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, 2019 (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 solutions1 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 index-enabled financial products, and facilitate reporting to stakeholders. Our industry-leading, research-enhanced products and services include indexes; portfolio construction and risk management analytics; ESG research and ratings; and real estate benchmarks, return-analytics and market insights. Through our integrated franchise we provide solutions across our products and services to support our clients' dynamic and complex needs. We are flexible in the delivery of our content and capabilities, much of which can be accessed by our clients through multiple channels and platforms.
We are focused on staying at the forefront of investment trends to address the evolving needs of our clients in a changing 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 an increasing number of "robo-advisors")
As of September 30, 2020 , we served over 7,900 clients in more than 90
countries. To calculate the number of clients, we use the shipping address of
the ultimate customer utilizing the product, which counts affiliates, user
locations or business units within a single organization as separate clients. If
we aggregate all related clients under their respective parent entity, the
number of clients would be over 4,300, as of September 30, 2020 . As of
September 30, 2020 , we had offices in more than 30 cities across more than 20
countries to help serve our diverse client base, with 47.1% of our revenues
coming from clients in the Americas , 36.9% in EMEA and 16.0% in Asia and
Australia .
Our principal business model is generally to license annual, recurring
subscriptions for the majority of our Index, Analytics and ESG products and
services for a fee due in advance of the service period. We also license annual
recurring subscriptions for the majority of our Real Estate products for a fee
which is primarily paid in arrears after the product is delivered, with the
exception of the Market Information product for which the fees are generally
paid in advance. 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 The term "solutions" as used throughout this Quarterly Report on Form 10-Q
refers to the use of our products or services by our clients to help them
achieve their objectives.
25
-------------------------------------------------------------------------------- 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) expanding leadership in research-enhanced content, (b) strengthening existing and new client relationships by providing solutions, (c) improving access to our solutions through cutting-edge technology and platforms, (d) expanding value-added service offerings 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 two-thirds of the AUM are 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, 2020 and 2019 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, 2020 2019 2020 2019 % Change (in thousands, except per share data) Operating revenues$ 425,333 $ 394,251 7.9 %$ 1,251,729 $ 1,151,190 8.7 % Operating expenses: Cost of revenues 70,704 70,486 0.3 % 215,769 224,807 (4.0 %) Selling and marketing 52,668 52,107 1.1 % 159,834 159,812 0.0 % Research and development 24,901 24,310 2.4 % 73,997 71,234 3.9 % General and administrative 27,613 26,559 4.0 % 86,755 80,434 7.9 %
Amortization of intangible assets 14,333 12,361 16.0 %
42,171 36,167 16.6 %
Depreciation and amortization of
property,
equipment and leasehold
improvements 7,494 7,209 4.0 % 22,524 22,464 0.3 %
Total operating expenses 197,713 193,032 2.4 % 601,050 594,918 1.0 %
Operating income 227,620 201,219 13.1 % 650,679 556,272 17.0 %
Other expense (income), net 38,577 32,471 18.8 % 159,620 99,487 60.4 %
Income before provision for income
taxes 189,043 168,748 12.0 % 491,059 456,785 7.5 %
Provision for income taxes 6,685 31,765 (79.0 %) 45,453 15,920 185.5 %
Net income $ 182,358 $ 136,983 33.1 % $ 445,606 $ 440,865 1.1 %
Earnings per basic common share
$ 5.30 $ 5.21 1.7 %
Earnings per diluted common share
$ 5.26 $ 5.15 2.1 % Operating margin 53.5 % 51.0 % 52.0 % 48.3 % 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 and All Other, which includes the ESG and Real Estate product lines. 26 -------------------------------------------------------------------------------- The following table presents operating revenues by type for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Recurring subscriptions$ 313,190 $ 288,108 8.7 %$ 927,499 $ 859,621 7.9 % Asset-based fees 100,371 96,013 4.5 % 288,642 265,554 8.7 % Non-recurring 11,772 10,130 16.2 % 35,588 26,015 36.8 % Total operating revenues$ 425,333 $ 394,251 7.9 %$ 1,251,729 $ 1,151,190 8.7 % Total operating revenues for the three months endedSeptember 30, 2020 increased 7.9% to$425.3 million compared to$394.3 million for the three months endedSeptember 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 7.5% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , the increase was 8.7%, growing to$1,251.7 million compared to$1,151.2 million for the nine months endedSeptember 30, 2019 . The impact of foreign currency exchange rate fluctuations on total operating revenues was negligible. As a result of the impact of the COVID-19 pandemic, growth in operating revenues from recurring subscriptions may moderate in the near term. In addition, the volatility in the global equity markets may adversely impact AUM levels which in turn may impact future operating revenues from asset-based fees. Operating revenues from recurring subscriptions for the three months endedSeptember 30, 2020 increased 8.7% to$313.2 million compared to$288.1 million for the three months endedSeptember 30, 2019 , primarily driven by growth in Index products, which increased$13.0 million , or 9.7%, growth in ESG products, which increased$5.6 million , or 24.8%, and growth in Analytics products, which increased$4.1 million , or 3.4%. