msci-10q_20180331.htm

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 27, 2018, there were 89,024,288 shares of the registrant’s common stock, par value $0.01, outstanding.

MSCI Inc. files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document MSCI Inc. files with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains a website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including MSCI Inc.) file electronically with the SEC. MSCI Inc.’s electronic SEC filings are available to the public at the SEC’s website, www.sec.gov.

MSCI Inc.’s website is www.msci.com. You can access MSCI Inc.’s Investor Relations homepage at http://ir.msci.com. MSCI Inc. makes available free of charge, on or through its Investor Relations homepage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. MSCI Inc. also makes available, through its Investor Relations homepage, via a link to the SEC’s website, statements of beneficial ownership of MSCI Inc.’s equity securities filed by its directors, officers, 5% or greater shareholders and others under Section 16 of the Exchange Act.

You can access information about MSCI Inc.’s corporate governance at http://ir.msci.com/corporate-governance.cfm, including copies of the following:

MSCI Inc.’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer and its Chief Financial Officer. MSCI Inc. will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC on its website. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, MSCI Inc., 7 World Trade Center, 250 Greenwich Street, 49th Floor, New York, NY 10007; (212) 804-3986. The information on MSCI Inc.’s website is not incorporated by reference into this report or any other report filed or furnished by us with the SEC.

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause MSCI Inc.’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond MSCI Inc.’s control and that could materially affect MSCI Inc.’s actual results, levels of activity, performance or achievements.

Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in MSCI Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on February 26, 2018 and in quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished with the SEC. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what MSCI Inc. projected. Any forward-looking statement in this report reflects MSCI Inc.’s current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to MSCI Inc.’s operations, results of operations, growth strategy and liquidity. MSCI Inc. assumes no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise, except as required by law.

MSCI Inc. uses its website and corporate Twitter account (@MSCI_Inc) as channels of distribution of company information. The information MSCI Inc. posts through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following MSCI Inc.’s press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about MSCI Inc. when you enroll your email address by visiting the “Email Alerts Subscription” section of our Investor Relations homepage at http://ir.msci.com/alerts.cfm?. The contents of MSCI Inc.’s website and social media channels are not, however, incorporated by reference into this report or any other report filed or furnished by us with the SEC.

	As of
	March 31,			December 31,
	2018			2017
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	849,828		$	889,502
Accounts receivable (net of allowances of $1,861 and $1,700 at March 31, 2018 and December 31, 2017, respectively)		462,577			327,597
Prepaid income taxes		1,153			15,103
Prepaid and other assets		34,799			34,927
Total current assets		1,348,357			1,267,129
Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $177,562 and $171,280 at March 31, 2018 and December 31, 2017, respectively)		86,310			94,437
Goodwill		1,562,660			1,560,621
Intangible assets (net of accumulated amortization of $519,640 and $507,612 at March 31, 2018 and December 31, 2017, respectively)		316,259			321,836
Deferred tax assets		11,876			12,013
Other non-current assets		19,032			19,632
Total assets	$	3,344,494		$	3,275,668

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,382		$	1,612
Income taxes payable		22,144			14,828
Accrued compensation and related benefits		45,951			131,156
Other accrued liabilities		83,106			85,710
Deferred revenue		503,298			374,365
Total current liabilities		655,881			607,671
Long-term debt		2,078,816			2,078,093
Deferred taxes		76,768			78,027
Other non-current liabilities		111,655			110,865
Total liabilities		2,923,120			2,874,656

Commitments and Contingencies (see Note 7 and Note 8)

Shareholders' equity:
Preferred stock (par value $0.01, 100,000,000 share authorized; no shares issued)		—			—
Common stock (par value $0.01; 750,000,000 common shares authorized; 129,953,761 and 129,543,856 common shares issued and 89,859,658 and 90,104,885 common shares outstanding at March 31, 2018 and December 31, 2017, respectively)		1,300			1,295
Treasury shares, at cost (40,094,103 and 39,438,971 common shares held at March 31, 2018 and December 31, 2017, respectively)		(2,413,283	)		(2,321,989	)
Additional paid in capital		1,276,109			1,264,849
Retained earnings		1,601,583			1,505,204
Accumulated other comprehensive loss		(44,335	)		(48,347	)
Total shareholders' equity		421,374			401,012
Total liabilities and shareholders' equity	$	3,344,494		$	3,275,668

