Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Item 1A.—Risk Factors,” in our Form 10-K.

Except as the context otherwise indicates, the terms “MSCI,” the “Company,” “we,” “our” and “us” refer to MSCI Inc., together with its subsidiaries.

Overview

We are a leading provider of critical decision support tools and solutions for the global investment community. Our mission-critical offerings help investors address the challenges of a transforming investment landscape and power better investment decisions. Leveraging our knowledge of the global investment process and our expertise in research, data and technology, we enable our clients to understand and analyze key drivers of risk and return and confidently and efficiently build more effective portfolios. We operate in four reportable segments as follows: Index, Analytics, ESG and Climate, and All Other – Private Assets. The operating segments of Real Assets and The Burgiss Group, LLC (“Burgiss”) do not individually meet the segment reporting thresholds and have been combined and presented as part of the All Other – Private Assets reportable segment.

Our growth strategy includes: (a) extending leadership in research-enhanced content across asset classes, (b) leading the enablement of ESG and climate investment integration, (c) enhancing distribution and content-enabling technology, (d) expanding solutions that empower client customization, (e) strengthening client relationships and growing into strategic partnerships with clients and (f) executing strategic relationships and acquisitions with complementary content and technology companies. For more information about our Company’s operations, see “Item 1: Business” in our Form 10-K.

As of March 31, 2023, we served approximately 6,6001 clients in more than 95 countries.

Our principal business model is generally to license annual, recurring subscriptions for the majority of our Index, Analytics and ESG and Climate products and services for a fee due in advance of the service period. Real Assets products are also licensed annually through subscriptions, which are generally recurring, for a fee which is paid in advance when products are generally delivered ratably over the subscription period or in arrears after the product is delivered. A portion of our fees comes from clients who use our indexes as the basis for index-linked investment products. Such fees are primarily based on a client’s assets under management (“AUM”), trading volumes and fee levels.

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

We present revenues disaggregated by types and by segments, which represent our major product lines. 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 Retention Rate to manage and assess performance and to provide deeper insights into the recurring portion of our business.

In the discussion that follows, we provide certain variances excluding the impact of foreign currency exchange rate fluctuations and acquisitions. 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. While operating revenues adjusted for the impact of foreign currency fluctuations includes asset-based fees that have been adjusted for the impact of foreign currency fluctuations, the underlying AUM, which is the primary component of asset-based fees, is not adjusted for foreign currency fluctuations. Approximately three-fifths of the AUM is invested in securities denominated in currencies other than the U.S. dollar, and accordingly, any such impact is excluded from the disclosed foreign currency-adjusted variances.

For the three months ended March 31, 2023, our largest client organization by revenue, BlackRock, accounted for 10.2% of our consolidated operating revenues, with 95.3% of the operating revenues from BlackRock coming from fees based on the assets in BlackRock’s ETFs that are based on our indexes.

1 Represents the aggregate of all related clients under their respective parent entity.

The discussion of our results of operations for the three months ended March 31, 2023 and 2022 are presented below. The results of operations for interim periods may not be indicative of future results.

Results of Operations

Operating Revenues

Our operating revenues are grouped by the following types: recurring subscriptions, asset-based fees and non-recurring. We also group operating revenues by major product or reportable segment as follows: Index, Analytics, ESG and Climate and All Other – Private Assets, which includes the Real Assets operating segment.

The following table presents operating revenues by type for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Recurring subscriptions$445,247$399,76011.4%
Asset-based fees133,126145,053(8.2%)
Non-recurring13,84515,132(8.5%)
Total operating revenues$592,218$559,9455.8%

Total operating revenues increased 5.8%. Adjusting for the impact of foreign currency exchange rate fluctuations, total operating revenues would have increased 7.2%.

Operating revenues from recurring subscriptions increased 11.4%, primarily driven by strong growth in Index products, which increased $22.2 million, or 12.7%, ESG and Climate products, which increased $15.2 million, or 30.0%, and Analytics products, which increased $6.7 million, or 4.9%. Adjusting for the impact of foreign currency exchange rate fluctuations, operating revenues from recurring subscriptions would have increased 13.3%.

