明晟 (MSCI) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the MSCI fourth-quarter 2008 earnings results conference call. Today's conference is being recorded. With us today from the Company is Henry Fernandez, Chairman and Chief Executive Officer, and Michael Neborak, Chief Financial Officer. At this time, for opening remarks I would like to turn the conference over to Mr. Michael Neborak. Please go ahead, sir.

Thank you, operator. Good morning and thank you for joining our fourth-quarter 2008 earnings call. Please note that earlier this morning, we issued a press release describing our results for the fourth quarter and full year 2008. A copy of that release can be viewed on the Company's website at mscibarra.com under Investor Relations.

This presentation 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 the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ending November 30, 2007, and our quarterly filings and earnings releases for 2008.

Today's earnings call may also include discussion of certain non-GAAP financial measures. Please refer to today's earnings 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 run rate frequently in our discussion this morning, let me remind you that our run rate at a given point in time represents the forward-looking fees for subscriptions and product licenses that we will record over the next 12 months, assuming no cancellations, no new sales or changes in the assets and ETS license to our indices. Please refer to Table 2 in our press release for a detailed explanation.

The agenda for today is as follows. First, Henry will summarize the full year and fourth quarter. Second, I will review the fourth-quarter and fiscal 2008 financial results in some detail. Following our formal remarks, we will take questions.

With that, let me turn the call over to Henry.

Thanks, Mike. Good morning, everyone. We had a very successful first year as a public company. We delivered record revenues of $431 million, up 16.5% from '07. We delivered record adjusted EBITDA of $195 million, up 22.4%, and resulting in an adjusted EBITDA margin of 45.2%, an annual record as well.

We ended the year with a very strong balance sheet, with net debt of only $134 million, which is down nearly $120 million from last year.

In addition to producing very strong financial results for the year, we had several significant achievements from a business perspective during fiscal year 2008, including the following -- new product introductions such as GEM2, our Global Equity Risk Model, and Aegis 4.2, the accompanying software; Barra 3.2, which is a Monte Carlo VaR; and new indices of [the] Short and Leveraged and Frontier Market Indices.

48 new exchange-traded funds linked to our equity indices were launched during the year, bringing the total to 167. Nearly $27 billion flowed into this new -- into all of these 167 exchange-traded funds.

We opened sales offices in Boston and in Stamford, Connecticut, and established the infrastructure to open an office in Monterrey, Mexico, to service clients in the Americas. We increased staff, increasing our functions throughout the organization, including sales, client service, product management, data and content services, IT and application development.

We increased our headcount by 129 over the last year, including 78 individuals dedicated to the replacement of services provided by Morgan Stanley. We added to our staff in emerging market centers. Currently, about 28% of our employees reside in emerging market centers compared to 18% a year ago. And we successfully replaced most of the services in finance, HR and IT previously provided by Morgan Stanley, as laid out in our original plan earlier in '08.

Turning to the fourth-quarter results, our year-over-year fourth-quarter revenue growth slowed to 5.7%, reflecting the impact of the challenging financial markets on several of our product categories, most notably our Equity Index asset-based fees.

Despite the difficult operating environment and the significant duplicate expenses associated with the replacement of Morgan Stanley Services, we were very pleased to have generated a 45.2% adjusted EBITDA margin, which highlights the high levels of profitability of our various revenue streams, as well as our ongoing very disciplined cost management.

The adverse impact on our clients from the turmoil in the financial markets is also evident in our operating metrics, which provide a more recent picture of our operating environment. Our subscription run rate at the end of the fourth quarter was up only slightly compared to the end of the third quarter. Our asset-based fee run rate declined 27% compared to the third quarter, reflecting the decline in assets in investment products linked to our indices.

The run rate for the Company as a whole in Q4 increased 3.3% year over year to $408 million, but declined 4.5% sequentially. The impact of this weakness in our business will be reflected in our financial results during 2009.

While Q4 is typically seasonally weaker than Q3, thereby skewing the sequential comparison, we did experience weakness when compared to the very strong performance in fourth quarter 2007. This is reflected in our higher levels of cancellations. Our aggregate retention rate in Q4 declined to 80.6% from 89.9% in the fourth quarter of '07. A portion of the year-over-year decline in the retention rate can be attributed to product swaps, particularly from Aegis to BarraOne. Excluding the product swaps, the retention rate was 85.3%, which compares to a strong 90.6% in Q4 '07 and a more normal 82% or so for both Q4 '06 and Q4 '05.

While volatility in the financial markets persists, we remain encouraged by the high level of interest in our products from clients and prospects worldwide. And we believe that our diversified suite of products and our global client base position us well to manage through this difficult operating environment.

In Q4, we generated positive gross sales in each product category and added 71 new clients on a gross basis, with increases in each product category and across all geographic regions, including the Americas, EMEA and Asia. Moreover, we believe the current financial turmoil fosters the need for increased performance and risk management tools, which is evidenced by the strong performance of BarraOne in Q4, and drives demand for transparent investment products such as exchange-traded funds, which is evidenced by the $16 billion of inflows we experienced in ETFs linked to our indices during the quarter. There probably are only very few investment vehicles during the fourth quarter of '08 that saw significant asset inflows.

