MSCI Inc. Reports First Quarter 2014 Financial Results Business Wire NEW YORK -- April 30, 2014 MSCI Inc. (NYSE:MSCI), a leading global provider of investment decision support tools, including indexes and portfolio risk and performance analytics products and services, today announced results for the first quarter ended March 31, 2014. Due to the announced sale of Institutional Shareholder Services Inc. (“ISS”), results of the former Governance business are now reflected as discontinued operations in the financial statements of MSCI in the current quarter and for prior periods. The operating metrics for prior periods have also been updated to exclude the Governance business. (Note: Percentage changes are referenced to the comparable period in 2013, unless otherwise noted.) *Operating revenues increased 9.2% to $239.7 million for first quarter 2014. *Income from continuing operations declined 11.0% to $47.1 million for first quarter 2014. Diluted EPS from continuing operations for first quarter 2014 declined 7.0% to $0.40. *Adjusted EBITDA^1 fell 2.1% to $96.6 million for first quarter 2014. Adjusted EPS^2 decreased 8.0% to $0.46 for first quarter 2014, reflecting only the results of continuing operations. *Net income rose 36.4% to $80.4 million for first quarter 2014. Net income included an income tax benefit of $30.6 million related to our decision to sell ISS. Diluted EPS for first quarter 2014 was $0.68. *Run Rate ^ grew 9.5% to $955.3 million for first quarter 2014, driven by subscription growth of 7.5% and asset-based fee growth of 20.6%. *MSCI repurchased a total of 1.7 million shares as part of the February 2014 $100 million accelerated share repurchase program. Table 1: MSCI Inc. Selected Financial Information (unaudited) Three Months Ended Change from March 31, March 31, March 31, In thousands, except per share data 2014 2013 2013 Operating revenues $ 239,688 $ 219,469 9.2 % Operating expenses 160,183 136,578 17.3 % Income from continuing operations 47,146 52,958 (11.0 %) % Margin from continuing operations 19.7 % 24.1 % Net Income 80,399 58,937 36.4 % Diluted EPS from continuing $ 0.40 $ 0.43 (7.0 %) operations Diluted EPS $ 0.68 $ 0.48 41.7 % Adjusted EPS^2 $ 0.46 $ 0.50 (8.0 %) Adjusted EBITDA^1 $ 96,603 $ 98,654 (2.1 %) % Margin 40.3 % 45.0 % ^1 Net Income before income from discontinued operations, net of income taxes, provision for income taxes, other expense (income), net, depreciation and amortization. See Table 9 titled "Reconciliation of Adjusted EBITDA to Net Income (unaudited)" and information about the use of non-GAAP financial information provided under "Notes Regarding the Use of Non-GAAP Financial Measures." ^2 Per share net income before income from discontinued operations, net of income taxes, and the after-tax impact of amortization of intangible assets. See Table 10 titled "Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS (unaudited)" and information about the use of non-GAAP financial information provided under "Notes Regarding the Use of Non-GAAP Financial Measures." “MSCI had a strong start to 2014. Our Run Rate grew by 9.5% in the first quarter, driven by the investments we have been making and a modest improvement in our operating environment,” Henry A. Fernandez, Chairman and CEO, said. “With the sale of ISS, MSCI will be even more focused on providing mission-critical tools that shed light on the performance and risk of our clients’ portfolios across all major asset classes,” he added. “We believe the role that our tools play in our clients’ investment process will only become more important as the investment industry continues to evolve. In order to maximize that importance, we are making targeted investments in our product development, sales and marketing, and client service functions. While these investments are reducing our margins in 2014, we expect that they will lead to further acceleration in our revenue growth over the next several