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(Exact Name of Registrant as Specified in its Charter)
________________________________________
iDelaware
i13-4038723
(State
or other jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
i7 World Trade Center
i250
Greenwich Street, 49th Floor
iNew York, iNew York
i10007
(Address
of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code: (i212) i804-3900
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon stock, par value $0.01 per share
iMSCI
iNew
York Stock Exchange
________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated
filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
io
Emerging growth company
io
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ix
As
of July 18, 2023, there were i79,088,640 shares of the registrant’s common stock, par value $0.01, outstanding.
Our corporate headquarters is located at 7 World Trade Center, 250 Greenwich Street, 49th Floor, New York, New York, 10007, and our telephone number is (212) 804-3900. We maintain a website on the internet at www.msci.com. The contents of our website are not a part of or incorporated by reference in this Quarterly Report on Form 10-Q.
We
file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). The SEC maintains a website that contains reports, proxy and information statements and other information that we file electronically with the SEC at www.sec.gov. We also make available free of charge, on or through our website, these reports, proxy statements and other information as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC. To access these, click on the “SEC Filings” link under the “Financial Information” tab found on our Investor Relations homepage (http://ir.msci.com).
We
also use our Investor Relations homepage, Corporate Responsibility homepage and corporate Twitter account (@MSCI_Inc) as channels of distribution of Company information. The information we post through these channels may be deemed material.
Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about us when you enroll your email address by visiting the “Email Alerts” section of our Investor Relations homepage at https://ir.msci.com/email-alerts. The contents of our website,
including our Investor Relations homepage and Corporate Responsibility homepage, and our social media channels are not, however, a part of or incorporated by reference in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
We have included in this Quarterly Report on Form 10-Q, and from time to time may make in our public filings, press releases or other public statements, certain statements that constitute forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical
facts and represent only MSCI’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.
In some cases, you can identify forward-looking statements by the use of words such as “may,”“could,”“expect,”“intend,”“plan,”“seek,”“anticipate,”“believe,”“estimate,”“predict,”“potential” or “continue,” or the negative of these terms or other comparable terminology. Statements concerning our financial position, business strategy and plans or objectives for future operations
are forward-looking statements. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect our actual results, levels of activity, performance or achievements. Such risks and uncertainties include those set forth under “Risk Factors” in Part I, Item 1A of the 2022 Annual Report on Form 10-K filed with the SEC on February 10, 2023. If any of these risks or uncertainties materialize, or if MSCI’s underlying assumptions prove to be incorrect, actual results may vary significantly from what MSCI projected. Any forward-looking statement reflects our current views with respect to future events, levels of activity, performance or achievements and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations,
growth strategy and liquidity. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. MSCI assumes no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law. Therefore, readers should carefully review the risk factors set forth in the Annual Report on Form 10-K and in other reports or documents we file from time to time with the SEC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. iINTRODUCTION
AND BASIS OF PRESENTATION
MSCI Inc., together with its wholly owned subsidiaries (the “Company” or “MSCI”) is 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. Our products and services include indexes; portfolio construction and risk management tools; environmental, social and governance (“ESG”) and climate solutions; and real estate market and transaction
data and analysis.
i
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. If not materially different, certain note disclosures included therein have been omitted from these interim
condensed consolidated financial statements.
In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim consolidated financial statements, have been included. The results of operations for interim periods are not necessarily indicative of results for the entire year.
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. iThe Company makes
certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of operating revenues and expenses during the periods presented. Significant estimates and judgments made by management include such examples as assessment of impairment of goodwill and intangible assets and income taxes. The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Inter-company balances and transactions are eliminated in consolidation.
/i
Concentrations
For
the six months ended June 30, 2023 and 2022, BlackRock, Inc. (“BlackRock”) accounted for i10.0% and i10.8% of the Company’s consolidated
operating revenues, respectively. For the six months ended June 30, 2023 and 2022, BlackRock accounted for i16.9% and i18.0% of the Index segment’s operating revenues, respectively. No single customer represented 10.0%
or more of operating revenues within the Analytics, ESG and Climate or All Other – Private Assets segments for the six months ended June 30, 2023 and 2022.
/
iRestricted Cash
Restricted cash primarily relates to security deposits for certain operating leases
that are legally restricted and unavailable for our general operations.
There are no recently issued accounting standards updates that are currently expected to have a material impact on the Company.
3. iREVENUE
RECOGNITION
MSCI’s operating revenues are reported by product type, which generally reflects the timing of recognition. The Company’s operating revenue types are recurring subscriptions, asset-based fees and non-recurring revenues. The Company also disaggregates operating revenues by segment.
i
The tables that follow present the disaggregated operating revenues
for the periods indicated:
The
amounts of revenues recognized in the periods that were included in the opening current deferred revenue, which reflects contract liability amounts, were $i269.6 million and $i626.2
million for the three and six months ended June 30, 2023, respectively and $i232.9 million and $i572.6 million for the three and six months ended June 30,
2022, respectively. The difference between the opening and closing balances of the Company’s deferred revenue is primarily driven by an increase in the amortization of deferred revenue to operating revenues, partially offset by an increase in billings. As of June 30, 2023 and December 31, 2022, the Company carried a long-term deferred revenue balance of $i28.5
million and $i29.4 million, respectively, in “Other non-current liabilities” on the Unaudited Condensed Consolidated Statement of Financial Condition.
iFor
contracts that have a duration of one year or less, the Company has not disclosed either the remaining performance obligation as of the end of the reporting period or when the Company expects to recognize the revenue.iThe remaining performance obligations for
contracts that have a duration of greater than one year and the periods in which they are expected to be recognized are as follows:
As of
June 30,
(in thousands)
2023
First 12-month period
$
i682,799
Second
12-month period
i419,674
Third 12-month period
i186,009
Periods
thereafter
i121,348
Total
$
i1,409,830
4.
iEARNINGS PER COMMON SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the assumed conversion of all dilutive securities, including, when applicable, restricted stock units (“RSUs”), performance stock units (“PSUs”) and performance stock options (“PSOs”).
i
The
following table presents the computation of basic and diluted EPS:
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share data)
2023
2022
2023
2022
Net
income
$
i246,825
$
i210,587
$
i485,553
$
i439,010
Basic
weighted average common shares outstanding
i79,592
i80,923
i79,815
i81,255
Effect
of dilutive securities:
PSUs, RSUs and PSOs
i313
i372
i378
i534
Diluted
weighted average common shares outstanding
i79,905
i81,295
i80,193
i81,789
Earnings
per common share:
Basic
$
i3.10
$
i2.60
$
i6.08
$
i5.40
Diluted
$
i3.09
$
i2.59
$
i6.05
$
i5.37
/
5.
iPROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
i
Property, equipment and leasehold improvements, net consisted of the following as of the dates indicated:
As
of
June 30,
December 31,
(in thousands)
2023
2022
Computer & related equipment
$
i190,453
$
i181,710
Furniture &
fixtures
i15,486
i14,078
Leasehold
improvements
i57,687
i54,040
Work-in-process
i5,688
i2,373
Subtotal
i269,314
i252,201
Accumulated
depreciation and amortization
(i208,348)
(i198,348)
Property,
equipment and leasehold improvements, net
$
i60,966
$
i53,853
/
Depreciation
and amortization expense of property, equipment and leasehold improvements was $i5.2 million and $i6.8 million for the three months ended June 30, 2023 and 2022, respectively.