	Three Months Ended
	March 31,
	2018			2017
	(unaudited)
Operating revenues	$	351,316		$	301,207

Operating expenses:
Cost of revenues		71,304			67,463
Selling and marketing		46,409			42,972
Research and development		20,707			18,970
General and administrative		26,187			20,981
Amortization of intangible assets		11,338			11,251
Depreciation and amortization of property, equipment and leasehold improvements		8,205			8,838
Total operating expenses		184,150			170,475

Operating income		167,166			130,732

Interest income		(2,770	)		(932	)
Interest expense		29,560			29,024
Other expense (income)		938			1,015

Other expense (income), net		27,728			29,107

Income before provision for income taxes		139,438			101,625
Provision for income taxes		24,346			28,674
Net income	$	115,092		$	72,951

Earnings per basic common share	$	1.28		$	0.80

Earnings per diluted common share	$	1.24		$	0.80

Weighted average shares outstanding used in computing earnings per share
Basic		90,075			90,708
Diluted		92,587			91,624

Dividend declared per common share	$	0.38		$	0.28

	Three Months Ended
	March 31,
	2018			2017
	(unaudited)
Net income	$	115,092		$	72,951
Other comprehensive income (loss):
Foreign currency translation adjustments		3,962			2,941
Income tax effect		—			—
Foreign currency translation adjustments, net		3,962			2,941

Pension and other post-retirement adjustments		(100	)		(99	)
Income tax effect		27			37
Pension and other post-retirement adjustments, net		(73	)		(62	)

Net investment hedge adjustments		123			—
Income tax effect		—			—
Net investment hedge adjustments, net		123			—
Other comprehensive income (loss), net of tax		4,012			2,879
Comprehensive income	$	119,104		$	75,830

	Three Months Ended
	March 31,
	2018			2017
	(unaudited)
Cash flows from operating activities
Net income	$	115,092		$	72,951
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		11,338			11,251
Stock-based compensation expense		9,053			9,394
Depreciation and amortization of property, equipment and leasehold improvements		8,205			8,838
Amortization of debt origination fees		849			849
Deferred taxes		(1,097	)		(2,035	)
Other non-cash adjustments		321			25
Changes in assets and liabilities:
Accounts receivable		(134,801	)		(40,582	)
Prepaid income taxes		13,626			12,438
Prepaid and other assets		192			629
Accounts payable		(230	)		561
Accrued compensation and related benefits		(84,517	)		(76,708	)
Income taxes payable		3,001			3,755
Other accrued liabilities		(1,516	)		(10,280	)
Deferred revenue		148,468			43,247
Other		613			2,682
Net cash provided by operating activities		88,597			37,015

Cash flows from investing activities
Capital expenditures		(1,512	)		(7,322	)
Capitalized software development costs		(4,360	)		(2,307	)
Net cash used in investing activities		(5,872	)		(9,629	)

Cash flows from financing activities
Proceeds from exercise of stock options		102			625
Repurchase of treasury shares		(91,277	)		(100,362	)
Payment of dividends		(34,883	)		(25,489	)
Net cash used in financing activities		(126,058	)		(125,226	)

Effect of exchange rate changes		3,659			2,978

Net decrease in cash		(39,674	)		(94,862	)
Cash and cash equivalent, beginning of period		889,502			791,834

Cash and cash equivalent, end of period	$	849,828		$	696,972

Supplemental disclosure of cash flow information:
Cash paid for interest	$	35,121		$	34,916
Cash paid for income taxes	$	8,602		$	13,294

Supplemental disclosure of non-cash investing activities
Property, equipment and leasehold improvements accrued, but not yet paid	$	3,101		$	2,944

Supplemental disclosure of non-cash financing activities
Cash dividends declared, but not yet paid	$	337		$	269

MSCI Inc., together with its wholly-owned subsidiaries (the “Company” or “MSCI”), provides mission-critical investment decision support tools, including indexes; portfolio construction and risk management products and services; Environmental, Social and Governance (“ESG”) research and ratings; and real estate research, reporting and benchmarking offerings. MSCI’s research-derived intellectual property includes methodologies, models, derived data and algorithms, as well as applications and services, which help its clients manage their investment processes and address their investment, risk and regulatory challenges.

