明晟 (MSCI) 2008 Q2 法說會逐字稿

Good day everyone and welcome to the MSCI Inc. second-quarter 2008 earnings conference call. This call is being recorded and all callers are currently in a listen-only mode. With us today from the Company is the Chairman and Chief Executive Officer, Mr. Henry Fernandez; and Chief Financial Officer, Mr. Michael Neborak. At this time, I would like to turn the call over to Mr. Neborak. Please go ahead,sir.

(technical difficulty) may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made which reflect management's current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see forward-looking statements in our 10-K dated February 28, 2008 and filed with the Securities and Exchange Commission. Today's call may also include discussion of certain non-GAAP financial measures. Please refer to today's earning release for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures.

Since we will be referring to runrate frequently in our discussion this morning, please let me remind you that our runrate at any given point in time represents the forward-looking fees for all subscriptions and licenses that we will record over the next 12 months assuming no cancellations or new subscriptions. Please refer to Table 2 in our press release for a detailed explanation.

The agenda for today's call is as follows. First, Henry will summarize the second quarter. Second, I will review second quarter financial results in detail. Following our formal remarks, we will open up the call for questions. With that, let me turn the call over to Henry.

Before I review our second-quarter results, let me refer you to our press release we issued this morning. In that announcement we stated our intention to file shortly a registration statement on Form S-1 for the sale by Morgan Stanley of approximately half of its 53 million share ownership interest in MSCI through the sale of MSCI Class A common stock.

The proposed offering is consistent with Morgan Stanley's previous indication that it might sell a portion of its ownership interest in MSCI and that it may also ultimately divest its entire interest in the Company. This announcement is neither an offer to sell nor a solicitation of an offer to buy shares of Class A common stock. Any offering of (inaudible) securities will be made only by means of a prospectus. Due to securities regulations I can make no further comment about this announcement.

Now onto our second quarter financial performance. We delivered another strong quarter in 2008. Operating revenues in our second quarter increased 21.9% compared to the year-ago period and adjusted EBITDA increased 43.4%. We are particularly pleased with our ability to produce an adjusted EBITDA margin of 44.3% despite incurring significant expenses associated with the replacement of services currently provided by Morgan Stanley. Achieving this adjusted EBITDA margin reflects the attractive operating leverage of our business as well as our ability to manage costs in a disciplined manner.

Our cash earnings for Q2 '08 were $27.2 million or $0.27 on a fully diluted per share basis. The slight decline compared to Q2 '07 reflects the changes in our capital structure and our IPO which have resulted in higher interest expense and a higher number of diluted shares.

Our second quarter results show the demand for our investment (inaudible) support tools remain strong across our diversified client base worldwide. These strong results are further proof of the strength of our franchise particularly during a difficult operating environment in the financial services industry.

Overall, our business remains very healthy. Our runrate reached over $430 million at the end of the second quarter representing 21.4% growth compared to Q2 '07 and 4.1% growth compared to Q1 '08. However, we did begin to see some moderation in the rate of growth on a sequential basis in our subscription products. The runrate for subscriptions based products increased 3.8% in Q2 '08 versus Q1 '08 compared to 6.3% growth reported in Q1 '08 versus Q4 '07.

We believe that there are possibly two primary reasons for the moderation of the sequential rate of growth in our subscription based products. First, market conditions and quarterly variability. It is still too early to say precisely how much of the moderation reflects the current economic environment and how much is due to the normal variability in sales in our business from a quarter-to-quarter basis.

As to the variability in the last six quarters, our sequential runrate growth for our subscription products in '07 was 4.1% in Q1, 3.9% in Q2, 6.1% in Q3, and 4% for Q4. And as I said earlier in '08 it was 6.3% for Q1 and now 3.8% for Q2.

The second possible reason for this moderation is reallocation of resources. In addition to hiring nearly 70 people we have reassigned over 60 full-time equivalent employees in the Company to work on the replacement of Morgan Stanley services. This reassignment of existing staff has had some impact on new sales and new product introductions in the second quarter.