Depreciation and amortization expense of property, equipment and leasehold improvements was $i10.7 million and $i13.3 million for the six months ended June 30, 2023 and 2022, respectively.
6.
iGOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
i
The following table presents goodwill by reportable segment:
As of June 30, 2023, the Company had
outstanding an aggregate of $i4,200.0 million in senior unsecured notes (collectively, the “Senior Notes”) and an aggregate of $i343.4 million in senior unsecured tranche A term loans (the “Tranche A Term Loans”) under the term loan A facility (the “TLA Facility”),
as presented in the table below:
Maturity of Principal Debt Payments (in thousands)
Amounts
Remainder of 2023
$
i4,375
2024
i10,938
2025
i19,687
2026
i26,250
2027
i282,188
Thereafter
i4,200,000
Total
debt
$
i4,543,438
/i
Interest
payments attributable to the Company’s outstanding indebtedness are due as presented in the following table:
Interest payment frequency
First interest payment date
Senior Notes and Tranche A Term Loans
i4.000%
senior unsecured notes due 2029
iSemi-Annual
iMay 15
i3.625%
senior unsecured notes due 2030
iSemi-Annual
iMarch 1
i3.875%
senior unsecured notes due 2031
iSemi-Annual
iJune 1
i3.625%
senior unsecured notes due 2031
iSemi-Annual
iMay 1
i3.250%
senior unsecured notes due 2033
iSemi-Annual
iFebruary 15
Variable rate Tranche A Term Loans due 2027
iVariable
iJuly
11
/
The fair market value of the Company’s debt obligations represent Level 2 valuations. The Company utilized the market approach and obtained security pricing from a vendor who used broker quotes and third-party pricing services to determine fair values.
Credit Agreement. Since November 20, 2014, the Company has maintained a revolving credit agreement with a syndicate
of banks. On June 9, 2022, the Company, the guarantors party thereto and the lenders and agents party thereto, entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), amending and restating in its entirety the Company’s prior revolving credit agreement (the “Prior Revolving Credit Agreement”). The Credit Agreement makes available to the Company an aggregate of $i500.0
million of revolving loan commitments, which may be drawn until February 16, 2027, and the TLA Facility. At June 30, 2023, the revolving loan commitments were undrawn. As noted above, at June 30, 2023, the commitments under the TLA Facility were drawn in full, and the resulting Tranche A Term Loans mature on iFebruary 16, 2027. The obligations under the Credit Agreement are general unsecured obligations of the
Company and the guarantors.
Interest on the Tranche A Term Loans under the TLA Facility accrues, at a variable rate, based on the secured overnight funding rate (“SOFR”) or the alternate base rate (“Base Rate”), plus, in each case, an applicable margin and will be due on each Interest Payment Date (as defined in the Credit Agreement). The applicable margin is calculated by reference to the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) and ranges between i1.50%
to i2.00% for SOFR loans, and i0.50% to i1.00%
for Base Rate loans. At June 30, 2023, the interest rate on the TLA Facility was i7.19%.
In connection with the closings of the Senior Notes offerings, entry into the Prior Revolving Credit Agreement and the subsequent amendments thereto and entry into the Credit Agreement, the Company paid certain financing fees which, together with the existing fees related to prior credit facilities, are being amortized over their related lives.
At June 30, 2023, $i35.5 million of the deferred financing fees and premium remain unamortized, $i0.5 million of which is included
in “Prepaid and other assets,” $i1.4 million of which is included in “Other non-current assets” and $i33.6 million of which is included in “Long-term debt”
on the Unaudited Condensed Consolidated Statement of Financial Condition.
8. iLEASES
i
The components of lease
expense (income) of the Company’s operating leases are as follows:
Other information related to the Company’s operating leases are as follows:
Other Information
Six Months Ended June 30,
(in thousands)
2023
2022
Operating
cash flows used for operating leases
$
i14,906
$
i14,227
Right
of use assets obtained in exchange for new operating lease liabilities
$
i7,225
$
i2,905
9.
iSHAREHOLDERS’ EQUITY (DEFICIT)
Return of capital
On July 28, 2022, the Board of Directors authorized a stock repurchase program (the “2022 Repurchase Program”) for the purchase of up to $i1,000.0
million worth of shares of MSCI’s common stock in addition to the $i539.1 million of authorization then remaining under a previously existing share repurchase program that was replaced by, and incorporated into, the 2022 Repurchase Program for a total of $i1,539.1
million of stock repurchase authorization available under the 2022 Repurchase Program.
Share repurchases made pursuant to the 2022 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 the Board of Directors at any time without prior notice. As of June 30, 2023, there was $i863.5 million of available authorization remaining under the
2022 Repurchase Program.
i
The following table provides information with respect to repurchases of the Company’s common stock made on the open market:
Six
months ended (in thousands, except per share data)
(1)
As of January 1, 2023, the Company’s share repurchases in excess of issuances are subject to a i1% excise tax enacted by the Inflation Reduction Act. The values in this column exclude the i1%
excise tax incurred on share repurchases. Any excise tax incurred is recognized as part of the cost of the shares acquired in the Unaudited Condensed Consolidated Statement of Shareholders’ Equity (Deficit)
/i
The following table presents dividends declared per common share as well as total amounts declared, distributed and deferred for the periods indicated:
The Company’s provision for income taxes was $i98.0 million and $i70.0
million for the six months ended June 30, 2023 and 2022, respectively.
The effective tax rate of i16.8% for the six months ended June 30, 2023 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $i16.4
million, primarily related to $i11.2 million of excess tax benefits recognized on share-based compensation vested during the period and $i5.2 million related to prior-year items.