Operating revenues from asset-based fees decreased 8.2%, driven by a decline in revenues from non-ETF indexed funds linked to MSCI indexes and ETFs linked to MSCI equity indexes. Operating revenues from non-ETF indexed funds linked to MSCI indexes decreased by 21.9%, primarily driven by decreases in average AUM and in average basis point fees. Operating revenues from ETFs linked to MSCI equity indexes decreased by 3.6%, primarily driven by a decrease in average AUM, partially offset by an increase in average basis point fees.

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

Period Ended
20222023
(in billions)March 31,June 30,September 30,December 31,March 31,
AUM in ETFs linked to MSCI equity indexes(1), (2)$1,389.3$1,189.5$1,081.2$1,222.9$1,305.4
Sequential Change in Value
Market Appreciation/(Depreciation)$(89.7)$(207.3)$(105.7)$118.8$75.1
Cash Inflows27.47.5(2.6)22.97.4
Total Change$(62.3)$(199.8)$(108.3)$141.7$82.5

The following table presents the average value of AUM in ETFs linked to MSCI equity indexes for the periods indicated:

20222023
(in billions)MarchJuneSeptemberDecemberMarch
AUM in ETFs linked to MSCI equity indexes(1), (2)
Quarterly average$1,392.5$1,285.4$1,208.9$1,182.1$1,287.5
Year-to-date average$1,392.5$1,338.9$1,295.6$1,267.2$1,287.5

(1)The historical values of the AUM in ETFs linked to our equity 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 Equity Indexes” on our Investor Relations homepage at http://ir.msci.com. This information is updated mid-month each month. Information contained on our website is not deemed part of or incorporated by reference into this Quarterly Report on Form 10-Q or any other report filed with the SEC. The AUM in ETFs also includes AUM in Exchange Traded Notes, the value of which is less than 1.0% of the AUM amounts presented.

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

The average value of AUM in ETFs linked to MSCI equity indexes for the three months ended March 31, 2023, was down $105.0 billion, or 7.5%, compared to the three months ended March 31, 2022.

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

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues:
Index
Recurring subscriptions$196,678$174,49812.7%
Asset-based fees133,126145,053(8.2%)
Non-recurring9,57811,208(14.5%)
Index total339,382330,7592.6%
Analytics
Recurring subscriptions144,503137,7994.9%
Non-recurring2,5671,99828.5%
Analytics total147,070139,7975.2%
ESG and Climate
Recurring subscriptions65,73250,57230.0%
Non-recurring1,3261,457(9.0%)
ESG and Climate total67,05852,02928.9%
All Other - Private Assets
Recurring subscriptions38,33436,8913.9%
Non-recurring374469(20.3%)
All Other - Private Assets total38,70837,3603.6%
Total operating revenues$592,218$559,9455.8%

Refer to the section titled “Segment Results” that follows for further discussion of segment revenues.

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 estimated allocation based on the type of effort involved. Cost of revenues, selling and marketing, R&D and G&A all include both compensation as well as non-compensation related expenses.

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

Three Months Ended March 31,% Change
(in thousands)20232022
Operating expenses:
Cost of revenues$108,647$102,7715.7%
Selling and marketing66,47566,0530.6%
Research and development31,32328,32210.6%
General and administrative41,04445,567(9.9%)
Amortization of intangible assets24,66721,72013.6%
Depreciation and amortization of property, equipment and leasehold improvements5,4606,534(16.4%)
Total operating expenses$277,616$270,9672.5%

Total operating expenses increased 2.5%, and adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 5.4%.

Cost of Revenues

Cost of revenues expenses consist of costs related to the production and servicing of our products and services and primarily includes related information technology costs, including data center, cloud service, platform and infrastructure costs; costs to acquire, produce and maintain market data information; costs of research to support and 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.

Cost of revenues increased 5.7%, reflecting increases across the Index, ESG and Climate and Analytics reportable segments, partially offset by decreases in the All Other – Private Assets reportable segment. The change was driven by increases in non-compensation costs, primarily relating to higher market data costs, as well as higher compensation and benefit costs, primarily reflecting higher wages and salaries and incentive compensation, partially offset by lower benefits 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 and marketing teams, as well as costs incurred in other departments associated with acquiring new business, including product management, research, technology and sales operations.