These unaudited condensed consolidated financial statements include the accounts of MSCI Inc. and its subsidiaries and include all adjustments of a normal, recurring nature necessary to state fairly the financial condition as of March 31, 2018 and December 31, 2017, the results of operations and comprehensive income for the three months ended March 31, 2018 and 2017 and cash flows for the three months ended March 31, 2018 and 2017. The unaudited condensed consolidated statement of financial condition and related financial statement information as of December 31, 2017 have been derived from the 2017 audited consolidated financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in MSCI’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for interim periods are not necessarily indicative of results for the entire year.

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require the Company to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the deferral and recognition of revenue, research and development and software capitalization, impairment of long-lived assets, accrued compensation, income taxes and other matters that affect the unaudited condensed consolidated financial statements and related disclosures. The Company believes that estimates used in the preparation of these unaudited condensed consolidated financial statements are reasonable; however, actual results could differ materially from these estimates. Intercompany balances and transactions are eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the current period presentation.

For the three months ended March 31, 2018 and 2017, BlackRock, Inc. accounted for 12.9% and 10.3% of the Company’s consolidated operating revenues, respectively. For the three months ended March 31, 2018 and 2017, BlackRock, Inc. accounted for 22.1% and 18.6% of the Index segment operating revenues, respectively. No single customer represented 10.0% or more of revenues within the Analytics and All Other segments for the three months ended March 31, 2018 and 2017.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities had the option of adopting ASU 2014-09 retrospectively to each prior period presented, or retrospectively with a cumulative-effect adjustment recognized as of the date of initial application (the “Modified Retrospective Approach”).

In March 2016, the FASB issued Accounting Standards Update 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net).” In April 2016, the FASB issued Accounting Standards Update 2016-10, “Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued Accounting Standards Update 2016-12, “Narrow-Scope Improvements and Practical Expedients.” In December 2016, the FASB issued Accounting Standards Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” These updates provide supplemental adoption guidance and clarification to ASU 2014-09 and must be adopted concurrently. The Company adopted the new revenue standard as of January 1,

2018 using the Modified Retrospective Approach. See Note 3, “Revenue Recognition” of the Notes to the Unaudited Condensed Consolidated Financial Statements included herein for further information regarding revenue recognition.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842),” or ASU 2016-02. The FASB issued ASU 2016-02 in order to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB amended the FASB Accounting Standards Codification and created Topic 842, Leases. ASU 2016-02 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 requires reporting organizations to take a modified retrospective transition approach (as opposed to a full retrospective transition approach). The Company is continuing to evaluate the potential impact that ASU 2016-02 will have on its condensed consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or ASU 2016-13. The amendments in ASU 2016-13 introduce an approach based on expected losses to estimate credit losses on certain types of financial instruments, modify the impairment model for available-for-sale debt securities and provide for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted beginning after December 15, 2018. The adoption of ASU 2016-13 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” or ASU 2017-01. The amendments in ASU 2017-01 provide a screen to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under ASU 2017-01, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it’s not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 also narrows the definition of outputs by more closely aligning it with how outputs are described in Topic 606. ASU 2017-01 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The adoption of ASU 2017-01 did not have a material effect on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” or ASU 2017-04. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities. Instead, under the amendments in ASU 2017-04, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not more than the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2017-04 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In February 2017, the FASB issued Accounting Standards Update No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” or ASU 2017-07. The FASB issued ASU 2017-07 in order to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017-07 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. Entities should apply these amendments retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. As a result of the adoption of ASU 2017-07, the Company has restated the Condensed Consolidated Statement of Income for the three months ended March 31, 2017 by reclassing $0.1 million of non-service related pension costs out of “Operating Expenses” and into “Other expense (income)”.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting,” or ASU 2017-09. The FASB issued ASU 2017-09 in order to reduce the diversity in practice, as well as the cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation—Stock Compensation. ASU 2017-09 provides that an entity shall account for the effects of a modification of the terms or conditions of an equity award as an exchange of the original award for a new award, unless the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used), the vesting conditions and the classification of the modified award are the same as the original award immediately before the award is modified. ASU 2017-09 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. ASU 2017-09 requires reporting