The
effective tax rate of i13.7% for the six months ended June 30, 2022 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $i27.2
million, primarily related to $i28.3 million of excess tax benefits recognized on share-based compensation vested during the period.
The Company is under or open to examination by the IRS and other tax authorities in certain jurisdictions, including foreign jurisdictions, such as the United Kingdom, Switzerland and India, and states in the United States in which the
Company has significant operations, such as New York and California. The tax years currently under or open to examination vary by jurisdiction but include years from 2008 onwards.
The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions in which it files income tax returns. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when
an event occurs necessitating a change. Based on the current status of income tax audits, the Company believes it is reasonably possible that the total amount of unrecognized benefits may decrease by approximately $i22.9 million in the next twelve months as a result of the resolution of prior-year items.
During the three and six months ended June 30, 2023, the
Company’s unrecognized tax benefits decreased by $i1.0 million and $i4.8 million, respectively, principally
due to the resolution of prior-year items.
11. iSEGMENT INFORMATION
The Company has ifive
operating segments: Index, Analytics, ESG and Climate, Real Assets and The Burgiss Group, LLC (“Burgiss”), which are presented as the following ifour reportable segments: Index, Analytics, ESG and Climate and All Other – Private Assets.
The Index operating segment offers equity and fixed income indexes. The indexes
are used in many areas of the investment process, including for developing indexed financial products (e.g., Exchange Traded Funds (“ETFs”), mutual funds, annuities, futures, options, structured products and over-the-counter derivatives), performance benchmarking, portfolio construction and rebalancing, and asset allocation.
The Analytics operating segment offers risk management, performance attribution and portfolio management content, applications and services that provide clients with an integrated view of risk and return and tools for analyzing market, credit, liquidity, counterparty and climate risk across all major asset classes, spanning short-, medium- and long-term time horizons. Clients access Analytics tools and content through MSCI’s proprietary applications and application programming interfaces, third-party applications or directly through their own platforms. Additionally, the Analytics operating segment
also provides various managed services to help clients operate more efficiently, including consolidation of client portfolio data from various sources, review and reconciliation of input data and results, and customized reporting.
The ESG and Climate operating segment offers products and services that help institutional investors understand how ESG and climate considerations can impact the long-term risk and return of their portfolio and individual security-level investments. In addition, the ESG and Climate operating segment provides data, ratings, research and tools to help investors navigate increasing regulation, meet new client demands and better integrate ESG and climate elements into their investment processes.
The Real Assets operating segment offers data, benchmarks, return-analytics, climate assessments and market insights for tangible assets such as real estate and infrastructure.
In addition, Real Assets performance and risk analytics range from enterprise-wide to property-specific analysis. The Real Assets operating segment also provides business intelligence products to real estate owners, managers, developers and brokers worldwide.
The Burgiss operating segment represents the Company’s equity method investment in Burgiss, a global provider of investment decision support tools for private capital.
The Chief Operating Decision Maker (“CODM”) measures and evaluates reportable segments based on segment operating revenues as well as Adjusted EBITDA and other measures. The Company excludes the following items from segment Adjusted EBITDA: provision for income taxes, other expense
(income), net, depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments, including certain non-recurring acquisition-related integration and transaction costs, that the CODM does not consider for the purposes of making decisions to allocate resources among segments or to assess segment performance. Although these amounts are excluded from segment Adjusted EBITDA, they are included in reported consolidated net income and are included in the reconciliation that follows.
i
The
following table presents operating revenues by reportable segment for the periods indicated:
The following table presents segment profitability and a reconciliation to net income for the periods indicated:
Three
Months Ended June 30,
Six Months Ended June 30,
(in thousands)
2023
2022
2023
2022
Index Adjusted EBITDA
$
i277,070
$
i245,170
$
i530,752
$
i491,045
Analytics
Adjusted EBITDA
i65,149
i62,961
i125,929
i113,850
ESG
and Climate Adjusted EBITDA
i22,798
i14,332
i40,674
i26,424
All
Other - Private Assets Adjusted EBITDA
i12,289
i8,681
i24,680
i18,369
Total
operating segment profitability
i377,306
i331,144
i722,035
i649,688
Amortization
of intangible assets
i26,154
i22,179
i50,821
i43,899
Depreciation
and amortization of property, equipment and leasehold improvements
i5,199
i6,765
i10,659
i13,299
Acquisition-related
integration and transaction costs(1)
i—
i1,819
i—
i3,131
Operating
income
i345,953
i300,381
i660,555
i589,359
Other
expense (income), net
i38,795
i40,349
i77,025
i80,384
Provision
for income taxes
i60,333
i49,445
i97,977
i69,965
Net
income
$
i246,825
$
i210,587
$
i485,553
$
i439,010
___________________________
(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.
/i
Operating revenues by geography are primarily based on the shipping address of the ultimate customer utilizing the product.
The following table presents operating revenues by geographic area for the periods indicated:
Long-lived assets consist of property, equipment and leasehold improvements, right of use assets and internally developed capitalized software, net of accumulated depreciation and amortization. The following table presents long-lived assets by geographic area on the dates indicated:
As
of
June 30,
December 31,
(in thousands)
2023
2022
Long-lived assets
Americas:
United States
$
i198,657
$
i179,453
Other
i12,170
i11,971
Total
Americas
i210,827
i191,424
EMEA:
United
Kingdom
i19,248
i19,674
Other
i23,678
i23,099
Total
EMEA
i42,926
i42,773
Asia
& Australia:
Japan
i1,403
i652
Other
i34,362
i32,962
Total
Asia & Australia
i35,765
i33,614
Total
$
i289,518
$
i267,811
/
12.
iSUBSEQUENT EVENTS
Subsequent to the three months ended June 30, 2023 and through trade date of July 24, 2023, the Company repurchased an additional i38,263
shares of common stock at an average price of $i467.13 per share for a total value of $i17.9 million.
On July 24, 2023, the Board of Directors declared a quarterly cash dividend of $i1.38
per share for the three months ending September 30, 2023 (“third quarter 2023”). The third quarter 2023 dividend is payable on August 31, 2023 to shareholders of record as of the close of trading on August 11, 2023.
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 June 30, 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 six months ended June 30,
2023, our largest client organization by revenue, BlackRock, accounted for 10.0% 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 and non-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 and six months ended June 30,
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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Recurring subscriptions
$
455,692
$
407,049
12.0
%
$
900,939
$
806,809
11.7
%
Asset-based
fees
138,162
132,216
4.5
%
271,288
277,269
(2.2
%)
Non-recurring
27,303
12,541
117.7
%
41,148
27,673
48.7
%
Total
operating revenues
$
621,157
$
551,806
12.6
%
$
1,213,375
$
1,111,751
9.1
%
Total
operating revenues increased 12.6% for the three months ended June 30, 2023. Adjusting for the impact of foreign currency exchange rate fluctuations, total operating revenues would have increased 12.8%.
