Business Overview and History

MSCI Inc. (MSCI) is a prominent provider of critical decision support tools and solutions for the global investment community. With over 50 years of expertise in research, data, and technology, the company powers better investment decisions by enabling clients to understand and analyze key drivers of risk and return, and confidently build more effective portfolios.

MSCI's roots trace back to 1966 when Morgan Stanley created the Capital International Composite Index, which later became the MSCI ACWI Index. The company was officially founded in 1998 as a business unit within Morgan Stanley and was subsequently spun out as a standalone company. In its early years, MSCI established itself as a leading provider of indexes, risk management analytics, and ESG research and ratings. The company's flagship MSCI Global Equity Indexes, which measure returns across developed, emerging, and frontier equity markets, became widely adopted industry benchmarks.

During the late 2000s, MSCI faced challenges, including the global financial crisis which impacted many of its clients. However, the company successfully navigated this period, maintaining its position as a critical data and analytics provider to the investment community. In 2007, MSCI completed an initial public offering, listing its shares on the New York Stock Exchange.

Over the past decade, MSCI has continued to grow and expand its product offerings. The company has invested heavily in ESG and climate solutions, recognizing the increasing importance of these factors in investment processes. MSCI has also bolstered its capabilities in areas like factor investing, multi-asset class analytics, and private assets. Through both organic development and strategic acquisitions, MSCI has solidified its status as a leading provider of mission-critical tools and solutions for the global investment community.

The company's operations are organized into three reportable segments: Index, Analytics, and ESG and Climate. The Index segment offers a wide range of equity and fixed income indexes, which are used by investors for product development, performance benchmarking, portfolio construction, and asset allocation. The Analytics segment provides risk management, performance attribution, and portfolio management tools and services, while the ESG and Climate segment offers products and services that help institutional investors integrate sustainability and climate considerations into their investment processes.

MSCI's client base spans a diverse spectrum of the global investment industry, including asset owners, asset managers, financial intermediaries, wealth managers, and corporates. As of December 31, 2024, the company served approximately 7,100 clients in more than 100 countries.

Financial Performance and Metrics

Over the past few years, MSCI has demonstrated strong financial performance and growth. In the fiscal year ended December 31, 2024, the company reported total operating revenues of $2.86 billion, representing a 12.9% increase from the prior year. This growth was driven by a 13.0% increase in recurring subscription revenues, a 17.9% increase in asset-based fees, and a 15.9% decrease in non-recurring revenues.

The company's adjusted EBITDA, a key profitability metric, increased by 12.7% to $1.72 billion, with an adjusted EBITDA margin of 60.1%. Net income for the year was $1.11 billion, a 3.4% decrease from the previous year.

For the fourth quarter of 2024, MSCI reported revenue of $743.5 million and net income of $305.5 million.

Financials

MSCI's financial position remains robust, with a strong balance sheet and healthy cash flow generation. As of December 31, 2024, the company had $409.35 million in cash and cash equivalents, including restricted cash of $3.5 million, and $4.51 billion in long-term debt. The company's free cash flow for the fiscal year 2024 was $1.39 billion, representing a 21.0% increase year-over-year.

MSCI also has a $1.25 billion revolving credit facility, of which $336.9 million was drawn as of December 31, 2024, providing additional financial flexibility.

Liquidity

MSCI's liquidity position is strong, as evidenced by its cash and cash equivalents balance and its ability to generate significant free cash flow. The company's financial flexibility allows it to invest in growth initiatives, pursue strategic acquisitions, and return capital to shareholders through dividends and share repurchases.

In 2024, MSCI repurchased $810 million worth of its own shares, with over $425 million of those repurchases occurring in the fourth quarter and through the end of the year.

Operational Metrics and Trends

MSCI's operating metrics provide insights into the company's business performance and growth drivers. The company's subscription run rate, which represents the annualized value of recurring revenues under client contracts, grew by 8.8% year-over-year to $2.92 billion as of December 31, 2024. This growth was driven by a 7.1% increase in recurring subscription run rate and a 14.8% increase in asset-based fee run rate.

The company's retention rate, a key indicator of client loyalty, remained strong at 93.7% for the full year 2024, demonstrating the stickiness of MSCI's products and services.

In the fourth quarter of 2024, MSCI's organic subscription run rate grew 8% excluding FX headwinds and 7% on a reported basis. The asset-based fee run rate grew 15% in Q4 2024, driven by higher average AUM and the highest quarterly cash inflows into equity ETFs linked to MSCI indices since the end of 2021 at more than $48 billion.

