million of stock-based compensation excess tax benefits related to the adoption of new accounting guidance that first impacted results during the year ended December 31, 2017. See Note 2, “Recent Accounting Standards Updates,” of the Notes to Consolidated Financial Statements included herein for more information.

Tax Reform significantly revises the future ongoing U.S. corporate income tax rate for U.S. corporations, reducing it from a maximum of 35.0% to a flat 21.0% effective beginning on January 1, 2018. As a result, we expect our effective tax rate for the year ending December 31, 2018 to be lower compared to the year ended December 31, 2017.

Net Income

As a result of the factors described above, net income for the year ended December 31, 2017 increased 16.5% to $304.0 million compared to $260.9 million for the year ended December 31, 2016.

Adjusted EBITDA

The following table presents the calculation of the non-GAAP Adjusted EBITDA measure for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating revenues:$1,274,172$1,150,669$123,50310.7%
Adjusted EBITDA expenses614,997581,21233,7855.8%
Adjusted EBITDA$659,175$569,457$89,71815.8%
Adjusted EBITDA margin %51.7%49.5%
Operating margin %45.5%42.4%

Adjusted EBITDA increased 15.8% to $659.2 million for the year ended December 31, 2017 compared to $569.5 million for the year ended December 31, 2016. Adjusted EBITDA margin increased to 51.7% for the year ended December 31, 2017 compared to 49.5% for the year ended December 31, 2016. The improvement in margin reflects a higher rate of growth in operating revenues, primarily attributable to strong operating results within the Index segment, as compared to the rate of growth of Adjusted EBITDA expenses.

Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses

The following table presents the reconciliation of Adjusted EBITDA to net income for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Index Adjusted EBITDA$522,043$431,478$90,56521.0%
Analytics Adjusted EBITDA125,349128,507(3,158)(2.5%)
All Other Adjusted EBITDA11,7839,4722,31124.4%
Consolidated Adjusted EBITDA659,175569,45789,71815.8%
Amortization of intangible assets44,54747,033(2,486)(5.3%)
Depreciation and amortization of property, equipment and leasehold improvements35,44034,3201,1203.3%
Operating income579,188488,10491,08418.7%
Other expense (income), net112,289102,16610,1239.9%
Provision for income taxes162,927125,08337,84430.3%
Net income$303,972$260,855$43,11716.5%

The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Index Adjusted EBITDA expenses$196,916$182,073$14,8438.2%
Analytics Adjusted EBITDA expenses332,920319,84613,0744.1%
All Other Adjusted EBITDA expenses85,16179,2935,8687.4%
Consolidated Adjusted EBITDA expenses614,997581,21233,7855.8%
Amortization of intangible assets44,54747,033(2,486)(5.3%)
Depreciation and amortization of property, equipment and leasehold improvements35,44034,3201,1203.3%
Total operating expenses$694,984$662,565$32,4194.9%

Segment Results

The results for each of our three reportable segments for the years ended December 31, 2017 and 2016 are presented below:

Index Segment

The following table presents the results for the Index segment for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$427,289$389,348$37,9419.7%
Asset-based fees276,092210,22965,86331.3%
Non-recurring15,57813,9741,60411.5%
Operating revenues total718,959613,551105,40817.2%
Adjusted EBITDA expenses196,916182,07314,8438.2%
Adjusted EBITDA$522,043$431,478$90,56521.0%
Adjusted EBITDA margin %72.6%70.3%

Revenues related to Index products increased 17.2% to $719.0 million for the year ended December 31, 2017 compared to $613.6 million for the year ended December 31, 2016.

Revenues from recurring subscriptions were up 9.7% to $427.3 million for the year ended December 31, 2017 compared to $389.3 million for the year ended December 31, 2016. The increase was primarily driven by strong growth in core products, growth in new products, including factor and ESG indexes, as well as growth in custom index products.

Revenues from asset-based fees increased 31.3% to $276.1 million for the year ended December 31, 2017 compared to $210.2 million for the year ended December 31, 2016. The increase in asset-based fees was driven by several items, including a $48.2 million, or 33.9%, growth in revenue from ETFs linked to MSCI indexes, which was driven by a 39.2% increase in average AUM, partially offset by the impact of a change in the product mix. In addition, revenue from non-ETF passive products grew $14.0 million, or 23.8%, driven by higher AUM and an increased contribution from higher fee products. Revenues from exchange traded futures and options contracts based on MSCI indexes also grew $3.7 million, or 38.8%, driven by a strong increase in total trading volumes and a more favorable product mix.

Index segment Adjusted EBITDA expenses increased 8.2% to $196.9 million for the year ended December 31, 2017 compared to $182.1 million for the year ended December 31, 2016, primarily reflecting higher cost of revenues and selling and marketing expenses associated with stronger operating performance and growth in the product line. Partially offsetting these increases were lower R&D expenses associated with higher allocations and investments in the prior year. Adjusted for the impact of foreign currency exchange rate fluctuations, Adjusted EBITDA expenses increased 8.4% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Analytics Segment

The following table presents the results for the Analytics segment for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$452,253$439,864$12,3892.8%
Non-recurring6,0168,489(2,473)(29.1%)
Operating revenues total458,269448,3539,9162.2%
Adjusted EBITDA expenses332,920319,84613,0744.1%
Adjusted EBITDA$125,349$128,507$(3,158)(2.5%)
Adjusted EBITDA margin %27.4%28.7%

Analytics segment revenues increased 2.2% to $458.3 million for the year ended December 31, 2017 compared to $448.4 million for the year ended December 31, 2016, primarily driven by growth in both Equity and Multi-Asset Class Analytics products. Adjusted for the impact of foreign currency exchange rate fluctuations, Analytics segment revenues increased 2.9% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Analytics segment Adjusted EBITDA expenses increased 4.1% to $332.9 million for the year ended December 31, 2017 compared to $319.8 million for the year ended December 31, 2016, primarily driven by higher R&D expenses associated with investments in the MSCI Analytics Platform and Fixed Income and Multi-Asset Class offerings, as well as higher cost of revenues.