Now that our efforts to replace Morgan Stanley services are well underway, we're stepping up our investment in the business to re-accelerate growth. We continue to believe that the market opportunity for us near-term and longer-term is significant and we will fully capitalize on the growth prospects that lie in front of us.

Now let me provide you with a bit more color on our second quarter results. In my remarks, when I discuss topline numbers, I will be referring only to runrate figures while Mike will focus on accounting numbers. I should also point out that while some of the numbers I will reference can be found in Table 2 of the earnings release, many of these numbers in my remarks are not included within the release. Please note that the runrate growth figures that I will refer to represent the percentage change from the runrate as of May 31, 2008 as compared to the runrate as of May 31, 2007 unless otherwise specified.

In our product categories, the runrate in equity indices increased over 25% to over to $240 million. This category is comprised of subscriptions and asset-based fees. In our equity index subscriptions we had an excellent quarter. Our runrate grew 24.3% to over $161 million reflecting growth in data subscriptions worldwide. We continue to see robust demand for GIMI, our global investable market indices with particular strength in our core and small cap developed market and emerging market indices.

However, growth has moderated slightly from the very strong levels experienced immediately following the launch of GIMI. We also saw strong sales of historical index data. We experienced growth across all client types led by asset managers, typically our largest category. New indices launched in Q2 included (inaudible) volatility and commodity producer indices. For Q3, we expect to launch our currency and short and leveraged indices.

For our equity index asset based fees, the runrate increased almost 28% to over $29 million reflecting the strong growth in assets in a change (inaudible) funds linked to MSCI indices and due to new ETF and asset inflows to existing ETF. Despite -- I should say -- during the second quarter 15 new ETF linked to MSCI equity indices were launched which brings the total for the first half of our fiscal year to 28 compared to 29 for all of '07. Our pipeline for launch of new ETF benchmark to MSCI indices also remains very full. Mike will go through ETF numbers in detail.

The runrate for equity portfolio analytics increased 15.7% to over $134 million led by growth in subscriptions to our equity risk content. The runrate for equity risk content increased almost 44% to over $42 million. For Barra Aegis, our bundle risk data and software product, our runrate increased a more modest 6.5% to $88.4 million reflecting in part the deferral of sales ahead of the launch of GEM2, our enhanced global equity risk model, to be launched later on this year. We saw revenue growth across all regions for our equity portfolio analytics with particular strength in Japan.

On a sequential basis our equity portfolio analytics runrate moderated to 2.4% from 6.3% in first-quarter 2008 due in part to a decline in our retention rate as we were negatively impacted by the elimination of certain (inaudible) portfolio management teams and a few asset managers and hedge funds. Overall we expect the launch of GEM2 and Aegis 4.2 in Q3 to re-accelerate revenue growth in our equity portfolio analytics category.

The runrate for our multi-asset class analytics increased nearly 38% to over $33 million. We were able to produce these strong results despite a large cancellation of our total risk subscription. BarraOne had one of its best quarters ever with a 65.4% increase in its runrate to nearly $22 million. The growth in total risk was a modest 4.9% as we no longer sell this product and we continue to transition clients from the legacy total risk product to BarraOne.

We experienced strong sales of BarraOne to asset managers and asset owners for the core risk management application used both for internal risk reporting as well as compliance reporting. And we also benefited from the outselling of the performance attribution module that we released in Q1. We expect to launch Monte Carlo value risk capabilities in BarraOne in Q3 and we expect to continue to add to our asset coverage including derivatives.

The runrate for our other product category increased over 21% to over $19 million. The runrate for [FEA], our energy and commodity valuation analytics, increased over 29% to $12.6 million and our fixed income analytics increased 11% to $6.3 million. These increases were partially offset by a 12.5% decline to $400,000 in asset-based fees from our hedge fund indices.

Looking at our business overall, during Q2 we were able to expand our client base as measured by client count and we continued to grow sales to our existing clients. In Q2, we added 62 net new clients for a total now of 3,032 clients excluding asset-based fee only clients.