Operating revenues from recurring subscriptions increased 12.0% for the three months ended June 30, 2023, primarily driven by strong growth in Index products, which increased $21.0 million, or 11.7%, ESG and Climate products, which increased $16.0 million, or 29.6%, and Analytics products, which increased $8.0 million, or 5.7%. Adjusting for the impact of foreign currency exchange rate fluctuations, operating revenues from recurring subscriptions would have increased 12.2%.
Operating revenues from non-recurring revenues increased 117.7% for the three months ended June 30,
2023, primarily driven by one-time license fees related to prior periods, as well as non-recurring licensed data products.
Operating revenues from asset-based fees increased 4.5% for the three months ended June 30, 2023, mainly driven by a growth in revenues from ETFs linked to MSCI equity indexes and non-ETF indexed funds linked to MSCI indexes, partially offset by a decrease in revenues from exchange traded futures and options contracts linked to MSCI indexes. Operating revenues from ETFs linked to MSCI equity indexes increased by 4.7%, primarily driven by increases in average AUM. Operating revenues from non-ETF indexed funds linked to MSCI indexes increased by 7.8%, primarily driven by an increase in average basis point fees, partially offset by a decrease in average AUM. Operating
revenues from exchange traded futures and options contracts linked to MSCI indexes decreased by 11.4%, driven by exchange fees and volume decreases.
Total operating revenues increased 9.1% for the six months ended June 30, 2023. Adjusting for the impact of foreign currency exchange rate fluctuations, total operating revenues would have increased 10.0%.
Operating revenues from recurring subscriptions increased 11.7% for the six months ended June 30, 2023, primarily driven by strong growth in Index products, which increased $43.2 million, or 12.2%, ESG and Climate products, which increased $31.2 million, or 29.8%, and Analytics products, which increased $14.7 million, or 5.3%. Adjusting
for the impact of foreign currency exchange rate fluctuations, operating revenues from recurring subscriptions would have increased 12.8%.
Operating revenues from non-recurring revenues increased 48.7% for the six months ended June 30, 2023, primarily driven by one-time license fees related to prior periods, as well as non-recurring licensed data products.
Operating revenues from asset-based fees decreased 2.2% for the six months ended June 30, 2023, primarily driven by a decline in revenues from non-ETF indexed funds linked to MSCI indexes and exchange traded futures and options contracts linked to MSCI indexes. Operating revenues from non-ETF indexed funds linked to MSCI indexes decreased
by 8.5%, primarily driven by a decrease in average AUM, partially offset by an increase in average basis point fees. Operating revenues from exchange traded futures and options contracts linked to MSCI indexes decreased by 7.9%, driven by exchange fees and volume decrease.
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
2022
2023
(in billions)
March
31,
June
30,
September
30,
December
31,
March
31,
June
30,
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
$
1,372.5
Sequential
Change in Value
Market Appreciation/(Depreciation)
$
(89.7)
$
(207.3)
$
(105.7)
$
118.8
$
75.1
$
48.4
Cash
Inflows
27.4
7.5
(2.6)
22.9
7.4
18.7
Total Change
$
(62.3)
$
(199.8)
$
(108.3)
$
141.7
$
82.5
$
67.1
The
following table presents the average value of AUM in ETFs linked to MSCI equity indexes for the periods indicated:
2022
2023
(in
billions)
March
June
September
December
March
June
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
$
1,333.8
Year-to-date
average
$
1,392.5
$
1,338.9
$
1,295.6
$
1,267.2
$
1,287.5
$
1,310.7
___________________________
(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 June 30, 2023, was up $48.4 billion, or 3.8% . For the six months ended June 30, 2023, it was down $28.2 billion, or 2.1%.
The following table presents operating revenues by reportable segment
and revenue type for the periods indicated:
Three Months Ended June
30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating revenues:
Index
Recurring
subscriptions
$
200,714
$
179,711
11.7
%
$
397,392
$
354,209
12.2
%
Asset-based fees
138,162
132,216
4.5
%
271,288
277,269
(2.2
%)
Non-recurring
23,440
9,022
159.8
%
33,018
20,230
63.2
%
Index
total
362,316
320,949
12.9
%
701,698
651,708
7.7
%
Analytics
Recurring
subscriptions
147,504
139,497
5.7
%
292,007
277,296
5.3
%
Non-recurring
2,377
2,187
8.7
%
4,944
4,185
18.1
%
Analytics
total
149,881
141,684
5.8
%
296,951
281,481
5.5
%
ESG
and Climate
Recurring subscriptions
70,047
54,037
29.6
%
135,779
104,609
29.8
%
Non-recurring
1,172
1,091
7.4
%
2,498
2,548
(2.0
%)
ESG
and Climate total
71,219
55,128
29.2
%
138,277
107,157
29.0
%
All
Other - Private Assets
Recurring subscriptions
37,427
33,804
10.7
%
75,761
70,695
7.2
%
Non-recurring
314
241
30.3
%
688
710
(3.1
%)
All
Other - Private Assets total
37,741
34,045
10.9
%
76,449
71,405
7.1
%
Total
operating revenues
$
621,157
$
551,806
12.6
%
$
1,213,375
$
1,111,751
9.1
%
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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating expenses:
Cost
of revenues
$
110,066
$
100,768
9.2
%
$
218,713
$
203,539
7.5
%
Selling and marketing
67,988
61,073
11.3
%
134,463
127,126
5.8
%
Research
and development
30,140
23,916
26.0
%
61,463
52,238
17.7
%
General and administrative
35,657
36,724
(2.9
%)
76,701
82,291
(6.8
%)
Amortization
of intangible assets
26,154
22,179
17.9
%
50,821
43,899
15.8
%
Depreciation and amortization of property, equipment and leasehold improvements
5,199
6,765
(23.1
%)
10,659
13,299
(19.9
%)
Total
operating expenses
$
275,204
$
251,425
9.5
%
$
552,820
$
522,392
5.8
%
Total
operating expenses increased 9.5% for the three months ended June 30, 2023. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 9.6%.
Total operating expenses increased 5.8% for the six months ended June 30, 2023. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 7.4%.
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 9.2% for the three months ended June 30, 2023, reflecting increases across the Index, Analytics and ESG and Climate reportable segments, partially offset by decreases in the All Other – Private Assets reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and benefits costs, as well as increases in non-compensation costs, primarily reflecting higher market data and recruiting costs.