All Other Segment

The following table presents the results for the All Other segment, which consists of the ESG and Real Estate product lines, for the years indicated:

Years Ended
December 31,December 31,
20172016Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$93,481$84,457$9,02410.7%
Non-recurring3,4634,308(845)(19.6%)
Operating revenues total96,94488,7658,1799.2%
Adjusted EBITDA expenses85,16179,2935,8687.4%
Adjusted EBITDA$11,783$9,472$2,31124.4%
Adjusted EBITDA margin %12.2%10.7%

All Other segment revenues increased 9.2% to $96.9 million for the year ended December 31, 2017 compared to $88.8 million for the year ended December 31, 2016. The increase in All Other revenues was driven by a 21.8% increase in ESG revenues to $54.8 million, partially offset by a decrease in Real Estate revenues of 3.8% to $42.1

million. The increase in ESG revenues was driven by higher ESG Ratings product revenues, which benefited from increased investments. The decrease in Real Estate revenues was driven by lower revenues from Portfolio Analysis Service products, partially offset by an increase in revenues from Market Information products. Adjusted for the impact of foreign currency exchange rate fluctuations and the divestiture of the Real Estate occupiers business, Real Estate revenues increased 0.3% and All Other operating revenues increased 11.3% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

All Other segment Adjusted EBITDA expenses increased 7.4% to $85.2 million for the year ended December 31, 2017 compared to $79.3 million for the year ended December 31, 2016, primarily driven by higher cost of revenues attributable to ESG operations, partially offset by lower general and administrative and selling and marketing costs attributable to Real Estate operations. Adjusted for the impact of foreign currency exchange rate fluctuations, Adjusted EBITDA expenses increased 7.8% for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

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

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands, except per share data)
Operating revenues$1,150,669$1,075,013$75,6567.0%
Operating expenses:
Cost of revenues252,107267,695(15,588)(5.8%)
Selling and marketing166,666162,2944,3722.7%
Research and development75,20477,320(2,116)(2.7%)
General and administrative87,23586,0071,2281.4%
Amortization of intangible assets47,03346,9101230.3%
Depreciation and amortization of property, equipment and leasehold improvements34,32030,8893,43111.1%
Total operating expenses662,565671,115(8,550)(1.3%)
Operating income488,104403,89884,20620.8%
Other expense (income), net102,16654,34447,82288.0%
Income from continuing operations before provision for income taxes385,938349,55436,38410.4%
Provision for income taxes125,083119,5165,5674.7%
Income from continuing operations260,855230,03830,81713.4%
Income (loss) from discontinued operations, net of income taxes—(6,390)6,390(100.0%)
Net income$260,855$223,648$37,20716.6%
Earnings per basic common share:
From continuing operations$2.72$2.11$0.6128.9%
From discontinued operations-(0.06)0.06(100.0%)
Earnings per basic common share$2.72$2.05$0.6732.7%
Earnings per diluted common share:
From continuing operations$2.70$2.09$0.6129.2%
From discontinued operations-(0.06)0.06(100.0%)
Earnings per diluted common share$2.70$2.03$0.6733.0%
Operating margin42.4%37.6%

Operating Revenues

The following table presents operating revenues by recurring subscriptions, asset-based fees and non-recurring revenues for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Recurring subscriptions$913,669$857,527$56,1426.5%
Asset-based fees210,229197,97412,2556.2%
Non-recurring26,77119,5127,25937.2%
Total operating revenues$1,150,669$1,075,013$75,6567.0%

Total operating revenues grew 7.0% to $1,150.7 million for the year ended December 31, 2016 compared to $1,075.0 million for the year ended December 31, 2015.

Revenue from recurring subscriptions increased 6.5% to $913.7 million for the year ended December 31, 2016 compared to $857.5 million for the year ended December 31, 2015. The increase in recurring subscription revenues was driven by growth from Index products as well as higher revenues from Analytics and ESG products, partially offset by lower Real Estate products’ revenues within the All Other segment. Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscription revenues would have increased 7.1% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

Revenues from asset-based fees increased 6.2% to $210.2 million for the year ended December 31, 2016 compared to $198.0 million for the year ended December 31, 2015. The increase was primarily driven by a 19.2% increase in non-ETF passive funds, as well as a 34.8% increase in revenue from futures and options contracts linked to MSCI indexes. The average value of AUM in ETFs linked to MSCI indexes increased $27.6 billion, or 6.6%, compared to the year ended December 31, 2015. Approximately two-thirds of the underlying securities included in the AUM of our index-linked investment products are denominated in currencies other than the U.S. dollar.

The following table presents the value of AUM 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
20152016
(in billions)March 31,June 30,September 30,December 31,March 31,June 30,September 30,December 31,
AUM in ETFs linked to MSCI indexes (1), (2)$418.0$435.4$390.0$433.4$438.3$439.7$474.9$481.4
Sequential Change in Value
Market Appreciation/ (Depreciation)$13.0$(6.9)$(48.2)$14.5$(1.7)$(2.5)$23.7$(8.7)
Cash Inflows31.724.33.028.76.63.911.515.2
Total Change$44.7$17.4$(45.2)$43.2$4.9$1.4$35.2$6.5

Source: Bloomberg and MSCI

(1)The value of AUM in ETFs linked to MSCI indexes is calculated by multiplying the ETF net asset value by the number of 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.

For the year ended December 31, 2016, the average value of AUM in ETFs linked to MSCI equity indexes was $446.4 billion, up $27.6 billion, or 6.6%, from $418.8 billion for the year ended December 31, 2015.

Non-recurring revenues increased 37.2% to $26.8 million for the year ended December 31, 2016, compared to $19.5 million for the year ended December 31, 2015, primarily resulting from higher one-time sales of Index products.