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 8.2% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , the increase was 7.9%, growing to$927.5 million compared to$859.6 million for the nine months endedSeptember 30, 2019 , primarily driven by growth in Index products, which increased$38.4 million , or 9.8%, growth in ESG products, which increased$13.9 million , or 21.4%, and growth in Analytics products, which increased$12.6 million , or 3.5%. The impact of foreign currency exchange rate fluctuations on revenues from recurring subscriptions was negligible. Operating revenues from asset-based fees for the three months endedSeptember 30, 2020 increased 4.5% to$100.4 million compared to$96.0 million for the three months endedSeptember 30, 2019 . The increase in asset-based fees was primarily driven by an increase in revenues from ETFs linked toMSCI indexes and non-ETF indexed funds linked toMSCI indexes. The increase in revenues from ETFs linked toMSCI indexes was driven by a 10.2% increase in average AUM in equity ETFs, partially offset by the impact of a change in product mix. Revenue growth from non-ETF indexed funds linked toMSCI indexes was 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, 2020 , revenues from asset-based fees increased 8.7% to$288.6 million compared to$265.6 million for the nine months endedSeptember 30, 2019 . The increase in asset-based fees was primarily driven by a strong increase in revenues from exchange traded futures and options contracts linked toMSCI indexes, primarily driven by price and volume increases. The increase was also driven by higher revenues from non-ETF indexed funds linked toMSCI indexes, primarily driven by an increase in average AUM. The impact of foreign currency exchange rate fluctuations on revenues from asset-based fees was negligible. 27 -------------------------------------------------------------------------------- The following table presents the value of AUM in equity ETFs linked toMSCI indexes and the sequential change of such assets as of the end of each of the periods indicated: Period Ended 2019 2020 March June September December March June September (in billions) 31, 30, 30, 31, 31, 30, 30, AUM in equity ETFs linked toMSCI indexes(1), (2), (3)$ 802.2 $ 819.3 $ 815.0
Sequential Change in Value Market Appreciation/(Depreciation)$ 78.3 $ 14.9 $ (9.2 ) $ 63.5 $ (216.5 ) $ 117.4 $ 57.0 Cash Inflows 28.3 2.2 4.9 55.9 (8.4 ) (1.5 ) 26.5 Total Change$ 106.6 $ 17.1 $ (4.3 ) $ 119.4 $ (224.9 ) $ 115.9 $ 83.5
The following table presents the average value of AUM in equity ETFs linked to
2019 2020
(in billions) March June September December March June September
AUM in equity ETFs linked to
MSCI indexes(1), (2), (3)
Quarterly average $ 766.0 $ 811.4 $ 810.9 $ 869.1 $ 877.1 $ 776.9 $ 893.4
Year-to-date average $ 766.0 $ 788.7 $ 796.1 $ 814.4 $ 877.1 $ 827.0 $ 849.1 (1) The historical values of the AUM in equity ETFs linked to our indexes as of
the last day of the month and the monthly average balance can be found under
the link "AUM in equity 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
Exchange Traded Notes, the value of which is less than 1.0% of the AUM
amounts presented.
(2) The values for periods prior to
Bloomberg and
were based on data from Refinitiv and
reported on a delayed basis.
(3) The value of AUM in equity ETFs linked to
multiplying the equity ETF net asset value by the number of shares
outstanding.
The average value of AUM in equity ETFs linked to MSCI equity indexes for the
three months ended September 30, 2020 was $893.4 billion , up $82.5 billion , or
10.2%, from $810.9 billion for the three months ended September 30, 2019 . For
the nine months ended September 30, 2020 , it was $849.1 billion , up $53.0
billion , or 6.7%, from $796.1 billion for the nine months ended September 30,
2019 .
Non-recurring revenues for the three months ended
For the nine months endedSeptember 30, 2020 , the increase was 36.8%, growing to$35.6 million compared to$26.0 million for the nine months endedSeptember 30, 2019 , primarily driven by growth in Index products, which increased$8.6 million , or 45.4%. 28 --------------------------------------------------------------------------------
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,
2020 2019 % Change 2020 2019 % Change
(in thousands)
Operating revenues:
Index
Recurring subscriptions $ 146,387 $ 133,403 9.7 % $ 431,631 $ 393,222 9.8 %
Asset-based fees 100,371 96,013 4.5 % 288,642 265,554 8.7 %
Non-recurring 8,933 8,011 11.5 % 27,582 18,974 45.4 %
Index total 255,691 237,427 7.7 % 747,855 677,750 10.3 %
Analytics
Recurring subscriptions 126,251 122,120 3.4 % 376,505 363,929 3.5 %
Non-recurring 2,086 1,483 40.7 % 4,903 4,790 2.4 %
Analytics total 128,337 123,603 3.8 % 381,408 368,719 3.4 %
All Other
Recurring subscriptions 40,552 32,585 24.4 % 119,363 102,470 16.5 %
Non-recurring 753 636 18.4 % 3,103 2,251 37.8 %
All Other total 41,305 33,221 24.3 % 122,466 104,721 16.9 %
Total operating revenues $ 425,333 $ 394,251 7.9 % $ 1,251,729 $ 1,151,190 8.7 %
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,
2020 2019 % Change 2020 2019 % Change
(in thousands)
Operating expenses:
Cost of revenues $ 70,704 $ 70,486 0.3 % $ 215,769 $ 224,807 (4.0 %)
Selling and marketing 52,668 52,107 1.1 % 159,834 159,812 0.0 %
Research and development 24,901 24,310 2.4 % 73,997 71,234 3.9 %
General and administrative 27,613 26,559 4.0 % 86,755 80,434 7.9 %
Amortization of intangible assets 14,333 12,361 16.0 % 42,171 36,167 16.6 %
Depreciation and amortization of
property,
equipment and leasehold
improvements 7,494 7,209 4.0 % 22,524 22,464 0.3 %
Total operating expenses $ 197,713 $ 193,032 2.4 % $ 601,050 $ 594,918 1.0 %
29
-------------------------------------------------------------------------------- Total operating expenses for the three months endedSeptember 30, 2020 increased 2.4% to$197.7 million compared to$193.0 million for the three months endedSeptember 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.2% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , the increase was 1.0%, growing to$601.1 million compared to$594.9 million for the nine months endedSeptember 30, 2019 . Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.0% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 .
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, 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 ended
For the nine months endedSeptember 30, 2020 , the decrease was 4.0% to$215.8 million compared to$224.8 million for the nine months endedSeptember 30, 2019 , reflecting decreases across the Analytics and Index reportable segments, partially offset by an increase in the All Other reportable segment. The change was driven by the absence of$7.0 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019, and decreases in other compensation and benefits costs, primarily relating to lower incentive compensation, as well as lower non-compensation costs, reflecting lower travel and entertainment costs, partially offset by higher information technology costs.