The new client additions came from our equity indices and our multi-asset class (inaudible) categories. Approximately 23% of our gross sales excluding asset-based fees during the quarter came from new clients. This was an increase from the 18% that we experienced in the fourth quarter.

We saw growth in our run rate for all of our major client categories. By client type, the growth was as follows -- 19.2% to $295.2 million for asset managers; 25% to $41.2 million for broker-dealers; 38.5% to $21.7 million for hedge funds; 24.1% to almost $28 million for asset owners; and 24.5% to $52.3 million for all others.

In terms of the outlook, we remain very comfortable that our revenue and EBITDA over time will be in line with our financial targets. They are revenue growth in the midteens and adjusted EBITDA margin in the low 40s. That said, in any given quarter, we estimate that our level of profitability may fall within a range of 40 to 50% depending on the rate of revenue growth particularly by our high margin (inaudible) credit fund fees and also depending on the pace of investment in important initiatives for continued growth and the significant expenses we are incurring related to the replacement of services currently provided by Morgan Stanley.

As I mentioned earlier, we have begun to ramp up our hiring efforts in various product sales, client service and data production areas that will and we will accelerate the investment spending in 2009 given that the majority of the Morgan Stanley allocation will hopefully be eliminated. As in the past we will remain very disciplined in our expense management and we will continue to aggressively take advantage of locating staff in lower cost centers throughout the world in order to add to our operating leverage in the business.

To sum up, our second-quarter results were very good. Our equity index data subscription products produced very strong results with continued strength in our new subscriptions to GIMI. Several new (inaudible) were launched during the quarter and inflows into new and existing ETF remain healthy.

Momentum for our BarraOne continued to build and Q2 was one of the products best quarters ever. We continue to add to our client base and diversify our revenue base. Our retention rates remain about 90% and importantly our adjusted EBITDA increased 43% and we delivered an adjusted EBITDA margin of over 44% despite incurring significant expenses that are duplicative associated with the replacement of Morgan Stanley services.

As in the past, we remain very excited about the prospects for each of our product categories and client categories. And we believe that new product launches and employee hires in the near term will contribute positively to our business over the coming quarters. I will now turn the call over to Mike for a detailed review of our second quarter financial performance.

Thank you Henry. I'm going to discuss in more detail our financial performance. Please note that unless otherwise specified, percent change figures represent the comparison between Q2 2008 and Q2 2007. First, our operating revenues.

For the second quarter 2008, operating revenues increased 21.9% to $108 million. We saw good growth in both our subscription and asset-based fee revenues which were up 21.3% and 25%, respectively. On a sequential basis versus Q1 2008, revenue growth was 3.1% negatively impacted by a decrease in our non-ETF asset-based fees.

Before I discuss the numbers, let me provide you with an update on some of our pricing initiatives. With respect to our equity index data products, that is approximately $160 million subscription base, we began to implement in early May a price increase of approximately 5% on a blended basis. This increase will go into effect as each client contract comes up for renewal. Consequently, the price increase will not be fully in place until early May 2009.

Since we recognize revenues over the life of a subscription which is typically one year, we will see very little benefit in fiscal 2008. In fiscal 2009, we estimate that this price increase may contribute 1.25% to the overall revenue growth of the Company. On the analytics side, we began to take some tactical price increases of approximately 3 to 5% on average in our equity portfolio analytics business. That is an approximately $135 million subscription base. The price increase will have minimal impact on our 2008 accounting revenues and will likely contribute approximately 1% to overall 2009 revenue growth.

I will next provide specifics about our revenue performance by product. Revenues from equity indices, our largest product category, approximately 56% of our revenue base, increased 25.7% to $60.1 million compared to the second quarter of 2007. Within equity indices, revenues from equity index data subscriptions, approximately 39% of revenues, were up 26% to $41.8 million reflecting growth in subscriptions to our MSCI global investable market indices.

