MSCI, INC. 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 endedDecember 31, 2020 (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 "
Overview
We are a leading provider of critical decision support tools and services for the global investment community. Leveraging our knowledge of the global investment process and our expertise in research, data and technology, our actionable solutions power better investment decisions by enabling our clients to understand and analyze key drivers of risk and return and confidently and efficiently build more effective portfolios. Investors all over the world use our tools and services to gain insight and improve transparency throughout their investment processes, including to help define their investment universe, inform and analyze their asset allocation and portfolio construction decisions, measure and manage portfolio performance and risk, conduct performance attribution, implement sustainable and other investment strategies, design and issue ETFs and other indexed financial products, and facilitate reporting to stakeholders. Our leading research-enhanced products and services include indexes; portfolio construction and risk management analytics; ESG and climate solutions; and real estate market and transaction data, benchmarks, return-analytics, climate assessments and market insights. Through our integrated franchise we provide solutions across our products and services to support our clients' dynamic and complex needs. Our content and capabilities can be accessed by our clients through multiple channels and platforms. We are focused on product innovation to address the evolving needs of our clients in light of changing investment trends and an increasingly complex industry. In order to most effectively serve our clients, we are committed to driving an integrated solutions-based approach, achieving service excellence, enhancing our differentiated research and content, and delivering flexible, cutting-edge technology and platforms.
Our clients comprise a wide spectrum of the global investment industry and include the following key client types:
• Asset owners (pension funds, endowments, foundations, central banks,
sovereign wealth funds, family offices and insurance companies)
• Asset managers (institutional funds and accounts, mutual funds, hedge
funds, ETFs, insurance products, private banks and real estate investment
trusts)
• Financial intermediaries (banks, broker-dealers, exchanges, custodians,
trust companies and investment consultants)
• Wealth managers (including robo-advisors and self-directed brokerages)
• Corporates As ofSeptember 30, 2021 , we served over 4,5001 clients in more than 90 countries. As ofSeptember 30, 2021 , we had offices in more than 35 cities across more than 20 countries to help serve our diverse client base, with 45.1% of our revenues coming from clients in theAmericas , 39.1% in EMEA and 15.8% inAsia andAustralia . 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 Estate 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.
1 Represents the aggregate of all related clients under their respective parent
entity, excluding clients of
not previouslyMSCI 's clients. 23
-------------------------------------------------------------------------------- In evaluating our financial performance, we focus on revenue and profit growth, including results accounted for under accounting principles generally accepted inthe United States ("GAAP") as well as non-GAAP measures, for the Company as a whole and by operating segment. In addition, we focus on operating metrics, includingRun Rate , subscription sales and Retention Rate, to manage the business. Our business is not highly capital intensive and, as such, we expect to continue to convert a high percentage of our profits into excess cash in the future. Our growth strategy includes: (a) extending leadership in research-enhanced content across asset classes, (b) enhancing distribution and content-enabling technology, (c) expanding solutions that empower client customization, (d) strengthening existing and developing new client relationships and (e) executing strategic relationships and acquisitions with complementary content and technology companies. In the discussion that follows, we provide certain variances excluding the impact of foreign currency exchange rate fluctuations. 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 theU.S. dollar, and accordingly, any such impact is excluded from the disclosed foreign currency-adjusted variances. The discussion of our results of operations for the three and nine months endedSeptember 30, 2021 and 2020 are presented below. The results of operations for interim periods may not be indicative of future results. Results of Operations The following table presents the results of operations for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 % Change (in thousands, except per share data) Operating revenues$ 517,099 $ 425,333 21.6 %$ 1,493,702 $ 1,251,729 19.3 % Operating expenses: Cost of revenues 89,674 70,704 26.8 % 262,781 215,769 21.8 % Selling and marketing 59,819 52,668 13.6 % 174,477 159,834 9.2 % Research and development 28,352 24,901 13.9 % 80,745 73,997 9.1 % General and administrative 38,110 27,613 38.0 % 103,020 86,755 18.7 %
Amortization of intangible assets 14,105 14,333 (1.6 %)
59,569 42,171 41.3 %
Depreciation and amortization of
property,
equipment and leasehold
improvements 6,809 7,494 (9.1 %) 20,972 22,524 (6.9 %)
Total operating expenses 236,869 197,713 19.8 % 701,564 601,050 16.7 %
Operating income 280,230 227,620 23.1 % 792,138 650,679 21.7 %
Other expense (income), net 79,580 38,577 106.3 % 179,765 159,620 12.6 %
Income before provision for income
taxes 200,650 189,043 6.1 % 612,373 491,059 24.7 %
Provision for income taxes 30,774 6,685 360.3 % 80,255 45,453 76.6 %
Net income $ 169,876 $ 182,358 (6.8 %) $ 532,118 $ 445,606 19.4 %
Earnings per basic common share
$ 6.45 $ 5.30 21.7 %
Earnings per diluted common share
$ 6.38 $ 5.26 21.3 % Operating margin 54.2 % 53.5 % 53.0 % 52.0 % Operating Revenues Our revenues are grouped by the following types: recurring subscriptions, asset-based fees and non-recurring. We also group revenues by major product or reportable segment as follows: Index, Analytics, ESG and Climate and All Other - Private Assets, which includes the Real Estate product line. 24 -------------------------------------------------------------------------------- The following table presents operating revenues by type for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 % Change 2021 2020 % Change (in thousands) Recurring subscriptions$ 357,640 $ 313,190 14.2 %$ 1,043,502 $ 927,499 12.5 % Asset-based fees 141,745 100,371 41.2 % 404,593 288,642 40.2 % Non-recurring 17,714 11,772 50.5 % 45,607 35,588 28.2 % Total operating revenues$ 517,099 $ 425,333 21.6 %$ 1,493,702 $ 1,251,729 19.3 % Total operating revenues for the three months endedSeptember 30, 2021 increased 21.6% to$517.1 million compared to$425.3 million for the three months endedSeptember 30, 2020 . Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, total operating revenues would have increased 20.4% for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase of total operating revenues was 19.3%, growing to$1,493.7 million compared to$1,251.7 million for the nine months endedSeptember 30, 2020 . Adjusting for the impact of foreign currency exchange rate fluctuations and the acquisition, total operating revenues would have increased 18.3% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Operating revenues from recurring subscriptions for the three months endedSeptember 30, 2021 increased 14.2% to$357.6 million compared to$313.2 million for the three months endedSeptember 30, 2020 , primarily driven by growth in Index products, which increased$18.9 million , or 12.9%, strong growth in ESG and Climate products, which increased$14.4 million , or 51.3%, and growth in Analytics products, which increased$8.1 million , or 6.4%. Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, operating revenues from recurring subscriptions would have increased 12.6% for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase of operating revenues from recurring subscriptions was 12.5%, growing to$1,043.5 million compared to$927.5 million for the nine months endedSeptember 30, 2020 , primarily driven by growth in Index products, which increased$48.9 million , or 11.3%, strong growth in ESG and Climate products, which increased$36.3 million , or 46.0%, and growth in Analytics products, which increased$22.9 million , or 6.1%. Adjusting for the impact of foreign currency exchange rate fluctuations and the acquisition, operating revenues from recurring subscriptions would have increased 11.2% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Operating revenues from asset-based fees for the three months endedSeptember 30, 2021 increased 41.2% to$141.7 million compared to$100.4 million for the three months endedSeptember 30, 2020 . The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 52.4% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. For the nine months endedSeptember 30, 2021 , revenues from asset-based fees increased 40.2% to$404.6 million compared to$288.6 million for the nine months endedSeptember 30, 2020 . The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 50.1% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. 25
-------------------------------------------------------------------------------- The following table presents the value of AUM in ETFs linked toMSCI equity indexes and the sequential change of such assets as of the end of each of the periods indicated: Period Ended 2020 2021 March June September December March June September (in billions) 31, 30, 30, 31, 31, 30, 30, AUM in ETFs linked toMSCI equity indexes(1), (2)$ 709.5 $ 825.4 $ 908.9
Sequential Change in Value Market Appreciation/(Depreciation)$ (216.5 ) $ 117.4 $ 57.0 $ 135.7 $ 43.2 $ 73.7 $ (30.7 ) Cash Inflows (8.4 ) (1.5 ) 26.5 59.0 62.8 52.9 31.1 Total Change$ (224.9 ) $ 115.9 $ 83.5 $ 194.7 $ 106.0 $ 126.6 $ 0.4
The following table presents the average value of AUM in ETFs linked to
2020 2021
(in billions) March June September December March June September
AUM in ETFs linked to MSCI
equity indexes(1), (2)
Quarterly average $ 877.1 $ 776.9 $ 893.4 $ 999.2 $ 1,169.2 $ 1,292.4 $ 1,361.9
Year-to-date average $ 877.1 $ 827.0 $ 849.1 $ 886.7 $ 1,169.2 $ 1,230.8 $ 1,274.5 (1) The historical values of the AUM in ETFs linked to our equity indexes as of
the last day of the month and the monthly average balance can be found under
the link "AUM in ETFs Linked to
Relations homepage at http://ir.msci.com. This information is updated
mid-month each month. Information contained on our website is not
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
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 September 30, 2021 was $1,361.9 billion , up $468.5 billion , or
52.4%, from $893.4 billion for the three months ended September 30, 2020 . For
the nine months ended September 30, 2021 , it was $1,274.5 billion , up $425.4
billion , or 50.1%, from $849.1 billion for the nine months ended September 30,
2020 .
The following table presents operating revenues by reportable segment and revenue type for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating revenues:
Index
Recurring subscriptions $ 165,310 $ 146,387 12.9 %$ 480,488 $ 431,631 11.3 % Asset-based fees 141,745 100,371 41.2 % 404,593 288,642 40.2 % Non-recurring 14,448 8,933 61.7 % 34,876 27,582 26.4 % Index total 321,503 255,691 25.7 % 919,957 747,855 23.0 % Analytics Recurring subscriptions 134,320 126,251 6.4 % 399,360 376,505 6.1 % Non-recurring 1,978 2,086 (5.2 %) 6,857 4,903 39.9 % Analytics total 136,298 128,337 6.2 % 406,217 381,408 6.5 % ESG and Climate Recurring subscriptions 42,592 28,152 51.3 % 115,299 78,961 46.0 % Non-recurring 1,099 399 175.4 % 2,450 1,125 117.8 % ESG and Climate total 43,691 28,551 53.0 % 117,749 80,086 47.0 % All Other - Private Assets Recurring subscriptions 15,418 12,400 24.3 % 48,355 40,402 19.7 % Non-recurring 189 354 (46.6 %) 1,424 1,978 (28.0 %) All Other - Private Assets total 15,607 12,754 22.4 % 49,779 42,380 17.5 % Total operating revenues$ 517,099 $ 425,333 21.6 %$ 1,493,702 $ 1,251,729 19.3 % 26
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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.
The following table presents operating expenses by activity category for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating expenses:
Cost of revenues $ 89,674 $ 70,704 26.8 % $ 262,781 $ 215,769 21.8 %
Selling and marketing 59,819 52,668 13.6 % 174,477 159,834 9.2 %
Research and development 28,352 24,901 13.9 % 80,745 73,997 9.1 %
General and administrative 38,110 27,613 38.0 % 103,020 86,755 18.7 %
Amortization of intangible assets 14,105 14,333 (1.6 %) 59,569 42,171 41.3 %
Depreciation and amortization of
property,
equipment and leasehold
improvements 6,809 7,494 (9.1 %) 20,972 22,524 (6.9 %)
Total operating expenses $ 236,869 $ 197,713 19.8 % $ 701,564 $ 601,050 16.7 %
Total operating expenses for the three months ended September 30, 2021 increased
19.8% to $236.9 million compared to $197.7 million for the three months ended
September 30, 2020 . Adjusting for the impact of foreign currency exchange rate
fluctuations, the increase would have been 18.4% for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 .
For the nine months ended September 30, 2021 , the increase was 16.7%, growing to
$701.6 million compared to $601.1 million for the nine months ended
September 30, 2020 . Adjusting for the impact of foreign currency exchange rate
fluctuations, the increase would have been 14.4% for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 .
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 for the three months endedSeptember 30, 2021 increased 26.8% to$89.7 million compared to$70.7 million for the three months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation, as well as higher non-compensation costs, reflecting higher professional fees, information technology costs and market data costs. For the nine months endedSeptember 30, 2021 , the increase was 21.8%, growing to$262.8 million compared to$215.8 million for the nine months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher wages and salaries and incentive compensation, as well as higher non-compensation costs, reflecting higher professional fees, information technology costs and market data costs. 27 --------------------------------------------------------------------------------
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 groups associated with acquiring new business, including product management, research, technology and sales operations. Selling and marketing expenses for the three months endedSeptember 30, 2021 increased 13.6% to$59.8 million compared to$52.7 million for the three months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, including higher incentive compensation and wages and salaries, partially offset by lower severance costs, as well as higher non-compensation costs, primarily relating to higher marketing and information technology costs. For the nine months endedSeptember 30, 2021 , the increase was 9.2%, growing to$174.5 million compared to$159.8 million for the nine months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, including incentive compensation and wages and salaries.