Segment Performance

The Index segment, which accounts for 55.9% of MSCI's total operating revenues, delivered a 9.9% year-over-year increase in revenues to $1.60 billion, driven by growth in both recurring subscriptions and asset-based fees. Asset-based fees accounted for 41.2% of the Index segment's total revenues, with the remaining 58.8% coming from recurring subscription fees. The Index segment's Adjusted EBITDA grew 10.4% to $1.22 billion, with an Adjusted EBITDA margin of 76.6%.

The Analytics segment, representing 23.6% of total revenues, grew by 9.6% to $675.09 million. Analytics segment Adjusted EBITDA increased 19.4% to $328.30 million, with an Adjusted EBITDA margin of 48.6%.

The ESG and Climate segment, which makes up 11.4% of revenues, saw a 13.6% increase to $326.60 million. ESG and Climate segment Adjusted EBITDA increased 14.2% to $104.71 million, with an Adjusted EBITDA margin of 32.1%. In Q4 2024, this segment saw 10% subscription run rate growth excluding FX.

The All Other Private Assets segment, which includes the company's real assets and private capital solutions offerings, experienced a 48.8% revenue growth to $258.29 million, largely due to the acquisition of Burgiss in 2023. Adjusted EBITDA for the segment increased 24.3% to $61.43 million, with an Adjusted EBITDA margin of 23.8%. The Private Capital Solutions segment saw 15% run rate growth in Q4 2024.

Client Performance

MSCI achieved strong performance across various client segments in Q4 2024. The company saw 15% and 12% subscription run rate growth excluding FX for hedge funds and wealth managers, respectively. With active asset managers, MSCI posted 5% subscription run rate growth excluding FX and a 94% retention rate.

Competitive Landscape and Growth Opportunities

MSCI operates in a competitive environment, with players such as S&P Dow Jones Indices, FTSE Russell, and Nasdaq vying for market share. However, the company's deep domain expertise, extensive data and research capabilities, and strong client relationships have enabled it to maintain its leadership position.

Looking ahead, MSCI is well-positioned to capitalize on several key industry trends, including:

1. The growing demand for sustainability and climate-focused investment solutions
2. The increasing adoption of indexed and rules-based investing strategies
3. The expansion of private asset allocations
4. The need for more sophisticated wealth management tools and analytics
5. Changing client strategies and operating models driven by fee compression, changing demographics, regulation, and economic conditions
6. Increased use of global, multi-asset-class, and other complex investment strategies
7. Growing demand for high-quality data, models, and timely research
8. Rising disclosure requirements driving demand for data and reporting solutions
9. Adoption of advanced technologies like AI to enhance products and operations

The company's strategic initiatives, such as enhancing its distribution and content-enabling technology, expanding solutions that empower client customization, and executing strategic partnerships and acquisitions, are aimed at driving continued growth and solidifying its position as a trusted partner to the global investment community.

Risks and Challenges

Like any prominent company, MSCI faces a range of risks and challenges that could impact its future performance. These include potential reputational and credibility concerns, client concentration risks, the threat of increased competition and pricing pressure, and the need to continuously innovate and develop new products and services to meet evolving client demands.

Additionally, the company's global operations expose it to currency fluctuations, regulatory changes, and geopolitical risks, which could affect its financial results and operational efficiency.

Future Outlook

For 2025, MSCI has provided the following guidance:

• Expense outlook assumes gradually increasing market levels throughout the year.

• Adjusted EBITDA expenses are expected to be about $35 million higher sequentially in Q1 2025 compared to Q4 2024, mostly driven by elevated compensation and benefits-related expenses.
• CapEx guidance reflects MSCI's investments in software development across most parts of the business.
• Free cash flow guidance reflects higher cash tax payments in Q1 2025, some of which were deferred during 2024.
• Interest expense guidance assumes MSCI's current debt levels and does not assume additional financings.
• MSCI expects its Q1 2025 effective tax rate to include a benefit from discrete items, and beyond Q1 2025, it expects a quarterly operating effective tax rate of 19% to 21%.

Conclusion

MSCI's strong market position, diversified client base, and innovative product offerings have positioned the company as a leader in the global investment ecosystem. The company's focus on delivering mission-critical tools and solutions, combined with its commitment to research, data, and technology, has enabled it to navigate industry changes and capitalize on emerging trends.

As the investment landscape continues to evolve, MSCI's ability to anticipate and respond to client needs, while maintaining its operational excellence and financial discipline, will be crucial to its long-term success and value creation for shareholders. The company's strong performance in 2024, with organic revenue growth of almost 10%, adjusted earnings per share growth of 12.4%, and free cash flow growth of 21%, demonstrates its ability to execute on its strategic initiatives and capitalize on market opportunities.