The following table presents operating revenues by reportable segment and revenue type for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating revenues:
Index
Recurring subscriptions$389,348$353,136$36,21210.3%
Asset-based fees210,229197,97412,2556.2%
Non-recurring13,9747,8546,12077.9%
Index total613,551558,96454,5879.8%
Analytics
Recurring subscriptions439,864426,72513,1393.1%
Non-recurring8,4896,6991,79026.7%
Analytics total448,353433,42414,9293.4%
All Other
Recurring subscriptions84,45777,6666,7918.7%
Non-recurring4,3084,959(651)(13.1%)
All Other total88,76582,6256,1407.4%
Total operating revenues$1,150,669$1,075,013$75,6567.0%

Refer to the section titled, “Segment Results of Operations” for an explanation of the results.

Operating Expenses

Operating expenses decreased 1.3% to $662.6 million for the year ended December 31, 2016 compared to $671.1 million for the year ended December 31, 2015. Adjusting for the impact of foreign currency exchange rate fluctuations, operating expenses would have increased 0.8% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

The following table presents operating expenses by activity for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating expenses:
Cost of revenues$252,107$267,695$(15,588)(5.8%)
Selling and marketing166,666162,2944,3722.7%
Research and development75,20477,320(2,116)(2.7%)
General and administrative87,23586,0071,2281.4%
Amortization of intangible assets47,03346,9101230.3%
Depreciation and amortization of property, equipment and leasehold improvements34,32030,8893,43111.1%
Total operating expenses$662,565$671,115$(8,550)(1.3%)

Cost of Revenues

Cost of revenues for the year ended December 31, 2016 decreased 5.8% to $252.1 million compared to $267.7 million for the year ended December 31, 2015, primarily driven by strong expense management, particularly in the Analytics segment, as reflected by lower compensation and benefits costs attributable to a higher percentage of employees in emerging market centers, which have lower cost structures, and severance costs, as well as a decrease in non-compensation information technology and occupancy costs.

Selling and Marketing

Selling and marketing expenses for the year ended December 31, 2016 increased 2.7% to $166.7 million compared to $162.3 million for the year ended December 31, 2015, primarily driven by higher incentive compensation, partially offset by lower salary expense and severance costs, as well as higher non-compensation marketing costs.

Research and Development

R&D expenses for the year ended December 31, 2016 decreased 2.7% to $75.2 million compared to $77.3 million for the year ended December 31, 2015, primarily due to an increase in capitalized software development costs. The year ended December 31, 2015 includes a non-cash charge of $3.4 million related to the termination of a technology project in the Analytics segment.

General and Administrative

G&A expenses for the year ended December 31, 2016 increased 1.4% to $87.2 million compared to $86.0 million for the year ended December 31, 2015, primarily driven by higher compensation and benefits costs, partially offset by lower non-compensation professional fees.

The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Compensation and benefits$414,322$426,238$(11,916)(2.8%)
Non-compensation expenses166,890167,078(188)(0.1%)
Amortization of intangible assets47,03346,9101230.3%
Depreciation and amortization of property, equipment and leasehold improvements34,32030,8893,43111.1%
Total operating expenses$662,565$671,115$(8,550)(1.3%)

We had 2,862 employees as of December 31, 2016 compared to 2,754 employees as of December 31, 2015. Our continued growth in emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefits expenses. As of December 31, 2016, 56.2% of our employees were located in emerging market centers compared to 52.8% of our employees as of December 31, 2015.

Compensation and benefits costs for the year ended December 31, 2016 decreased 2.8% to $414.3 million compared to $426.2 million for year ended December 31, 2015, primarily due to lower severance as well as higher capitalized software development costs. The higher capitalized software development costs includes a non-cash charge of $2.9 million related to the termination of a technology project in the Analytics segment recognized during the year ended December 31, 2015.

Non-compensation expenses for the year ended December 31, 2016 decreased 0.1% to $166.9 million compared to $167.1 million for the year ended December 31, 2015, primarily driven by a decrease in occupancy and

professional fees, as well as a non-cash charge of $0.5 million related to the termination of a technology project in the Analytics segment recognized during the year ended December 31, 2015. These decreases were partially offset by increases in costs primarily attributable to marketing.

Amortization of Intangibles

Amortization of intangibles expense for the years ended December 31, 2016 and 2015 totaled $47.0 million and $46.9 million, respectively.

Depreciation and amortization of property, equipment and leasehold improvements

For the years ended December 31, 2016 and 2015, depreciation and amortization of property, equipment and leasehold improvements totaled $34.3 million and $30.9 million, respectively. The 11.1% 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, 2016 increased 88.0% to $102.2 million compared to $54.3 million for the year ended December 31, 2015, primarily driven by $39.3 million of higher interest expense resulting from the increased level of indebtedness, a $3.7 million charge for estimated losses associated with miscellaneous transactions, as well as the impact of the $6.4 million from gains on the sale of investments realized in the year ended December 31, 2015.

Income Taxes

The provision for income tax expense was $125.1 million and $119.5 million for the years ended December 31, 2016 and 2015, respectively. These amounts reflect effective tax rates of 32.4% and 34.2% for the years ended December 31, 2016 and 2015, respectively. The decrease in the effective tax rate was primarily driven by efforts to better align our tax profile with our global operating footprint. For the year ended December 31, 2016, 31.7% of income from continuing operations before provision for income taxes was generated by foreign operations compared to 19.1% for the year ended December 31, 2015.

The effective tax rate of 32.4% for the year ended December 31, 2016 reflects our operating tax rate adjusted for the impact of certain discrete items. Included in the discrete items was the release of a reserve for uncertain tax positions related to an IRS audit settlement. Overall, the discrete items decreased our effective tax rate by 1.0% in the year ended December 31, 2016.

The effective tax rate of 34.2% for the year ended December 31, 2015 reflects our operating tax rate adjusted for the impact of certain discrete items. Included in the discrete items was a claim for an additional deduction related to U.S. production activities for prior years, which was partially offset by a provision for state tax liabilities related to prior years. Overall, the discrete items decreased our effective tax rate by 0.6% in the year ended December 31, 2015.

