明晟 (MSCI) 2009 Q4 法說會逐字稿

Good day earn, and welcome to today's MSCI fourth quarter 2009 earnings call. As a reminder, today's call is being recorded. At this time it is my pleasure to turn the call over to Mr. Michael Neborak, Chief Financial Officer. Please go ahead, sir.

Thank you, operator, good morning, everyone, and thank you for joining our fourth quarter 2009 earnings call. Please note that earlier this morning, we issued a press release describing our results for the fourth quarter and full-year 2009. 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 discussion of additional risks and uncertainties that may affect the future results of the Company, please see the description of risk factors in forward-looking statements in our Form 10-K for our fiscal year ending November 30, 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, and to the most directly comparable GAAP financial measures, and other related disclosures. Since we will be referring to run rates frequently in our discussion this morning, let me remind you that our run rate is an approximation at a given point in time of the forward-looking fees for subscriptions and product licenses that we will record over the next 12 months, assuming no cancellations, new sales, or changes in assets in ETF license to our indices. Please refer to Table 2 in our press release for a detailed explanation. Henry will begin the discussion with an overview of our investment spending program. And then I will provide some details on financial results. Following our formal remarks, we will open up the line for questions. Our prepared remarks will focus on commentary that is incremental to the earnings release, so as to leave adequate time for questions and answers. I will now turn the call over to Henry.

Thanks, Mike, and good morning to everyone. Thank you again for joining us. For the full-year we were able to deliver growth in both revenues and adjusted EBITDA in what was a very difficult environment for the global economy and for our customers. This adds another year to our long history of consecutive annual revenue growth. We ended 2009 on a strong note. We reported record Q4 revenues of $119 million, record adjusted EBITDA of $59 million, and a record adjusted EBITDA margin of nearly 50%. This performance is a testament to our diverse and complementary product line, the critical nature of our investment products and tools for our clients, our disciplined expense management, and the hard work and dedication of all of our employees throughout the world during a very challenging year.

A clear driver of our growth in the fourth quarter was our asset based fee business. The record rally in global equity markets continued in Q4, bolstering the assets in a changed rate of funds linked to our equity indices. We further benefited from a strong inflows into those ETFs. The rally has continued over the past month, and total assets under management in MSCI linked ETFs closed last night at $252 billion, up 8% from the end of November 2009. We continue to see signs of our recovery in our subscription business. We saw growth in new sales activity in the quarter, and we appear to have crested the wave of cancellations that began over a year ago.

This sequential increase in our retention rate is an important sign that cancellations have begun to subside. These trends continued in December with new sales activity rising, and cancellations falling versus a year ago, and versus the first month of the fourth quarter of 2009. In Q4, new recurrent subscription sales rose by almost 4%, to $16 million from Q3 2009 levels. The increase was lead by strong demand for our equity in these products, and we also saw high levels of new sales in our multi-asset class analytics products. The aggregate retention rate increased sequentially to 82% from 81% at the end of Q3. This sequential improvement in the retention rate is particularly encouraging, as it was a break from the typical pattern in which the fourth quarter retention rate is down from the third quarter. In fact, cancellations declined sequentially for the first time in 2009, falling 5% to $16 million.

The biggest driver of this sequential improvement in the retention rate came in our equity portfolio analytics products, which saw aggregate retention rates increase to 79% from 68%. This progress was offset, in part, by a decline in the retention rate for multi-asset class analytics, which was primarily a result of expected cancellations in TotalRisk, as you know, a product that we're in the final stages of decommissioning. Make no mistake, we are not celebrating a retention rate of 82%. We do think we have now felt the full impact of the immediate crisis-driven retrenchment. And we expect it may take several quarters for our new sales activity and retention rates to return to pre-crisis levels, but we're cautiously optimistic that we have crested the wave of problems.

Let us now dive a little deeper in to our product -- different product line. In my prepared remarks, I will be referring only to run rate figures, whereas Mike will focus on financial accounting numbers. I will be speaking to comparisons to Q3 2009 numbers, unless otherwise noted. The run rate in our overall equity index business increased 7% compared to Q3. The equity index subscription run rate rose 2%, lead by 3% growth in our core index modules of developed, emerging, and small cap market. We also experience growth of 2% in user fee, and 7% in reporting and redistribution licenses . This growth was offset by a modest decline in the more discretionary products, such as our value and our growth index module. Equity index subscription sales continued to benefit from price increases, that we announced in May of 2009.

In addition, we continued to see good progress in our global equity investment benchmark initiative, which resulted in 7 (inaudible) benchmark wins from pension funds in '09. Run rate growth was experienced across all regions, with relative strength coming from the Americas, and also strength across all client types with the exception of hedge funds, which is a small client segment for us anyhow. The retention rate and equity index subscriptions remain under modest pressure falling to 89%, from 91% in Q3. We saw some weakness in Europe, where asset managers continued to curtail their spending, and where consolidation activity has ticked up. In fact structural changes like consolidation and firm, or fund closures accounted for more than 50% of the equity index cancelled this quarter. Mike will provide more color about the other part of our equity index business, the asset-based fees, later on in the call.