Revenues attributable to equity index asset-based fee products, approximately 17% of revenues, increased 25% to $18.3 million compared to the same period in 2007 led by growth in our ETF asset-based fee revenues. Approximately 80% of the revenue included in equity index asset-based fees relates to exchange traded funds.

The other 20% includes fees on passive mutual funds, transaction volume-based fees for futures and options traded on certain MSCI indices and other structured products. As shown in Table 2 in our press release, we are now disclosing the average value of assets and ETF linked to MSCI indices in addition to the period-end balance. This view makes sense since we are paid based on the average daily balances.

There's substantial detail provided in the press release on our ETF so I will highlight just one key item. Compared to first quarter 2008, equity index asset-based fee revenues declined 6.5% from $19.6 million to $18.3 million because of declines in our non-ETF asset-based fee revenues. Our ETF asset-based revenues were flat in the second quarter 2008 compared to the first quarter of 2008. The average value of assets in ETF linked to MSCI's equity indices was $184.4 billion for the second quarter of 2008 compared to $183.2 billion for the first quarter of 2008. At May 31, 2008 the value of assets in ETF linked to MSCI equity indices was $199.6 billion.

Our second largest product category is equity portfolio analytics products. That represents about 31% of our revenue base. Revenues for this category increased 12.2% to $33.9 million in the second quarter of 2008. Continued strong demand for our proprietary equity risk data, access to our equity models direct and (inaudible) vendors drove the increase.

Multi-asset class portfolio analytics had one of its best quarters ever. Revenues increased 94.6% to $8.6 million. Recall that this product category includes TotalRisk and BarraOne. We're currently in the process of decommissioning the client-hosted TotalRisk product and providing clients with the opportunity to eventually transition to our BarraOne Web based application. The year-over-year increase is largely attributable to strong new subscriptions to BarraOne. That is an overview of the revenue picture. I will now move to expenses.

Operating expenses increased 20.4% to $74.7 million in the second quarter of 2008 compared to the second quarter 2007. The large increase is primarily due to three factors -- founders grant expenses, set-up and duplicate costs related to the replacement of services provided by Morgan Stanley and public company costs. If we exclude the founders grant expense of $6.9 million, operating expenses increased by 9.3% to $67.9 million in the second quarter of 2008.

I'm not going to review all the major expense categories since we provide a significant amount of detail in the text and in the tables of our release. However, I do want to spend a few minutes on compensation expense and provide an update on our movement to low-cost centers.

Compensation expense increased 11% excluding the founders grant compared to Q2 2007. If we also exclude $1.9 million of compensation costs associated with hiring new employees to replace services currently provided by Morgan Stanley, compensation expenses increased 5.4%. Our headcount was 686 at the end of the quarter representing an increase of 43 people or 6.7% from the end of Q2 2007. On May 31, 2008 103 full-time employees were located in Budapest and Mumbai compared to 49 on May 31, 2007 and 83 on February 29, 2008. I will now talk a little bit about our capital structure.

Because we achieved certain leverage thresholds defined in our credit agreement, the LIBOR spread on both our Term Loan A and Term Loan B debt stepped down 25 basis points during the second quarter. The LIBOR spread on our Term Loan A decreased to 2.75% from 3% and the LIBOR spread on our Term Loan B increased to 2.5% from 2.75%.

Our effective all-in interest rate for the second quarter including our interest rate swap was 5.6%. On May 30, our three-month LIBOR rate reset to 2.65% from 3.09%. As such, our effective all-in interest rate including the interest rate swap we have during the third quarter should be approximately 5.3%.

Before we discuss net income and EPS I'd like to reemphasize how the founders grant expense, changes in our capital structure and our initial public offering impact the comparability of Q2 2008 results with Q2 2007. We incurred founders grant expense of $6.9 million pretax in the second-quarter 2008 versus zero in the second quarter of 2007. As of May 31, 2008 we had borrowings of $414 million outstanding on our [equipment] facility.