Cost
of revenues increased 7.5% for the six months ended June 30, 2023, reflecting increases across the Index, Analytics and ESG and Climate reportable segments, partially offset by decreases in the All Other – Private Assets reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries, as well as increases in non-compensation costs, primarily reflecting higher market data and recruiting 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 11.3% for the three months ended June 30, 2023, reflecting increases across all reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries, incentive compensation and benefits costs, as well as increases in non-compensation costs, primarily reflecting increased marketing costs.
Selling and marketing expenses increased 5.8% for the six months ended June 30, 2023, reflecting increases across all reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages
and salaries and incentive compensation costs, as well as increases in non-compensation costs, primarily reflecting increased marketing costs and travel and entertainment expenses.
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 26.0% for the three months ended June 30, 2023, reflecting increases across the ESG and Climate, Index and All Other - Private Assets 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, as well as increases in non-compensation costs, primarily reflecting higher information technology costs.
R&D expenses increased 17.7% for the six months ended June 30, 2023, reflecting increases across the ESG and Climate,
Index and All Other - Private Assets 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 increases in 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,
but are instead allocated, to a product or service.
G&A expenses decreased 2.9% for the three months ended June 30, 2023, reflecting decreases across the All Other - Private Assets and Analytics reportable segments, partially offset by increases in the ESG and Climate and Index reportable segments. The change was driven by the absence of non-recurring transaction and integration costs related to the September 2021 acquisition of Real Capital Analytics, Inc. (“RCA”) and lower non-compensation costs, primarily relating to lower professional fees. The change was partially offset by increases in compensation and benefits costs, primarily relating to higher incentive compensation costs, partially offset by lower severance costs.
G&A expenses decreased 6.8% for the six months ended June 30,
2023, reflecting decreases across the All Other - Private Assets, Analytics and Index reportable segments, partially offset by increases in the ESG and Climate reportable segment. The change was primarily driven by the absence of non-recurring transaction and integration costs related to the aforementioned acquisition of RCA and lower non-compensation costs, primarily relating to lower professional fees and other tax expenses. The change was partially offset by increases in compensation and benefits costs, primarily relating to higher incentive compensation costs, partially offset by lower severance 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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Compensation and benefits
$
174,172
$
154,242
12.9
%
$
355,751
$
334,080
6.5
%
Non-compensation
expenses
69,679
68,239
2.1
%
135,589
131,114
3.4
%
Amortization of intangible assets
26,154
22,179
17.9
%
50,821
43,899
15.8
%
Depreciation
and amortization of property, equipment and leasehold improvements
5,199
6,765
(23.1
%)
10,659
13,299
(19.9
%)
Total operating expenses
$
275,204
$
251,425
9.5
%
$
552,820
$
522,392
5.8
%
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 4,980 employees as of June 30, 2023, compared to 4,513 employees as of June 30, 2022, reflecting a 10.3% growth 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 June 30, 2023, 66.2% of our employees were located in emerging market centers compared to 64.1% as of June 30, 2022.
Compensation and benefits costs increased 12.9%, for the three months ended June 30, 2023, driven by an increase in wages and salaries, incentive compensation and benefits costs. Compensation and benefits costs increased 6.5% for the six months ended June 30, 2023, driven by an increase in wages and salaries and incentive compensation costs, partially offset by increased capitalization of expenses related to internally developed software projects and decreased benefits
costs. Adjusting for the impact of foreign currency exchange rate fluctuations, compensation and benefits costs would have increased by 13.1% and 8.7%, respectively, for the three and six months ended June 30, 2023.
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 2.1% for the three months ended June 30, 2023, primarily driven by higher information
technology costs, partially offset by the absence of non-recurring transaction and integration costs related to the September 2021 acquisition of RCA.
Non-compensation expenses increased 3.4% for the six months ended June 30, 2023, primarily driven by higher information technology and market data costs, partially offset by the absence of non-recurring transaction and integration costs related to the September 2021 acquisition of RCA.
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 17.9% and 15.8% for the three and six months ended June 30, 2023, respectively, 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 23.1% and 19.9% for the three and six months ended June 30, 2023, respectively, 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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Interest income
$
(10,403)
$
(924)
1025.9
%
$
(20,765)
$
(1,222)
1599.3
%
Interest
expense
46,617
41,085
13.5
%
92,823
81,799
13.5
%
Other expense (income)
2,581
188
1272.9
%
4,967
(193)
(2673.6
%)
Total
other expense (income), net
$
38,795
$
40,349
(3.9
%)
$
77,025
$
80,384
(4.2
%)
Total
other expense (income), net decreased 3.9% and 4.2% for the three and six months ended June 30, 2023, respectively, primarily driven by higher interest income reflecting higher yields and higher cash balances, partially offset by higher interest expense due to higher average outstanding debt levels and the impact of foreign currency exchange rate fluctuations.
The
following table shows our income tax provision and effective tax rate for the periods indicated:
Three
Months Ended June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Provision for income taxes
$
60,333
$
49,445
22.0
%
$
97,977
$
69,965
40.0
%
Effective
tax rate
19.6
%
19.0
%
3.2
%
16.8
%
13.7
%
22.6
%
The effective tax rate of 19.6% and 19.0% for the three months ended June 30,
2023 and 2022, respectively, reflects the Company’s estimate of the effective tax rate for the period. The level of discrete items was not impactful to the effective tax rate for the period.
The effective tax rate of 16.8% for the six months ended June 30, 2023 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $16.4 million, primarily related to $11.2 million of excess tax benefits recognized on share-based compensation vested during the period and $5.2 million related to prior-year items.
The effective tax rate of 13.7% for
the six months ended June 30, 2022 reflects the Company’s estimate of the effective tax rate for the period and was impacted by certain favorable discrete items totaling $27.2 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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Net income
$
246,825
$
210,587
17.2
%
$
485,553
$
439,010
10.6
%
As
a result of the factors described above, net income increased 17.2% for the three months ended June 30, 2023, and increased 10.6% for the six months ended June 30, 2023.
Weighted Average Shares and Common Shares Outstanding
The following table shows our weighted average shares outstanding for the periods indicated:
Three
Months Ended June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Weighted average shares outstanding:
Basic
79,592
80,923
(1.6
%)
79,815
81,255
(1.8
%)
Diluted
79,905
81,295
(1.7
%)
80,193
81,789
(2.0
%)
The
following table shows our common shares outstanding for the periods indicated:
The decrease in weighted average shares and common shares outstanding primarily reflects the impact of share repurchases made pursuant to the stock repurchase program.