As of Wednesday of this week, January 7, the assets under management balance in ETFs linked to our indices stood at $137 billion, which is up $20 billion from November 30. The new ETF pipeline also remains strong. However, given the level of uncertainty regarding the outlook for financial markets worldwide and the impact of a weak financial market on our business in the near term, we're managing our expenses cautiously in 2009. While we have hired 81 people of the 115 people approved last summer and we plan to hire an additional 20, primarily in emerging markets, we have pushed back the timing of some of our hiring plans until we have greater clarity in the near-term outlook. Given the growth opportunities we have over the medium to long term, we will add to our staff as market conditions improve.

In the event that the operating environment turns more negative, other levers that we have with respect to our expenses are decreases in headcount through attrition, the acceleration of our move into emerging market centers, and reductions in incentive compensation for existing staff.

I will now discuss our fourth-quarter performance in more detail. In my remarks, when I discuss topline numbers, I will be referring only to run rate figures, while Mike will focus on accounting revenues. Run rate serves as an indicator for future revenue. However, I do caution you that they're only a snapshot of our business at a given point in time.

Please note that the run rate gross figures that I will refer to represent the percentage change from the run rate as of November 30, 2008, compared to the run rate as of November 30, 2007, unless otherwise specified. Keep in mind that the sequential comparisons for Q4 versus Q3 have typically been weaker than other quarters. As I mentioned earlier, cancellations are generally highest in Q4, given the timing of our contract renewals.

In terms of major product categories, the run rate in equity indices increased 2.1%. Our equity index data subscriptions had a good quarter and showed the resilience of our benchmarking franchise across the world, but growth moderated in Q4 from the very robust levels experienced in the first three quarters of the year. The run rate grew [20.8%] year over year and 2.3% sequentially from Q3 '08.

We continue to see good demand for our core products, particularly our small-cap indices; in addition, our custom indices, which now have a run rate of $10 million. In addition, user fees increased 9% from Q3 and now comprise 11% of our equity index data run rate compared to 9% a year ago. However, we are also seeing an increase in the rate of cancellations for our less essential index products as our clients seek to reduce their costs. By client segment, we saw growth of 3% in our run rate from asset managers, 4% from hedge funds and 5% from asset owners. And we saw a decline of 3% from broker-dealers, which account for 13% of this category. The broker-dealer category was impacted by cancellations from Bear Stearns of $225,000 and from Lehman of $198,000.

For our equity index asset-based fees, the run rate decreased 32.5% year over year and decreased 26% sequentially due to the decline in AUM linked to our indices. During the fourth quarter, 11 new ETFs linked to our indices were launched, which brings the total for the full year to 48 compared to 29 for all of 2007.

Our pipeline remains strong, although market conditions may impact the actual launch dates of these products. The run rate for equity portfolio analytics increased 3.6% year over year and declined 4.5% sequentially. This sequential decline includes 40 basis point decline from the negative impact from foreign currency and reflects product swaps and general weakness in the operating environment. Excluding the impact of foreign exchange and the $1.2 million of swaps from Aegis into BarraOne, the equity portfolio analytics run rate declined 3.2% from Q3.

The run rate for Aegis declined 4.5% from Q3 to $84.1 million. Excluding the swaps into BarraOne, Aegis was down 3.1%. The run rate for equity risk data sold directly decreased 3.7% to $42.2 million from Q3 '08. As we mentioned in our prior calls, the reduction of quant users as traditional fund managers and the closure of some quant funds continued to impact our run rate. In Q4, approximately 20% of the cancellations in Aegis and Models Direct were from quant teams or quant firms shutting down.

The launch of GEM2 and Aegis 4.2 in September and our short horizon GEM2 model in December were positive factors in the quarter, as was the continued trend of double-investing. For Aegis, nine of the top 10 sales in the fourth quarter included either GEM2 or short horizon models. In Q2, we expect to release the GEM2 history, the history data, and a new European equity model.

Multi-Asset Class Analytics had a very strong quarter. The run rate increased 20% year over year and 7.4% sequentially. Excluding the impact of foreign currency translation, the sequential growth rate is 10.6%. BarraOne had a record quarter in terms of gross sales, and the run rate for BarraOne increased 41% year over year and 12.7% sequentially.

We have several deals that have been in the pipeline for some time which closed in Q4, including two very large client wins. Strength was broad-based, led by asset managers and asset owners, and from a regional perspective we experienced double-digit sequential growth in all regions except for Europe, which was flat compared to a very strong Q3.

Good demand in BarraOne was seen from our core BarraOne products, which is Optimizer, attribution and VaR simulation products. The product swaps from Aegis into BarraOne also helped our performance, contributing about $3.1 million to the run rate as the lower-priced Aegis sales were compared to higher-priced BarraOne sales.