Selling and Marketing
Selling and marketing expenses consist of costs associated with acquiring new clients or selling new products or product renewals to existing clients and primarily includes the costs of our sales and marketing teams, as well as costs incurred in other groups associated with acquiring new business, including product management, research, technology and sales operations. Selling and marketing expenses for the three months endedSeptember 30, 2020 increased 1.1% to$52.7 million compared to$52.1 million for the three months endedSeptember 30, 2019 , driven by higher costs in the All Other reportable segment, partially offset by lower costs in the Index and Analytics reportable segments. The change was driven by increases in compensation and benefits costs, including wages and salaries and severance costs, partially offset by decreases in non-compensation costs, primarily relating to lower travel and entertainment costs. For the nine months endedSeptember 30, 2020 , it was flat at$159.8 million compared to the nine months endedSeptember 30, 2019 , with higher costs in the All Other and Analytics reportable segments, offset by lower costs in the Index reportable segment. The higher costs reflect increases in compensation and benefits costs, primarily relating to higher wages and salaries and benefits costs, offset by the absence of$4.5 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019 and lower non-compensation costs, including travel and entertainment costs and marketing costs. 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, 2020 increased 2.4% to$24.9 million compared to$24.3 million for the three months endedSeptember 30, 2019 , reflecting higher investments in the Index and All Other reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, including wages and salaries and severance costs, partially offset by decreases in non-compensation costs, primarily relating to lower travel and entertainment costs. For the nine months endedSeptember 30, 2020 , the increase was 3.9%, growing to$74.0 million compared to$71.2 million for the nine months endedSeptember 30, 2019 , reflecting higher investments in the All Other and Index reportable segments, partially offset by lower investment in the Analytics reportable segment. The change was driven by increases in compensation and benefits costs, including wages and salaries and severance costs. 30 --------------------------------------------------------------------------------
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, 2020 increased 4.0% to$27.6 million compared to$26.6 million for the three months endedSeptember 30, 2019 , reflecting increases across all three reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher severance costs, partially offset by decreases in non-compensation costs. For the nine months endedSeptember 30, 2020 , the increase was 7.9%, growing to$86.8 million compared to$80.4 million for the nine months endedSeptember 30, 2019 , reflecting increases across all three reportable segments. The change was driven by increases in compensation and benefits costs, primarily relating to higher incentive compensation, wages and salaries and severance costs, partially offset by the absence of$3.5 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019 and lower non-compensation costs. The following table presents operating expenses using compensation and non-compensation categories, rather than using activity categories, for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Compensation and benefits$ 129,920 $ 122,009 6.5 %$ 395,985 $ 388,496 1.9 % Non-compensation expenses 45,966 51,453 (10.7 %) 140,370 147,791 (5.0 %) Amortization of intangible assets 14,333 12,361 16.0 % 42,171 36,167 16.6 % Depreciation and amortization of property, equipment and leasehold improvements 7,494 7,209 4.0 % 22,524 22,464 0.3 % Total operating expenses$ 197,713 $ 193,032 2.4 %$ 601,050 $ 594,918 1.0 % 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 3,545 and 3,358 employees as ofSeptember 30, 2020 and 2019, respectively, reflecting a 5.6% 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, 2020 , 64.2% of our employees were located in emerging market centers compared to 63.3% as ofSeptember 30, 2019 . Compensation and benefits costs for the three months endedSeptember 30, 2020 increased 6.5% to$129.9 million compared to$122.0 million for the three months endedSeptember 30, 2019 , driven by higher severance costs, wages and salaries and benefits costs, partially offset by lower incentive compensation costs. For the nine months endedSeptember 30, 2020 , the increase was 1.9%, growing to$396.0 million compared to$388.5 million for the nine months endedSeptember 30, 2019 , primarily driven by higher wages and salaries, benefits costs and severance costs, partially offset by the absence of$15.4 million of payroll tax expense associated with the vesting of the 2016 Multi-Year PSUs recognized in 2019. 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 as a result of the impact of the COVID-19 pandemic, incentive compensation is expected to decrease accordingly.
Non-Compensation Expenses
Non-compensation expenses for the three months endedSeptember 30, 2020 decreased 10.7% to$46.0 million compared to$51.5 million for the three months endedSeptember 30, 2019 , primarily driven by lower travel and entertainment costs and professional fees.
For the nine months ended
31
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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 as a result of the COVID-19 pandemic.
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, 2020 increased 16.0% to$14.3 million compared to$12.4 million for the three months endedSeptember 30, 2019 , primarily driven by higher amortization of internally developed capitalized software.
For the nine months ended
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 life of the assets. Depreciation and amortization of property, equipment and leasehold improvements for the three months endedSeptember 30, 2020 increased 4.0% to$7.5 million compared to$7.2 million for the three months endedSeptember 30, 2019 . The increase was primarily the result of higher depreciation on computer and related equipment and furniture.
For the nine months ended
Other Expense (Income), Net
Other expense (income), net for the three months endedSeptember 30, 2020 increased 18.8% to$38.6 million compared to$32.5 million for the three months endedSeptember 30, 2019 . The increase in net expenses was primarily driven by lower interest income due to lower rates earned on cash balances and higher interest expense associated with the higher outstanding debt during the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , it increased 60.4% to$159.6 million compared to$99.5 million for the nine months endedSeptember 30, 2019 . The increase in net expenses was primarily driven by 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"), respectively. The loss on debt extinguishment associated with the 2025 Senior Notes included an applicable premium of approximately$29.5 million (as defined in the indenture governing the terms of the 2025 Senior Notes) and the write-off of approximately$5.5 million of unamortized debt issuance costs. The loss on debt extinguishment associated with the 2024 Senior Notes Redemption included a redemption price of approximately$7.9 million (as set forth in the indenture governing the terms of the 2024 Senior Notes) and the write-off of approximately$2.1 million of unamortized debt issuance costs. In addition, the increase reflects higher interest expense associated with the higher outstanding debt during the nine months endedSeptember 30, 2020 and lower interest income due to lower rates earned on cash balances.