Selling and marketing expenses increased 0.6%, reflecting increases in the ESG and Climate reportable segment, partially offset by decreases across the Index, All Other – Private Assets and Analytics reportable segments. The change was driven by increases in non-compensation costs, primarily relating to higher marketing costs and travel and entertainment expenses, partially offset by lower compensation and benefit costs, primarily relating to lower benefits costs.

Research and Development

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

R&D expenses increased 10.6%, reflecting increases across the ESG and Climate, All Other - Private Assets and Index reportable segments, partially offset by decreases in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation costs, partially offset by increased capitalization of costs related to internally developed software projects. The change was also driven by higher non-compensation costs, primarily relating to higher information technology costs.

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 to a product or service, but are instead allocated to G&A expenses.

G&A expenses decreased 9.9%, reflecting decreases across the All Other - Private Assets, Index and Analytics reportable segments, partially offset by increases in the ESG and Climate reportable segment. The change was driven by lower non-compensation costs, primarily relating to lower professional fees and the absence of non-recurring transaction and integration costs related to the September 2021 acquisition of Real Capital Analytics, Inc. (“RCA”). The change was also driven by decreases in compensation and benefit costs, primarily relating to lower incentive compensation and benefits costs.

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

Three Months Ended March 31,% Change
(in thousands)20232022
Compensation and benefits$181,579$179,8381.0%
Non-compensation expenses65,91062,8754.8%
Amortization of intangible assets24,66721,72013.6%
Depreciation and amortization of property, equipment and leasehold improvements5,4606,534(16.4%)
Total operating expenses$277,616$270,9672.5%

Compensation and Benefits

A significant portion of the incentive compensation component of operating expenses is based on the achievement of a number of financial and operating metrics. In a scenario where operating revenue growth and profitability moderate, incentive compensation would be expected to decrease accordingly.

We had 4,846 employees as of March 31, 2023, compared to 4,361 employees as of March 31, 2022, reflecting a 11.1% increase in the number of employees. Continued growth of our emerging market centers around the world is an important factor in our ability to manage and control the growth of our compensation and benefits costs. As of March 31, 2023, 65.4% of our employees were located in emerging market centers compared to 63.8% as of March 31, 2022.

Compensation and benefits costs increased 1.0%, primarily driven by an increase in salaries and incentive compensation due to headcount growth, partially offset by decreased benefits costs. Adjusting for the impact of foreign currency exchange rate fluctuations, compensation and benefits costs would have increased by 5.0%.

Non-Compensation Expenses

Fixed costs constitute a significant portion of the non-compensation component of operating expenses. The discretionary non-compensation component of operating expenses could, however, be reduced in the near-term in a scenario where operating revenue growth moderates.

Non-compensation expenses increased 4.8%, primarily driven by higher information technology and market data costs.

Amortization of Intangible Assets

Amortization of intangible assets expense relates to definite-lived intangible assets arising from past acquisitions and capitalization of internally developed software projects recognized over their estimated useful lives. Amortization of intangible assets expense increased 13.6%, primarily driven by higher amortization of internal use software.

Depreciation and Amortization of Property, Equipment and Leasehold Improvements

Depreciation and amortization of property, equipment and leasehold improvements consists of expenses related to depreciating or amortizing the cost of computer and related equipment, leasehold improvements, software and furniture and fixtures over the estimated useful life of the assets. Depreciation and amortization of property, equipment and leasehold improvements decreased 16.4%, primarily driven by lower depreciation on computer and related equipment.

Total Other Expense (Income), Net

The following table shows our other expense (income), net for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Interest income$(10,362)$(298)3377.2%
Interest expense46,20640,71413.5%
Other expense (income)2,386(381)(726.2%)
Total other expense (income), net$38,230$40,035(4.5%)

Total other expense (income), net decreased 4.5%, primarily driven by higher interest income due to higher yields and higher cash balances, partially offset by higher interest expense associated with higher average outstanding debt balances and by foreign currency exchange rate losses.