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

On April 30, 2014, MSCI completed the sale of ISS which is reflected as discontinued operations in our consolidated financial statements. Loss from discontinued operations, net of income taxes, for the year ended December 31, 2015 reflects the impact of a $6.4 million out-of-period income tax charge associated with tax obligations triggered upon the sale of ISS.

Net Income

As a result of the factors described above, net income for the year ended December 31, 2016 increased 16.6% to $260.9 million compared to $223.6 million for the year ended December 31, 2015.

Adjusted EBITDA

The following table presents the calculation of the non-GAAP Adjusted EBITDA measure for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating revenues:$1,150,669$1,075,013$75,6567.0%
Adjusted EBITDA expenses581,212593,316(12,104)(2.0%)
Adjusted EBITDA$569,457$481,697$87,76018.2%
Adjusted EBITDA margin %49.5%44.8%
Operating margin %42.4%37.6%

Adjusted EBITDA increased 18.2% to $569.5 million for the year ended December 31, 2016 compared to $481.7 million for the year ended December 31, 2015. Adjusted EBITDA margin increased to 49.5% for the year ended December 31, 2016 compared to 44.8% for the year ended December 31, 2015. The improvement in margin reflects higher growth in operating revenues in the Index, Analytics and ESG product lines, combined with lower Adjusted EBITDA expenses, reflecting strong expense management.

Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses

The following table presents the reconciliation of Adjusted EBITDA to net income for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Index Adjusted EBITDA$431,478$392,987$38,4919.8%
Analytics Adjusted EBITDA128,50795,46833,03934.6%
All Other Adjusted EBITDA9,472(6,758)16,230240.2%
Consolidated Adjusted EBITDA569,457481,69787,76018.2%
Amortization of intangible assets47,03346,9101230.3%
Depreciation and amortization of property, equipment and leasehold improvements34,32030,8893,43111.1%
Operating income488,104403,89884,20620.8%
Other expense (income), net102,16654,34447,82288.0%
Provision for income taxes125,083119,5165,5674.7%
Income from continuing operations260,855230,03830,81713.4%
Income (loss) from discontinued operations, net of income taxes—(6,390)6,390(100.0%)
Net income$260,855$223,648$37,20716.6%

The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Index Adjusted EBITDA expenses$182,073$165,977$16,0969.7%
Analytics Adjusted EBITDA expenses319,846337,956(18,110)(5.4%)
All Other Adjusted EBITDA expenses79,29389,383(10,090)(11.3%)
Consolidated Adjusted EBITDA expenses581,212593,316(12,104)(2.0%)
Amortization of intangible assets47,03346,9101230.3%
Depreciation and amortization of property, equipment and leasehold improvements34,32030,8893,43111.1%
Total operating expenses$662,565$671,115$(8,550)(1.3%)

Segment Results

The results for each of our three reportable segments for the years ended December 31, 2016 and 2015 are presented below:

Index Segment

The following table presents the results for the Index segment for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$389,348$353,136$36,21210.3%
Asset-based fees210,229197,97412,2556.2%
Non-recurring13,9747,8546,12077.9%
Operating revenues total613,551558,96454,5879.8%
Adjusted EBITDA expenses182,073165,97716,0969.7%
Adjusted EBITDA$431,478$392,987$38,4919.8%
Adjusted EBITDA margin %70.3%70.3%

Revenues related to Index products increased 9.8% to $613.6 million for the year ended December 31, 2016 compared to $559.0 million for the year ended December 31, 2015.

Revenues from recurring subscriptions were up 10.3% to $389.3 million for the year ended December 31, 2016 compared to $353.1 million for the year ended December 31, 2015. The increase was primarily driven by growth in benchmark and data products. The impact on total recurring subscriptions from foreign currency exchange rate fluctuations was not significant.

Revenues from asset-based fees increased 6.2% to $210.2 million for the year ended December 31, 2016 compared to $198.0 million for the year ended December 31, 2015. The increase was driven by a 19.2% increase in non-ETF passive funds, as well as a 34.8% increase in revenue from futures and options contracts based on MSCI indexes. Revenue from ETFs linked to MSCI indexes was essentially flat for full-year 2016, driven by the impact of a change in the product mix that offset a 6.6% increase in average AUM. Average AUM in ETFs linked to MSCI indexes increased 6.6% to $446.4 billion for the year ended December 31, 2016 compared to $418.8 billion for the year ended December 31, 2015, driven by cash inflows and market appreciation.

Index segment Adjusted EBITDA expenses increased 9.7% to $182.1 million for the year ended December 31, 2016 compared to $166.0 million for the year ended December 31, 2015, primarily reflecting higher selling and marketing and R&D activities. Adjusting for the impact of foreign currency exchange rate fluctuations, Adjusted EBITDA expenses would have increased 12.2% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

Analytics Segment

The following table presents the results for the Analytics segment for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$439,864$426,725$13,1393.1%
Non-recurring8,4896,6991,79026.7%
Operating revenues total448,353433,42414,9293.4%
Adjusted EBITDA expenses319,846337,956(18,110)(5.4%)
Adjusted EBITDA$128,507$95,468$33,03934.6%
Adjusted EBITDA margin %28.7%22.0%

Analytics segment revenues increased 3.4% to $448.4 million for the year ended December 31, 2016 compared to $433.4 million for the year ended December 31, 2015, primarily driven by higher revenues from RiskManager, equity models and InvestorForce products. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment revenues would have increased 4.6% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

Analytics segment Adjusted EBITDA expenses decreased 5.4% to $319.8 million for the year ended December 31, 2016 compared to $338.0 million for the year ended December 31, 2015, primarily due to a decline in cost of revenues and R&D. The decrease in R&D reflects the impact of a non-cash charge of $3.4 million related to the termination of a technology project recognized during the year ended December 31, 2015. Adjusting for the impact of foreign currency exchange rate fluctuations, Adjusted EBITDA expenses would have decreased 3.6% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

All Other Segment

The following table presents the results for the All Other segment for the years indicated:

Years Ended
December 31,December 31,
20162015Increase/(Decrease)
(in thousands)
Operating revenues:
Recurring subscriptions$84,457$77,666$6,7918.7%
Non-recurring4,3084,959(651)(13.1%)
Operating revenues total88,76582,6256,1407.4%
Adjusted EBITDA expenses79,29389,383(10,090)(11.3%)
Adjusted EBITDA$9,472$(6,758)$16,230240.2%
Adjusted EBITDA margin %10.7%(8.2%)

All Other segment revenues increased 7.4% to $88.8 million for the year ended December 31, 2016 compared to $82.6 million for the year ended December 31, 2015, driven by a $7.4 million, or 19.6%, increase in ESG revenues to $45.0 million, partially offset by a $1.2 million, or 2.7%, decrease in revenues from Real Estate products to $43.8 million. Adjusting for the impact of foreign currency exchange rate fluctuations and the divestiture of the

Real Estate occupiers business, Real Estate revenues would have increased 7.9% and All Other segment revenues would have increased 13.4% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

All Other segment Adjusted EBITDA expenses decreased 11.3% to $79.3 million for the year ended December 31, 2016 compared to $89.4 million for the year ended December 31, 2015, primarily driven by lower costs attributable to Real Estate, partially offset by ESG costs, mainly related to higher R&D and selling and marketing. Adjusting for the impact of foreign currency exchange rate fluctuations, Adjusted EBITDA expenses would have decreased 8.0% for the year ended December 31, 2016 compared to the year ended December 31, 2015.

Operating Metrics

Run Rate

“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 below. 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, and associated revenue recognition, 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 have 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.

Changes in our recurring revenues typically lag changes in Run Rate. The actual amount of recurring revenues we will realize over the following 12 months will differ from Run Rate for numerous reasons, including:

•fluctuations in revenues associated with new recurring sales;
•modifications, cancellations and non-renewals of existing Client Contracts, subject to specified notice requirements;
•differences between the recurring license start date and the date the Client Contract is executed due to, for example, contracts with onboarding periods;
•fluctuations in asset-based fees, which may result from changes in certain investment products’ total expense ratios, market movements, including foreign currency exchange rates, 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 those related to the timing of implementations and report deliveries for certain of our products and services;
•fluctuations in foreign exchange rates; and
•the impact of acquisitions and dispositions.

The following table presents Run Rates by reportable segment as of the dates indicated and the growth percentages over the years indicated:

As ofComparison of
December 31,December 31,December 31,December 31,December 31,
2017201620152017 to 20162016 to 2015
(in thousands)
Index:
Recurring subscriptions$451,048$406,729$368,85510.9%10.3%
Asset-based fees316,812216,982201,04746.0%7.9%
Index total767,860623,711569,90223.1%9.4%
Analytics489,451451,533436,6718.4%3.4%
All Other108,41388,07482,67723.1%6.5%
Total Run Rate$1,365,724$1,163,318$1,089,25017.4%6.8%
Recurring subscriptions total$1,048,912$946,336$888,20310.8%6.5%
Asset-based fees316,812216,982201,04746.0%7.9%
Total Run Rate$1,365,724$1,163,318$1,089,25017.4%6.8%

December 31, 2017 Compared to December 31, 2016

Total Run Rate grew 17.4% to $1,365.7 million as of December 31, 2017 compared to $1,163.3 million as of December 31, 2016. Recurring subscription Run Rate grew 10.8% to $1,048.9 million as of December 31, 2017 compared to $946.3 million as of December 31, 2016. Adjusted for the impact of foreign currency exchange rate fluctuations, recurring subscription Run Rate increased 9.5% as of December 31, 2017 compared to December 31, 2016.

Run Rate from asset-based fees increased 46.0% to $316.8 million as of December 31, 2017, from $217.0 million as of December 31, 2016, 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. As of December 31, 2017, the value of AUM in ETFs linked to MSCI indexes was $744.3 billion, up $262.9 billion, or 54.6%, from $481.4 billion as of December 31, 2016. The increase of $262.9 billion consisted of net inflows of $139.3 billion and market appreciation of $123.6 billion.

Index recurring subscription Run Rate grew 10.9% to $451.0 million as of December 31, 2017 compared to $406.7 million as of December 31, 2016, driven by strong growth in core products, growth in new products, including factor and ESG indexes, as well as growth in custom index products.

Run Rate from Analytics products increased 8.4% to $489.5 million as of December 31, 2017 compared to $451.5 million as of December 31, 2016, primarily driven by growth in both Multi-Asset Class and Equity Analytics products. Adjusted for the impact from foreign currency exchange rate fluctuations, Analytics Run Rate increased 6.8% as of December 31, 2017 compared to December 31, 2016.

Run Rate from All Other products increased 23.1% to $108.4 million at December 31, 2017 compared to $88.1 million at December 31, 2016, driven by a $15.5 million, or 31.5%, increase in ESG Run Rate to $64.6 million and a $4.9 million, or 12.5%, increase in Real Estate Run Rate to $43.8 million. The increase in ESG Run Rate was primarily driven by growth in ESG Ratings products. The increase in Real Estate Run Rate was primarily driven by growth in Market Information and Portfolio Analysis Service products. Adjusted for the impact of foreign currency exchange rate fluctuations, ESG Run Rate increased 27.3%, Real Estate Run Rate increased 3.8% and All Other Run Rate increased 16.9%, in each case, as of December 31, 2017 compared to December 31, 2016.

December 31, 2016 Compared to December 31, 2015

Total Run Rate grew 6.8% to $1,163.3 million as of December 31, 2016 compared to $1,089.3 million as of December 31, 2015. Recurring subscription Run Rate grew 6.5% to $946.3 million as of December 31, 2016

compared to $888.2 million as of December 31, 2015. Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscription Run Rate would have increased 7.2% as of December 31, 2016 compared to December 31, 2015.

Run Rate from asset-based fees increased 7.9% to $217.0 million as of December 31, 2016, from $201.0 million as of December 31, 2015, primarily driven by higher AUM in non-ETF passive funds and ETFs as well as increases in futures and options contracts, all linked to MSCI indexes. As of December 31, 2016, the value of AUM in ETFs linked to MSCI indexes was $481.4 billion, up $48.0 billion, or 11.1%, from $433.4 billion as of December 31, 2015. The increase of $48.0 billion consisted of net inflows of $37.2 billion and market depreciation of $10.8 billion.