We have noted in the past that BarraOne's sales are lumpy. So the rate of growth in BarraOne may vary significantly quarter to quarter. In 2009, we plan to launch server rights on Monte Carlo VaR, expand our asset coverage more, particularly in the structured products, we plan to launch equity risk factor-based performance attribution, enhance our reporting functionality and upgrade our fixed-income models.

Let me now provide you with some more detail on our client segments. We ended the year with a total of 3091 clients, excluding clients who only pay us asset-based fees, which represents an increase of 165 clients from a year ago. In fourth quarter '08, we added 71 clients, but lost 77 clients, resulting in a net decline of six clients. The sequential decline in the client counts reflect net increases of one to 1399 for asset managers and four to 211 for asset owners, and net decreases of one to 210 for broker-dealers -- that is 210 for broker-dealers -- and net decreases of nine to 243 for hedge funds and one to 1028 for other.

By client type on a sequential basis, the subscription run rate was flat at $219 million for asset managers, declined 1.8% to $43 million for broker-dealers, declined 1.9% to $22 million for hedge funds, increased 3.9% to $21 million for asset owners, and increased 2.2% to $51 million for all other client categories.

In terms of our hedge fund client exposure, equity portfolio analytics is the product category with the most relative hedge fund exposure. Of the $22 million run rate we generated from hedge funds for the Company as a whole, $14 million was in equity portfolio analytics. This $14 million accounted for 11% of equity portfolio analytics' total run rate and was down 5% from $14.8 million at the end of the third quarter. Another $5 million was in equity indices and another $2 million was in Multi-Asset Class Analytics.

In terms of the outlook, we remain comfortable with our long-term financial targets of revenue growth in the midteens and an adjusted EBITDA margin in the low 40s. In the near term, we do not believe that we will reach the revenue growth targets. However, for 2009, we believe that the adjusted EBITDA margin target is achievable.

I will now turn it over to Mike for a detailed review of fourth-quarter financial performance.

Thank you, Henry. I'm going to describe in more detail our financial performance and talk a little bit about our balance sheet. Please note that unless otherwise specified, percent change figures represent the comparisons between Q4 2008 and Q4 2007.

I'm going to talk first about our operating revenues. For the fourth quarter 2008, operating revenues increased 5.7% to $107.4 million. Growth of 13.2% in subscription revenues was offset by a decline of 27.9% in asset-based fee revenues.

Now some specifics about revenue performance by product -- revenues from equity indices, our largest product category, represents approximately 55% of our revenues, increased 5.3% to $59 million compared to the fourth quarter 2007. Within equity indices, revenues from equity index data subscriptions -- represents about 42% of our revenue base -- they were up 21.9% to $45.5 million in the fourth quarter 2008, reflecting growth in subscriptions across our Global Investable Market Index series.

Revenues attributable to equity index asset-based fee products, representing approximately 13% of our revenues, decreased 27.9% to $13.5 million in the fourth quarter 2008. In the fourth quarter 2008, approximately 78% of the revenue included in this product category is from exchange-traded funds. The other 22% includes fees on institutional indexed funds, transaction volume-based fees for futures and options traded on certain MSCI indices, and other structured products.

Compared to third quarter 2008, equity index asset-based fee revenue declined 26.4%, reflecting a 26.3% decline in our ETF asset-based fee revenue and a decline in institutional index funds, partially offset by an increase in futures and options. The average value of assets in ETFs linked to MSCI's equity indices was $135 billion for the fourth quarter 2008 compared to $178 billion for the third quarter of 2008.

On November 30, 2008, the value of assets in ETFs linked to our indices was $119 billion. US-listed ETFs accounted for 85% of our AUM, with the balance primarily listed in Europe. In the fourth quarter, we experienced $15.9 billion of asset inflows into our ETFs linked to our equity indices, the highest level since the fourth quarter of 2007.

As reported in the press, ETFs in recent months have benefited from mutual fund redemptions and the desire by investors for transparency. We experienced inflows in all of the major indexed ETFs. There are currently 167 ETFs linked to MSCI indices, including 25 with $1 billion or greater in AUMs versus 39 a year ago with greater than $1 billion in AUMs.

Our market share of global equity ETFs at the end of 2008 was 23%, comprised of a 26% share of the US-listed ETF market and a 23% share in EMEA. Our market share a year ago was 26% on a global basis, comprised of a 31% share in the US and a 17% share in EMEA. The decline in our US market share reflects the underperformance of ETFs with non-US assets compared to ETFs with US assets.

As Henry mentioned, our AUM balance as of Wednesday, January 7, was $139 billion, which is up 17% from the end of the fourth quarter and up 39% from the low point that we reached of $100 billion on October 27.