“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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating revenues
$
621,157
$
551,806
12.6
%
$
1,213,375
$
1,111,751
9.1
%
Adjusted
EBITDA expenses
243,851
220,662
10.5
%
491,340
462,063
6.3
%
Adjusted EBITDA
$
377,306
$
331,144
13.9
%
$
722,035
$
649,688
11.1
%
Operating
margin %
55.7
%
54.4
%
54.4
%
53.0
%
Adjusted EBITDA margin %
60.7
%
60.0
%
59.5
%
58.4
%
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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Net income
$
246,825
$
210,587
17.2
%
$
485,553
$
439,010
10.6
%
Provision
for income taxes
60,333
49,445
22.0
%
97,977
69,965
40.0
%
Other expense (income), net
38,795
40,349
(3.9
%)
77,025
80,384
(4.2
%)
Operating
income
345,953
300,381
15.2
%
660,555
589,359
12.1
%
Amortization
of intangible assets
26,154
22,179
17.9
%
50,821
43,899
15.8
%
Depreciation and amortization of property, equipment and leasehold improvements
5,199
6,765
(23.1
%)
10,659
13,299
(19.9
%)
Acquisition-related
integration and
transaction costs (1)
—
1,819
(100.0
%)
—
3,131
(100.0
%)
Consolidated Adjusted EBITDA
$
377,306
$
331,144
13.9
%
$
722,035
$
649,688
11.1
%
Index
Adjusted EBITDA
277,070
245,170
13.0
%
530,752
491,045
8.1
%
Analytics Adjusted EBITDA
65,149
62,961
3.5
%
125,929
113,850
10.6
%
ESG
and Climate Adjusted EBITDA
22,798
14,332
59.1
%
40,674
26,424
53.9
%
All Other - Private Assets Adjusted EBITDA
12,289
8,681
41.6
%
24,680
18,369
34.4
%
Consolidated
Adjusted EBITDA
$
377,306
$
331,144
13.9
%
$
722,035
$
649,688
11.1
%
___________________________
(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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Total operating expenses
$
275,204
$
251,425
9.5
%
$
552,820
$
522,392
5.8
%
Amortization
of intangible assets
26,154
22,179
17.9
%
50,821
43,899
15.8
%
Depreciation and amortization of property, equipment and leasehold improvements
5,199
6,765
(23.1
%)
10,659
13,299
(19.9
%)
Acquisition-related
integration and
transaction costs (1)
—
1,819
(100.0
%)
—
3,131
(100.0
%)
Consolidated Adjusted EBITDA expenses
$
243,851
$
220,662
10.5
%
$
491,340
$
462,063
6.3
%
Index
Adjusted EBITDA expenses
85,246
75,779
12.5
%
170,946
160,663
6.4
%
Analytics Adjusted EBITDA expenses
84,732
78,723
7.6
%
171,022
167,631
2.0
%
ESG
and Climate Adjusted EBITDA expenses
48,421
40,796
18.7
%
97,603
80,733
20.9
%
All Other - Private Assets Adjusted EBITDA expenses
25,452
25,364
0.3
%
51,769
53,036
(2.4
%)
Consolidated
Adjusted EBITDA expenses
$
243,851
$
220,662
10.5
%
$
491,340
$
462,063
6.3
%
___________________________
(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.
The following table presents the results for the Index segment for the periods indicated:
Three
Months Ended June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating revenues:
Recurring
subscriptions
$
200,714
$
179,711
11.7
%
$
397,392
$
354,209
12.2
%
Asset-based fees
138,162
132,216
4.5
%
271,288
277,269
(2.2
%)
Non-recurring
23,440
9,022
159.8
%
33,018
20,230
63.2
%
Operating
revenues total
362,316
320,949
12.9
%
701,698
651,708
7.7
%
Adjusted
EBITDA expenses
85,246
75,779
12.5
%
170,946
160,663
6.4
%
Adjusted EBITDA
$
277,070
$
245,170
13.0
%
$
530,752
$
491,045
8.1
%
Adjusted
EBITDA margin %
76.5
%
76.4
%
75.6
%
75.3
%
Index operating revenues increased 12.9% for the three months ended June 30, 2023, primarily driven by strong growth from both recurring subscriptions and non-recurring revenues. Adjusting for the
impact of foreign currency exchange rate fluctuations, Index operating revenues would have increased 13.0%.
Operating revenues from recurring subscriptions increased 11.7% for the three months ended June 30, 2023, primarily driven by strong growth from both market cap-weighted and factor, ESG and climate Index products.
Operating revenues from non-recurring revenues increased 159.8% for the three months ended June 30, 2023, primarily driven by one-time license fees related to prior periods, as well as non-recurring licensed data products.
Operating revenues from asset-based fees increased 4.5% for the three months ended June 30, 2023, mainly driven by a growth in revenues from ETFs linked
to MSCI equity indexes and non-ETF indexed funds linked to MSCI indexes, partially offset by a decrease in revenues from exchange traded futures and options contracts linked to MSCI indexes. Operating revenues from ETFs linked to MSCI equity indexes increased by 4.7%, primarily driven by increases in average AUM. Operating revenues from non-ETF indexed funds linked to MSCI indexes increased by 7.8%, primarily driven by an increase in average basis point fees, partially offset by a decrease in average AUM. Operating revenues from exchange traded futures and options contracts linked to MSCI indexes decreased by 11.4%, driven by exchange fees and volume decreases.
Index segment Adjusted EBITDA expenses increased 12.5% for the three months ended
June 30, 2023, primarily driven by higher compensation expenses across all expense activity categories. The increase reflects higher wages and salaries, incentive compensation and benefits costs. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased by 12.4%.
Index operating revenues increased 7.7% for the six months ended June 30, 2023, primarily driven by strong growth from both recurring subscriptions and non-recurring revenues. Adjusting for the impact of foreign currency exchange rate fluctuations, Index operating revenues would have increased 7.9%.
Operating revenues from recurring subscriptions increased 12.2% for the six months ended June 30, 2023,
primarily driven by strong growth from both market cap-weighted and factor, ESG and climate Index products.
Operating revenues from non-recurring revenues increased 63.2% for the six months ended June 30, 2023, primarily driven by one-time license fees related to prior periods, as well as non-recurring licensed data products.