Research and Development
R&D expenses consist of the costs to develop new or enhance existing products and the costs to develop new or improved technology and service platforms for the delivery of our products and services and primarily include the costs of development, research, product management, project management and the technology support associated with these efforts. R&D expenses for the three months endedSeptember 30, 2021 increased 13.9% to$28.4 million compared to$24.9 million for the three months endedSeptember 30, 2020 , reflecting higher investment in the Index and ESG and Climate reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, as well as higher non-compensation costs, reflecting higher information technology costs. For the nine months endedSeptember 30, 2021 , the increase was 9.1%, growing to$80.7 million compared to$74.0 million for the nine months endedSeptember 30, 2020 , reflecting higher investment in the Index and ESG and Climate reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, as well as higher non-compensation costs, reflecting 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 for the three months endedSeptember 30, 2021 increased 38.0% to$38.1 million compared to$27.6 million for the three months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by higher non-compensation costs, primarily driven by non-recurring transaction and integration costs related to the acquisition of RCA, higher professional fees and information technology costs, as well as higher compensation costs, reflecting higher incentive compensation and wages and salaries, partially offset by lower severance costs. For the nine months endedSeptember 30, 2021 , the increase was 18.7%, growing to$103.0 million compared to$86.8 million for the nine months endedSeptember 30, 2020 , reflecting increases across all four reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation and wages and salaries, partially offset by lower severance costs, and higher non-compensation costs related to non-recurring transaction and integration costs related to the acquisition of RCA, information technology costs, insurance costs and professional fees. 28 -------------------------------------------------------------------------------- The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 % Change 2021 2020 % Change (in thousands) Compensation and benefits$ 152,540 $ 129,920 17.4 %$ 452,237 $ 395,985 14.2 % Non-compensation expenses 63,415 45,966 38.0 % 168,786 140,370 20.2 % Amortization of intangible assets 14,105 14,333 (1.6 %) 59,569 42,171 41.3 % Depreciation and amortization of property, equipment and leasehold improvements 6,809 7,494 (9.1 %) 20,972 22,524 (6.9 %) Total operating expenses$ 236,869 $ 197,713 19.8 %$ 701,564 $ 601,050 16.7 % Compensation and Benefits Compensation and benefits costs are our most significant expense and typically represent approximately 65% of operating expenses or more than 70% of Adjusted EBITDA expenses. We had 4,237 and 3,545 employees as ofSeptember 30, 2021 and 2020, respectively, reflecting a 19.5% 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 benefit expenses. As ofSeptember 30, 2021 , 62.5% of our employees were located in emerging market centers compared to 64.2% as ofSeptember 30, 2020 . Compensation and benefits costs for the three months endedSeptember 30, 2021 increased 17.4% to$152.5 million compared to$129.9 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase was 14.2%, growing to$452.2 million compared to$396.0 million for the nine months endedSeptember 30, 2020 . The increase in both the three and nine months endedSeptember 30, 2021 was primarily driven by higher incentive compensation and wages and salaries.
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.
Non-Compensation Expenses
Non-compensation expenses for the three months endedSeptember 30, 2021 increased 38.0% to$63.4 million compared to$46.0 million for the three months endedSeptember 30, 2020 , primarily driven by higher non-recurring transaction and integration costs related to the acquisition of RCA, professional fees, information technology costs and market data costs. For the nine months endedSeptember 30, 2021 , the increase was 20.2%, growing to$168.8 million compared to$140.4 million for the nine months endedSeptember 30, 2020 , primarily driven by higher information technology costs, professional fees, non-recurring transaction and integration costs related to the acquisition of RCA and market data costs. 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.
Amortization of Intangible Assets
Amortization of intangible assets expense relates to definite-lived intangible assets arising from past acquisitions and internal capitalized software projects recognized over their estimated useful lives. Amortization of intangible assets expense for the three months endedSeptember 30, 2021 remained consistent at$14.1 million compared to$14.3 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , it increased 41.3% to$59.6 million compared to$42.2 million for the nine months endedSeptember 30, 2020 , primarily driven by a write-off of$16.0 million of certain internally developed capitalized software intangible assets as a result of management's decision during the three months endedJune 30, 2021 to discontinue development and cease related sales activities of certain Analytics segment products and transition existing customers to other product offerings.
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 furniture
and fixtures, computer and related equipment and leasehold improvements over the
estimated useful
29
-------------------------------------------------------------------------------- life of the assets. Depreciation and amortization of property, equipment and leasehold improvements for the three months endedSeptember 30, 2021 decreased 9.1% to$6.8 million compared to$7.5 million for the three months endedSeptember 30, 2020 . The decrease was primarily the result of lower depreciation on software, computer and related equipment and furniture. For the nine months endedSeptember 30, 2021 , it decreased 6.9% to$21.0 million compared to$22.5 million for the nine months endedSeptember 30, 2020 . The decrease was primarily the result of lower depreciation on software, computer and related equipment and leasehold improvements.
Other Expense (Income), Net
Other expense (income), net for the three months endedSeptember 30, 2021 increased 106.3% to$79.6 million compared to$38.6 million for the three months endedSeptember 30, 2020 . The increase in net expenses was primarily driven by the approximately$37.3 million loss on debt extinguishment associated with the redemption of all of the$500.0 million aggregate principal amount of the 2027 Senior Notes (the "2027 Senior Notes Redemption") during the three months endedSeptember 30, 2021 . The loss on debt extinguishment associated with the 2027 Senior Notes Redemption included an applicable premium of approximately$33.6 million (as set forth in the indenture governing the terms of the 2027 Senior Notes) and the write-off of approximately$3.7 million of unamortized debt issuance costs associated with the 2027 Senior Notes. For the nine months endedSeptember 30, 2021 , net expenses increased 12.6% to$179.8 million compared to$159.6 million for the nine months endedSeptember 30, 2020 . The increase in net expenses was primarily driven by the approximately$37.3 million and$21.8 million loss on debt extinguishment associated with the 2027 Senior Notes Redemption and the redemption of all of the$500.0 million aggregate principal amount of the 2026 Senior Notes that remained outstanding (the "2026 Senior Notes Redemption") during the nine months endedSeptember 30, 2021 , respectively. The loss on debt extinguishment associated with the 2026 Senior Notes Redemption included an applicable premium of approximately$18.2 million (as set forth in the indenture governing the terms of the 2026 Senior Notes) and the write-off of approximately$3.6 million of unamortized debt issuance costs associated with the 2026 Senior Notes. This was partially offset by the absence of the$35.0 million and$10.0 million loss on debt extinguishment associated with the redemption of all of the outstanding$800.0 million aggregate principal amount of the 2025 Senior Notes ("2025 Senior Notes Redemption") and the redemption of all of the remaining$300.0 million of the 5.250% Senior Notes due 2024 ("2024 Senior Notes Redemption") during the nine months endedSeptember 30, 2020 , respectively.