Our second-largest product category is equity portfolio analytics, representing approximately 30% of our revenues. Revenues for this category increased 2.8% to $32.5 million in the fourth quarter of 2008. Multi-Asset Class Portfolio Analytics had another strong quarter. Revenues increased 21.9% to $9.4 million in the fourth quarter 2008. This increase reflects an increase of 31.9% to $7.1 million for BarraOne and a decrease of 1.3% to $2.3 million for TotalRisk, which is in the process of being decommissioned.

I want to talk a little bit now about expenses. Our operating expenses in the quarter increased 27% to $77.2 million compared to the fourth quarter of 2007. The increase was due primarily to two factors -- founders' grant expenses and setup and duplicate costs related to the replacement of services provided by Morgan Stanley. If we exclude the founders' grant expense of $8.6 million, operating expenses increased 14.5% to $68.6 million in the fourth quarter of 2008. If we also include replacement costs of $11.9 million in Q4 2008 related to replacing Morgan Stanley Services, and we also eliminate the Morgan Stanley allocation that we received in the fourth quarter of $2.3 million and the $6.6 million allocation in the fourth quarter of 2007, our expenses were up 4.6% compared to the fourth quarter of 2007.

Compensation expenses, excluding the founders' grant, increased 1.5% to $33.9 million. We lowered our bonus accrual in the fourth quarter to reflect market compensation. If we normalize the bonus accrual in the fourth quarter and exclude the FX benefit on our non-US payroll, compensation expenses increased in the midteens.

Our headcount was 766 at the end of the quarter, an increase of 129 or 20.3% from the end of the fourth quarter 2007.

With respect to foreign currency, when comparing the fourth quarter of 2008 to the fourth quarter 2007, the impact on revenues was insignificant. While expenses benefited by $2.8 million -- I mean expenses were lowered by $2.8 million, principally from the appreciation of the US dollar versus the British pound between Q4 2008 and Q4 2007.

Approximately $15 million or 14% of our fourth-quarter revenues were denominated in non-US dollars. Approximately $28.5 million or 37% of our fourth-quarter expenses were denominated in non-US dollars.

Our foreign currency exposure on the expense side has increased steadily during 2008 as we replaced Morgan Stanley Services. For the full year 2008, approximately 28% of expenses were denominated in non-US dollars versus 23% for all of 2007.

The remeasurement of our monetary assets and liabilities in the fourth quarter of 2008 from the end of the third quarter 2008 resulted in a foreign currency loss of $1.3 million because of the strengthening US dollar. This loss is included in the nonoperating other expense line.

Net income for the fourth quarter 2008 declined 29.7% to $12.8 million from the fourth quarter of 2007. The decline in net income primarily reflects the impact of higher allocation and replacement expenses of $14.2 million in the fourth quarter 2008. That is versus a 7.9 figure in the fourth quarter of 2007. It reflects higher founders' grant expenses in the fourth quarter 2008 of $8.6 million versus $0.8 million in the fourth quarter of 2007 and the $3 million Alacra write-off.

These items were offset in part by lower income taxes in the fourth quarter 2008. That figure was $7.6 million versus $15.9 million in the fourth quarter of 2007.

During the quarter, we wrote off our entire 17% interest in Alacra. This investment was unrelated to our core operations. We have no other investments on our balance sheet.

Our diluted EPS for Q4 2008 was $0.13 per share, a decline of 38.1% from the fourth quarter of 2007, reflecting lower net income and a higher number of shares outstanding. Adjusted EBITDA decreased 1.4% to $48.6 million for the fourth quarter 2008.

I want to refer to Table 9 in our press release for the reconciliation of adjusted EBITDA to net income. The adjusted EBITDA margin declined to 45.2% in the fourth quarter from 48.5% in the fourth quarter of 2007, primarily reflecting the decline in our equity index asset-based fee revenues and higher replacement expenses.

Our cash earnings for the fourth quarter 2008 were $22.7 million or $0.22 per share on a diluted per share basis compared to $22.5 million or $0.26 per diluted share for the fourth quarter of 2007. We calculate cash earnings of $22.7 million by taking net income of $12.8 million and adding back the after-tax impact of the founders' grant -- this is equal to $4.5 million -- and then adding back the after-tax impact of amortization of intangibles. This figure is equal to $5.4 million.

Now a little bit about our balance sheet. At November 30, we had $268 million of cash on our balance sheet, which is an increase of nearly $97 million from our cash balance of $171 million at fiscal year end 2007. This $97 million cash increase is after $23 million of CapEx that we incurred and paid for during 2008 and after $22 million in debt repayments. CapEx for 2009 is expected to be approximately $10 million.

Scheduled debt repayments under our credit facility for 2009 are $22.25 million. Our debt outstanding at November 30 was $402 million.

I'm going to talk a little bit about our credit ratios. They are significantly better than what is required under our credit agreements. In terms of leverage, as defined by total debt divided by latest 12 months' adjusted EBITDA, we are at 1.94 times, well below the 3.7 time requirement in the credit facility. Our coverage ratio as defined by latest 12 months' adjusted EBITDA as in a numerator divided by interest expense, is at 8.37 times, well above the required 3.0 time requirement.