Income Taxes
The Company's provision for income taxes for the three months ended
For the three months endedSeptember 30, 2020 , the effective tax rate of 3.5% 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 . These discrete items primarily related to the$20.8 million tax impact from the favorable impact on prior years of final regulations released during the three months endedSeptember 30, 2020 clarifying certain provisions established in the 2017 Tax Act. Also included in the discrete items is a$5.5 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings. For the three months endedSeptember 30, 2019 , the effective tax rate of 18.8% reflected the Company's estimate of the effective tax rate for the period which was impacted by$4.1 million of discrete tax benefits related to the resolution of certain prior years' items. In addition, the effective tax rate was also impacted by a beneficial geographic mix of earnings and lower anticipated taxes on the repatriation of foreign earnings. 32 -------------------------------------------------------------------------------- The Company's provision for income taxes for the nine months endedSeptember 30, 2020 and 2019 was$45.5 million and$15.9 million , respectively. These amounts reflect effective tax rates of 9.3% and 3.5% for the nine months endedSeptember 30, 2020 and 2019, respectively. For the nine months endedSeptember 30, 2020 , the effective tax rate of 9.3% reflects the Company's estimate of the effective tax rate for the period and was impacted by certain discrete items totaling$61.7 million . These discrete items primarily related to$21.9 million of excess tax benefits recognized on the conversion of equity awards during the period,$20.8 million tax impact from the favorable impact on prior years of final 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 on the 2024 Senior Notes Redemption and 2025 Senior Notes Redemption. Also included in the discrete items is a$6.3 million benefit related to the revaluation of the cost of deemed repatriation of foreign earnings. For the nine months endedSeptember 30, 2019 , the effective tax rate of 3.5% reflected the Company's estimate of the effective tax rate for the period and was impacted by certain discrete items totaling$82.7 million . These discrete items primarily related to$66.6 million of excess tax benefits recognized on the conversion of the 2016 Multi-Year PSUs and$10.8 million of excess tax benefits related to the conversion of other equity awards recognized during the period. In addition, the effective tax rate was impacted by a beneficial geographic mix of earnings.
Net Income
As a result of the factors described above, net income for the three months endedSeptember 30, 2020 increased 33.1% to$182.4 million compared to$137.0 million for the three months endedSeptember 30, 2019 and for the nine months endedSeptember 30, 2020 , it increased 1.1% to$445.6 million compared to$440.9 million for the nine months endedSeptember 30, 2019 .
Weighted Average Shares
The weighted average shares outstanding used to calculate basic and diluted earnings per share for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 decreased by 1.4% and 1.3%, respectively. The decreases primarily reflect the impact of share repurchases made prior toSeptember 30, 2020 pursuant to the 2019 Repurchase Program and the vesting of the restricted stock units that were included in the dilutive share count in the prior year.
For the nine months ended
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 the impact
related to the vesting of the 2016 Multi-Year PSUs.
"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 the impact related to the vesting of the 2016 Multi-Year PSUs.
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.
33
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The following table presents the calculation of Adjusted EBITDA for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 % Change 2020 2019 % Change
(in thousands)
Operating revenues $ 425,333 $ 394,251 7.9 % $ 1,251,729 $ 1,151,190 8.7 %
Adjusted EBITDA expenses 175,886 173,462 1.4 % 536,355 520,898 3.0 %
Adjusted EBITDA $ 249,447 $ 220,789 13.0 % $ 715,374 $ 630,292 13.5 %
Adjusted EBITDA margin % 58.6 % 56.0 % 57.2 % 54.8 %
Operating margin % 53.5 % 51.0 % 52.0 % 48.3 %
Adjusted EBITDA for the three months ended September 30, 2020 increased 13.0% to
$249.4 million compared to $220.8 million for the three months ended
September 30, 2019 . Adjusted EBITDA margin for the three months ended
September 30, 2020 increased to 58.6% compared to 56.0% for the three months
ended September 30, 2019 . The increase in Adjusted EBITDA margin reflects a
higher rate of growth in operating revenues as compared to the rate of growth of
Adjusted EBITDA expenses.
For the nine months ended September 30, 2020 , Adjusted EBITDA increased 13.5% to
$715.4 million compared to $630.3 million for the nine months ended
September 30, 2019 . For the nine months ended September 30, 2020 , Adjusted
EBITDA margin increased to 57.2% compared to 54.8% for the nine months ended
September 30, 2019 . The increase in Adjusted EBITDA margin reflects a higher
rate of growth in operating revenues as compared to the rate of growth of
Adjusted EBITDA expenses.
Reconciliation of Adjusted EBITDA to Net Income and Adjusted EBITDA Expenses to Operating Expenses
The following table presents the reconciliation of Adjusted EBITDA to net income
for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Index Adjusted EBITDA $ 194,720 $ 177,680 $ 561,563 $ 493,806
Analytics Adjusted EBITDA 45,056 37,797 127,540 113,266
All Other Adjusted EBITDA 9,671 5,312 26,271 23,220
Consolidated Adjusted EBITDA 249,447 220,789 715,374 630,292
2016 Multi-Year PSUs grant payroll tax
expense - - - 15,389
Amortization of intangible assets 14,333 12,361 42,171 36,167
Depreciation and amortization of
property,
equipment and leasehold improvements 7,494 7,209 22,524 22,464
Operating income 227,620 201,219 650,679 556,272
Other expense (income), net 38,577 32,471 159,620 99,487
Provision for income taxes 6,685 31,765 45,453 15,920
Net income $ 182,358 $ 136,983 $ 445,606 $ 440,865 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,
2020 2019 2020 2019
(in thousands)
Index Adjusted EBITDA expenses $ 60,971 $ 59,747 $ 186,292 $ 183,944
Analytics Adjusted EBITDA expenses 83,281 85,806 253,868 255,453
All Other Adjusted EBITDA expenses 31,634 27,909 96,195 81,501
Consolidated Adjusted EBITDA expenses 175,886 173,462 536,355 520,898
2016 Multi-Year PSUs grant payroll tax
expense - - - 15,389
Amortization of intangible assets 14,333 12,361 42,171 36,167
Depreciation and amortization of
property,
equipment and leasehold improvements 7,494 7,209 22,524 22,464
Total operating expenses $ 197,713 $ 193,032 $ 601,050 $ 594,918
34
--------------------------------------------------------------------------------
The discussion of the segment results is presented below.