Operating revenues from asset-based fees decreased 2.2% for the six months ended June 30, 2023, primarily driven by a decline in revenues from non-ETF indexed funds linked to MSCI indexes and exchange traded futures and options contracts linked to MSCI indexes. Operating revenues from non-ETF indexed funds linked to MSCI indexes decreased by 8.5%, primarily driven by a
decrease in average AUM, partially offset by an increase in average basis point fees. Operating revenues from exchange traded futures and options contracts linked to MSCI indexes decreased by 7.9%, driven by exchange fees and volume decreases.
Index segment Adjusted EBITDA expenses increased 6.4% for the six months ended June 30, 2023, driven by higher compensation and non-compensation expenses across the cost of revenues,
R&D and selling and marketing expense activity categories, partially offset by lower non-compensation expenses in the G&A expense activity category. The increase was primarily driven by higher wages and salaries and incentive compensation costs, partially offset by lower benefits costs. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased by 8.1%.
Analytics Segment
The following table presents the results for the Analytics segment for the periods indicated:
Three
Months Ended June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating revenues:
Recurring
subscriptions
$
147,504
$
139,497
5.7
%
$
292,007
$
277,296
5.3
%
Non-recurring
2,377
2,187
8.7
%
4,944
4,185
18.1
%
Operating
revenues total
149,881
141,684
5.8
%
296,951
281,481
5.5
%
Adjusted
EBITDA expenses
84,732
78,723
7.6
%
171,022
167,631
2.0
%
Adjusted EBITDA
$
65,149
$
62,961
3.5
%
$
125,929
$
113,850
10.6
%
Adjusted
EBITDA margin %
43.5
%
44.4
%
42.4
%
40.4
%
Analytics operating revenues increased 5.8% for the three months ended June 30, 2023, 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 6.0%.
Analytics segment Adjusted EBITDA expenses increased 7.6% for the three months ended June 30, 2023, driven by higher compensation expenses across all expense activity categories reflecting higher wages and salaries, decreased capitalization of expenses related to internally developed software projects and higher incentive compensation costs. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have increased 7.6%.
Analytics operating revenues increased 5.5% for the six months ended June 30, 2023, primarily driven by growth from recurring subscriptions related to both Multi-Asset
Class and Equity Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics operating revenues would have increased 6.0%.
Analytics segment Adjusted EBITDA expenses increased 2.0% for the six months ended June 30, 2023, driven by higher compensation expenses across the cost of revenues and selling and marketing expense activity categories partially offset by lower compensation expenses in the R&D and G&A expense activity categories. The increase was primarily driven by increased wages and salaries, decreased capitalization of expenses related to internally developed software projects and higher incentive compensation costs, partially offset by lower benefits costs. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have increased 3.4%.
ESG
and Climate Segment
The following table presents the results for the ESG and Climate segment for the periods indicated:
ESG and Climate operating revenues increased 29.2% for the three months ended June 30, 2023, 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 29.3%.
ESG and Climate segment Adjusted EBITDA expenses increased 18.7% for the three months ended June 30, 2023, primarily driven by higher compensation expenses across all expense activity categories as a result of increased wages and salaries, incentive compensation and benefits costs due to higher headcount, partially offset by increased capitalization of expenses related to internally developed software projects. Adjusting
for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 19.2%.
ESG and Climate operating revenues increased 29.0% for the six months ended June 30, 2023, 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 33.4%.
ESG and Climate segment Adjusted EBITDA expenses increased 20.9% for the six months ended June 30, 2023, driven by higher compensation and non-compensation expenses across all expense activity categories. The increase was primarily driven by increased wages and salaries, incentive compensation and benefits costs
as a result of increased headcount, as well as increased information technology costs. The increase was partially offset by increased capitalization of expenses related to internally developed software projects. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 23.3%.
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 June 30,
% Change
Six Months Ended June 30,
% Change
(in thousands)
2023
2022
2023
2022
Operating revenues:
Recurring
subscriptions
$
37,427
$
33,804
10.7
%
$
75,761
$
70,695
7.2
%
Non-recurring
314
241
30.3
%
688
710
(3.1
%)
Operating
revenues total
37,741
34,045
10.9
%
76,449
71,405
7.1
%
Adjusted
EBITDA expenses
25,452
25,364
0.3
%
51,769
53,036
(2.4
%)
Adjusted EBITDA
$
12,289
$
8,681
41.6
%
$
24,680
$
18,369
34.4
%
Adjusted
EBITDA margin %
32.6
%
25.5
%
32.3
%
25.7
%
All Other – Private Assets operating revenues increased 10.9% for the three months ended June 30, 2023, primarily driven by growth from recurring subscriptions related to growth from Index Intel,
Performance Insights, and RCA 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 11.9%.
All Other – Private Assets segment Adjusted EBITDA expenses were relatively flat across all expense activity categories with a minor increase in information technology costs for the three months ended June 30, 2023. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets segment Adjusted EBITDA expenses would have increased 1.4%.
All Other – Private Assets operating revenues increased 7.1% for the six months ended June 30, 2023, primarily driven by growth from recurring subscriptions
related to growth from Index Intel and RCA 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 9.9%.
All Other – Private Assets segment Adjusted EBITDA expenses decreased 2.4% for the six months ended June 30, 2023, primarily driven by lower compensation expenses across the cost of revenues, G&A and selling and marketing expense activity categories, reflecting increased capitalization of expenses related to internally developed software projects and 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 increased 0.3%.
“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
Total
Run Rate increased 10.7%, driven by an 11.8% increase from recurring subscriptions and a 7.2% increase from asset-based fees. Adjusting for the impact of foreign currency exchange rate fluctuations, recurring subscriptions Run Rate would have increased 11.3%.
Run Rate from Index recurring subscriptions increased 11.8%, 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 increased 7.2%, driven by higher AUM in ETFs linked to MSCI equity indexes, partially offset by lower AUM in non-ETF indexed funds linked to MSCI indexes and lower exchange traded futures and options volume.
Run Rate from Analytics products increased 6.6%, primarily
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 26.2%, driven by strong growth in Ratings, Climate and Screening products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate Run Rate would have increased 24.1%.
Run Rate from All Other - Private Assets increased 9.3%, primarily driven by growth in RCA, Index Intel and Performance Insights products. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other - Private Assets Run Rate would have increased 8.8%.
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:
Asignificant 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 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.
As of June 30, 2023, we had an aggregate of $4,200.0 million in Senior Notes outstanding. In addition, under the Credit Agreement, we had as of June 30, 2023: (i) an aggregate of $343.4 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 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 governing the TLA Facility and the revolving credit facility also contains covenants that limit our and our subsidiaries’ ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make other distributions in respect of capital stock or engage in certain types of stock repurchases, redemptions and other restricted payments, enter into sale/leaseback transactions and consolidate, merge or sell all or substantially all of our assets.