Income Taxes
The Company's provision for income taxes for the three months ended
The effective tax rate of 15.3% for the three months endedSeptember 30, 2021 reflects the Company's estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling$15.1 million . For the three months endedSeptember 30, 2021 , these discrete items primarily related to the$9.6 million tax impact of loss on debt extinguishment recognized during the period on the 2027 Senior Notes Redemption. Also included in the discrete items was a$3.8 million benefit related to prior year settlements,$1.3 million of excess tax benefits recognized on share-based compensation vested during the period and$0.4 million of tax benefits related to other prior year items. In addition, the effective tax rate was impacted by the level of earnings. The effective tax rate of 3.5% for the three months endedSeptember 30, 2020 reflects the Company's estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling$27.7 million . For the three months endedSeptember 30, 2020 , these discrete items primarily related to the$20.8 million tax impact from the favorable impact on prior years of financial regulations released during the three months endedSeptember 30, 2020 clarifying certain provisions established in the 2017 Tax Act. The discrete items also included a$5.5 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings. The Company's provision for income taxes for the nine months endedSeptember 30, 2021 and 2020 was$80.3 million and$45.5 million , respectively. These amounts reflect effective tax rates of 13.1% and 9.3% for the nine months endedSeptember 30, 2021 and 2020, respectively. The effective tax rate of 13.1% for the nine months endedSeptember 30, 2021 reflects the Company's estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling$49.3 million in relation to pretax income. For the nine months endedSeptember 30, 2021 , these discrete items primarily related to$22.7 million of excess tax benefits recognized on share-based compensation vested during the period and$15.2 million related to the tax impact of loss on debt extinguishment recognized during the period on the 2027 Senior Notes Redemption and 2026 Senior Notes Redemption. Also included in the discrete items is a$5.1 million benefit related to prior year settlements, a$2.3 million benefit related to the revaluation of deferred taxes as a result of the enactment of an increase in theUK corporate tax rate, a$2.0 million benefit related to the filing of prior year refund claims and$2.0 million of tax benefits related to other prior year items. In addition, the effective tax rate was impacted by the level of earnings. 30 -------------------------------------------------------------------------------- The effective tax rate of 9.3% for the nine months endedSeptember 30, 2020 reflects the Company's estimate of the effective tax rate for the period, which was impacted by certain favorable discrete items totaling$61.7 million . For the nine months endedSeptember 30, 2020 , these discrete items primarily related to$21.9 million of excess tax benefits recognized on share-based compensation vested during the period, the$20.8 million tax impact from the favorable impact on prior years of financial regulations released during the three months endedSeptember 30, 2020 clarifying certain provisions established in the 2017 Tax Act and$11.5 million related to the tax impact of loss on debt extinguishment recognized during the period. The discrete items also included a$6.3 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings. Net Income As a result of the factors described above, net income for the three months endedSeptember 30, 2021 decreased 6.8% to$169.9 million compared to$182.4 million for the three months endedSeptember 30, 2020 and for the nine months endedSeptember 30, 2021 increased 19.4% to$532.1 million compared to$445.6 million for the nine months endedSeptember 30, 2020 .
Weighted Average Shares
The weighted average shares outstanding used to calculate basic and diluted earnings per share for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 decreased by 1.4% and 1.1%, respectively. For the nine months endedSeptember 30, 2021 , the weighted average shares outstanding used to calculate basic and diluted earnings per share compared to the nine months endedSeptember 30, 2020 decreased by 1.8% and 1.6%, respectively. The decrease in both the three and nine months endedSeptember 30, 2021 , primarily reflect the impact of share repurchases made pursuant to the stock repurchase program. Adjusted EBITDA "Adjusted EBITDA," a non-GAAP measure used by management to assess operating performance, is defined as net income before (1) provision for income taxes, (2) other expense (income), net, (3) depreciation and amortization of property, equipment and leasehold improvements, (4) amortization of intangible assets and, at times, (5) certain other transactions or adjustments, including 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 certain non-recurring acquisition-related integration and transaction costs. Adjusted EBITDA and Adjusted EBITDA expenses are believed to be meaningful measures of the operating performance of the Company because they adjust for significant one-time, unusual or non-recurring items as well as eliminate the accounting effects of 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 and adjusted EBITDA expenses in the same way. These measures can differ significantly from company to company depending on, among other things, long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Accordingly, the Company's computation of the Adjusted EBITDA and Adjusted EBITDA expenses measures may not be comparable to similarly titled measures computed by other companies. The following table presents the calculation of Adjusted EBITDA for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 % Change 2021 2020 % Change (in thousands) Operating revenues$ 517,099 $ 425,333 21.6 %$ 1,493,702 $ 1,251,729 19.3 % Adjusted EBITDA expenses 210,504 175,886 19.7 % 615,572 536,355 14.8 % Adjusted EBITDA$ 306,595 $ 249,447 22.9 %$ 878,130 $ 715,374 22.8 % Adjusted EBITDA margin % 59.3 % 58.6 % 58.8 % 57.2 % Operating margin % 54.2 % 53.5 % 53.0 % 52.0 % Adjusted EBITDA for the three months endedSeptember 30, 2021 increased 22.9% to$306.6 million compared to$249.4 million for the three months endedSeptember 30, 2020 . Adjusted EBITDA margin for the three months endedSeptember 30, 2021 increased to 59.3% compared to 58.6% for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , Adjusted EBITDA increased 22.8% to$878.1 million compared to$715.4 million for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , Adjusted EBITDA margin increased to 58.8% compared to 57.2% for the nine months endedSeptember 30, 2020 . The increase in Adjusted EBITDA margin for both the three and nine months ended 31
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Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses
The following table presents the reconciliation of Adjusted EBITDA to net income
for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Index Adjusted EBITDA $ 245,587 $ 194,720 $ 698,934 $ 561,563
Analytics Adjusted EBITDA 50,291 45,056 145,836 127,540
ESG and Climate Adjusted
EBITDA 9,820 7,658 20,585 16,783
All Other - Private Assets
Adjusted EBITDA 897 2,013 12,775 9,488
Consolidated Adjusted EBITDA 306,595 249,447 878,130 715,374
Acquisition-related
integration and
transaction costs 5,451 - 5,451 -
Amortization of intangible
assets 14,105 14,333 59,569 42,171
Depreciation and amortization
of property,
equipment and leasehold
improvements 6,809 7,494 20,972 22,524
Operating income 280,230 227,620 792,138 650,679
Other expense (income), net 79,580 38,577 179,765 159,620
Provision for income taxes 30,774 6,685 80,255 45,453
Net income $ 169,876 $ 182,358 $ 532,118 $ 445,606 The following table presents the reconciliation of Adjusted EBITDA expenses to operating expenses for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Index Adjusted EBITDA expenses $ 75,916 $ 60,971 $ 221,023 $ 186,292
Analytics Adjusted EBITDA
expenses 86,007 83,281 260,381 253,868
ESG and Climate Adjusted
EBITDA
expenses 33,871 20,893 97,164 63,303
All Other - Private Assets
Adjusted EBITDA
expenses 14,710 10,741 37,004 32,892
Consolidated Adjusted EBITDA
expenses 210,504 175,886 615,572 536,355
Acquisition-related
integration and
transaction costs 5,451 - 5,451 -
Amortization of intangible
assets 14,105 14,333 59,569 42,171
Depreciation and amortization
of property,
equipment and leasehold
improvements 6,809 7,494 20,972 22,524
Total operating expenses $ 236,869 $ 197,713 $ 701,564 $ 601,050 The discussion of the segment results is presented below.