Segment Results
Index Segment
The following table presents the results for the Index segment for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 % Change 2020 2019 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 146,387 $ 133,403 9.7 % $ 431,631 $ 393,222 9.8 %
Asset-based fees 100,371 96,013 4.5 % 288,642 265,554 8.7 %
Non-recurring 8,933 8,011 11.5 % 27,582 18,974 45.4 %
Operating revenues total 255,691 237,427 7.7 % 747,855 677,750 10.3 %
Adjusted EBITDA expenses 60,971 59,747 2.0 % 186,292 183,944 1.3 %
Adjusted EBITDA $ 194,720 $ 177,680 9.6 % $ 561,563 $ 493,806 13.7 %
Adjusted EBITDA margin % 76.2 % 74.8 % 75.1 % 72.9 %
Revenues related to Index products for the three months ended September 30, 2020
increased 7.7% to $255.7 million compared to $237.4 million for the three months
ended September 30, 2019 and for the nine months ended September 30, 2020 , the
increase was 10.3%, growing to $747.9 million compared to $677.8 million for the
nine months ended September 30, 2019 .
Recurring subscriptions for the three months ended September 30, 2020 increased
9.7% to $146.4 million compared to $133.4 million for the three months ended
September 30, 2019 . The increase was primarily driven by growth in core
products, strong growth in factor and ESG/Climate index products and growth in
custom index products. The impact of foreign currency exchange rate fluctuations
on revenues from recurring subscriptions was negligible.
For the nine months ended September 30, 2020 , the increase was 9.8%, growing to
$431.6 million compared to $393.2 million for the nine months ended
September 30, 2019 . The increase was driven by strong growth in core products,
factor and ESG/Climate index products and custom 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 ended September 30, 2020
increased 4.5% to $100.4 million compared to $96.0 million for the three months
ended September 30, 2019 . The increase in asset-based fees was primarily driven
by an increase in revenues from ETFs linked to MSCI indexes and non-ETF indexed
funds linked to MSCI indexes. The increase in revenues from ETFs linked to MSCI
indexes was driven by a 10.2% increase in average AUM in equity ETFs, partially
offset by the impact of a change in product mix. Revenue growth from non-ETF
indexed funds linked to MSCI indexes was 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 ended September 30, 2020 , the increase was 8.7%, growing to
$288.6 million compared to $265.6 million for the nine months ended
September 30, 2019 . The increase in asset-based fees was primarily driven by a
strong increase in revenues from exchange traded futures and options contracts
linked to MSCI indexes, primarily driven by higher volumes from new and existing
agreements. The increase was also driven by higher revenues from non-ETF indexed
funds linked to MSCI 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 ended
For the nine months endedSeptember 30, 2020 the increase was 45.4%, growing to$27.6 million compared to$19.0 million for the nine months endedSeptember 30, 2019 . The increase was primarily driven by the recognition of higher fees resulting from the finalization of fees with clients. Index segment Adjusted EBITDA expenses for the three months endedSeptember 30, 2020 increased 2.0% to$61.0 million compared to$59.7 million for the three months endedSeptember 30, 2019 , reflecting higher expenses across the cost of revenues, R&D and G&A expense activity categories, partially offset by lower expenses across the selling and marketing expense activity 35 --------------------------------------------------------------------------------
category. Adjusting for the impact of foreign currency exchange rate
fluctuations, the increase would have been 1.8% for the three months ended
For the nine months endedSeptember 30, 2020 , the increase was 1.3%, growing to$186.3 million compared to$183.9 million for the nine months endedSeptember 30, 2019 , reflecting higher expenses across the G&A, R&D and cost of revenues expense activity categories, partially offset by lower expenses across the selling and marketing expense activity category. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 2.2% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Analytics Segment The following table presents the results for the Analytics segment for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 % Change 2020 2019 % Change (in thousands) Operating revenues: Recurring subscriptions$ 126,251 $ 122,120 3.4 %$ 376,505 $ 363,929 3.5 % Non-recurring 2,086 1,483 40.7 % 4,903 4,790 2.4 % Operating revenues total 128,337 123,603 3.8 % 381,408 368,719 3.4 % Adjusted EBITDA expenses 83,281 85,806 (2.9 %) 253,868 255,453 (0.6 %) Adjusted EBITDA$ 45,056 $ 37,797 19.2 %$ 127,540 $ 113,266 12.6 % Adjusted EBITDA margin % 35.1 % 30.6 % 33.4 % 30.7 % Analytics segment revenues for the three months endedSeptember 30, 2020 increased 3.8% to$128.3 million compared to$123.6 million for the three months endedSeptember 30, 2019 , primarily driven by growth in Multi-Asset Class Analytics products. The impact of foreign currency exchange rate fluctuations on Analytics segment revenues was negligible. For the nine months endedSeptember 30, 2020 , the increase was 3.4%, growing to$381.4 million compared to$368.7 million for the nine months endedSeptember 30, 2019 , primarily driven by growth in Multi-Asset Class 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 endedSeptember 30, 2020 decreased 2.9% to$83.3 million compared to$85.8 million for the three months endedSeptember 30, 2019 , primarily driven by lower expenses across the cost of revenues, R&D and selling and marketing expense activity categories, partially offset by higher expenses across the G&A expense activity category. The impact of foreign currency exchange rate fluctuations on Analytics segment Adjusted EBITDA expenses was negligible. For the nine months endedSeptember 30, 2020 , the decrease was 0.6%, declining to$253.9 million compared to$255.5 million for the nine months endedSeptember 30, 2019 , primarily driven by lower expenses across the cost of revenues and R&D expense activity categories, partially offset by higher expenses across the selling and marketing and G&A expense activity categories. Adjusting for the impact of foreign currency exchange rate fluctuations, Analytics segment Adjusted EBITDA expenses would have increased 0.5% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 .