As of May 31, 2007 there was no debt outstanding and we had a cash balance approaching $400 million. Consequently, we recorded interest expense of $3 million in the second quarter of 2008 compared to interest income of $5 million in the second quarter of 2007. Weighted average common shares outstanding for the second quarter 2008 include 16.1 million shares issued in our November IPO while the second quarter 2007 does not.

So net income in the second quarter 2008 declined 6.1% to $18.6 million in the second quarter of 2007 and that decline primarily reflects the founders grant expense, higher interest expense and lower interest income offset in part by an increase in operating income. Our diluted earnings per share for Q2 '08 was $0.18, a decline of 25% from Q2 '07. So in addition to the items I just mentioned which impact the numerator, we had the denominator impacted compared to the second quarter of 2007 due to the additional common shares issued in conjunction with our November 2007 IPO.

Adjusted EBITDA increased 43.4% to $48 million. See Table 9 in our press release for a reconciliation of adjusted EBITDA to net income. The adjusted EBITDA margin expanded to 44.3% in the second quarter of 2008 from 37.7% in the second quarter of 2007. The increase reflects the operating leverage in the business and our disciplined cost management. Basically, we grew revenues at 22% and expenses at 9.3% when you exclude the founders grant which the adjusted EBITDA margin excludes.

Fully diluted cash EPS decreased 3.6% to $0.27 per share in the second quarter of 2008 versus the second quarter of 2007. We calculate cash earnings of $27.2 million by taking net income of $8.6 million and adding back the after-tax impact of the founders grant which equals $4.2 million and also adding back the after-tax impact of intangibles amortization which equals $4.4 million. We summarize our operating metrics in Table 2 of the release. Henry discussed several of these metrics but I wanted to spend a moment on our retention rate.

Our aggregate retention rate decreased to 91% for the second quarter of 2008 from 94% in the second quarter of 2007. The aggregate retention rate for the second quarter of 2008 was negatively impacted by the cancellation of a total risk subscription. Excluding this cancellation, the aggregate retention rate was 93%. We estimate that the closing of several quantitative strategy teams and some of our clients further reduced our retention rate by approximately 75 basis points.

I'm now going to discuss in some detail our efforts to replace services currently provided by Morgan Stanley and provide a road map for these initiatives for the next few quarters. This overview is our best estimate at this point in time.

For Q2 2008, the allocation for the cost of services currently provided by Morgan Stanley declined by $0.5 million to $5.8 million from $6.3 million in Q1 2008 as we took over certain services, principally human resources, previously provided by Morgan Stanley. In addition, Morgan Stanley eliminated certain corporate charges for services such as internal audit.

Our goal is to be self-sufficient (inaudible) the vast majority of our services currently provided by Morgan Stanley by the end of fiscal year 2008 with the process completed during Q2 2009. As such, we expect the allocation for the cost of services currently provided by Morgan Stanley to decline again by approximately $0.5 million in Q3 to $5.3 million and then in the fourth quarter for it to decline further by $1 million to $1.5 million or so to approximately 4 to $4.5 million in the fourth quarter.

In fiscal 2009, we expect the total allocation for the cost of services provided by Morgan Stanley to be approximately $6 million or so reflecting largely IT related expenses. Again, we expect Morgan Stanley charges to cease after Q2 2009.

For the full year fiscal 2008 we expect the allocation for the cost of services currently provided by Morgan Stanley to total approximately $22 million. That would be compared to $26.4 million that we incurred for fiscal year 2007. In Q2 2008 the initial setup costs as well as duplicate costs we incurred related to establishing the infrastructure and hiring people to eventually replace the services currently provided by Morgan Stanley totaled $5.1 million including approximately $1.7 million of nonrecurring expenses.

We expect these expenses to increase in the third quarter to about $6 million that will also include some nonrecurring expenses and peak around $7.5 million in the fourth quarter which will also include some nonrecurring expenses. So in summary, we estimate that we will incur total expenses to replace Morgan Stanley services during 2008 of approximately 21 to $22 million.