organizations to apply the amendments prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 did not have a material effect on the Company’s condensed consolidated financial statements.

In August 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” or ASU 2017-12. The FASB issued ASU 2017-12 in order to expand and refine hedge accounting for both financial and non-financial risk components and align the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements. ASU 2017-12 also includes certain targeted improvements to simplify the application of current guidance related to the assessment of hedge accounting. ASU 2017-12 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-12 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, the Tax Cuts and Jobs Act (“Tax Reform”). Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” (“SAB 118”), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, registrants are required to record in their financial statements their reasonable estimates of the impact of Tax Reform that can be determined at the time they issue their financial statements, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the impact of Tax Reform for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the impact of Tax Reform where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with the law in effect prior to the enactment of Tax Reform. The Company adopted SAB 118 in the year ended December 31, 2017 and has made the relevant disclosures herein. See Note 9, “Income Taxes,” for additional information.

MSCI adopted the new revenue standard set forth under Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers,” or ASC 606, as of January 1, 2018 using the Modified Retrospective Approach and an adjustment was recorded within the Unaudited Condensed Consolidated Statement of Financial Condition as of January 1, 2018. The adoption resulted in more revenue being recognized upfront or earlier in the life of new client contracts for certain of the Company’s products and services, including fees related to the licensing of certain desktop applications, implementation services as it relates to the Company’s hosted applications and set-up fees as it relates to the Company’s custom indexes. The new revenue standard also has the impact of ratable revenue recognition as it relates to multi-year deals. The adoption of the standard also resulted in higher accounts receivable and deferred revenue balances. Under the old revenue standard, MSCI generally recorded the value of an invoice to accounts receivable and deferred revenue once the service period began. Under the new revenue standard, MSCI records accounts receivable and a corresponding offset to deferred revenue when an invoice is issued for a contract that is non-cancellable by the client and non-refundable because MSCI has an unconditional right to the consideration.

MSCI generally licenses annual, recurring subscriptions for the majority of its Index, Analytics and ESG products and services for a fee due in advance of the service period. MSCI’s contracts are typically non-cancellable by the client and non-refundable for the term of the agreement. Fees may vary based on a number of factors including by product or service, number of users and/or volume of services. MSCI’s client contracts do not have a financing component and the consideration received is typically not variable except as noted below.

MSCI also charges clients to use its indexes as the basis for index-linked investment products, such as ETFs, passively managed funds and separate accounts. These clients commonly pay MSCI a license fee, typically in arrears, primarily based on the assets under management (“AUM”) in their investment products. These fees are variable and fall within the sales-based and royalty-based exception.

Certain exchanges use MSCI’s indexes as the basis for futures and options contracts and pay MSCI a license fee, typically in arrears, primarily based on the volume of trades and/or number of instruments. These fees are variable, and fall within the sales-based and royalty-based exception.

Clients of MSCI’s Real Estate products subscribe to periodic benchmark reports, digests, market information and other publications. Fees are primarily paid in arrears after the product is delivered, with the exception of the market information product which is generally paid in advance.

MSCI also realizes one-time fees commonly related to customized reports, historical data sets, certain derivative financial products and certain implementation and consulting services, as well as from particular products and services that are purchased on a non-renewal basis.

The following describes MSCI’s primary types of revenues and the applicable revenue recognition policies. The Company’s revenues are primarily derived from the licensing of products and services and revenue is recognized when control of the promised goods or services is transferred to MSCI’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services. Revenue is recognized when the parties to the contract have legally enforceable obligations and are committed to performing their respective obligations, the Company can identify each party’s rights regarding the goods or services to be provided, the Company can identify the payment terms for the goods or services to be provided, the contract has commercial substance and it is probable that the Company will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be provided to the customer. Revenue is recognized exclusive of any applicable sales or other indirect tax withholdings.