All Other Segment
The following table presents the results for the All Other segment for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 % Change 2020 2019 % Change
(in thousands)
Operating revenues:
Recurring subscriptions $ 40,552 $ 32,585 24.4 % $ 119,363 $ 102,470 16.5 %
Non-recurring 753 636 18.4 % 3,103 2,251 37.8 %
Operating revenues total 41,305 33,221 24.3 % 122,466 104,721 16.9 %
Adjusted EBITDA expenses 31,634 27,909 13.3 % 96,195 81,501 18.0 %
Adjusted EBITDA $ 9,671 $ 5,312 82.1 % $ 26,271 $ 23,220 13.1 %
Adjusted EBITDA margin % 23.4 % 16.0 % 21.5 % 22.2 %
All Other segment revenues for the three months ended September 30, 2020
increased 24.3% to $41.3 million compared to $33.2 million for the three months
ended September 30, 2019 . The increase in All Other revenues was driven by a
$5.8 million , or
36
-------------------------------------------------------------------------------- 25.6%, increase in ESG revenues to$28.5 million and a$2.3 million , or 21.6%, increase in Real Estate revenues to$12.8 million . The increase in ESG revenues was primarily driven by strong growth from Ratings, Climate and Screening products. The increase in Real Estate revenues was primarily driven by strong growth in Enterprise Analytics and Global Intel products. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other operating revenues would have increased 20.6%, ESG revenues would have increased 22.3% and Real Estate revenues would have increased 16.7% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , All Other segment revenues increased 16.9% to$122.5 million compared to$104.7 million for the nine months endedSeptember 30, 2019 . The increase in All Other revenues was driven by a$14.3 million , or 21.9%, increase in ESG revenues to$80.1 million and by a$3.4 million , or 8.7%, increase in Real Estate revenues to$42.4 million . The increase in ESG revenues was primarily driven by strong growth in Ratings, Climate and Screening products. The increase in Real Estate revenues was primarily driven by strong growth from our Global Intel products and growth from our Enterprise Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, All Other operating revenues would have increased 17.3%, ESG revenues would have increased 21.8% and Real Estate revenues would have increased 9.5% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . All Other segment Adjusted EBITDA expenses for the three months endedSeptember 30, 2020 increased 13.3% to$31.6 million compared to$27.9 million for the three months endedSeptember 30, 2019 , driven by higher expenses attributable primarily to ESG operations. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 12.4% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . For the nine months endedSeptember 30, 2020 , the increase was 18.0%, growing to$96.2 million compared to$81.5 million for the nine months endedSeptember 30, 2019 , driven by higher expenses attributable primarily to ESG operations. Adjusting for the impact of foreign currency exchange rate fluctuations, the increase would have been 19.0% for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 .Run Rate "Run Rate" estimates at a particular point in time the annualized value of the recurring revenues under our client license agreements ("Client Contracts") for the next 12 months, assuming all Client Contracts that come up for renewal are renewed and assuming then-current currency exchange rates, subject to the adjustments and exclusions described below. For any Client Contract where fees are linked to an investment product's assets or trading volume/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 or non-renewal during the period and have determined that such notice evidences the client's final decision to terminate or not renew the applicable products or services, even though such notice is not effective until a later date. Changes in our recurring revenues typically lag changes 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;
• 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
37
--------------------------------------------------------------------------------
• 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, %
2020 2019 Change
(in thousands)
Index:
Recurring subscriptions $ 598,799 $ 544,059 10.1 %
Asset-based fees 401,196 356,013 12.7 %
Index total 999,995 900,072 11.1 %
Analytics 544,315 509,261 6.9 %
All Other 175,243 141,283 24.0 %
Total Run Rate $ 1,719,553 $ 1,550,616 10.9 %
Recurring subscriptions total $ 1,318,357 $ 1,194,603 10.4 %
Asset-based fees 401,196 356,013 12.7 %
Total Run Rate $ 1,719,553 $ 1,550,616 10.9 %
Total Run Rate grew 10.9% to $1,719.6 million as of September 30, 2020 compared
to $1,550.6 million as of September 30, 2019 . Recurring subscriptions Run Rate
grew 10.4% to $1,318.4 million as of September 30, 2020 compared to $1,194.6
million as of September 30, 2019 . Adjusting for the impact of foreign currency
exchange rate fluctuations, recurring subscriptions Run Rate would have
increased 9.6% as of September 30, 2020 compared to September 30, 2019 .
Run Rate from asset-based fees increased 12.7% to $401.2 million as of
September 30, 2020 from $356.0 million as of September 30, 2019 , primarily
driven by higher volume in futures and options, higher AUM in equity ETFs linked
to MSCI indexes and higher AUM non-ETF indexed funds linked to MSCI indexes.
Offsetting the impact of the increase in AUM in equity ETFs linked to MSCI
indexes was a change in product mix, which was the primary driver of a decline
in period-end basis point fees to 2.67 as of September 30, 2020 from 2.81 as of
September 30, 2019 . As of September 30, 2020 , the value of AUM in equity ETFs
linked to MSCI indexes was $908.9 billion , up $93.9 billion , or 11.5%, from
$815.0 billion as of September 30, 2019 . The increase of $93.9 billion consisted
of net inflows of $72.5 billion and market appreciation of $21.4 billion .
Index recurring subscriptions Run Rate grew 10.1% to $598.8 million as of
September 30, 2020 compared to $544.1 million as of September 30, 2019 ,
primarily driven by strong growth in core products, custom and specialized index
products and factor and ESG/Climate index products, with growth across all our
regions and client segments.