years,” Mr. Fernandez concluded. Summary of Results for First Quarter 2014 Compared to First Quarter 2013 Operating Revenues – See Table 4 Operating revenues for the three months ended March 31, 2014 (“first quarter 2014”) increased $20.2 million, or 9.2%, to $239.7 million compared to $219.5 million for the three months ended March 31, 2013 (“first quarter 2013”). First quarter 2014 recurring subscription revenues rose $15.3 million, or 8.5%, to $195.0 million, asset-based fees increased $4.4 million, or 12.0%, to $40.9 million and non-recurring revenues rose $0.5 million to $3.8 million. *Index and ESG products: Index and ESG product revenues increased $16.8 million, or 13.9%, to $138.2 million. Subscription revenues grew by $12.5 million, or 14.7%, to $97.3 million, driven by growth in revenues from equity index benchmark products. Revenues also benefited from the timing of revenue recognition related to IPD products, which contributed to an increase in revenues of $5.2 million relative to first quarter 2013. Revenues attributable to equity index asset-based fees rose $4.4 million, or 12.0%, to $40.9 million driven by an increase in licensing revenues from non-ETF passive funds and ETFs linked to MSCI indexes. A change in the mix of ETFs linked to MSCI indexes more than offset a decline of $38.2 billion, or 10.4%, in average assets under management (“AUM”) in ETFs linked to MSCI indexes. Excluding the $2.5 million in asset-based fees linked to certain Vanguard ETFs that transitioned during first quarter 2013, asset-based fees would have grown by 20.3%. *Risk management analytics: Revenues related to risk management analytics products, which now include revenues previously reported separately as energy and commodity analytics products, increased $5.2 million, or 7.3%, to $75.6 million, driven by higher revenues from the RiskManager and BarraOne products. Results also benefited from one additional month of revenues from InvestorForce totaling $0.9 million, which was acquired on January 29, 2013. *Portfolio management analytics: Revenues related to portfolio management analytics products declined $1.8 million, or 6.4%, to $25.9 million as a result of lower sales of equity analytics products in prior periods as well as lower fixed income analytics revenues. Operating Expenses – See Table 5 Total operating expenses from continuing operations rose $23.6 million, or 17.3%, to $160.2 million from first quarter 2013 reflecting increases in product development, sales and marketing, client service and corporate infrastructure. *Compensation costs: Total compensation costs rose $12.7 million, or 14.1%, to $102.4 million for first quarter 2014, driven by an increase in overall headcount of 17.5%. Employees located in emerging market centers represent 47.1% of the workforce, up from 40.4% at the end of first quarter 2013. *Non-compensation costs excluding depreciation and amortization: Non-compensation costs rose $9.6 million, or 30.9%, to $40.7 million for first quarter 2014 reflecting increases in professional services, information technology, occupancy, market data fees, marketing and recruiting costs, among other items. *Depreciation and amortization: Amortization of intangible assets totaled $11.3 million for first quarter 2014, an increase of 0.9% compared to first quarter 2013. Depreciation and amortization of property, equipment and leasehold improvements rose $1.2 million, or 26.8%, to $5.8 million, primarily reflecting higher depreciation associated with investments in our information technology infrastructure. Other Expense (Income), Net Other expense (income), net for first quarter 2014 was $6.0 million, a decline of $2.7 million from first quarter 2013, driven primarily by lower interest expense associated with lower interest rates and indebtedness. Provision for Income Taxes The provision for income taxes was $26.4 million for first quarter 2014, up $5.2 million, or 24.3%, from first quarter 