So to sum up the quarter, we're very pleased with our results which showed adjusted EBITDA growth of 43% on revenue growth of 22%. As Henry mentioned, we are excited about our growth prospects and look forward to continuing to deliver value to our clients and shareholders. Thank you for participation in today's call and with that I will now turn it over to the operator for questions.

(OPERATOR INSTRUCTIONS) Andrew Fones, UBS Securities.

My first question was given the fact that your adjusted EBITDA margin is currently over 44%, you're currently running some duplicate costs and obviously we have seen some nice kind of (inaudible) in your business and the removal of people to lower-cost locations. As we think about margins in '09, what are some of the offsets to gets you to a target of only low 40% for '09 and beyond? Thanks.

I think as we have said in the past we would like to keep the adjusted EBITDA margin in the low 40s for at least the next couple of years because we see significant organic investment opportunities in our business to hopefully at some point accelerate revenue growth to a higher level down the path. Some of the specific investment opportunities that I would like to make are in two growth categories.

The first category is to increase substantially our client organization particularly our salespeople. We think that we are not maximizing a lot of cross selling and [outselling] opportunities with our clients and capturing new clients by (inaudible) size of our [plant] organization including salespeople and therefore we think that the increase in that -- the number of people there over the next two years will add -- will be very additive to our growth.

The second category is -- we have had some bottlenecks in our data production environment that has slowed down our rate of growth (inaudible). Or saying it differently, it has not accelerated. We haven't slowed down -- we haven't accelerated the (inaudible) so we believe that by adding people and information technologies to help us automate certain of those processes and adding more staff to that, we can break down some of the bottleneck and accelerate quite dramatically new product introductions particularly in equity analytics that will lead to higher growth of those products.

Thanks, that's really helpful. Second, in terms of the retention rate you mentioned that several (inaudible) closed down and that impacted your retention rate by about 25 basis points. Can you tell us when that occurred in the quarter, whether that was early or late in the quarter or you know if there was any trend there that was noticeable? Thanks.

It was more or less evenly spread throughout the quarter so I think it would be hard really to kind of draw any conclusions from that.

Okay, and then finally just on the interest expense you mentioned a 25 basis point drop in the spread. Did that occur and did that impact your second quarter results or will that start in Q3?

That basically occurred in mid-April so it was more or less halfway through our second quarter. So we got half of the benefit for that in the second quarter. We'll get the full benefit of that in the third quarter here.

John Neff, William Blair.

The dynamics around -- just trying to get a little bit more of a handle on some of the things going on with asset-based revenue. Can you just maybe describe some of the volume dynamics? I am assuming the part that ETF (inaudible) were better than we were looking for. So the volume dynamics on the 20% of the business that is not ETF-related can you just maybe give us a little more color on some of the volume dynamics of futures options and things like that? And also maybe if you could speak to the drop in hedge fund index asset runrates down 39% sequentially and what should we look for in terms of the outlook there?

What's happening if you look at the asset-based fees, you know 80% are ETF's and 20% are non-ETF's. On the 80% of the ETF's there are some very strong secular growth that are apparently temporarily mitigated by asset level declines in the equity markets around the world and the end result as we have presented is relatively flat (inaudible) for us in Q1 versus Q2.

The second category, the 20% which is composed of assets under management fees and transaction volume fees, on the assets under management fees these are retail and institutional funds in which we get paid on the basis of assets under management. Those products by some of these clients are much more susceptible to asset level declines not being compensated by the secular trends of growth like the ETF fees.

So you'll see a direct negative correlation between the markets and the asset levels of these people and therefore our corresponding decrease in fees. On the volume driven futures and options and the like, it wasn't really much of a negative impact at all on that one. It was mostly on the retail institution mutual funds that were being paid on assets under management fees.

Now on the hedge funds index linked investment products that have been declining almost quarter by quarter, I think it's fair to assume that over some period of time that decline will continue and may even get to a very low level. That's probably the best assumption. These are products that were launched some time ago in (inaudible) structured products to retail investors they had initially something like five-year expirations and there would be no [winding]. So I will not participate a change from the decline that we're seeing quarter to quarter.