Run Rate from All Other products increased 24.0% to$175.2 million as ofSeptember 30, 2020 compared to$141.3 million as ofSeptember 30, 2019 . The$34.0 million increase was driven by a$29.1 million , or 31.2%, increase in ESGRun Rate to$122.3 million , and a$4.9 million , or 10.2%, increase in Real EstateRun Rate to$52.9 million . The increase in ESG Run Rate was primarily driven by strong growth in Ratings and Climate products. The increase in Real EstateRun Rate was primarily driven by growth in Global Intel and Enterprise Analytics products. Adjusting for the impact of foreign currency exchange rate fluctuations, ESG Run Rate would have increased 28.6%, All OtherRun Rate would have increased 21.1% and Real EstateRun Rate would have increased 6.5% as ofSeptember 30, 2020 compared toSeptember 30, 2019 .
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. 38 --------------------------------------------------------------------------------
Total gross sales represent the sum of new recurring subscription sales and non-recurring sales. Total net sales represent the total gross sales net of the impact from subscription cancellations.
The following table presents our recurring subscription sales, cancellations and non-recurring sales by reportable segment for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30, % September 30, September 30, %
2020 2019 Change 2020 2019 Change
(in thousands)
New recurring subscription sales
Index $ 18,743 $ 17,553 6.8 % $ 58,073 $ 54,408 6.7 %
Analytics 15,229 15,285 (0.4 %) 41,426 41,705 (0.7 %)
All Other 9,344 7,495 24.7 % 29,861 22,724 31.4 %
New recurring subscription sales total 43,316 40,333 7.4 % 129,360 118,837 8.9 %
Subscription cancellations
Index (7,050 ) (5,066 ) 39.2 % (19,589 ) (13,033 ) 50.3 %
Analytics (8,211 ) (7,854 ) 4.5 % (27,008 ) (22,720 ) 18.9 %
All Other (1,871 ) (1,002 ) 86.7 % (6,167 ) (4,179 ) 47.6 %
Subscription cancellations total (17,132 ) (13,922 ) 23.1 % (52,764 ) (39,932 ) 32.1 %
Net new recurring subscription sales Index 11,693 12,487 (6.4 %) 38,484 41,375 (7.0 %) Analytics 7,018 7,431 (5.6 %) 14,418 18,985 (24.1 %) All Other 7,473 6,493 15.1 % 23,694 18,545 27.8 % Net new recurring subscription sales total 26,184 26,411 (0.9 %) 76,596 78,905 (2.9 %) Non-recurring sales Index 10,001 9,029 10.8 % 30,734 20,092 53.0 % Analytics 2,562 4,876 (47.5 %) 7,486 10,084 (25.8 %) All Other 247 487 (49.3 %) 1,852 1,571 17.9 % Non-recurring sales total 12,810 14,392 (11.0 %) 40,072 31,747 26.2 % Gross sales Index$ 28,744 $ 26,582 8.1 %$ 88,807 $ 74,500 19.2 % Analytics 17,791 20,161 (11.8 %) 48,912 51,789 (5.6 %) All Other 9,591 7,982 20.2 % 31,713 24,295 30.5 % Total gross sales$ 56,126 $ 54,725 2.6 %$ 169,432 $ 150,584 12.5 % Net sales Index$ 21,694 $ 21,516 0.8 %$ 69,218 $ 61,467 12.6 % Analytics 9,580 12,307 (22.2 %) 21,904 29,069 (24.6 %) All Other 7,720 6,980 10.6 % 25,546 20,116 27.0 % Total net sales$ 38,994 $ 40,803 (4.4 %)$ 116,668 $ 110,652 5.4 % 39
-------------------------------------------------------------------------------- A significant portion ofMSCI 's operating revenues are derived from subscriptions or licenses of products and services, which are provided over contractually-agreed periods of time that are subject to renewal or cancellation at the end of current contract terms. As ofSeptember 30, 2020 , cancellations have not deviated significantly from historical levels as a result of the COVID-19 pandemic. However, new sales could moderate and cancellations could increase in the near term as a result of the COVID-19 pandemic.
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,
2020 2019 2020 2019
Index 95.0% 96.0% 95.3% 96.5%
Analytics 93.8% 93.6% 93.2% 93.8%
All Other 95.1% 96.8% 94.6% 95.5%
Total 94.5% 95.0% 94.3% 95.2%
Retention Rate is an important metric because subscription cancellations
decrease our Run Rate and ultimately our operating revenues over time. The
annual Retention Rate represents the retained subscription Run Rate
(subscription Run Rate at the beginning of the fiscal year less actual cancels
during the year) as a percentage of the subscription Run Rate at the beginning
of the fiscal year.
The Retention Rate for a non-annual period is calculated by annualizing the
cancellations for which we have received a notice of termination or for which we
believe there is an intention not to renew during the non-annual period, and we
believe that such notice or intention evidences the client's final decision to
terminate or not renew the applicable agreement, even though such notice is not
effective until a later date. This annualized cancellation figure is then
divided by the subscription Run Rate at the beginning of the fiscal year to
calculate a cancellation rate. This cancellation rate is then subtracted from
100% to derive the annualized Retention Rate for the period.
Retention Rate is computed by operating segment on a
product/service-by-product/service basis. In general, if a client reduces the
number of products or services to which it subscribes within a segment, or
switches between products or services within a segment, we treat it as a
cancellation for purposes of calculating our Retention Rate except in the case
of a product or service switch that management considers to be a replacement
product or service. In those replacement cases, only the net change to the
client subscription, if a decrease, is reported as a cancel. In the Analytics
and the ESG 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-sale of the same product or service as a
cancellation to the extent of the reduction. We do not calculate Retention Rate
for that portion of our Run Rate attributable to assets in index-linked
investment products or futures and options contracts, in each case, linked to
our indexes.
In our product lines, 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 and also in Note 2, "Recent Accounting Standards Updates," in the Notes to Condensed Consolidated Financial Statements (Unaudited) included herein. There have been no significant changes in our accounting policies or critical accounting estimates since the end of the fiscal year endedDecember 31, 2019 other than those described in Note 2, "Recent Accounting Standards Updates" in the Notes to Condensed Consolidated Financial Statements (Unaudited) included herein.