32
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Segment Results
Index Segment
The following table presents the results for the Index segment for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 165,310 $ 146,387 12.9 % $ 480,488 $ 431,631 11.3 %
Asset-based fees 141,745 100,371 41.2 % 404,593 288,642 40.2 %
Non-recurring 14,448 8,933 61.7 % 34,876 27,582 26.4 %
Operating revenues total 321,503 255,691 25.7 % 919,957 747,855 23.0 %
Adjusted EBITDA expenses 75,916 60,971 24.5 % 221,023 186,292 18.6 %
Adjusted EBITDA $ 245,587 $ 194,720 26.1 % $ 698,934 $ 561,563 24.5 %
Adjusted EBITDA margin % 76.4 % 76.2 % 76.0 % 75.1 %
Revenues related to Index products for the three months ended
Recurring subscriptions for the three months endedSeptember 30, 2021 increased 12.9% to$165.3 million compared to$146.4 million for the three months endedSeptember 30, 2020 . The increase was primarily driven by strong growth from market cap-weighted index products and from factor, ESG and climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible. For the nine months endedSeptember 30, 2021 , the increase was 11.3%, growing to$480.5 million compared to$431.6 million for the nine months endedSeptember 30, 2020 . The increase was primarily driven by strong growth from market cap-weighted index products and from factor, ESG and climate index products. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible. Revenues from asset-based fees for the three months endedSeptember 30, 2021 increased 41.2% to$141.7 million compared to$100.4 million for the three months endedSeptember 30, 2020 . The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 52.4% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. For the nine months endedSeptember 30, 2021 , the increase was 40.2%, growing to$404.6 million compared to$288.6 million for the nine months endedSeptember 30, 2020 . The increase in asset-based fees was driven by growth in revenues from all our index-linked investment product categories, including an increase in revenues from ETFs linked toMSCI equity indexes that was primarily driven by a 50.1% increase in average AUM in ETFs, partially offset by a decline in average basis point fees. The increase in revenues from asset-based fees was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. Non-recurring revenues for the three months endedSeptember 30, 2021 increased 61.7% to$14.4 million compared to$8.9 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase was 26.4%, growing to$34.9 million compared to$27.6 million for the nine months endedSeptember 30, 2020 . The increase in both the three and nine months endedSeptember 30, 2021 , was primarily driven by client license and usage fees related to prior periods. Index segment Adjusted EBITDA expenses for the three months endedSeptember 30, 2021 increased 24.5% to$75.9 million compared to$61.0 million for the three months endedSeptember 30, 2020 , reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased 22.8% for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase was 18.6%, growing to$221.0 million compared to$186.3 million for the nine months endedSeptember 30, 2020 , reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, Index segment Adjusted EBITDA expenses would have increased 16.0% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . 33
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Analytics Segment
The following table presents the results for the Analytics segment for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 134,320 $ 126,251 6.4 % $ 399,360 $ 376,505 6.1 %
Non-recurring 1,978 2,086 (5.2 %) 6,857 4,903 39.9 %
Operating revenues total 136,298 128,337 6.2 % 406,217 381,408 6.5 %
Adjusted EBITDA expenses 86,007 83,281 3.3 % 260,381 253,868 2.6 %
Adjusted EBITDA $ 50,291 $ 45,056 11.6 % $ 145,836 $ 127,540 14.3 %
Adjusted EBITDA margin % 36.9 % 35.1 % 35.9 % 33.4 %
Analytics segment revenues for the three months ended September 30, 2021
increased 6.2% to $136.3 million compared to $128.3 million for the three months
ended September 30, 2020 , primarily driven by growth in Multi-Asset Class and
Equity Analytics products. The impact of foreign currency exchange rate
fluctuations on Analytics segment revenues was negligible.
For the nine months ended September 30, 2021 , the increase was 6.5%, growing to
$406.2 million compared to $381.4 million for the nine months ended
September 30, 2020 , primarily driven by growth in Multi-Asset Class and Equity
Analytics products. The impact of foreign currency exchange rate fluctuations on
Analytics segment revenues was negligible.
Analytics segment Adjusted EBITDA expenses for the three months ended
September 30, 2021 increased 3.3% to $86.0 million compared to $83.3 million for
the three months ended September 30, 2020 , reflecting higher expenses across the
cost of revenues, G&A and selling and marketing expense activity categories,
partially offset by lower expense across the R&D expense activity category.
Adjusting for the impact of foreign currency exchange rate fluctuations,
Analytics segment Adjusted EBITDA expenses would have increased 2.1% for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020 .
For the nine months ended September 30, 2021 , the increase was 2.6%, growing to
$260.4 million compared to $253.9 million for the nine months ended
September 30, 2020 , reflecting higher expenses across the cost of revenues, G&A
and selling and marketing expense activity categories, partially offset by lower
expense across the R&D expense activity category. Adjusting for the impact of
foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA
expenses would have increased 0.7% for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 .
ESG and Climate Segment
The following table presents the results for the ESG and Climate segment for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 42,592 $ 28,152 51.3 % $ 115,299 $ 78,961 46.0 %
Non-recurring 1,099 399 175.4 % 2,450 1,125 117.8 %
Operating revenues total 43,691 28,551 53.0 % 117,749 80,086 47.0 %
Adjusted EBITDA expenses 33,871 20,893 62.1 % 97,164 63,303 53.5 %
Adjusted EBITDA $ 9,820 $ 7,658 28.2 % $ 20,585 $ 16,783 22.7 %
Adjusted EBITDA margin % 22.5 % 26.8 % 17.5 % 21.0 %
ESG and Climate segment revenues for the three months ended September 30, 2021
increased 53.0% to $43.7 million compared to $28.6 million for the three months
ended September 30, 2020 . The increase in ESG and Climate revenues was primarily
driven by strong growth from Ratings, Screening and Climate products. Adjusting
for the impact of foreign currency exchange rate fluctuations, ESG and Climate
operating revenues would have increased 47.2%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 .