For the quarter ended November 30, 2008, our effective all-in interest rate, including the swap, was approximately 5.12%. For Q1 2009, we expect our effective all-in interest rate to be approximately 4.90%.

Our operating metrics are provided in Table 2 of our earnings release. However, I want to talk a little bit about retention rates. Our aggregate retention rate declined to 80.6% from fourth quarter 2008 from 89.9% in fourth quarter 2007. A portion of the year-over-year decline in retention can be attributed to product swaps. Excluding product swaps, the retention rate was 85.3%, which compares to 90.6% in Q4 2007 and approximately 82% in Q4 2006 and Q4 2005.

The aggregate retention rate by product category in Q4 2008 -- I'm going to give you some figures here. For the first set of figures I'm going to give you is the Q4 2008 figure, and then the second figure for the category is in the fourth quarter of 2007. So for equity index data, the comparison is 89.3% versus 94.3%. For Equity Portfolio Analytics, the comparison is 69.6% versus 85.2%. The comparison for Multi-Asset Class is 81 -- I'm sorry, 85.1% versus 92.6%. And the other category, the comparison is 80.0% versus 82.1%.

As we have stated before, typically 40% of cancels for the year occur in our fourth quarter, given the high level of contract renewals that occur in December and January. In 2008, approximately 48% of cancellations came in the fourth quarter.

I want to talk a little bit now about the Morgan Stanley allocation and the replacement expenses that we have been spending on during all of 2008 to become self-sufficient in those areas. So I really want to summarize this whole area by saying that for 2009, we expect the allocation and replacement expenses to total $32 million, which compares to $45.8 million that we incurred in 2008. And the $32 million figure includes an expected allocation from Morgan Stanley of approximately $5 million.

And with that, I will turn it back over to the operator for questions.

(Operator Instructions). Andrew Fones, UBS.

I wanted to ask a question about the ETFs' assets under management. It seems as though you had some nice inflows there through November. I was wondering if you know the reason behind that. I'm just wondering whether people kind of parked the money in the ETFs ahead of expected redemptions, or whether you think that is a sustainable trend? And then second, you saw some nice improvements there, from 119 to 137 by the end of December. Could you tell us what occurred there? Was that driven by asset appreciation, and how much of that flows into the funds? Thanks.

I think the overall theme on ETFs is a theme of various components. The first one is a significant emphasis on indexation in markets like this. And therefore, people want to invest in portfolios in which they know exactly what the stock picks are and can monitor them frequently.

The second component is -- and then therefore, that adds to the transparency of the product. The second component is the liquidity of the product in which, given these volatile markets, investors can come in and out relatively easily as compared to a potential investment in mutual funds that are once a day, or worse yet, investments in private securities, which is hedge funds, which have a significant amount of lock-up periods.

So I think that, therefore, it is not a surprise that you see major inflows of assets into this product category. We think it is sustainable, maybe not at these very high levels, because there are potential investors that are parking money there with a view that they will want to invest it in more actively managed products later on.

In terms of your second question, (multiple speakers)

Yes, it was to then compare the level of assets under management at the end of November of 119 to the level at the end of December at 137, and if you can give us any kind of color there in terms of how much of that was driven by an increase in the asset value versus flows?

Okay, of that increase, 5.5 was inflows and the remainder was through asset appreciation.

Okay, that is really helpful. Thanks. And then in terms of the number of clients, do you have a rough sense of where you stand currently or where you were at the end of December?

Actually, that is not information that we have at this point.

Okay. And then just one final one. In terms of this transition expense and the rolloff next year, I was just wondering how much of that has already been earmarked for spending versus what you still have discretion over, whether you hang on to some of that money? And then I guess one other, if -- perhaps you can answer that first. Thanks.

Yes, I think of the expenditure in the transition -- in the services to transition away from the remaining Morgan Stanley services, most of that is already baked into the run rate and therefore would not consider them to be discretionary.

Okay. And I guess just the other piece was the GEM2 history and European model that you expect to roll out this quarter, if you think there's going to be any kind of significant expense related to those? Thanks.

No, not much of an expense. That is already embedded in what we are doing today. What we are hoping is that the rollout of a lot of new models in the coming year will mitigate the weakness that we have seen in the equity analytics product category.

David Scharf, JMP Securities.

A few things. First, on the margin front, and this is really more just clarification, you have talked about this kind of low 40% adjusted EBITDA target. You've been delivering mid-40% the last few quarters, and that is obviously in the context of both the declining assets under management, which are very high margin for each incremental dollar, as well as a lot of Morgan Stanley costs that are going away. I'm just trying to get a feeling for why mid-40%, even in sort of a flat revenue environment next year isn't achievable, or am I just kind of missing the semantics? Maybe you can define low 40s for me.

Well, if I understand you correctly, let me paraphrase what I have said and answer your question. We feel comfortable that even in a down environment like this one, we can maintain the EBITDA margin in the low 40s. And the reason for that is because we have a lot of flexibility in our cost structure, and we also have a lot of initiatives to mitigate any potential downturn, such as the move that we are having into emerging market centers.