Liquidity and Capital Resources
We require capital to fund ongoing operations, internal growth initiatives and
acquisitions. Our primary sources of liquidity are cash flows generated from our
operations, existing cash and cash equivalents and credit capacity under our
existing credit facility. In addition, we believe we have access to additional
funding in the public and private markets. We intend to use these sources of
liquidity to, among other things, service our existing and future debt
obligations, fund our working capital requirements for capital expenditures,
investments, acquisitions and dividend payments, and 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.
40
--------------------------------------------------------------------------------Senior Notes and Credit Agreement
We have an aggregate of$3,400.0 million in Senior Notes outstanding and a$400.0 million undrawn Revolving Credit Agreement with a syndicate of banks. See Note 7, "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 and further negative pledges;
• incur additional indebtedness or prepay, redeem or repurchase indebtedness;
• make loans or hold investments; • merge, dissolve, liquidate, consolidate with or into another person; • enter into acquisition transactions; • enter into sale/leaseback transactions; • issue disqualified capital stock; • sell, transfer or dispose of assets;
• pay dividends or make other distributions in respect of our capital stock
or engage in stock repurchases, redemptions and other restricted payments;
• create new subsidiaries; • permit certain restrictions affecting our subsidiaries;
• change the nature of our business, accounting policies or fiscal periods;
• enter into any transactions with affiliates other than on an arm's-length
basis; and
• amend our organizational documents or amend, modify or change the terms of
certain agreements relating to our indebtedness.
The Revolving Credit Agreement and the Indentures also contain customary events of default, including those relating to non-payment, breach of representations, warranties or covenants, cross-default and cross-acceleration, bankruptcy and insolvency events, invalidity or impairment of loan documentation or collateral, change of control and customary ERISA defaults. None of the restrictions above are expected to impact our ability to effectively operate the business. The Revolving Credit Agreement also requires us and our subsidiaries to achieve financial and operating results sufficient to maintain compliance with the following financial ratios on a consolidated basis through the termination of the Revolving Credit Agreement: (1) the maximum Consolidated Leverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall not exceed 4.25:1.00 and (2) the minimum Consolidated Interest Coverage Ratio (as defined in the Revolving Credit Agreement) measured quarterly on a rolling four-quarter basis shall be at least 4.00:1.00. As ofSeptember 30, 2020 , our Consolidated Leverage Ratio was 3.31:1.00 and our Consolidated Interest Coverage Ratio was 6.81:1.00. As ofSeptember 30, 2020 , there were no amounts drawn and outstanding under the Revolving Credit Agreement. 41 -------------------------------------------------------------------------------- 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$956.6 million , or 57.7%, of our total revenue for the trailing 12 months endedSeptember 30, 2020 , approximately$341.0 million , or 40.1%, of our consolidated operating income for the trailing 12 months endedSeptember 30, 2020 , and approximately$947.0 million , or 23.0%, of our consolidated total assets (excluding intercompany assets) and$605.0 million , or 13.5%, of our consolidated total liabilities, in each case as ofSeptember 30, 2020 .
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, 2020 $ 278.69 2,021 $ 563,336
September 30, 2019 $ 147.97 690 $ 102,081 As of
Subsequent to the nine months endedSeptember 30, 2020 and throughOctober 23, 2020 , the Company repurchased an additional 0.1 million shares of common stock at an average price of$347.26 per share for a total value of$51.0 million .
Cash Dividend
OnOctober 26, 2020 , the Board of Directors declared a quarterly cash dividend of$0.78 per share for the three months endingSeptember 30, 2020 . The fourth quarter 2020 dividend is payable onNovember 30, 2020 to shareholders of record as of the close of trading onNovember 13, 2020 . Cash Flows As ofSeptember 30 ,December 31, 2020 2019 (in thousands)
Cash and cash equivalents
Cash and cash equivalents were$1,302.9 million and$1,506.6 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. We typically seek to maintain minimum cash balances globally of approximately$200.0 million to$250.0 million for general operating purposes but may maintain higher minimum cash balances while the COVID-19 pandemic continues to impact global economic markets. As ofSeptember 30, 2020 andDecember 31, 2019 ,$411.0 million and$321.2 million , respectively, of the cash and cash equivalents were held by foreign subsidiaries. As a result of the 2017 Tax Act, we can now more efficiently access a significant portion of our cash held outside of theU.S. in the short-term without being subject toU.S. income taxes. Repatriation of some foreign cash may still be subject to certain withholding taxes in local jurisdictions and other distribution restrictions. 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 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. 42 -------------------------------------------------------------------------------- Net Cash Provided by (Used In) Operating, Investing and Financing Activities Nine Months EndedSeptember 30, 2020 2019 (in thousands)
Net cash provided by operating activities
(4,507 ) (3,299 )
Net decrease in cash $ (203,709 ) $ (23,026 ) 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$575.2 million and$465.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The year-over-year increase was primarily driven by higher cash collections from customers, partially offset by higher payments for income taxes and higher interest payments. As a result of a provision within the Cares Act, we elected to defer estimated payments for income taxes for the year endingDecember 31, 2020 that historically would have been paid in the six months endedJune 30, 2020 into the month ofJuly 2020 . Our primary uses of cash from operating activities are for the payment of cash compensation expenses, office rent, technology costs, market data costs, interest expenses and income taxes. Historically, the payment of cash for compensation and benefits is at its highest level in the first quarter when we pay discretionary employee compensation related to the previous fiscal year.
Cash Flows From Investing Activities
Cash used in investing activities was$224.9 million for the nine months endedSeptember 30, 2020 compared to$35.3 million for the nine months endedSeptember 30, 2019 . The year-over-year change was primarily driven by the$190.8 million investment in Burgiss.
Cash Flows From Financing Activities
Cash used in financing activities was$549.5 million for the nine months endedSeptember 30, 2020 compared to$450.3 million for the nine months endedSeptember 30, 2019 . The year-over-year change was primarily driven by the early redemptions of the 2025 Senior Notes and 2024 Senior Notes, as well as the impact of higher share repurchases. This was partially offset by the impact of the 2031 Senior Notes and 2030 Senior Notes offerings inMay 2020 andFebruary 2020 , respectively.
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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