2013. The effective tax rate for first quarter 2014 was 35.9% versus 28.6% a year ago. First quarter 2013 income tax expense benefited from discrete items of $3.9 million, which were primarily related to a reduction in state taxes and the reinstatement of the 2012 research and development credit. In addition, the current period reflects a higher rate largely associated with the impact of the research and development credit, which has not been renewed in 2014. Income and Earnings per Share from Continuing Operations – See Table 10 Income from continuing operations fell $5.8 million, or 11.0%, to $47.1 million for first quarter 2014. Diluted EPS from continuing operations was $0.40, down $0.03, or 7.0%, as a 2.6% decline in weighted average shares outstanding partially offset the impact of lower income. Adjusted Net Income, which excludes the after-tax impact of discontinued operations and amortization of intangible assets, fell $6.6 million, or 10.8%, to $54.4 million. Adjusted EPS, which excludes the after-tax, per diluted share impact of discontinued operations and the amortization of intangible assets, fell $0.04, or 8.0%, to $0.46. See Table 10 titled “Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS (unaudited)” and “Notes Regarding the Use of Non-GAAP Financial Measures” below. Adjusted EBITDA – See Table 9 Adjusted EBITDA, which excludes income from discontinued operations, net of income taxes, provision for income taxes, other expense (income), net, depreciation and amortization was $96.6 million, down $2.1 million, or 2.1%, from first quarter 2013. The Adjusted EBITDA margin declined to 40.3% from 45.0%. See Table 9 titled “Reconciliation of Adjusted EBITDA to Net Income (unaudited)” and “Notes Regarding the Use of Non-GAAP Financial Measures” below. Sale of ISS and Discontinued Operations On March 18, 2014, MSCI announced that it entered into a definitive agreement to sell ISS to Vestar Capital Partners for cash consideration of $364.0 million, subject to working capital adjustments. The ISS business, previously referred to as the Governance segment but excluding the impact of stranded allocated costs, is reflected as discontinued operations in MSCI’s financial statements. Prior periods have been updated to reflect this categorization. Income from discontinued operations, net of income taxes, was $33.3 million for first quarter 2014. This compares with income from discontinued operations, net of income taxes of $6.0 million for first quarter 2013. First quarter 2014 income included an income tax benefit of $30.6 million associated with the creation of a net deferred tax asset on the difference between MSCI’s tax and book basis in ISS. That tax asset is expected to be realized in the second quarter of 2014 upon the closing of the sale. MSCI does not expect to incur a cash tax liability on the proceeds from the sale. Net Income and Earnings per Share Net income was $80.4 million for first quarter 2014, up 36.4% from $58.9 million from first quarter 2013. Diluted EPS was $0.68 for first quarter, up from $0.48 from first quarter 2013. The increase was driven by the income tax benefit associated with discontinued operations as previously discussed. Share Repurchase Activity MSCI entered into a third ASR agreement with Morgan Stanley & Co. LLC (“Morgan Stanley”) on February 6, 2014.Under this ASR agreement, MSCI paid Morgan Stanley $100.0 million in cash and received a delivery of 1.7 million shares of its common stock on February 7, 2014. Additional shares may be delivered to MSCI at or prior to maturity of the ASR agreement in May 2014. On February 4, 2014, MSCI’s Board of Directors authorized the repurchase of up to $300.0 million of additional shares. The $300.0 million authorization will be available for utilization from time to time at management’s discretion. Key Operating Metrics – See Tables 6, 7, 8 Total Run Rate grew by $83.2 million, or 9.5%, to $955.3 million as of March 