And as I said, a good portion, I think it's $35 million to $40 million of the compensation expense that we have in our run rate is incentive compensation, particularly in the top 25, 50 people in the Company, which is, in a down market or more of a down market, obviously could be helpful in maintaining the EBITDA margins. So that is that one point.

The second question is, what happens in an upturn, when the markets rally, and particularly with the ETF fees increasingly significantly as the markets rally. Some of that will drop to the EBITDA, for sure. But we're hoping that some of that will be available for major investment opportunities that we see, either on products or an expansion of our sales organization and the like, to be able to grow at fairly high levels in an up market in the future.

So therefore, when good times come back, we are hoping that some of that may drop in the EBITDA, but some of that -- most of that can be reinvested because we do see very attractive investment opportunities organically in our business.

Got you. Henry, can you expand a little on a comment you made in your opening remarks about the index subscription demand? You referred to cancellations up for, quote, nonessential indices. And I'm trying to get a better feel for how we ought to think about the retention rate in the index business. Obviously, the portfolio analytics historically has been more volatile. But based on -- number one, maybe you can give me just an example of how a firm would define a nonessential index. And if you can also shed some light, perhaps, based on that definition, how much of the first nine months of the year's new sales and equity index subscriptions would potentially fall into that nonessential category? Just trying to gauge those retention rates going forward in a challenging '09.

Yes, that is a good question. In general, we believe that the -- and therefore are comfortable that a lot of the index data subscriptions will hold up in a market like this. We don't know how much, obviously, because we haven't experienced such a downturn in our lifetime.

The vast majority of the equity index data subscriptions for our clients are pretty essential and required in what they do. But at the margin, there are things that they could cut if they are out there looking for cost savings. For example, recently we had a client that was subscribed to a lot of our basic modules, but in addition to that they were subscribing to what we call our All Country Sector index module. So they kept the core modules of developed market and emerging market and the like, but canceled the sectorial approach to the same data that is packaged in a different module. That is an example of that.

Another one was a client had a few custom indices in addition to the standard indices, and they decided to cut the custom indices, with the view that they could pretty much manage the money against the standard indices.

So those are examples of the like. I don't want to overemphasize those, because we believe that the majority of what we do is essential, and we still see a demand from clients, and in some cases good demand from clients for additional index data subscriptions.

Got you. Just curious, the 89.3% retention rate within equity index, have you ever seen a -- has that figure ever been that low before, or is this sort of unchartered territory as we try to forecast the next six months?

I don't have -- we don't have the numbers in front of us. But the year 2003, which was three, four years after the beginning of the Internet bubble bursting, was a year in which our retention went down, maybe -- probably not by as much, but I wouldn't have the data in front of us here.

Well, I can always get that a little later. Maybe bigger picture, you've talked earlier in the year about a broad plan to double sales headcount over the course of the next three years. Are there any plans to put more feet on the street over the next six to 12 months, the 20 people that are still potentially up for hire, or are those all more either backoffice or support, or are we still anticipating adding folks on the sales side?

Absolutely. We are anticipating adding -- a lot of those 20 people are in the client organization. So we're doing a number of things in that front. They are all grounded on the fact that we continue to see good demand for our products worldwide and would like to have more pairs of hands looking at that demand so we can capitalize on it even in a down market.

So the things that we're doing is we're adding to the headcount in the client organization. Secondly, we're trying to shift some of the mix from developed market centers to emerging market centers so we can operate from there. So for example, we announced -- not announced, but we just said in the press release that we built the infrastructure to set up an office in Monterrey, Mexico. We have I think five hires already that are coming in the next week or two. They are being trained, and there will be more to come in there.

And the idea there is to serve -- to do client service and what we call technical client service and other client support for the Americas and to also hire salespeople there to cover the Southwest of the US. That is one example of how we add, but in a cost-effective way.

Another one is that we're adding more and more to our sales staff in Mumbai, India, not just -- not to the -- not necessarily to cover the India market, but support and client service for the client base in Europe and in Asia. And what we do is that then we move the client service staff that is located in London and Frankfurt and other places into sales, so we have more people selling.

So the plan is the same, to try to double the sales organization over time. We are still adding to it because the demand is still there, but we're trying to do it in a cost-effective way to preserve our EBITDA margin as much as possible.

Got you. Thanks a lot. I will get back in line.

James Kissane, Banc of America Securities.

Henry, can you comment on the pricing environment, maybe on both sides of the business? Kind of in this environment, are you seeing any pushback on your pricing?

There is definitely pushback in this environment, because even though the demand for what we do is relatively strong, there are not a lot of budgets out there with surplus money. So a lot of our clients want to subscribe to everything that they [demand], but they're talking to us about doing it in a way that fits into their overall budget.