For the nine months ended September 30, 2021 , the increase was 47.0%, growing to
$117.7 million compared to $80.1 million for the nine months ended September 30,
2020 . The increase in ESG and Climate revenues was primarily driven by strong
growth from Ratings, Climate and Screening products. Adjusting for the impact of
foreign currency exchange rate fluctuations, ESG and
34
--------------------------------------------------------------------------------
Climate operating revenues would have increased 39.6%, for the nine months ended
ESG and Climate segment Adjusted EBITDA expenses for the three months endedSeptember 30, 2021 increased 62.1% to$33.9 million compared to$20.9 million for the three months endedSeptember 30, 2020 , reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 60.4% for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , the increase was 53.5%, growing to$97.2 million compared to$63.3 million for the nine months endedSeptember 30, 2020 , reflecting higher expenses across all expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and Climate segment Adjusted EBITDA expenses would have increased 49.7% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 .
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 Nine Months Ended
September 30, September 30,
2021 2020 % Change 2021 2020 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 15,418 $ 12,400 24.3 % $ 48,355 $ 40,402 19.7 %
Non-recurring 189 354 (46.6 %) 1,424 1,978 (28.0 %)
Operating revenues total 15,607 12,754 22.4 % 49,779 42,380 17.5 %
Adjusted EBITDA expenses 14,710 10,741 37.0 % 37,004 32,892 12.5 %
Adjusted EBITDA $ 897 $ 2,013 (55.4 %) $ 12,775 $ 9,488 34.6 %
Adjusted EBITDA margin % 5.7 % 15.8 % 25.7 % 22.4 %
All Other - Private Assets segment revenues for the three months ended
September 30, 2021 increased 22.4% to $15.6 million compared to $12.8 million
for the three months ended September 30, 2020 . The increase in All Other -
Private Assets revenues was primarily driven by the acquisition of RCA, which
contributed $3.4 million of operating revenues. Excluding the acquisition of
RCA, All Other - Private Assets segment revenues were lower due to lower volume
of deliveries to clients in three months ended September 30, 2021 as compared to
the three months ended September 30, 2020 . Adjusting for both the impact of the
acquisition and foreign currency exchange rate fluctuations, All Other - Private
Assets operating revenues would have decreased 7.6% for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 .
Adjusting for the impact of the acquisition and foreign currency exchange rate
fluctuations, All Other - Private Assets operating revenues would have decreased
4.4% and increased 19.2%, respectively, for the three months ended September 30,
2021 compared to the three months ended September 30, 2020 .
For the nine months ended September 30, 2021 , the increase was 17.5%, growing to
$49.8 million compared to $42.4 million for the nine months ended September 30,
2020 . The increase in All Other - Private Assets revenues was primarily driven
by the acquisition of RCA and favorable foreign currency exchange rate
fluctuations. Adjusting for both the impact of the acquisition and foreign
currency exchange rate fluctuations, All Other - Private Assets operating
revenues would have increased 1.6% for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 . Adjusting for the impact
of the acquisition and foreign currency exchange rate fluctuations, All Other -
Private Assets operating revenues would have increased 9.4% and 9.7%,
respectively, for the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020 .
All Other - Private Assets segment Adjusted EBITDA expenses for the three months
ended September 30, 2021 increased 37.0% to $14.7 million compared to $10.7
million for the three months ended September 30, 2020 , driven by higher expenses
across the cost of revenues, G&A and selling and marketing expense activity
categories. Adjusting for the impact of the acquisition and foreign currency
exchange rate fluctuations, All Other - Private Assets segment Adjusted EBITDA
expenses would have increased 4.0% and 34.1%, respectively, for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 .
For the nine months ended September 30, 2021 , the increase was 12.5%, growing to
$37.0 million compared to $32.9 million for the nine months ended September 30,
2020 , driven by higher expenses across the cost of revenues and G&A expense
activity categories. Adjusting for the impact of the acquisition and foreign
currency exchange rate fluctuations, All Other - Private Assets segment Adjusted
EBITDA expenses would have increased 1.8% and 8.3%, respectively, for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 .
Run Rate
"Run Rate" estimates at a particular point in time the annualized value of the
recurring revenues under our client license agreements ("Client Contracts") for
the next 12 months, assuming all Client Contracts that come up for renewal, or
reach the end of
35
-------------------------------------------------------------------------------- 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 toRun 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 fromRun 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 inRun Rate . The actual amount of recurring revenues we will realize over the following 12 months will differ fromRun 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;
• fluctuations in the number of hedge funds for which we provide investment
information and risk analysis to hedge fund investors;
• price changes or discounts;
• revenue recognition differences under
to the timing of implementation and report deliveries for certain of our
products and services;
• fluctuations in foreign currency exchange rates; and
• the impact of acquisitions and divestitures.
The following table presents the Run Rates as of the dates indicated and the growth percentages over the periods indicated:
As of
September 30, September 30, %
2021 2020 Change
(in thousands)
Index:
Recurring subscriptions $ 667,023 $ 598,799 11.4 %
Asset-based fees 550,230 401,196 37.1 %
Index total 1,217,253 999,995 21.7 %
Analytics 568,932 544,315 4.5 %
ESG and Climate 178,398 122,273 45.9 %
All Other - Private Assets 131,678 52,970 148.6 %
Total Run Rate $ 2,096,261 $ 1,719,553 21.9 %
Recurring subscriptions total $ 1,546,031 $ 1,318,357 17.3 %
Asset-based fees 550,230 401,196 37.1 %
Total Run Rate $ 2,096,261 $ 1,719,553 21.9 %
Total Run Rate grew 21.9% to $2,096.3 million as of September 30, 2021 compared
to $1,719.6 million as of September 30, 2020 . Recurring subscriptions Run Rate
grew 17.3% to $1,546.0 million as of September 30, 2021 compared to $1,318.4
million as of September 30, 2020 . Adjusting for the impact of the acquisition
and foreign currency exchange rate fluctuations, recurring
36
--------------------------------------------------------------------------------
subscriptions
Run Rate from asset-based fees increased 37.1% to$550.2 million as ofSeptember 30, 2021 from$401.2 million as ofSeptember 30, 2020 , primarily driven by higher AUM in ETFs linked toMSCI equity indexes and higher AUM in non-ETF indexed funds linked toMSCI indexes. Partially offsetting the impact of the increase in AUM in ETFs linked toMSCI equity indexes was a change in fee levels of certain products, which was the primary driver of a decline in average basis point fees to 2.57 as ofSeptember 30, 2021 from 2.67 as ofSeptember 30, 2020 . As ofSeptember 30, 2021 , the value of AUM in ETFs linked toMSCI equity indexes was$1,336.6 billion , up$427.7 billion , or 47.1%, from$908.9 billion as ofSeptember 30, 2020 . The increase of$427.7 billion consisted of market appreciation of$221.9 billion and net inflows of$205.8 billion . Index recurring subscriptionsRun Rate grew 11.4% to$667.0 million as ofSeptember 30, 2021 compared to$598.8 million as ofSeptember 30, 2020 , driven by growth in market cap-weighted index products and strong growth in factor, ESG and climate index products and reflected growth across all regions and all client segments.