31, 2014 compared to March 31, 2013. Total subscription Run Rate grew by $55.5 million, or 7.5%, to $793.4 million as of March 31, 2014 compared to March 31, 2013. Changes in foreign currency rates had only a nominal impact on the change in total Run Rate during first quarter 2014 and increased Run Rate by $5.5 million versus March 31, 2013. *Index and ESG products: Index and ESG subscription Run Rate grew by $38.1 million, or 11.1%, to $382.4 million, driven primarily by growth in equity index benchmark and data products aided by strong growth in IPD and ESG products. Run Rate attributable to asset-based fees rose $27.7 million, or 20.6%, to $161.9 million. The increase was primarily driven by inflows and higher market performance in ETFs linked to MSCI indexes. The first quarter 2013 asset-based fee Run Rate excludes those Vanguard ETFs that later switched benchmarks. As of March 31, 2014, AUM in ETFs linked to MSCI indexes were $340.8 billion, down $16.5 billion, or 4.6%, from March 31, 2013 but up $7.9 billion, or 2.4%, from December 31, 2013. Of that $7.9 billion sequential increase, net inflows added $6.6 billion and market gains accounted for $1.3 billion. If the AUM in those Vanguard ETFs which transitioned earlier in 2013 were excluded from the March 31, 2013 balance, AUM in MSCI-linked ETFs would have risen $55.4 billion, or 19.4%, compared to March 31, 2013. *Risk management analytics: Risk management analytics Run Rate now includes Run Rate previously reported separately as energy and commodity analytics products. Risk management analytics Run Rate increased $19.9 million, or 6.9%, to $307.5 million, driven by strong growth from RiskManager products. Changes in foreign currency positively benefited Run Rate by $3.5 million versus first quarter 2013 and by $0.1 million versus fourth quarter 2013. *Portfolio management analytics: Run Rate related to portfolio management analytics products declined $2.6 million, or 2.4%, to $103.5 million. Relative to fourth quarter 2013, portfolio management analytics Run Rate increased slightly, as an increase in retention rates more than offset the impact of lower sales. Conference Call Information Investors will have the opportunity to listen to MSCI Inc.’s senior management review first quarter and full year 2014 results on Wednesday, April 30, 2014 at 11:00 am Eastern Time. To listen to the live event, visit the investor relations section of MSCI's website, http://ir.msci.com/events.cfm, or dial 1-877-312-9206 within the United States. International callers dial 1-408-774-4001. An audio recording of the conference call will be available on our website approximately two hours after the conclusion of the live event and will be accessible through May 2, 2014. To listen to the recording, visit http://ir.msci.com/events.cfm, or dial 1-800-585-8367 (passcode: 31423282) within the United States. International callers dial 1-404-537-3406 (passcode: 31423282). About MSCI MSCI Inc. is a leading provider of investment decision support tools to investors globally, including asset managers, banks, hedge funds and pension funds. MSCI products and services include indices, portfolio risk and performance analytics, and governance tools. For equity investors, MSCI’s flagship performance and risk tools include: the MSCI indexes with approximately $8 trillion estimated to be benchmarked to them on a worldwide basis^1; Barra factor models, portfolio risk and performance analytics; and ESG (environmental, social and governance) Research screening, analysis and ratings. MSCI is also a leading provider of multi-asset class risk management tools including RiskMetrics multi-asset class market and credit risk analytics; Barra multi-asset class factor models, portfolio risk and performance analytics. MSCI also provides IPD real estate information, indexes and analytics for investors in and managers of commercial real estate. MSCI also offers ISS governance research and outsourced proxy voting and reporting services; and FEA valuation models and risk management software for the energy and commodities markets. MSCI is headquartered in New York, with research and commercial offices around the world. MSCI#IR ^1As of September 30, 2013, as reported on January 31, 2014 by eVestment, Lipper and Bloomberg For further information on MSCI, please visit our website at www.msci.com. Forward-Looking Statements This earnings release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements. Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in MSCI’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2014, and in quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC, and may also include the risks and uncertainties associated with a failure to consummate or a delay in the consummation of the proposed ISS transaction, including as a result of a failure to satisfy the conditions to closing in a timely manner or at all. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what MSCI projected. Any forward-looking statement in this release reflects MSCI’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to MSCI’s operations, results of operations, growth strategy and liquidity. MSCI assumes no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law. Website and Social Media Disclosure MSCI uses its website and corporate Twitter account (@MSCI_Inc) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about MSCI when you enroll your email address by visiting the “Email Alert Subscription” section at http://ir.msci.com/alerts.cfm. The contents of MSCI’s website and social media channels are not, however, incorporated by reference into this earnings release. Notes Regarding the Use of Non-GAAP Financial Measures MSCI has presented supplemental non-GAAP financial measures as part of this earnings release. A reconciliation is provided that reconciles each non-GAAP financial measure with the most comparable GAAP measure. The presentation of non-GAAP financial measures should not be considered as alternative measures for the most directly comparable GAAP financial measures. These measures are used by management to monitor the financial performance of the business, inform business decision making and forecast future results. Adjusted EBITDA is defined as net income before income from discontinued operations, net of income taxes, provision for income taxes, other expense (income), net, depreciation and amortization. Adjusted Net Income and Adjusted EPS are defined as net income and EPS, respectively, before income from discontinued operations, net of income taxes, and the after-tax impact of the provision for amortization of intangible assets and debt repayment and refinancing costs. We believe that adjusting for debt repayment and refinancing expenses is useful to management and investors because it allows for an evaluation of MSCI’s underlying operating performance. Additionally, we believe that adjusting for debt repayment and refinancing expenses and depreciation and amortization may help investors compare our performance to that of other companies in our industry as we do not believe that other companies in our industry have as significant of a portion of their operating expenses represented by these items. Finally, we believe that adjusting for discontinued operations, net of income tax, provides investors with a meaningful trend of results for our continuing operations. We believe that the non-GAAP financial measures presented in this earnings release facilitate meaningful period-to-period comparisons and provide a baseline for the evaluation of future results. Adjusted EBITDA, Adjusted Net Income and Adjusted EPS are not defined in the same manner by all companies and may not be comparable to other similarly-titled measures of other companies. Table 2: MSCI Inc. Consolidated Statement of Income (unaudited) Three Months Ended March 31, March 31, December 31, In