For products within MSCI’s Index segment, with respect to index data subscriptions, MSCI’s performance obligation to deliver the data is satisfied over time and, accordingly, revenue is recognized ratably over the term of the agreement. With respect to licenses to create index-linked investment products, MSCI’s performance obligation allows customers to use the Company’s intellectual property (i.e., the indexes) as the basis of the funds or other investment products the customers create over the term of the agreement. The fees earned for these rights are typically variable in which case they are accrued under the sales and usage based royalty exception pursuant to the level of performance achieved, which is measured based on AUM, volume of trades and/or other factors. The level of performance achieved is based on information obtained from independent third-party sources or best estimates from the most recently reported information from the client. Set-up fees associated with the creation of MSCI’s custom indexes are satisfied and revenue recognized at the point in time at which the setup is complete.

For products within MSCI’s Analytics segment, MSCI’s performance obligations include providing access to its proprietary models and/or hosted applications and, in some cases, delivery of managed services, which are all satisfied over time, and accordingly, revenue is recognized ratably over the term of the agreement. For implementation services, MSCI meets its performance obligation once the service is complete and is available for the client to use and revenue is recognized at the point in time in which the completion has occurred. With respect to software licenses for the Company’s energy and commodity analytics products, MSCI’s performance obligation is partially satisfied and revenue recognized at the point in time when the software’s code key is delivered to the customer, which based upon a fair value assessment, represents approximately 82.0% of the contract value. MSCI’s remaining performance obligations are the post contractual support services and revenue is recognized evenly over the course of the license term, which based on a fair value assessment, represents approximately 18.0% of the value of the software. As of April 9, 2018, MSCI divested Financial Engineering Associates, Inc. (“FEA”) and the related energy and commodity analytics product line. See Note 11, “Subsequent Events,” for further details.

For products within the All Other segment, MSCI’s performance obligations under the Company’s ESG products are satisfied over time for the majority of the data subscriptions as MSCI provides and updates the data to the customer throughout the term of the agreement and revenue is recognized ratably over the term of the agreement. For custom ESG research data, the performance obligation is complete, and revenue recognized, at the point in time that the data is updated and available to the customer. With respect to the Company’s Real Estate products, MSCI primarily satisfies its performance obligations, and revenue is recognized, at the point in time when the Company delivers reports or publications or events are completed. For certain sponsorships, the performance obligation is satisfied, and revenue is recognized, over the term of the agreements. For market information products, publications are delivered throughout the year, and the revenue is recognized over time.

The Company allocates the transaction price to each performance obligation based on the best estimate of the relative standalone selling price of each distinct good or service in the contract. The transaction price in the contract is allocated at contract inception to the distinct good or service underlying each performance obligation in proportion to the standalone selling prices. This standalone selling price may be the contract price, but is more often than not the best estimate of the price the Company would receive for selling the good or service to other similar customers. Discounts applied to the contract will be allocated based on the same proportion of standalone selling prices.

For services where the transaction price is variable based upon AUM, volume of trades and/or number of investments linked to MSCI’s indexes, the transaction price is based upon pricing models and is not allocated at the inception of the contract but rather falls within the sales and usage based royalty exception under which the price and associated revenue are based upon actual known performance or best estimates of actual performance during the performance period.

The majority of MSCI’s contracts have a duration of one year or less and, accordingly, revenue associated with these performance obligations will be recognized within 12 months. For those contracts where fees are based on AUM or trading volumes of financial products linked to the Company’s indexes, including ETFs and futures and options contracts, revenue associated with MSCI’s performance obligations is recognized over the course of the year.

Determining when control has transferred can sometimes require management judgement (e.g., implementation services), which could affect the timing of revenue recognition. The Company has determined that the above methods provide a faithful depiction of the transfer of control of goods or services to the customer.