Index recurring subscription Run Rate grew 10.3% to $406.7 million as of December 31, 2016 compared to $368.9 million as of December 31, 2015, driven by growth in core products, factor and thematic products and usage fees. There was a negligible impact from foreign currency exchange rate fluctuations on Index recurring subscription Run Rate as of December 31, 2016 compared to December 31, 2015.

Run Rate from Analytics products increased 3.4% to $451.5 million as of December 31, 2016 compared to $436.7 million as of December 31, 2015, primarily driven by growth in sales of equity models as well as RiskManager, BarraOne and InvestorForce products. Adjusting for the impact from foreign currency exchange rate fluctuations, Analytics Run Rate would have increased 3.8% as of December 31, 2016 compared to December 31, 2015.

Run Rate from All Other products increased 6.5% to $88.1 million at December 31, 2016 compared to $82.7 million at December 31, 2015, driven by an $8.9 million, or 22.0%, increase in ESG Run Rate to $49.2 million, partially offset by a $3.5 million, or 8.2%, decrease in Real Estate Run Rate to $38.9 million. The increase in ESG Run Rate was driven by strong sales of ESG Ratings products. Adjusting for the impact of foreign currency exchange rate fluctuations and the divestiture of the Real Estate occupiers business, Real Estate Run Rate would have increased 5.2% and All Other Run Rate would have increased 14.8%, in each case as of December 31, 2016 compared to December 31, 2015.

Subscription Sales

The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the years indicated:

Years EndedComparison of
December 31,December 31,December 31,December 31,December 31,
2017201620152017 to 20162016 to 2015
(in thousands)
New recurring subscription sales
Index$61,308$55,279$49,52110.9%11.6%
Analytics64,17755,25552,81916.1%4.6%
All Other22,54419,97816,65712.8%19.9%
New recurring subscription sales total148,029130,512118,99713.4%9.7%
Subscription cancellations
Index(16,995)(17,417)(16,254)(2.4%)7.2%
Analytics(33,674)(39,205)(29,362)(14.1%)33.5%
All Other(7,717)(8,288)(9,042)(6.9%)(8.3%)
Subscription cancellations total(58,386)(64,910)(54,658)(10.1%)18.8%
Net new recurring subscription sales
Index44,31337,86233,26717.0%13.8%
Analytics30,50316,05023,45790.0%(31.6%)
All Other14,82711,6907,61526.8%53.5%
Net new recurring subscription sales total89,64365,60264,33936.6%2.0%
Non-recurring sales
Index16,31017,8508,964(8.6%)99.1%
Analytics10,3068,8307,28616.7%21.2%
All Other3,8754,2474,880(8.8%)(13.0%)
Non-recurring sales total30,49130,92721,130(1.4%)46.4%
Gross sales
Index$77,618$73,129$58,4856.1%25.0%
Analytics74,48364,08560,10516.2%6.6%
All Other26,41924,22521,5379.1%12.5%
Total gross sales$178,520$161,439$140,12710.6%15.2%
Net sales
Index$60,623$55,712$42,2318.8%31.9%
Analytics40,80924,88030,74364.0%(19.1%)
All Other18,70215,93712,49517.3%27.5%
Total net sales$120,134$96,529$85,46924.5%12.9%

Aggregate Retention Rate

Another key metric is our “Aggregate Retention Rate.” This metric is important because subscription cancellations decrease our Run Rate and ultimately our operating revenues over time. 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 segment products, we treat it as a cancellation for purposes of calculating our Aggregate Retention Rate. Our Aggregate Retention Rate is 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 Retention Rate for that portion of our Run Rate attributable to assets in index-linked investment products or futures and options contracts, in each case, linked to our indexes. Aggregate Retention Rate for a non-annual period reflects the annualization of the cancels recorded in the period.

The following table presents our Aggregate Retention Rate by reportable segment and product category for the periods indicated for the years ended December 31, 2017, 2016 and 2015:

IndexAnalyticsAll OtherTotal
2017
Three Months Ended March 31,96.9%93.3%92.4%94.7%
Three Months Ended June 30,97.0%93.9%90.8%94.9%
Three Months Ended September 30,95.5%93.4%90.7%94.0%
Three Months Ended December 31,93.9%89.7%91.1%91.6%
Year Ended December 31,95.8%92.5%91.2%93.8%
2016
Three Months Ended March 31,96.3%94.6%92.2%95.1%
Three Months Ended June 30,95.6%91.7%89.2%93.1%
Three Months Ended September 30,95.8%90.4%90.8%92.7%
Three Months Ended December 31,93.4%87.4%87.8%89.9%
Year Ended December 31,95.3%91.0%90.0%92.7%
2015
Three Months Ended March 31,97.2%92.9%90.7%94.4%
Three Months Ended June 30,95.4%93.8%90.7%94.2%
Three Months Ended September 30,95.4%95.3%89.1%94.8%
Three Months Ended December 31,92.7%89.9%83.9%90.4%
Year Ended December 31,95.2%93.0%88.6%93.4%

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.

For example, in the fourth quarter of 2017, we recorded cancellations of $19.8 million. To derive the Aggregate Retention Rate for the fourth quarter, we annualized the actual cancellations during the quarter of $19.8 million to derive $79.3 million of annualized cancellations. This $79.3 million was then divided by the $946.3 million subscription Run Rate at the beginning of the year to derive a cancellation rate of 8.4%. The 8.4% was then subtracted from 100.0% to derive an Aggregate Retention Rate of 91.6% for the fourth quarter.

For the year ended December 31, 2017, 33.9% of our cancellations occurred in the fourth quarter. Historically, the Aggregate Retention Rate has 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.

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 existing credit facilities. In addition, we believe we have access to additional funding in the public and private markets. We intend to use these sources of liquidity to, among other things, service our existing and future debt obligations and fund our working capital requirements, capital expenditures, investments, acquisitions, dividend payments 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.