Run Rate from ESG and Climate products increased 45.9% to$178.4 million as ofSeptember 30, 2021 compared to$122.3 million as ofSeptember 30, 2020 , primarily driven by strong growth in both Ratings and Climate products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG and ClimateRun Rate would have increased 46.3% as ofSeptember 30, 2021 compared toSeptember 30, 2020 .Run Rate from All Other - Private Assets products increased 148.6% to$131.7 million as ofSeptember 30, 2021 compared to$53.0 million as ofSeptember 30, 2020 , primarily driven by the acquisition of RCA, growth in both Global Intel and Enterprise Analytics products and strong growth from new sales of Real Estate Climate Value-at-Risk products. Adjusting for both the impact of the acquisition and foreign currency exchange rate fluctuations, All Other - Private AssetsRun Rate would have increased 7.3% as ofSeptember 30, 2021 compared toSeptember 30, 2020 . Adjusting for the impact of the acquisition and foreign currency exchange rate fluctuations, All Other - Private AssetsRun Rate would have increased 9.1% and 147.4%, respectively, as ofSeptember 30, 2021 compared toSeptember 30, 2020 . Sales Sales represents the annualized value of products and services clients commit to purchase fromMSCI 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 ofRun 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 toRun Rate . Subscription cancellations reflect client activities during the period, such as discontinuing products and services and/or reductions in price, resulting in reductions toRun 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 toRun 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.
37
--------------------------------------------------------------------------------The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30, % September 30, September 30, %
2021 2020 Change 2021 2020 Change
(in thousands)
New recurring subscription sales
Index $ 19,546 $ 18,743 4.3 % $ 66,037 $ 58,073 13.7 %
Analytics 15,889 15,229 4.3 % 44,381 41,426 7.1 %
ESG and Climate 17,310 7,932 118.2 % 46,706 26,128 78.8 %
All Other - Private Assets 2,479 1,412 75.6 % 6,023 3,733 61.3 %
New recurring subscription sales total 55,224 43,316 27.5 % 163,147 129,360 26.1 %
Subscription cancellations
Index (6,203 ) (7,050 ) (12.0 %) (18,192 ) (19,589 ) (7.1 %)
Analytics (9,213 ) (8,211 ) 12.2 % (25,188 ) (27,008 ) (6.7 %)
ESG and Climate (1,338 ) (1,215 ) 10.1 % (3,636 ) (4,473 ) (18.7 %)
All Other - Private Assets (1,296 ) (656 ) 97.6 % (2,881 ) (1,694 ) 70.1 %
Subscription cancellations total (18,050 ) (17,132 ) 5.4 % (49,897 ) (52,764 ) (5.4 %)
Net new recurring subscription sales Index 13,343 11,693 14.1 % 47,845 38,484 24.3 % Analytics 6,676 7,018 (4.9 %) 19,193 14,418 33.1 % ESG and Climate 15,972 6,717 137.8 % 43,070 21,655 98.9 % All Other - Private Assets 1,183 756 56.5 % 3,142 2,039 54.1 % Net new recurring subscription sales total 37,174 26,184 42.0 % 113,250 76,596 47.9 % Non-recurring sales Index 17,366 10,001 73.6 % 39,340 30,734 28.0 % Analytics 2,377 2,562 (7.2 %) 8,123 7,486 8.5 % ESG and Climate 1,090 135 707.4 % 2,927 702 317.0 % All Other - Private Assets 130 112 16.1 % 1,201 1,150 4.4 % Non-recurring sales total 20,963 12,810 63.6 % 51,591 40,072 28.7 % Gross sales Index$ 36,912 $ 28,744 28.4 %$ 105,377 $ 88,807 18.7 % Analytics 18,266 17,791 2.7 % 52,504 48,912 7.3 % ESG and Climate 18,400 8,067 128.1 % 49,633 26,830 85.0 % All Other - Private Assets 2,609 1,524 71.2 % 7,224 4,883 47.9 % Total gross sales$ 76,187 $ 56,126 35.7 %$ 214,738 $ 169,432 26.7 % Net sales Index$ 30,709 $ 21,694 41.6 %$ 87,185 $ 69,218 26.0 % Analytics 9,053 9,580 (5.5 %) 27,316 21,904 24.7 % ESG and Climate 17,062 6,852 149.0 % 45,997 22,357 105.7 % All Other - Private Assets 1,313 868 51.3 % 4,343 3,189 36.2 % Total net sales$ 58,137 $ 38,994 49.1 %$ 164,841 $ 116,668 41.3 % 38
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A significant portion of
Retention Rate
The following table presents our Retention Rate by reportable segment for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Index 96.0% 95.0% 96.1% 95.3%
Analytics 93.4% 93.8% 94.0% 93.2%
ESG and Climate 96.1% 95.2% 96.5% 94.1%
All Other - Private Assets (1) 91.0% 94.8% 91.2% 95.6%
Total 94.5% 94.5% 94.9% 94.3%
(1) Retention rate for All Other - Private Assets excluding the impact of RCA was
93.7% and 94.2% for the three and nine months ended
respectively.
The annual Retention Rate represents the retained subscriptionRun Rate (subscriptionRun Rate at the beginning of the fiscal year less actual cancels during the year) as a percentage of the subscriptionRun Rate at the beginning of the fiscal year. Retention Rate is an important metric because subscription cancellations decrease ourRun Rate and ultimately our future operating revenues over time. 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 subscriptionRun 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 Estate 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 ourRun 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 endedDecember 31, 2020 or critical accounting estimates applied in the fiscal year endedDecember 31, 2020 . In accordance with our acquisition ofReal Capital Analytics, Inc. ("RCA") onSeptember 13, 2021 , the initial valuation of intangible assets, as part of the acquisition method of accounting, are subjective and based, in part, on inputs that are unobservable. These inputs include, but are not limited to, forecasted cash flows, operating revenues growth rates, client attrition rates and discount rates. These estimates are inherently uncertain and unpredictable, and if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and assumed liabilities differently from the allocation that we have made.
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
39
-------------------------------------------------------------------------------- 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 repurchases of our common stock. In connection with our business strategy, we regularly evaluate acquisition and strategic partnership opportunities. We believe our liquidity, along with other financing alternatives, will provide the necessary capital to fund these transactions and achieve our planned growth.