thousands, except per share data 2014 2013 2013 Operating revenues $ 239,688 $ 219,469 $ 236,864 Operating expenses Cost of services 75,427 65,300 72,254 Selling, general and administrative 67,658 55,515 64,175 Amortization of intangible assets 11,270 11,166 11,218 Depreciation and amortization of property, equipment and leasehold 5,828 4,597 5,569 improvements Total operating expenses $ 160,183 $ 136,578 $ 153,216 Operating income $ 79,505 $ 82,891 $ 83,648 Operating margin 33.2 % 37.8 % 35.3 % Interest income (156 ) (237 ) (239 ) Interest expense 5,059 7,016 6,914 Other expense (income) 1,071 1,922 (20 ) Other expenses (income), net $ 5,974 $ 8,701 $ 6,655 Income from continuing operations 73,531 74,190 76,993 before provision for income taxes Provision for income taxes 26,385 21,232 36,120 Income from continuing operations $ 47,146 $ 52,958 $ 40,873 Income from continuing operations 19.7 % 24.1 % 17.3 % margin Income from discontinued $ 33,253 $ 5,979 $ 6,384 operations, net of income taxes Net Income $ 80,399 $ 58,937 $ 47,257 Earnings per basic common share from: Continuing operations $ 0.40 $ 0.44 $ 0.34 Discontinued operations 0.28 0.05 0.06 Earnings per basic common share $ 0.68 $ 0.49 $ 0.40 Earnings per diluted common share from: Continuing operations $ 0.40 $ 0.43 $ 0.34 Discontinued operations 0.28 0.05 0.05 Earnings per diluted common share $ 0.68 $ 0.48 $ 0.39 Weighted average shares outstanding used in computing earnings per share Basic 117,582 120,746 118,828 Diluted 118,597 121,702 119,877 Table 3: MSCI Inc. Selected Balance Sheet Items (unaudited) As of March 31, December 31, March 31, In thousands 2014 2013 2013 Cash and cash equivalents $ 260,450 $ 358,434 $ 263,029 Accounts receivable, net of allowances 191,905 169,490 166,915 Deferred revenue $ 314,247 $ 319,735 $ 350,470 Current maturities of long-term debt 19,775 19,772 43,106 Long-term debt, net of current 783,065 788,010 785,856 maturities Table 4: Quarterly Operating Revenues by Product Category and Revenue Type (unaudited) Three Months Ended % Change from March 31, March 31, December March 31, December 31, 31, In thousands 2014 2013 2013 2013 2013 Index and ESG products Subscriptions $ 97,343 $ 84,888 $ 93,771 14.7 % 3.8 % Asset-based fees 40,900 36,515 39,200 12.0 % 4.3 % Index and ESG 138,243 121,403 132,971 13.9 % 4.0 % products total Risk management 75,580 70,420 78,380 7.3 % (3.6 %) analytics Portfolio management 25,865 27,646 25,513 (6.4 %) 1.4 % analytics Total operating $ 239,688 $ 219,469 $ 236,864 9.2 % 1.2 % revenues Recurring $ 194,972 $ 179,663 $ 193,430 8.5 % 0.8 % subscriptions Asset-based fees 40,900 36,515 39,200 12.0 % 4.3 % Non-recurring 3,816 3,291 4,234 16.0 % (9.9 %) revenue Total operating $ 239,688 $ 219,469 $ 236,864 9.2 % 1.2 % revenues Table 5: Quarterly Operating Expense Detail (unaudited) Three Months Ended % Change from March 31, March 31, December March December 31, 31, 31, In thousands 2014 2013 2013 2013 2013 Cost of services Compensation $ 56,282 $ 49,404 $ 52,146 13.9 % 7.9 % Non-compensation 19,145 15,896 20,108 20.4 % (4.8 %) Total cost of $ 75,427 $ 65,300 $ 72,254 15.5 % 4.4 % services Selling, general and administrative Compensation $ 46,133 $ 40,350 $ 41,824 14.3 % 10.3 % Non-compensation 21,525 15,165 22,351 41.9 % (3.7 %) Total selling, general and $ 67,658 $ 55,515 $ 64,175 21.9 % 5.4 % administrative Amortization of 11,270 11,166 11,218 0.9 % 0.5 % intangible assets Depreciation and amortization of property, equipment and leasehold 5,828 4,597 5,569 26.8 % 4.7 % improvements Total operating $ 160,183 $ 136,578 $ 153,216 17.3 % 4.5 % expenses Compensation $ 102,415 $ 89,754 $ 93,970 14.1 % 9.0 % Non-compensation 40,670 31,061 42,459 30.9 % (4.2 %) expenses Amortization of 11,270 11,166 11,218 0.9 % 0.5 % intangible assets Depreciation and amortization of property, equipment and leasehold 5,828 4,597 5,569 26.8 % 4.7 % improvements Total operation $ 160,183 $ 136,578 $ 