Income Taxes

The following table shows our income tax provision and effective tax rate for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Provision for income taxes37,64420,52083.5%
Effective tax rate13.6%8.2%65.9%

The effective tax rate of 13.6% for the three months ended March 31, 2023 reflects the Company's estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $16.5 million, primarily related to $11.1 million of excess tax benefits recognized on share-based compensation vested during the period and $4.6 million of tax benefits related to the resolution of prior year items.

The effective tax rate of 8.2% for the three months ended March 31, 2022 reflects the Company's estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $28.1 million, primarily related to $28.3 million of excess tax benefits recognized on share-based compensation vested during the period.

Net Income

The following table shows our net income for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Net income$238,728$228,4234.5%

As a result of the factors described above, net income increased 4.5%.

Weighted Average Shares and Common Shares Outstanding

The following table shows our weighted average shares outstanding for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Weighted average shares outstanding:
Basic80,04181,591(1.9%)
Diluted80,48282,286(2.2%)

The following table shows our common shares outstanding for the periods indicated:

As of% Change
(in thousands)March 31, 2023December 31, 2022
Common shares outstanding80,06379,9600.1%

The decrease in weighted average shares primarily reflects the impact of share repurchases made pursuant to the stock repurchase program during the twelve months ended December 31, 2022. The increase in common shares outstanding primarily reflects the vesting of certain share-based awards during the three months ended March 31, 2023.

Adjusted EBITDA

“Adjusted EBITDA,” a non-GAAP measure used by management to assess operating performance, is defined as net income before (1) provision for income taxes, (2) other expense (income), net, (3) depreciation and amortization of property, equipment and leasehold improvements, (4) amortization of intangible assets and, at times, (5) certain other transactions or adjustments, including, when applicable, certain non-recurring acquisition-related integration and transaction costs.

“Adjusted EBITDA expenses,” a non-GAAP 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, including, when applicable, certain non-recurring acquisition-related integration and transaction costs.

“Adjusted EBITDA margin” is defined as Adjusted EBITDA divided by operating revenues.

Adjusted EBITDA, Adjusted EBITDA margin and Adjusted EBITDA expenses are believed to be meaningful measures for management to assess 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 certain capital spending and acquisitions that do not directly affect what management considers to be the Company’s ongoing operating performance in the period. All companies do not calculate adjusted EBITDA, adjusted EBITDA margin 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, Adjusted EBITDA margin and Adjusted EBITDA expenses measures may not be comparable to similarly titled measures computed by other companies.

The following table presents non-GAAP Adjusted EBITDA for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues$592,218$559,9455.8%
Adjusted EBITDA expenses247,489241,4012.5%
Adjusted EBITDA$344,729$318,5448.2%
Operating margin %53.1%51.6%
Adjusted EBITDA margin %58.2%56.9%

The change in Adjusted EBITDA margin reflects changes in the rate of growth of Adjusted EBITDA expenses as compared to the rate of growth of operating revenues, driven by the factors previously described.

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

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

Three Months Ended March 31,% Change
(in thousands)20232022
Net income$238,728$228,4234.5%
Provision for income taxes37,64420,52083.5%
Other expense (income), net38,23040,035(4.5%)
Operating income314,602288,9788.9%
Amortization of intangible assets24,66721,72013.6%
Depreciation and amortization of property, equipment and leasehold improvements5,4606,534(16.4%)
Acquisition-related integration and transaction costs (1)—1,312(100.0%)
Consolidated Adjusted EBITDA344,729318,5448.2%
Index Adjusted EBITDA$253,682$245,8753.2%
Analytics Adjusted EBITDA60,78050,88919.4%
ESG and Climate Adjusted EBITDA17,87612,09247.8%
All Other - Private Assets Adjusted EBITDA12,3919,68827.9%
Consolidated Adjusted EBITDA344,729318,5448.2%

(1)Incremental and non-recurring costs attributable to acquisitions directly related to the execution of the transaction and integration of the acquired business that have occurred no later than 12 months after the close of the transaction.