Senior Notes and Credit Agreement
We have an aggregate of$4,200.0 million in Senior Notes outstanding and a$500.0 million undrawn Revolving Credit Agreement with a syndicate of banks. See Note 8, "Commitments and Contingencies," of the Notes to Condensed Consolidated Financial Statements (Unaudited) included herein for additional information on our Senior Notes and Revolving Credit Agreement. The Senior Notes and the Revolving Credit Agreement are fully and unconditionally, and jointly and severally, guaranteed by our direct or indirect wholly owned domestic subsidiaries that account for more than 5% of our and our subsidiaries' consolidated assets, other than certain excluded subsidiaries (the "subsidiary guarantors"). Amounts due under the Revolving Credit Agreement are our and the subsidiary guarantors' senior unsecured obligations and rank equally with the Senior Notes and any of our other unsecured, unsubordinated debt, senior to any of our subordinated debt and effectively subordinated to our secured debt to the extent of the assets securing such debt. The indentures governing our Senior Notes (the "Indentures") among us, each of the subsidiary guarantors, andWells Fargo Bank, National Association , as trustee, contain covenants that limit our and certain of our subsidiaries' ability to, among other things, incur liens, enter into sale/leaseback transactions and consolidate, merge or sell all or substantially all of our assets. In addition, the Indentures restrict our non-guarantor subsidiaries' ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiaries guaranteeing the Senior Notes on a pari passu basis. The Revolving Credit Agreement contains affirmative and restrictive covenants that, among other things, limit our ability and the ability of our existing or future subsidiaries to: • incur liens; • in the case of our subsidiaries that are not guarantors under the Revolving Credit Agreement, incur additional indebtedness;
• merge, dissolve, liquidate, consolidate with or into another person or
sell all or substantially all assets of the Company and its subsidiaries
on a consolidated basis;
• enter into sale/leaseback transactions;
• pay dividends or make other distributions in respect of our capital stock
or engage in stock repurchases, redemptions and other restricted payments;
or
• change the nature of our business.
The Revolving Credit Agreement and the Indentures also contain customary events
of default, including those relating to non-payment, breach of representations,
warranties or covenants, cross-default and cross-acceleration, and bankruptcy
and insolvency events, and, in the case of the Revolving Credit Agreement,
invalidity or impairment of loan documentation, change of control and customary
ERISA defaults in addition to the foregoing. None of the restrictions above are
expected to impact our ability to effectively operate the business.
The Revolving Credit Agreement also requires us and our subsidiaries to achieve
financial and operating results sufficient to maintain compliance with the
following financial ratios on a consolidated basis through the termination of
the Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as
defined in the Revolving Credit Agreement) measured quarterly on a rolling
four-quarter basis shall not exceed 4.25:1.00 (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 Revolving Credit Agreement) measured
quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As of
September 30, 2021 , our Consolidated Leverage Ratio was 3.56:1.00 and our
Consolidated Interest Coverage Ratio was 7.42:1.00. As of September 30, 2021 ,
there were no amounts drawn and outstanding under the Revolving Credit
Agreement.
Our non-guarantor subsidiaries under the Senior Notes consist of: (i) domestic
subsidiaries of the Company that account for 5% or less of consolidated assets
of the Company and its subsidiaries and (ii) any foreign or domestic subsidiary
of the Company that is deemed to be a controlled foreign corporation within the
meaning of Section 957 of the Internal Revenue Code of 1986, as amended. Our
non-guarantor subsidiaries accounted for approximately $1,173.8 million , or
60.6%, of our total revenue for the trailing 12 months ended September 30, 2021 ,
approximately $418.3 million , or 40.8%, of our consolidated operating income for
the trailing 12 months ended September 30, 2021 , and approximately $2,185.8
million , or 42.5%, of our consolidated total assets (excluding intercompany
assets) and $851.1 million , or 15.7%, of our consolidated total liabilities, in
each case as of September 30, 2021 .
40
--------------------------------------------------------------------------------Share Repurchases
The following table provides information with respect to repurchases of the Company's common stock pursuant to open market repurchases:
Average Total Dollar
Price Number of Value of
Paid Per Shares SharesNine Months Ended Share Repurchased Repurchased
(in thousands)
September 30, 2021 $ 407.70 330 $ 134,340
September 30, 2020 $ 278.69 2,021 $ 563,336 As of
Cash Dividend
OnOctober 25, 2021 , the Board of Directors declared a quarterly cash dividend of$1.04 per share for the three months endingDecember 31, 2021 . The fourth quarter 2021 dividend is payable onNovember 30, 2021 to shareholders of record as of the close of trading onNovember 12, 2021 . Cash Flows As ofSeptember 30 ,December 31, 2021 2020 (in thousands)
Cash and cash equivalents
Cash and cash equivalents were$1,284.7 million and$1,300.5 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. We typically seek to maintain minimum cash balances globally of approximately$200.0 million to$250.0 million for general operating purposes. As ofSeptember 30, 2021 andDecember 31, 2020 ,$514.4 million and$423.4 million , respectively, of the cash and cash equivalents were held by foreign subsidiaries. Repatriation of some foreign cash may be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. We believe the global cash and cash equivalent balances that are maintained will be available to meet our global needs whether for general corporate purposes or other needs, including acquisitions or expansion of our products. We believe that global cash flows from operations, together with existing cash and cash equivalents and funds available under our existing revolving credit facility and our ability to access the debt and capital markets for additional funds, will continue to be sufficient to fund our global operating activities and cash commitments for investing and financing activities, such as material capital expenditures and share repurchases, for at least the next 12 months and for the foreseeable future thereafter. In addition, we expect that foreign cash flows from operations, together with existing cash and cash equivalents will continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and for the foreseeable future thereafter. Net Cash Provided by (Used In) Operating, Investing and Financing Activities Nine Months Ended September 30, 2021 2020 (in thousands) Net cash provided by operating activities$ 656,405 $
575,181
Net cash used in investing activities (985,879 ) (224,899 ) Net cash provided by (used in) financing activities 321,249 (549,484 ) Effect of exchange rate changes (7,632 ) (4,507 ) Net decrease in cash$ (15,857 ) $ (203,709 ) 41
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Cash Flows From Operating Activities
Cash flows from operating activities consist of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities was$656.4 million and$575.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The year-over-year increase was driven by higher cash collections from customers, partially offset by higher payments for income taxes and cash expenses. Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year. In addition, during the three months endedDecember 31, 2021 , we expect higher payments to satisfy tax liabilities by approximately$110.0 million resulting from the temporary acceleration of the recognition of income for tax purposes. The timing and amount of the payments is contingent upon execution of transactions that result in higher tax obligations for the current fiscal year.
Cash Flows From Investing Activities
Cash used in investing activities was$985.9 million for the nine months endedSeptember 30, 2021 compared to$224.9 million for the nine months endedSeptember 30, 2020 . The year-over-year change was primarily driven by the acquisition of RCA, partially offset by the absence of the$190.8 million equity method investment in Burgiss.
Cash Flows From Financing Activities
Cash provided by financing activities was$321.2 million for the nine months endedSeptember 30, 2021 compared to cash used in financing activities of$549.5 million for the nine months endedSeptember 30, 2020 . The year-over-year change was primarily driven by the impact of lower share repurchases and higher proceeds from the new senior notes offerings made during the nine months endedSeptember 30, 2021 .
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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