MSCI has elected the Modified Retrospective Approach and as such would apply the new revenue standard only to contracts that are not completed at the adoption date and would not have adjusted prior reporting periods.

The cumulative impact of adoption on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition was as follows (in thousands):

Included in the above adjustments is an increase of approximately $135.5 million primarily to accounts receivable and deferred revenue with no impact to retained earnings. In accordance with the new revenue standard, the Company now records an accounts receivable and an associated contract liability, reflected as “Deferred revenue” on MSCI’s Unaudited Condensed Consolidated Statement of Financial Condition, when it bills the customer in advance of the start date of the subscription period because the Company has determined it has an unconditional right to receive cash because the contracts are non-cancellable by the client and non-refundable. Under the old revenue standard, these balances would not have been recorded as accounts receivable and deferred revenue as the contract service start date was subsequent to December 31, 2017.

The impact of adopting the new revenue standard on the Company’s Unaudited Condensed Consolidated Statement of Income through the date of March 31, 2018 is as follows (in thousands):

	For the period ended March 31, 2018
Selected line items	As reported		Impact of Change			Without Adoption of ASC 606
Statement of Income
Operating revenues	$	351,316	$	(2,286	)	$	349,030
Operating income	$	167,166	$	(2,286	)	$	164,880
Income before provision for income taxes	$	139,438	$	(2,286	)	$	137,152
Provision for income taxes	$	24,346	$	457		$	24,803
Net income	$	115,092	$	(1,829	)	$	113,263
Earnings per basic common share	$	1.28	$	(0.02	)	$	1.26
Earnings per diluted common share	$	1.24	$	(0.02	)	$	1.22

The impact of adopting the new revenue standard on the Company’s Unaudited Statement of Financial Condition through the date of March 31, 2018 is as follows (in thousands):

	March 31, 2018
Selected line items	As reported at March 31, 2018		Impact of Change			Without Adoption of ASC 606
Statement of Financial Condition
Accounts receivable	$	462,577	$	(91,945	)	$	370,632
Income taxes payable	$	22,144	$	(4,771	)	$	17,373
Other accrued liabilities	$	83,106	$	(3,456	)	$	79,650
Deferred revenue	$	503,298	$	(65,818	)	$	437,480
Retained earnings	$	1,601,583	$	(17,900	)	$	1,583,683

The table that follows presents the disaggregated revenues for the periods indicated (in thousands):

	For the Three Months Ended March 31, 2018
	Segments
	Index		Analytics		All Other		Total
Product Types
Recurring subscriptions	$	113,205	$	118,244	$	29,367	$	260,815
Asset-based fees		85,483		—		—		85,483
Non-recurring		3,226		744		1,048		5,018
Total	$	201,913	$	118,987	$	30,415	$	351,316

MSCI’s policy for the majority of its subscription services is to bill in advance of services being provided and before the service period has begun. Under ASC 606, both the cash received and/or the amount billed in advance of the service period or the services being provided is presented as deferred revenue. Contract assets are services provided in advance of the payment due and are typically recorded as unbilled revenue. Since MSCI’s contracts are non-refundable and non-cancellable by the client, MSCI has an unconditional right to receive the cash for service and products provided in advance of billing and therefore are classified as “Accounts receivable” on the Company’s Unaudited Condensed Consolidated Statement of Financial Condition. This represents a change from past practice as a receivable was not recorded until the subscription period began and, as such, the adoption of ASC 606 resulted in a significant increase to both “Accounts receivable” and “Deferred revenue” with no change to net assets.

The amount of revenue recognized in the period that was included in the opening current deferred revenue, which reflects the contract liability amounts, was $221.5 million. The difference between the opening and closing balances of the Company’s deferred revenue represents the increase in the balance as a result of billings offset by the amortization of deferred revenue to operating revenues. MSCI had an insignificant long-term deferred revenue balance as of March 31, 2018 reflected as a part of “Other non-current liabilities” on its Unaudited Condensed Consolidated Statement of Financial Condition.