153,216 17.3 % 4.5 % expenses Table 6: Key Operating Metrics ^ (unaudited)^1 As of % Change from March 31, March 31, December 31, March December 31, 31, Dollars in 2014 2013 2013 2013 2013 thousands Run Rates^2 Index and ESG products Subscription $ 382,383 $ 344,267 $ 371,511 11.1 % 2.9 % Asset-based 161,882 134,186 158,305 20.6 % 2.3 % fees Index and ESG 544,265 478,453 529,816 13.8 % 2.7 % products total Risk management 307,460 287,554 301,957 6.9 % 1.8 % analytics Portfolio management 103,531 106,091 103,125 (2.4 %) 0.4 % analytics Total 955,256 872,098 934,898 9.5 % 2.2 % Subscription $ 793,374 $ 737,912 $ 776,593 7.5 % 2.2 % total Asset-based 161,882 134,186 158,305 20.6 % 2.3 % fees total Total Run Rate $ 955,256 $ 872,098 $ 934,898 9.5 % 2.2 % New Recurring Subscription $ 30,422 $ 25,676 $ 31,082 18.5 % (2.1 %) Sales Subscription (13,978 ) (13,995 ) (21,077 ) (0.1 %) (33.7 %) Cancellations Net New Recurring $ 16,444 $ 11,681 $ 10,005 40.8 % 64.4 % Subscription Sales Non-recurring $ 4,798 $ 5,117 $ 4,107 (6.2 %) 16.8 % sales Employees 2,623 2,233 2,580 17.5 % 1.7 % % Employees by location Developed 53 % 60 % 54 % Market Centers Emerging 47 % 40 % 46 % Market Centers ^1 Operating metrics have been updated for previous periods to solely reflect continuing operations. ^2 The Run Rate at a particular point in time represents the forward-looking revenues for the next 12 months from all subscriptions and investment product licenses we currently provide to our clients under renewable contracts or agreements assuming all contracts or agreements that come up for renewal are renewed and assuming then-current currency exchange rates. For any license where fees are linked to an investment product’s assets or trading volume, the Run Rate calculation reflects an annualization of the most recent periodic fee earned under such license or subscription. The Run Rate does not include fees associated with “one-time” and other non-recurring transactions. In addition, we remove from the Run Rate the fees associated with any subscription or investment product license agreement with respect to which we have received a notice of termination or non-renewal during the period and determined that such notice evidences the client’s final decision to terminate or not renew the applicable subscription or agreement, even though such notice is not effective until a later date. Table 7: ETF Assets Linked to MSCI Indexes^1 (unaudited) Three Three Months Ended 2013 Year Ended Months Ended In Billions March June September December December March 2013 2014 Beginning Period AUM in ETFs linked to MSCI $ 402.3 $ 357.3 $ 269.7 $ 302.6 $ 402.3 $ 332.9 Indexes Cash Inflow/Outflow^2 (61.0 ) (74.4 ) 12.7 19.4 (103.3 ) 6.6 Appreciation/Depreciation 16.0 (13.2 ) 20.2 10.9 33.9 1.3 Period End AUM in ETFs linked to $ 357.3 $ 269.7 $ 302.6 $ 332.9 $ 332.9 $ 340.8 MSCI Indexes Period Average AUM in ETFs linked to $ 369.0 $ 324.1 $ 286.2 $ 321.5 $ 325.0 $ 330.8 MSCI Indexes ^1 ETF assets under management calculation methodology is ETF net asset value multiplied by shares outstanding. Source: Bloomberg and MSCI ^2 Cash Inflow/Outflow for the first and second quarter of 2013 includes the migration of $82.8 billion of AUM in 9 Vanguard ETFs and $74.8 billion of AUM in 13 Vanguard ETFs, respectively, that transitioned to other indexes during each quarter. Table 8: Supplemental Operating Metrics (unaudited) Sales & Cancellations Three Three Months Ended 2013 Year Ended Months Ended In thousands March June September December December March 2014 2013 New Recurring Subscription $ 25,676 $ 27,526 $ 26,697 $ 31,082 $ 110,981 $ 30,422 Sales Subscription (13,995 ) (14,154 ) (13,345 ) (21,077 ) (62,571 ) (13,978 ) Cancellations Net New Recurring $ 11,681 $ 13,372 $ 13,352 $ 10,005 $ 48,410 $ 16,444 Subscription Sales Non-recurring 5,117 5,714 2,970 4,107 17,908 4,798 sales Total Sales $ 30,793 $ 33,240 $ 29,667 $ 35,189 $ 128,889 $ 35,220 Aggregate & Core Retention Rates Three Three Months Ended 2013 Year Ended Months Ended March June September December December March 2014 2013 Aggregate Retention Rate^1 Index and ESG 95.0 % 94.0 % 94.7 % 90.7 % 93.6 % 94.9 % products Risk management 93.4 % 92.2 % 91.7 % 85.7 % 90.8 % 91.0 % analytics Portfolio management 81.7 % 87.0 % 89.1 % 88.9 % 86.7 % 90.6 % analytics Total Aggregate 92.4 % 92.3 % 92.7 % 88.5 % 91.5 % 92.8 % Retention Rate Core Retention Rate^1 Index and ESG 95.0 % 94.1 % 94.8 % 90.9 % 93.7 % 94.9 % products Risk management 93.7 % 92.8 % 91.7 % 85.8 % 91.0 % 91.0 % analytics Portfolio management 82.8 % 87.5 % 90.3 % 90.1 % 87.7 % 93.4 % analytics Total Core Retention 92.7 % 92.6 % 92.9 % 88.8 % 91.8 % 93.2 % Rate ^1 The Aggregate Retention Rates are calculated by annualizing the cancellations for which we have received a notice of termination or non-renewal during the quarter and we have determined that such notice evidences the client’s final decision to terminate or not renew the applicable subscription or agreement, even though such notice is not effective until a later date. This annualized cancellation figure is then divided by the subscription Run Rate at the beginning of the year to calculate a cancellation rate. This cancellation rate is then subtracted from 100% to derive the annualized Retention Rate for the quarter. The Aggregate Retention Rate is computed on a product-by-product basis. Therefore, if a client reduces the number of products to which it subscribes or switches between our products, we treat it as a cancellation. In addition, we treat any reduction in fees resulting from renegotiated contracts as a cancellation in the calculation to the extent of the reduction. For the calculation of the Core Retention Rates the same methodology is used except the amount of cancellations in the quarter is reduced by the amount of product swaps. Table 9: Reconciliation of Adjusted EBITDA to Net Income (unaudited) Three Months Ended In thousands March 31, March 31, December 31, 2014 2013 2013 Net Income $ 80,399 $ 58,937 $ 47,257 Less: Income from discontinued $ (33,253 ) $ (5,979 ) $ (6,384 ) operations, net of income taxes Income from continuing operations $ 47,146 $ 52,958 $ 40,873 Plus: Provision for income taxes 26,385 21,232 36,120 Plus: Other expense (income), net 5,974 8,701 6,655 Operating income $ 79,505 $ 82,891 $ 83,648 Plus: Depreciation and amortization of property, equipment and leasehold improvements 5,828 4,597 5,569 Plus: Amortization of intangible 11,270 11,166 11,218 assets Adjusted EBITDA $ 96,603 $ 98,654 $ 100,435 Table 10: Reconciliation of Adjusted Net Income and Adjusted EPS to Net Income and EPS (unaudited) Three Months Ended March 31, March 31, December 31, In thousands, except per share data 2014 2013 2013 Net Income $ 80,399 $ 58,937 $ 47,257 Less: Income from discontinued $ (33,253 ) $ (5,979 ) $ (6,384 ) operations, net of income taxes Income from continuing operations $ 47,146 $ 52,958 $ 40,873 Plus: Amortization of intangible 11,270 11,166 11,218 assets Plus: Debt repayment and refinancing - - 1,405 expenses Less: Income tax effect (4,044 ) (3,196 ) (5,732 ) Adjusted net income $ 54,372 $ 60,928 $ 47,764 Diluted EPS $ 0.68 $ 0.48 $ 0.39 Less: Earnings per diluted common (0.28 ) (0.05 ) (0.05 ) share from discontinued operations Earnings per diluted common share 0.40 0.43 0.34 from continuing operations Plus: Amortization of intangible 0.09 0.09 0.09 assets Plus: Debt repayment and refinancing - - 0.01 expenses Less: Income tax effect (0.03 ) (0.02 ) (0.04 ) Adjusted EPS $ 0.46 $ 0.50 $ 0.40 Contact: MSCI, New York W. Edings Thibault, + 1-212-804-5273 or Media Inquiries: MSCI, London Jo Morgan, + 44-20-7618-2224 or MSCI, New York Kristin Meza, + 1-212-804-5330 or MHP Communications, London Sally Todd / Christian Pickel, + 44-20-3128-8100
MSCI Inc. Reports First Quarter 2014 Financial Results
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