That's helpful. And then, Mike, a question for you here on expenses. At the $5.1 million for replacing services provided by Morgan Stanley, the $5.8 million for the Morgan Stanley allocation, I guess my question is how much of the $5.8 million Morgan Stanley allocation is duplicative? Will all of that go away at some point?

In terms of the $5.1 million, $1.7 million was nonrecurring. So therefore in the quarter, you know about $3.4 million of that will continue on if you want to look at it versus that $5.8 million.

I think what is happening here is that you've got to look at it from two components -- the allocations for Morgan Stanley which are services currently rendered by Morgan Stanley to us that [were] paying fees, those will gradually decline as Mike indicated in his remarks. And separate from that but obviously very related, we're stepping up our hiring efforts to replace those services and that's where you're seeing this increase in onetime expenses and recurring expenses of what we call replacement services.

Okay.

John, I don't think you can just basically relate the 5.1 and the 5.8 directly in terms of the recurring and nonrecurring piece because there's lots of things in that $5.1 million that relate to services that will be in some cases replaced in the short-term or the shorter-term meaning beginning here in the third quarter but some of it related to things that won't get replaced until early 2009 that are more IT related.

Okay, that's fair. And then one point of clarification. It said in the tables of the press release that the $5.1 million for replacing the services includes founders grant expense. Did I read that correctly?

Yes; that's a very, very small piece that was put in there to be accurate. But it's a tiny expense. We just didn't have time to take it out but it is small.

Okay but obviously it's just a small fraction of the $6.9 million?

It's a small fraction.

And then question for you on BarraOne. I'd appreciate the color. It sounds like it's $22 million runrate. I'm just wondering if you could give us or quantify the current EBITDA margin drag associated with that product and maybe give us a sense if possible what sort of revenue runrate does that product have to reach before the drag is no longer so pronounced?

Basically the revenue runrate needs to be somewhere between 40 and $50 million so that product will then breakeven and basically the drag -- and these are round numbers in terms of our -- where we currently stand we are losing 10 to $15 million in that product line right now. So depending on how you want to calculate the margin, that would be how you do it.

We don't break out profitability but a lot of this is the combined business of TotalRisk and BarraOne. That's combined cost structure which obviously has $22 million of runrate for BarraOne and close to $11 million of runrate for TotalRisk. We're hoping that the majority of the runrate on TotalRisk will eventually transition to BarraOne but you know we're not certain on that because always we're talking to those clients about transitioning over some period of time. As Mike indicated, on a combined basis we're probably losing 10 to $15 million.

On sorry, what was the runrate you cited for TotalRisk?

It's about $11 million so the combined line is about $33 million of runrate. That's the multi-asset class line in total.

Yes. On that whole thing you're losing 10 to $15 million?

Correct.

Last question. I can get back in queue. The price increases for the equity portfolio analytics, Mike, I just didn't get the numbers down. I think you said -- was it 3 to 5% and that you would expect that to add roughly 1% to '09 overall growth rate?

That's correct.

Is that a price increase across the board or for specific products within the --?

No, it was more tactical so specific products [in a] very geographically driven if you will. The numbers I cited to you were kind of a blended average because it would be difficult to kind of highlight all the different products in different areas geographically that (inaudible), so --

(OPERATOR INSTRUCTIONS) Ivy De Dianous, Fox-Pitt Kelton.

My question is could you provide some details on the quarterly performance outside of the US in your different business lines?

You mean the runrates? Revenues?

Just any general color that you can provide.

I think we look at our business pretty much on a product basis and a client segment basis across the whole world. We don't (inaudible) sort of breaking down the growth rates per region. What we can tell you thought is that the US has remained very resilient, very strong and so has Japan and non-Japan Asia. I think we dragged a little bit in EMEA. A good amount of the drag in EMEA for our analytics products, not our index products, our analytics products, the drag in EMEA has been attributable to the shortage of staff in our client organization to fully take advantage of the opportunities that we see there.

So we should see a pickup once you staff more people in that area?