Now, in the past we have been very inflexible about any of that. In this environment, we are doing it, but in a way that it is what we view to be smart, which is, get the client, put them into the subscription that they have, maybe give them a couple months free or whatever, or do it at a slightly lower fee in the first year, but contractually and automatically rolling into the regular fees at the renewal rate a year from now.

So we're seeing that pushback. We could walk away from it and say, this is the list price, and either you pay it or you don't. But we're trying to be more helpful to the client base in order to benefit them, and remember us at this time, and take only -- build the book of business and the book of revenue on subscriptions in a way that when the upturn comes, we can get the benefit of that.

Okay, great. And Mike, can you give us a little more color on the $2.5 million that was removed from the run rate? What services was that specifically related to?

Basically, we have put in place in the fourth quarter a new run rate database, and then we reconcile that back to the other database that we were using. And while we were doing that, we came across a number of deals that basically really were not recurring in nature, so it should not be part of our run rate.

So I will give you an example. So for example, let's say somebody pays us $100,000 to use our indices for five years in some index-based structured product. Over five years, we would record $20,000 a year of accounting revenue. Items like that were in our run rate, but they really shouldn't be in our run rate because it's not really a subscription business. We enter into the deal once with the client; it's over with at the end of five years. So those would be principally the types of deals that we took out. In terms of the category, it was in large part, I believe, in equity index -- well, equity index data was the largest component of that.

Okay. Can you give us -- you talk about two large BarraOne deals that were kind of out there in the pipeline that came through in the quarter. Can you give us a sense of the size of those deals?

Those deals were in the mid -- in the $300 million and $500 million category. I'm sorry, $500,000. I wish they were a million, right? But $300,000 to $500,000 category. Some of them were pension fund-driven deals. There has been a good pickup in interest by what we will call asset owners, which is pension funds, into gathering their portfolios and understanding risk and understanding performance of their portfolios. So we're trying to capitalize on that.

You probably saw in some of my remarks that the run rate from asset owners, mostly pension funds, is increasing. We've put more people -- we reallocated people they used to call hedge funds into pension funds to capitalize on that. So those are examples of that.

The last one, Henry, just any comment on the M&A environment and maybe your appetite? And the balance sheet is real solid, obviously.

Well, the way I look at it is, a crisis is a terrible thing to waste. So therefore, if there are opportunities out there to create shareholder value, we will be there.

Okay, excellent. Thanks.

Murali Gopal, KBW.

A couple of quick questions. I know you talked about this a little bit, but I was hoping to get a little bit more clarity. When I look at the run rate subscription revenues at the end of November, that's about $355 million or so, and that is kind of flat from where the expectations were at the end of August, the August run rate. And I'm trying to look at it from the perspective of the annual rates have trended lower. It's about 85% or so. And then you also have some pricing pressures. I would have thought, given those two factors, the run rate expectations would probably have trended lower than where it was in August. Can you just talk a little bit in terms of what may be the underlying dynamics there that offsets the renewal rate and the pricing pressures?

I think the question you are asking is why our run rate at the end of November versus August, given all the factors you cited and difficulty in the market, actually didn't decline for our subscription business?

Right.

Basically because although we did have high levels of cancels and higher than typical that we have in the fourth quarter, we had strong gross new sales in the fourth quarter of 2008. They remained fairly strong, so that basically allowed us to keep our run rate flat.

Okay. And in terms of, given the market environment and the index subscription revenues grew pretty nicely, 4.3% or so on a sequential basis, and I know you talked a little bit in terms of what is driving growth, could you talk a little bit in terms of, in this environment, what kind of clients and what is the reason they are coming to you rather than waiting until the environment improves? I know you said 2009 midteens growth is unlikely. So just in terms of the index subscription business, the environment was pretty bad in Q4, so what is your expectation that says that in 2009, a similar 4.3% or so is not achievable? What leads you to believe that?

Well, we cannot and do not want to quantify what is going to happen in the next few quarters in equity index data subscriptions. But I think the overall structure of this data for our client is that it is the oil that lubricates what they do. And first of all, it's very hard for them to cancel a lot of it because their business depends on it. And then secondly, these people are out there also trying to get new business and generate new opportunities, and there are times in which people, like us, who are contrarians, will be looking in a market like this to launch new products and go get new clients and go set up new funds and the like. So for that, they will need new data.

So that is kind of the driver. We have been -- for example, we have seen a pickup in sales to what we call the bronze client, you know, smaller, mid to smaller entities, that are looking at this crisis as an opportunity to launch new products and do new things, and therefore will need data to support that.

Okay. And lastly, in terms of expense management, you did talk a little bit in terms of the additional levers. And you said -- you had mentioned that you could potentially accelerate the move to lower-cost centers, depending on the revenue environment, it required. Just so I understand, in terms of the move to lower-cost centers, is that new hires that is going to be in the lower-cost environment, or are you also using a combination of existing employees? And how reasonable is it to make the transition in the near term, and when I say near term, wait for 2009 to see what the operating revenues look like? And then if you are going to make the change, wouldn't there be a kind of reasonable lag between the two?