Senior Notes and Credit Agreement

The 2024 Senior Notes are scheduled to mature and be paid in full on November 15, 2024. At any time prior to November 15, 2019, we may redeem all or part of the 2024 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 2024 Senior Notes, together with accrued and unpaid interest, on or after November 15, 2019, at redemption prices set forth in the indenture governing our 2024 Senior Notes.

The 2025 Senior Notes are scheduled to mature and be paid in full on August 15, 2025. At any time prior to August 15, 2020, we may redeem all or part of the 2025 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 2025 Senior Notes, together with accrued and unpaid interest, on or after August 15, 2020, at redemption prices set forth in the indenture governing our 2025 Senior Notes. At any time prior to August 15, 2018, we may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2025 Senior Notes, including any permitted additional notes, at a redemption price equal to 105.75% of the principal amount.

The 2026 Senior Notes are scheduled to mature and be paid in full on August 1, 2026. At any time prior to August 1, 2021, the Company may redeem all or part of the 2026 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, the Company may redeem all or part of the 2026 Senior Notes, together with accrued and unpaid interest, on or after August 1, 2021, at redemption prices set forth in the indenture governing the 2026 Senior Notes. At any time prior to August 1, 2019, the Company may use the proceeds of certain equity offerings to redeem up to 35% of the aggregate principal amount of the 2026 Senior Notes, including any permitted additional notes, at a redemption price equal to 104.75% of the principal amount.

Interest payments attributable to the 2024 Senior Notes are due on May 15 and November 15 of each year. Interest payments attributable to the 2025 Senior Notes are due on February 15 and August 15 of each year. Interest payments attributable to the 2026 Senior Notes are due on February 1 and August 1 of each year.

On August 4, 2016, we entered into Amendment No. 1 (the “Amendment”) to the 2014 Revolving Credit Agreement (the 2014 Revolving Credit Agreement as so amended, the “Revolving Credit Agreement”). The Amendment, among other things, (i) increased aggregate commitments available to be borrowed to $220.0 million, (ii) increased the maximum consolidated leverage ratio from 3.75:1.00 to 4.25:1.00 and (iii) extended the initial term to August 2021 with an option to extend for an additional one-year term.

As of December 31, 2017, we had $2.1 billion of outstanding indebtedness from our Senior Notes and our Revolving Credit Agreement was undrawn. The Revolving Credit Agreement is subject to an unused commitment fee of 0.35%. We recognized an interest expense associated with the Senior Notes and the Revolving Credit Agreement of approximately $116.0 million for the year ended December 31, 2017.

The Senior Notes and the Revolving Credit Agreement are fully and unconditionally, and jointly and severally, guaranteed by our direct or indirect wholly-owned domestic subsidiaries that account for more than 5% of our and our subsidiaries’ consolidated assets, other than certain excluded subsidiaries (the “subsidiary guarantors”). Amounts due under the Revolving Credit Agreement are our and the subsidiary guarantors’ senior unsecured obligations and rank equally with the Senior Notes and any of our other unsecured, unsubordinated debt, senior to any of our subordinated debt and effectively subordinated to our secured debt to the extent of the assets securing such debt.

The indentures governing our Senior Notes (the “Indentures”) among us, each of the subsidiary guarantors, and Wells Fargo Bank, National Association, as trustee, contain covenants that limit our and certain of our subsidiaries’ ability to, among other things, incur liens, enter into sale/leaseback transactions and consolidate, merge

or sell all or substantially all of our assets. In addition, the Indentures restrict our non-guarantor subsidiaries’ ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiaries guaranteeing the Senior Notes on a pari passu basis.

The 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;
•enter into sale/leaseback 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 Revolving Credit Agreement and the Indentures also contain 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 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 Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall not exceed 4.25:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As of December 31, 2017, our Consolidated Leverage Ratio was 2.98:1.00 and our Consolidated Interest Coverage Ratio was 6.27:1.00. There were no amounts drawn under the Revolving Credit Facility since its November 20, 2014 inception.

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 $551.0 million, or 43.2%, of our total revenue for the 12 months ended December 31, 2017, approximately $192.1 million, or 33.2%, of our consolidated operating income for the 12 months ended December 31, 2017, and approximately $893.1 million, or 27.3%, of our consolidated total assets (excluding intercompany assets) and $360.9 million, or 12.6%, of our consolidated total liabilities, in each case as of December 31, 2017.

Share Repurchases

On September 18, 2014, we entered into the September 2014 ASR Agreement. On September 19, 2014, we paid $300.0 million in cash and received approximately 4.5 million shares of our common stock under the September 2014 ASR Agreement. On May 21, 2015, we completed the September ASR Program, receiving approximately 1.2 million shares of our common stock. In total, 5.7 million shares of our common stock were delivered for an average purchase price of $52.79 per share. The repurchased shares are held in treasury.

On June 2, 2015, we began purchasing shares of our common stock in the open market in accordance with SEC Rule 10b5-1. The following table provides information with respect to repurchases of our common stock pursuant to open market repurchases:

Year EndedAverage Price Paid Per ShareTotal Number of Shares RepurchasedDollar Value of Shares Repurchased
(in thousands)
December 31, 2015$62.6310,710$670,824
December 31, 2016$73.7110,303$759,427
December 31, 2017$87.961,556$136,899

Subsequent to the year ended December 31, 2017 and through February 16, 2018, the Company repurchased an additional 0.4 million shares of common stock at an average price of $137.06 per share for a total value of $54.5 million.

As of February 16, 2018, a total of $678.6 million remained available on the share repurchase authorization. This authorization may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

Cash Dividends

On September 17, 2014, our Board of Directors approved a plan to initiate a regular quarterly cash dividend to our shareholders. On October 30, 2014, we began paying regular quarterly cash dividends and have paid such dividends each quarter thereafter.

On January 30, 2018, the Board of Directors declared a quarterly dividend of $0.38 per share of common stock to be paid on March 15, 2018 to shareholders of record as of the close of trading on February 16, 2018.