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

Three Months Ended March 31,% Change
(in thousands)20232022
Total operating expenses$277,616$270,9672.5%
Amortization of intangible assets24,66721,72013.6%
Depreciation and amortization of property, equipment and leasehold improvements5,4606,534(16.4%)
Acquisition-related integration and transaction costs (1)—1,312(100.0%)
Consolidated Adjusted EBITDA expenses247,489241,4012.5%
Index Adjusted EBITDA expenses$85,700$84,8841.0%
Analytics Adjusted EBITDA expenses86,29088,908(2.9%)
ESG and Climate Adjusted EBITDA expenses49,18239,93723.1%
All Other - Private Assets Adjusted EBITDA expenses26,31727,672(4.9%)
Consolidated Adjusted EBITDA expenses$247,489$241,4012.5%

(1)Incremental and non-recurring costs attributable to acquisitions directly related to the execution of the transaction and integration of the acquired business that have occurred no later than 12 months after the close of the transaction.

The discussion of the segment results is presented below.

Segment Results

Index Segment

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

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues:
Recurring subscriptions$196,678$174,49812.7%
Asset-based fees133,126145,053(8.2%)
Non-recurring9,57811,208(14.5%)
Operating revenues total339,382330,7592.6%
Adjusted EBITDA expenses85,70084,8841.0%
Adjusted EBITDA$253,682$245,8753.2%
Adjusted EBITDA margin %74.7%74.3%

Index operating revenues increased 2.6%, driven by growth from recurring subscriptions, partially offset by a decline in asset-based fees and non-recurring revenues. Adjusting for the impact of foreign currency exchange rate fluctuations, Index operating revenues would have increased 2.9%.

Operating revenues from recurring subscriptions increased 12.7%, primarily driven by strong growth from market cap-weighted and factor, ESG and climate Index products.

Operating revenues from asset-based fees decreased 8.2%, primarily driven by a decline in revenues from non-ETF indexed funds linked to MSCI indexes and ETFs linked to MSCI equity indexes. Operating revenues from non-ETF indexed funds linked to MSCI indexes decreased by 21.9%, primarily driven by decreases in average AUM. Operating revenues from ETFs linked to MSCI equity indexes decreased by 3.6%, primarily driven by a decrease in average AUM, partially offset by an increase in average basis point fees.

Index segment Adjusted EBITDA expenses increased 1.0%, driven by higher non-compensation expenses across the cost of revenues and selling and marketing expense activity categories, primarily relating to higher market data costs. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased by 4.2%.

Analytics Segment

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

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues:
Recurring subscriptions$144,503$137,7994.9%
Non-recurring2,5671,99828.5%
Operating revenues total147,070139,7975.2%
Adjusted EBITDA expenses86,29088,908(2.9%)
Adjusted EBITDA$60,780$50,88919.4%
Adjusted EBITDA margin %41.3%36.4%

Analytics operating revenues increased 5.2%, primarily driven by growth from recurring subscriptions related to both Equity Analytics and Multi-Asset Class products. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics operating revenues would have increased 5.9%.

Analytics segment Adjusted EBITDA expenses decreased 2.9%, primarily driven by lower compensation expenses across all expense activity categories, as a result of lower benefits costs and increased capitalization of expenses related to internally developed software projects. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have decreased 0.2%.

ESG and Climate Segment

The following table presents the results for the ESG and Climate segment for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues:
Recurring subscriptions$65,732$50,57230.0%
Non-recurring1,3261,457(9.0%)
Operating revenues total67,05852,02928.9%
Adjusted EBITDA expenses49,18239,93723.1%
Adjusted EBITDA$17,876$12,09247.8%
Adjusted EBITDA margin %26.7%23.2%

ESG and Climate operating revenues increased 28.9%, primarily driven by strong growth from recurring subscriptions related to Ratings, Climate and Screening products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate operating revenues would have increased 37.6%.

ESG and Climate segment Adjusted EBITDA expenses increased 23.1%, primarily driven by higher compensation expenses across all expense activity categories as a result of increased wages and salaries, incentive compensation and benefits costs. The change was also driven by higher non-compensation expenses across all expense activity categories, primarily due to higher information technology costs and professional fees. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 27.4%.