No, no, we are constantly and very actively promoting and growing our emerging market centers. It is not simply a response to the downturn in the market. It is a strategy to eventually have 50% or so of our then-staff in three to five years in emerging market centers. And the reason for that is that we find lower attrition in these places. We find extremely high quality of personnel. And of course, this is cost-effective, given the supply/demand dynamics in many of these markets.

So my comment was that in the event that the environment gets even worse, we could accelerate some of those plans that we are executing on already.

Okay. And just very quickly, lastly, can you talk a little bit in terms of what are the functions or services from Morgan Stanley that are yet to be internalized, and what is the timeframe for, like, close to, if not 100%, close to 100% internalization of Morgan Stanley Services?

Yes, what it is is that the vast majority of the functions have been transferred. There are two very critical functions that are in the process of being transferred, and that is our two big data factories, the index data and the analytics data factories. The index data factory, where the cost of turning the switch to transfer it is all in place, we're doing testing, we're doing reviews and the like. And the analytics data factory is a few weeks behind that process. And therefore, while we're doing that, we continue to rely on services by Morgan Stanley in their data centers and the like, and therefore have to pay for them.

(Operator Instructions). John Neff, William Blair.

I'll try to keep this to a few questions here. Can you talk about the dynamics in terms of the Americas versus outside the Americas? Subscription run rate was pretty much up 2% sequentially in the Americas, but it was down 2% outside of the Americas. If you could just sort of compare and contrast the sales and retention dynamics in those geographies?

Yes, the two markets are different. To begin with, the Americas, it has less variability on a quarter-to-quarter basis than EMEA. EMEA has a component, has more component of emerging market sales there in South Africa, the Middle East, and Eastern Europe and India. So overall, the first point is more variability in EMEA than in the Americas.

Secondly, the mix of products is different. BarraOne's sales have traditionally been stronger in EMEA, given to asset owners -- I'm sorry, to asset managers, given the [use of three] regulations there. So that is a source of difference as well. But most of the time, the Americas is outperforming in the last few quarters EMEA, but recently EMEA has begun to do very well as well compared to the Americas. So we like it because it's a very well diversified process with the two regions.

And then quickly here, if I could, if you could discuss the market climate's impact on index and portfolio analytics' competitors? In other words, is this an opportunity to widen the IP advantage that you have over them?

Absolutely, absolutely. I think we have been gaining share in equity analytics from competitors quite aggressively. Some of that may get mitigated in a down market like this, because what they have is an ability to compete on price. And if they drop prices in a market like this, there will be some clients that will gravitate towards that, even though the product is lower quality. But we're definitely out there pounding competitively to gain market share, particularly in Europe, with some of the weaker competitors. In equity index, it is pretty stable in the competitive dynamics. We are the lion's share of that market, and the question there is more expanding the market by expanding usage by clients.

[Shane Dineen], Pershing Square.

Could you please reclarify what percent of your annual equity portfolio analytics cancellations occur in December and January?

I think what we stated is that overall cancellations in the fourth quarter are typically 40% of the total. This year, we had 48% of the total. So when you say clarify, I'm not sure there was a comment that we made that is to clarify.

Well, what is it? How many clients do you usually lose in those two months? It seems like as it is the year end and the budget review process, that it might be more skewed toward those two months. If you could just comment on trends you've seen historically?

Okay, so our overall book of business, about 20% to 25% of our total book renews during that time period. And that is basically an average; equity index data is lower and Equity Portfolio Analytics is higher. That kind of blends to that number in total. So Equity Portfolio Analytics is probably somewhere between 30% and 35%.

That is great. That is very helpful. Thank you. And if I could just ask one more, to what extent were your multi-asset sales products in Q4 driven by new product releases? And do you expect that to kind of sustain going into this next quarter?

We have had a major and significant increase in product development in multi-asset class, particularly over the BarraOne, in the last 12, 18 months. The product sales have not yet completely reflected that effect. So we hope that as we continue into this year and next, there are significant and meaningful subscriptions that will come from there. We continue to invest in the product as well, so to add to that. So we think it is a pretty wide-open field there for a product like this. But obviously, you've got to mitigate all of that by the environment. Asset owners will probably continue to be robust sales for us. Asset managers will weaken.

Great. And out of curiosity, when you do sell those products, how much of that is direct to the client versus maybe third-party analytics providers who are selling your Barra products through different platforms? How does that break down?

BarraOne is always direct to the client, always. We don't go through anybody. It is always direct to the client.

Due to time constraints, this will conclude the Q&A portion of the program. I would like to turn the conference over to our presenters for any additional or closing comments.

Well, thank you very much, everyone, for participating. As I said at the beginning, we're very pleased with our performance as a first year of a holding company. Quite a lot was achieved during that period of time. And we look forward to continuing to work for you pretty hard and delivering shareholder value in '09, even in a difficult operating environment.

This does conclude today's conference. Thank you for your participation. You may now disconnect.