Cash Flows

The following table presents the Company’s cash and cash equivalents as of the dates indicated:

As of
December 31,December 31,
20172016
(in thousands)
Cash and cash equivalents$889,502$791,834

The following table presents the breakdown of the Company’s cash flows for the periods indicated:

Years Ended
December 31,December 31,December 31,
201720162015
(in thousands)
Net cash provided by operating activities$404,158$442,363$321,247
Net cash (used in) provided by investing activities(48,046)(42,031)(48,861)
Net cash (used in) provided by financing activities(267,543)(372,899)4,696
Effect of exchange rates on cash and cash equivalents9,099(13,305)(8,175)
Net increase in cash and cash equivalents$97,668$14,128$268,907

Cash and Cash Equivalents

Cash and cash equivalents were $889.5 million and $791.8 million as of December 31, 2017 and 2016, respectively. MSCI seeks to maintain minimum cash balances globally of approximately $200.0 million to $250.0 million for general operating purposes. As of December 31, 2017 and 2016, $503.0 million and $208.2 million, respectively, of the cash and cash equivalents were held by foreign subsidiaries. As a result of Tax Reform, MSCI can now more efficiently access a significant portion of its cash held outside of the U.S. in the short-term without being subject to U.S. income taxes. Repatriation of some foreign cash may be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. The increase in cash and cash equivalents held by foreign subsidiaries primarily reflects ongoing efforts to better align our tax profile with our global operating footprint. The global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purpose or other needs, including acquisitions or expansion of our products.

We believe that global cash flows from operations, together with existing cash and cash equivalents and funds available under our existing credit facility and our ability to access the debt and capital markets for additional funds, will continue to be sufficient to fund our global operating activities and cash commitments for investing and financing activities, such as material capital expenditures and share repurchases, for at least the 12 months following issuance of this Form 10-K and for the foreseeable future thereafter.

Accounts receivable

Accounts receivable as of December 31, 2017 increased $106.1 million, or 47.9%, to $327.6 million compared to $221.5 million for the year ended December 31, 2016. The year-over-year change primarily reflects changes to our international billing practices associated with re-aligning our tax profile with our global operating footprint, a lengthening of client payment process approval cycles and higher accruals of asset-based fees related to the growth in AUM. As we fully implement the changes to our international billing practices, we expect a decrease in our accounts receivable balances excluding the impact of adopting ASC Subtopic 606-10, which would improve the rate of growth of our future cash flows.

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 $404.2 million and $442.4 million for the years ended December 31, 2017 and 2016, respectively. The year-over-year decrease reflects higher cash expenses, including higher interest and income tax payments, partially offset by increased cash collections.

Cash provided by operating activities was $442.4 million and $321.2 million for the years ended December 31, 2016 and 2015, respectively. The year-over-year increase reflects higher billings and collections from customers, a decrease in cash expenses and lower cash payments for income taxes, including the impact of income tax refunds, partially offset by higher interest payments.

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 used in investing activities was $48.0 million and $42.0 million for the years ended December 31, 2017 and 2016, respectively, primarily reflecting higher capitalized software development costs mainly related to investments in the MSCI Analytics Platform and Fixed Income products.

Cash used in investing activities was $42.0 million for the year ended December 31, 2016 compared to cash provided by investing activities of $48.9 million for the year ended December 31, 2015.

Cash Flows From Financing Activities

Cash used in financing activities was $267.5 million for the year ended December 31, 2017 compared to $372.9 million for the year ended December 31, 2016. The year-over-year change primarily reflects lower repurchases of treasury shares, partially offset by lower proceeds from borrowings and higher dividend payments.

Cash used in financing activities was $372.9 million for the year ended December 31, 2016 compared to cash provided by financing activities of $4.7 million for the year ended December 31, 2015. The year-over-year decrease primarily reflects the impact of lower proceeds from borrowings and increased repurchases 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 as of December 31, 2017:

Years Ending December 31,
(in thousands)Total20182019202020212022Thereafter
Operating leases$230,65430,21025,34621,94319,09416,208117,853
Vendor obligations67,06949,63013,7483,095596——
Senior Notes (1)3,275,750111,750111,750111,750111,750111,7502,717,000
Other obligations (2)47,4435,0673,6853,6853,6853,68527,637
Total contractual obligations$3,620,916$196,657$154,529$140,473$135,125$131,643$2,862,490
(1)Includes the impact of payments for the principal amount on the 2024 Senior Notes, 2025 Senior Notes and the 2026 Senior Notes plus interest based on the 5.25%, 5.75% and 4.75% coupon interest rate, respectively.
(2)Primarily includes amounts payable related to the estimated Toll Charge. The Toll Charge is included within “Prepaid income taxes” and “Other non-current liabilities” in our Consolidated Statements of Financial Condition.

The obligations related to our uncertain tax positions, which are not considered material, have been excluded from the table above because of the uncertainty surrounding the timing and final amounts of any settlement.

Off-Balance Sheet Arrangements

At December 31, 2017 and 2016, 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 Standards Updates

Effective January 1, 2018, we will be adopting the new revenue standard as set forth under ASC Subtopic 606-10 using the modified retrospective transition method. Compared to the revenue recognition method used prior

to the adoption, the new revenue standard will generally result in more revenue being recognized up-front or earlier in the life of new contracts for certain of our 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 the consolidated financial statements or the annual trend of revenue. However, it may increase quarterly revenue variability by segment depending on the timing of deal closings and renewals. The adoption of ASC Subtopic 606-10 will also result in a change in the accounts receivable and deferred revenue balances compared to the current guidance. Under the current guidance, we record the value of an invoice to accounts receivable and deferred revenue once the service period begins. Under the new guidance, however, when we issue an invoice for a non-cancellable, non-refundable contract, MSCI has an unconditional right to consideration and recognizes a valid receivable and the corresponding deferred revenue. This change in accounting will result in similar increases in both the accounts receivable and deferred revenue balances.

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

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