All Other – Private Assets Segment

The following table presents the results for the All Other – Private Assets segment for the periods indicated:

Three Months Ended March 31,% Change
(in thousands)20232022
Operating revenues:
Recurring subscriptions$38,334$36,8913.9%
Non-recurring374469(20.3%)
Operating revenues total38,70837,3603.6%
Adjusted EBITDA expenses26,31727,672(4.9%)
Adjusted EBITDA$12,391$9,68827.9%
Adjusted EBITDA margin %32.0%25.9%

All Other – Private Assets operating revenues increased 3.6%, primarily driven by growth from recurring subscriptions related to growth from RCA, Datscha, Global Intel and Climate Value-at-Risk products, partially offset by unfavorable foreign currency exchange rate fluctuations. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other – Private Assets operating revenues would have increased 8.0%.

All Other – Private Assets segment Adjusted EBITDA expenses decreased 4.9%, reflecting lower expenses across the G&A, selling and marketing and cost of revenues expense activity categories. This change was driven by lower compensation and benefits costs, primarily relating to lower incentive compensation and wages and salaries. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets segment Adjusted EBITDA expenses would have decreased 0.7%.

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, or reach the end of the committed subscription period, 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/fees, 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/or reported exchange fees, 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, non-renewal or an indication the client does not intend to continue their subscription 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 or fee waiver 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;

  • price changes or discounts;

  • revenue recognition differences under U.S. GAAP, including those related to the timing of implementation and report deliveries for certain of our products and services;

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

  • fluctuations in foreign currency exchange rates; and

  • the impact of acquisitions and divestitures.

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

As of% Change
(in thousands)March 31, 2023March 31, 2022
Index:
Recurring subscriptions$795,621$711,11311.9%
Asset-based fees534,491576,234(7.2%)
Index total1,330,1121,287,3473.3%
Analytics621,611588,4475.6%
ESG and Climate278,947216,19729.0%
All Other - Private Assets148,440137,5327.9%
Total Run Rate$2,379,110$2,229,5236.7%
Recurring subscriptions total$1,844,619$1,653,28911.6%
Asset-based fees534,491576,234(7.2%)
Total Run Rate$2,379,110$2,229,5236.7%

Total Run Rate increased 6.7%, driven by an 11.6% increase from recurring subscriptions, partially offset by a 7.2% decrease from asset-based fees. Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscriptions Run Rate would have increased 12.1%.

Run Rate from Index recurring subscriptions increased 11.9%, primarily driven by strong growth from market cap-weighted products, custom Index products and special packages, and factor, ESG and climate products. The increase reflected growth across all regions and client segments.

Run Rate from Index asset-based fees decreased 7.2%, primarily driven by lower AUM in non-ETF indexed funds linked to MSCI indexes and ETFs linked to MSCI equity indexes.

Run Rate from Analytics products increased 5.6%, driven by strong growth in Equity Analytics products as well as growth in Multi-Asset Class products, and reflected growth across all regions. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics Run Rate would have increased 6.3%.

Run Rate from ESG and Climate products increased 29.0%, driven by strong growth in Ratings, Climate and Screening products with contributions across all regions and client segments. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate Run Rate would have increased 29.9%.

Run Rate from All Other - Private Assets increased 7.9%, primarily driven by growth in RCA, Global Intel, Enterprise Analytics, Datscha and Climate Value-at-Risk products, partially offset by unfavorable foreign currency exchange rate fluctuations. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets Run Rate would have increased 10.4%.

Sales

Sales represents the annualized value of products and services clients commit to purchase from MSCI and will result in additional operating revenues. Non-recurring sales represent the actual value of the customer agreements entered into during the period and are not a component of Run Rate. New recurring subscription sales represent additional selling activities, such as new customer agreements, additions to existing agreements or increases in price that occurred during the period and are additions to Run Rate. Subscription cancellations reflect client activities during the period, such as discontinuing products and services and/or reductions in price, resulting in reductions to Run Rate. Net new recurring subscription sales represent the amount of new recurring subscription sales net of subscription cancellations during the period, which reflects the net impact to Run Rate during the period.