I think so. I mean clearly over (inaudible) if the economic environment gets worse you'll have two forces. One is our pickup in staff and therefore ste- up our selling effort in EMEA in analytics moderated a bit by headwinds on the environment if the environment were to continue to deteriorate in the next few quarters.

My second question is that this quarter we see some of the account managers, asset managers in hedge funds disappear that affected the equity portfolio analytics line of business. It didn't affect equity index at all?

That's correct. I think [we want in the third] obviously full disclosure and being as transparent as possible, we have had some cancellation of equity analytics for (inaudible) in some of our clients. But they haven't been very large at this point so I think that's important to understand.

Secondly, related to your second question equity indices to a lot of the (inaudible) teams and hedge funds is not a very large percentage of our revenue base. So you're likely to see more -- either more stickiness in that or less cancellations. The [quantum] teams are heavy users of our equity analytics per se and less so on equity indices.

Should we worry about with this current financial environment still not stable, should we worry about further decline in the subscription to the equity portfolio analytics tools?

Well we are clearly monitoring that very closely. There has been some impact that we have had and at the moment it's hard to say how much of the impact is attributed to the bad economic environment and how much of it has been for as I said the shortage of staff that we have had in this area worldwide. For sure if the environment for a number of quarters were to continue to deteriorate rapidly, we would face some headwinds in that area.

[Greg Lapin, Decade].

What is your target retention rate?

Well our retention rate for 2007 was -- for the full year was 92% and for 2008 we haven't provided a target retention rate. We would would hope it would be between 92 and 93% for the full year.

Andrew Fones, UBS Securities.

I thought I would ask a question to clean up the -- just thoughts about the duplicate expense. The Morgan Stanley allocation I think you said in the quarter was $5.8 million and the transition expense was $5.1 million for a total of about $11 million and then I think you said in the fourth quarter this year you would expect the transition expense to reach about $7.5 million suggesting that you currently are running with about 3 to $4 million of excess expense. Is that a good way of thinking about it or would that $7.5 million actually move even higher if we were to kind of think (inaudible) that all-in expense should be? Thanks.

Well, the 7.5 is kind of the peak quarterly number that we'll incur. It has a lot of onetime charges in it. So our quarterly expense on our own which all these charges basically are trying to get to the point where we become self-sufficient and we're running on our own cost structure will not be as high as the 7.5 in the quarter.

The way I look at it here as I said we -- for these duplicate costs and set-up costs to replace the services for all of 2008 we are basically -- we think that expenses will be about $22 million and the allocation for Morgan Stanley for the full year is going to be about $22 million down from where it was at 2007 which was $26.4 million. So the net cost of all this during the year if you take the difference between the allocation in '07 and '08 and subtract that from the $22 million of cost that we're going to incur, that cost to us is about 17 to $18 million.

Okay, can you just quantify what the amount of the onetime expenses are in that $7.5 million roughly?

No, we're not going to do that at this point just because it's a number that is changing.

Okay, understood. (inaudible) the $17 million divided by 4 gets us back to kind of a similar kind of range. Thanks.

Just remember one thing, Andrew. In the numbers -- some of what we -- since we hire people we have compensation expense and you don't hire all the people on the first of the year. So the runrate of the compensation expense is higher than what you'll see in terms of our accounting charges because we're not getting the full year impact of that. Some of the analysis you're doing with onetime -- that's why it gets awfully complicated to summarize it in a pure runrate basis excluding the onetime charges and then giving a runrate for the compensation part of what we're putting on to replace those services.

Understood, thank you.

(OPERATOR INSTRUCTIONS) That will conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Fernandez for any additional or closing remarks.

Once again we're very pleased with the very strong performance of our team this quarter. It is a tribute to the focus and execution skills of our employees worldwide. We continue to be very excited about the opportunities that we have ahead of us to grow our business and deliver shareholder value consistently. So we thank you very much for your participation in this call.

Ladies and gentlemen this does conclude today's conference. Thank you for your participation and you may now disconnect.