For contracts that have a duration of one year or less, the Company has chosen to use the practical expedient available under the new revenue standard and, as such, has not disclosed either the remaining performance obligation as of the end of the reporting period or when the Company expects to recognize the revenue. The remaining performance obligations for contracts that have a duration of greater than one year is $397.4 million, which is expected to be recognized as follows:

Basic earnings per share (“EPS”) is computed by dividing income available to MSCI common shareholders by the weighted average number of common shares outstanding during the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement-eligible requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. There were an immaterial number of anti-dilutive securities excluded from the calculation of diluted EPS for all periods presented.

	Three Months Ended
	March 31,
	2018		2017
(in thousands, except per share data)
Net income	$	115,092	$	72,951

Basic weighted average common shares outstanding		90,075		90,708
Effect of dilutive securities:
Stock options and restricted stock units		2,512		916
Diluted weighted average common shares outstanding		92,587		91,624

Earnings per basic common share	$	1.28	$	0.80

Earnings per diluted common share	$	1.24	$	0.80

Property, equipment and leasehold improvements at March 31, 2018 and December 31, 2017 consisted of the following:

Depreciation and amortization expense of property, equipment and leasehold improvements was $8.2 million and $8.8 million for the three months ended March 31, 2018 and 2017, respectively.

⁽¹⁾The goodwill in All Other at March 31, 2018, consisted of $31.6 million in the ESG segment and $21.8 million in the Real Estate segment and at December 31, 2017 consisted of $31.6 million in the ESG segment and $21.0 million in the Real Estate segment.

Amortization expense related to intangible assets was $11.3 million for both the three months ended March 31, 2018 and 2017. The amortization expense of acquired intangible assets was $9.2 million and $10.5 million for the three months ended March 31, 2018 and 2017, respectively. The amortization expense of internally developed capitalized software was $2.1 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively.

The gross carrying and accumulated amortization amounts related to the Company’s identifiable intangible assets were as follows:

	As of
	March 31,			December 31,
	2018			2017
	(in thousands)
Gross intangible assets:
Customer relationships	$	361,199		$	361,199
Trademarks/trade names		223,382			223,382
Technology/software		229,654			225,407
Proprietary data		28,627			28,627
Subtotal		842,862			838,615
Foreign exchange translation adjustment		(6,963	)		(9,167	)
Total gross intangible assets	$	835,899		$	829,448
Accumulated amortization:
Customer relationships	$	(194,614	)	$	(189,100	)
Trademarks/trade names		(119,618	)		(116,691	)
Technology/software		(195,491	)		(193,095	)
Proprietary data		(10,832	)		(10,352	)
Subtotal		(520,555	)		(509,238	)
Foreign exchange translation adjustment		915			1,626
Total accumulated amortization	$	(519,640	)	$	(507,612	)
Net intangible assets:
Customer relationships	$	166,585		$	172,099
Trademarks/trade names		103,764			106,691
Technology/software		34,163			32,312
Proprietary data		17,795			18,275
Subtotal		322,307			329,377
Foreign exchange translation adjustment		(6,048	)		(7,541	)
Total net intangible assets	$	316,259		$	321,836

The following table presents the estimated amortization expense for the remainder of the year ending December 31, 2018 and succeeding years:

Delaware		13-4038723
(State of Incorporation)		(I.R.S. Employer Identification Number)

7 World Trade Center 250 Greenwich Street, 49^th Floor New York, New York		10007
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth company	☐

		Page
	Part I
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40

	Part II
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

Selected line items	As reported at December 31, 2017		Adjustments due to Adoption of ASC 606		Adjusted as of December 31, 2017
Statement of Financial Condition
Accounts receivable	$	327,597	$	145,803	$	473,400
Income taxes payable	$	14,828	$	4,314	$	19,142
Other accrued liabilities	$	85,710	$	5,128	$	90,838
Deferred revenue	$	374,365	$	120,226	$	494,591
Retained earnings	$	1,505,204	$	16,135	$	1,521,339

	March 31, 2018
	Accounts receivable			Deferred revenue
Opening (1/1/2018)	$	473,400		$	494,591
Closing (03/31/2018)		462,577			503,298
Increase/(decrease)	$	(10,823	)	$	8,707