Total gross sales represent the sum of new recurring subscription sales and non-recurring sales. Total net sales represent the total gross sales net of the impact from subscription cancellations.

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

Three Months Ended% Change
(in thousands)March 31, 2023March 31, 2022
New recurring subscription sales
Index$25,090$22,41711.9%
Analytics13,67414,069(2.8%)
ESG and Climate12,48619,142(34.8%)
All Other - Private Assets5,1435,559(7.5%)
New recurring subscription sales total56,39361,187(7.8%)
Subscription cancellations
Index(7,082)(5,920)19.6%
Analytics(9,183)(8,128)13.0%
ESG and Climate(2,635)(643)309.8%
All Other - Private Assets(2,856)(1,978)44.4%
Subscription cancellations total(21,756)(16,669)30.5%
Net new recurring subscription sales
Index18,00816,4979.2%
Analytics4,4915,941(24.4%)
ESG and Climate9,85118,499(46.7%)
All Other - Private Assets2,2873,581(36.1%)
Net new recurring subscription sales total34,63744,518(22.2%)
Non-recurring sales
Index12,78213,715(6.8%)
Analytics1,3703,489(60.7%)
ESG and Climate1,2191,308(6.8%)
All Other - Private Assets21315240.1%
Non-recurring sales total15,58418,664(16.5%)
Gross sales
Index$37,872$36,1324.8%
Analytics15,04417,558(14.3%)
ESG and Climate13,70520,450(33.0%)
All Other - Private Assets5,3565,711(6.2%)
Total gross sales$71,977$79,851(9.9%)
Net sales
Index$30,790$30,2121.9%
Analytics5,8619,430(37.8%)
ESG and Climate11,07019,807(44.1%)
All Other - Private Assets2,5003,733(33.0%)
Total net sales$50,221$63,182(20.5%)

A significant portion of MSCI's operating revenues are derived from subscriptions or licenses of products and services, which are provided over contractually-agreed periods of time that are subject to renewal or cancellation at the end of current contract terms.

Retention Rate

The following table presents our Retention Rate by reportable segment for the periods indicated:

Three Months Ended March 31,
20232022
Index96.4%96.6%
Analytics94.0%94.4%
ESG and Climate96.1%98.7%
All Other - Private Assets92.1%94.1%
Total95.2%95.9%

Retention Rate is an important metric because subscription cancellations decrease our Run Rate and ultimately our future operating revenues over time. The annual Retention Rate represents the retained subscription Run Rate (subscription Run Rate at the beginning of the fiscal year less actual cancels during the year) as a percentage of the subscription Run Rate at the beginning of the fiscal year.

The Retention Rate for a non-annual 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 or discontinue the subscription during the non-annual 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 fiscal year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Retention Rate for the period.

Retention Rate is computed by operating segment on a product/service-by-product/service basis. In general, if a client reduces the number of products or services to which it subscribes within a segment, or switches between products or services within a segment, we treat it as a cancellation for purposes of calculating our Retention Rate except in the case of a product or service switch that management considers to be a replacement product or service. In those replacement cases, only the net change to the client subscription, if a decrease, is reported as a cancel. In the Analytics and the ESG and Climate operating segments, substantially all product or service switches are treated as replacement products or services and netted in this manner, while in our Index and Real Assets operating segments, product or service switches that are treated as replacement products or services and receive netting treatment occur only in certain limited instances. In addition, we treat any reduction in fees resulting from a down-sell of the same product or service as a cancellation to the extent of the reduction. We do not calculate 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.

Retention Rate is generally 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.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, “Introduction and Basis of Presentation,” of the Notes to Consolidated Financial Statements included in our Form 10-K. There have been no significant changes in our accounting policies since the end of the fiscal year ended December 31, 2022 or critical accounting estimates applied in the fiscal year ended December 31, 2022.