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 detailed 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 June 30, 2023, our Consolidated Leverage Ratio was 2.88:1.00 and our Consolidated Interest Coverage Ratio was 8.39:1.00.
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 $1,442.5 million, or 61.4%, of our total revenue for the trailing 12 months ended June 30, 2023, approximately $592.1 million, or 46.3%, of our consolidated operating income for the trailing 12 months ended June 30, 2023, and approximately $950.9 million, or 20.0%, of our consolidated total assets (excluding intercompany assets) and $863.4 million, or 14.5%, of our consolidated total liabilities, in each case as of June 30,
2023.
Share Repurchases
The following table provides information with respect to repurchases of the Company’s common stock pursuant to open market repurchases:
(1) As of January 1, 2023, the Company’s share repurchases in excess of issuances are subject to a 1% excise tax enacted by the Inflation Reduction Act. The values in this column exclude the 1% excise tax incurred on share repurchases. Any excise tax incurred is recognized as part of the cost of the shares
acquired in the Unaudited Condensed Consolidated Statement of Shareholders’ Equity (Deficit)
As of June 30, 2023, there was $863.5 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 July 24, 2023, the Board of Directors
declared a quarterly cash dividend of $1.38 per share for the three months ending September 30, 2023. The third quarter 2023 dividend is payable on August 31, 2023 to shareholders of record as of the close of trading on August 11, 2023.
Cash Flows
The following table presents the Company’s cash and cash equivalents, including restricted cash, as of the dates indicated:
We
typically seek to maintain minimum cash balances globally of approximately $225.0 million to $275.0 million for general operating purposes. As of June 30, 2023 and December 31, 2022, $282.3 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
Six Months Ended June 30,
(in thousands)
2023
2022
Net cash provided by operating activities
$
555,945
$
456,873
Net
cash (used in) investing activities
(48,430)
(34,413)
Net cash (used in) provided by financing activities
(712,052)
(982,936)
Effect of exchange rate changes
3,302
(18,673)
Net
(decrease) increase in cash, cash equivalents and restricted cash
$
(201,235)
$
(579,149)
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 higher cash collections from customers, partially offset by higher income tax payments and higher payments for interest expense.
Our
primary uses of cash from operating activities are for the payment of cash compensation expenses, income taxes, interest expenses, 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.
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 the absence of proceeds from borrowings and by higher dividend payments..
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
We are subject to foreign currency exchange fluctuation risk. Exchange rate movements can impact the U.S. dollar-reported value of our revenues, expenses, assets and liabilities denominated in non-U.S. dollar currencies or where the currency of such items is different than the functional currency
of the entity where these items were recorded.
We generally invoice our clients in U.S. dollars; however, we invoice a portion of our clients in Euros, British pounds sterling, Japanese yen and a limited number of other non-U.S. dollar currencies. For the six months ended June 30, 2023 and 2022, 16.8% and 15.8%, respectively, of our revenues are subject to foreign currency exchange rate risk and primarily included clients billed in foreign currency as well as U.S. dollar exposures on non-U.S. dollar foreign operating entities. Of the 16.8% of non-U.S. dollar exposure for the six months ended June 30, 2023, 42.2% was in Euros, 31.3% was in British pounds sterling and 18.0% was in Japanese yen. Of the 15.8% of non-U.S. dollar exposure for the six months ended June 30,
2022, 40.5% was in Euros, 29.0% was in British pounds sterling and 19.9% was in Japanese yen.
Revenues from asset-based fees represented 22.4% and 24.9% of operating revenues for the six months ended June 30, 2023 and 2022, respectively. While a substantial portion of our asset-based fees are invoiced in U.S. dollars, the fees are based on the assets in investment products, of which approximately three-fifths are invested in securities denominated in currencies other than the U.S. dollar. Accordingly, declines in such other currencies against the U.S. dollar will decrease the fees payable to us under such licenses. In addition, declines in such currencies against the U.S. dollar could impact the attractiveness of such investment products resulting in net fund outflows, which would further reduce the fees payable under such
licenses.
We are exposed to additional foreign currency risk in certain of our operating costs. Approximately 43.5% and 43.3% of our operating expenses for the six months ended June 30, 2023 and 2022, respectively, were denominated in foreign currencies, the significant majority of which were denominated in British pounds sterling, Indian rupees, Euros, Hungarian forints, Mexican pesos and Swiss francs.
We have certain monetary assets and liabilities denominated in currencies other than local functional amounts and when these balances are remeasured into their local functional currency, either a gain or a loss results from the change of the value of the functional currency as compared to the originating currencies. We manage foreign currency exchange rate risk, in part, through the
use of derivative financial instruments comprised principally of forward contracts on foreign currency which are not designated as hedging instruments for accounting purposes. The objective of the derivative instruments is to minimize the impact on the income statement of the volatility of amounts denominated in certain foreign currencies. We recognized total foreign currency exchange losses of $3.9 million and gains of $2.4 million for the six months ended June 30, 2023 and 2022, respectively.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial
Officer have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as of June 30, 2023, and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company in the ordinary course of business. While the amounts claimed could be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that MSCI’s business, operating results, financial condition or cash flows in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters
that are currently pending or asserted will not, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.
Item 1A. Risk Factors
For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for fiscal year ended December 31, 2022.
There have been no material changes to the risk factors and uncertainties known to the Company and disclosed in the
Company’s Form 10-K for the fiscal year ended December 31, 2022, that, if they were to materialize or occur, would, individually or in the aggregate, have a material effect on MSCI’s business, operating results, financial condition or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the three months ended June 30, 2023.
The table below presents information with respect to purchases made by or on behalf of the Company of its shares of common
stock during the three months ended June 30, 2023.
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased(1)
Average
Price
Paid
Per Share(2)
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
(1)Includes,
when applicable, (i) shares purchased by the Company on the open market under the stock repurchase program; (ii) shares withheld to satisfy tax withholding obligations on behalf of employees that occur upon vesting and delivery of outstanding shares underlying restricted stock units; and (iii) shares held in treasury under the MSCI Inc. Non-Employee Directors Deferral Plan. The value of shares withheld to satisfy tax withholding obligations was determined using the fair market value of the Company’s common stock on the date of withholding, using a valuation methodology established by the Company.
(2)Excludes 1% excise tax incurred on share repurchases.
(3)See Note 9, “Shareholders’ Equity (Deficit),” of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding our stock repurchase program.
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.