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 facility. 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, fund our working capital requirements for capital expenditures, investments, acquisitions and dividend payments, and make repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition and strategic partnership 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

As of March 31, 2023, we had an aggregate of $4,200.0 million in Senior Notes outstanding. In addition, under the Credit Agreement, we had as of March 31, 2023: (i) an aggregate of $345.6 million in Tranche A Term Loans outstanding under the TLA Facility and (ii) $500 million of undrawn borrowing capacity under the revolving credit facility. See Note 7, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements (Unaudited) included herein for additional information on our outstanding indebtedness and revolving credit facility.

The Senior Notes and the 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 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 Computershare, National Association, as trustee and successor to Wells Fargo Bank, National Association, 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 Credit Agreement contains affirmative and restrictive covenants that, among other things, limit our ability and/or 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;

  • 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 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, and bankruptcy and insolvency events, and, in the case of the Credit Agreement, invalidity or impairment of loan documentation, change of control and customary ERISA defaults in addition to the foregoing. None of the restrictions above are expected to impact our ability to effectively operate the business.

The 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 Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) measured quarterly on a rolling four-quarter basis not to exceed 4.25:1.00 (or 4.50:1.00 for two fiscal quarters following a material acquisition) and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) measured quarterly on a rolling four-quarter basis of at least 4.00:1.00. As of March 31, 2023, our Consolidated Leverage Ratio was 3.00:1.00 and our Consolidated Interest Coverage Ratio was 8.36:1.00.

Our non-guarantor subsidiaries under the Senior Notes and the Credit Agreement 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 $1,391.0 million, or 61.0%, of our total revenue for the trailing 12 months ended March 31, 2023, approximately $561.0 million, or 45.5%, of our consolidated operating income for the trailing 12 months ended March 31, 2023, and approximately $963.6 million, or 19.0%, of our consolidated total assets (excluding intercompany assets) and $835.8 million, or 14.0%, of our consolidated total liabilities, in each case as of March 31, 2023.

Share Repurchases

The following table provides information with respect to repurchases of the Company’s common stock pursuant to open market repurchases:

Three Months Ended (in thousands except per share data)Average Price Paid Per ShareTotal Number of Shares RepurchasedDollar Value of Shares Repurchased
March 31, 2023$——$—
March 31, 2022$515.741,498$772,657

As of March 31, 2023, there was $1,304.4 million of available authorization remaining under the 2022 Repurchase Program. This authorization may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

Cash Dividends

On April 24, 2023, the Board of Directors declared a quarterly cash dividend of $1.38 per share for the three months ending June 30, 2023. The second quarter 2023 dividend is payable on May 31, 2023 to shareholders of record as of the close of trading on May 12, 2023.

Cash Flows

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

As of
(in thousands)March 31, 2023December 31, 2022
Cash and cash equivalents (includes restricted cash of $3,871 and $368 at March 31, 2023 and December 31, 2022, respectively)$1,080,608$993,564

We typically seek to maintain minimum cash balances globally of approximately $225.0 million to $275.0 million for general operating purposes. As of March 31, 2023 and December 31, 2022, $278.9 million and $344.5 million, respectively, of the Company’s cash and cash equivalents were held by foreign subsidiaries. Repatriation of some foreign cash may be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. We believe the global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purposes 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 revolving credit facility and our ability to access bank debt, private debt and the 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 next 12 months and for the foreseeable future thereafter. In addition, we expect that foreign cash flows from operations, together with existing cash and cash equivalents, will continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter.

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

Three Months Ended March 31,
(in thousands)20232022
Net cash provided by operating activities$264,141$244,184
Net cash (used in) investing activities(21,762)(15,310)
Net cash (used in) provided by financing activities(158,293)(966,117)
Effect of exchange rate changes2,958(4,891)
Net (decrease) increase in cash, cash equivalents and restricted cash$87,044$(742,134)

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. The year-over-year change was primarily driven by lower payments for cash expenses as well as higher cash collections from customers, partially offset by higher payments for interest expense.

Our primary uses of cash from operating activities are for the payment of cash compensation expenses, interest expenses, income taxes, technology costs, professional fees, market data costs and office rent. 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

The year-over-year change was primarily driven by higher capital expenditures and capitalized software development costs.

Cash Flows From Financing Activities

The year-over-year change was primarily driven by the impact of lower share repurchases, partially offset by higher dividend payments.

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