The sequential decline in the run rate for equity portfolio analytics moderated to 2%, from the 4% reported in Q3 as the wave of cancellations we saw in Q3 subsided. The retention rate for equity portfolio analytics increased to 79%, from 68% as we seem to have cycled through many of the large cost crisis cancellations in this product line. We are seeing good momentum with smaller clients, which particularly reflects our increased focus on this client segment for equity analytics. We're also encouraged by the positive response we continue to see for GEM2, our new global equity risk model. The run rate for GEM2 grew by 7% from Q4 2008, which highlights the benefits we are receiving from the investments we have made in this area. One of the goals of our investment strategy is to increase the volume and pace of new product development in equity portfolio analytics. And we expect to see further product enhancements and development and launches in the second half of 2010, and in to 2011.

Early here in Q1, we continue to see some signs that the budget pressures, related to equity portfolio analytics are easing, although spending remains below pre-crisis levels. The multi class asset analytics run rate increased 4%, comprised of a 9% growth, for BarraOne, and a 17% decline for TotalRisk. The demand for BarraOne remains strong, and our managed service platform is gaining traction. The decline in the aggregate run rate -- I'm sorry, the decline in the retention rate for multi-asset class portfolio analytics to 60%, from 74% in Q3 largely reflects expected cancellations of TotalRisk, a product that we're in the final stages of decommissioning. For BarraOne specifically, the retention rate moderated from 79% to 81%. The decline for BarraOne reflects ongoing budget pressures at asset managers.

I would now like to review our medium to long-term financial targets, as well as our investment spending plan. We are raising our target for adjusted EBITDA margin to the high 40s from the prior target of the low 40s. Given firstly, the high levels of incremental profitability we have experienced in our business in recent quarters. Secondly, the increased contribution from our asset-based fee business to our overall business. And thirdly, our ability to maintain disciplined cost controls, we believe we can operate the business with adjusted EBITDA margins in the high 40s even after factoring in increased investment spending. Our revenue growth target for the medium to long term remains in the mid-teens. We are optimistic that the investments we're making in the business will help us access rate this rate of growth, but we do not yet have the visibility to raise our target.

Based on our financial performance in the fourth quarter, and the one month in to the first quarter, we are cautiously optimistic about 2010. We continue to see healthy levels of new sales activity, and cancels continue to moderate. Having said that, with the prevailing caution regarding the outlook for financial markets around the world, we believe clients are likely to continue to monitor budgets closely over the next few quarters, which will temper our growth. As we emerge from this financial crisis, we are more convinced than ever that our portfolio risk and performance tools are an integral part of our client's investment processes, and our business is positioned very well for the ongoing recovery. Moreover, we believe our business will continue to be the beneficiary of three key secular trends in global investing. The first significant trend is the continued globalization of investing, the increasing focus on non-domestic investing has two important benefits for us.

First, we have robust market share in non-domestic equity indices around the world, so we think that more often than not, investors will be benched marked against our indices. Secondly, a broader investment universe in the global investment landscape is likely to increase demand for quantitative tools to help investors narrow the opportunity set that plays well to the strength of our equity portfolio analytics products. The second key trend is the continued rise of passive investing. The increased use of passive investing tools such as the (inaudible) credit funds, and all sorts of index funds and enhanced index funds has positive implications for our business in two fronts. As the market leader in ETF linked to equity indices, we are well positioned to take advantage of rising fund loads in to these products. And the increased use of investment benchmarks will have a positive impact on the use of our equity indices for both index investors and bench a mark for active investors. The third trend is the need to understand, measure, manage, and report risk. This is a trend which has only been reinforced by the unprecedented volatility we have seen in global financial markets, and one trend that plays really well to the core strength of our analytics product suite. Because of our strong Q4 results and full-year results, and the significant opportunities we see to expand our business, we will continue to make investments in our business in order to position ourselves well to take advantage of this positive trend.

I would like to share with you some of the details of our current plan. We categorize our investments into three categories. The first category is product development, which includes investments which are expected to lead to the launch of new products, and the enhancement of existing products that we see ready demand for. The second category is client coverage, which includes investments which should help our sales force and our client service team reach out to new clients around the world, and increase the penetration of existing clients and outselling existing clients. The third category is work productivity, which includes investments which should help internally our MSCI people to make better decisions across the Company, and have better control of our expenses throughout the organization.

As you know well in concrete terms, the biggest area of investment for us is adding people. We expect to make an additional 105 hires over the next three to six months, with approximately 90% of these new hires expected to be in our emerging market centers. We expect the annualized run rate of compensation expense for this 105 positions to be approximately $7 million. Over 60% of these positions are in the product development category. This includes positions in data operations and technology, client software development, product management, and research for risk models and index methodologies. These are all areas which should contribute to the launch of new products, such as new risk models, new functionality for client software, new indices and new services for our clients, leading hopefully, directly to revenue growth.

The remaining 40% of the headcount addition is split between the client coverage organization, and work productivity investment. Our investment in the client coverage organization will include new hires is sales, in sales support, in client service, to expand our client base globally. We will also be making non-compensation-related investments over the next three to six months, which are expected to total a little over more than $2 million on an annualized basis. To be clear, these are investment spending initiatives which are budgeted for the next three to six months, and I would like to reiterate that our new adjusted EBITDA target includes the cost of this investment. We will continue to monitor the operating environment closely throughout the year, and will adjust our plan accordingly if necessary. Let me now turn over the presentation to Mike for a review of other financial highlights. Thank you.

Thank you, Henry. My first topic is to discuss our asset fee business. Revenues were up $9.3 million or 69% to $22.8 million versus the fourth quarter of 2008. Similar to prior periods, the substantial majority of that revenue was related to the equity ETF business. The AUM in equity ETFs inked to our indices rose by $35 billion at the end of quarter number three. We estimate that market appreciation accounted for $18 billion of that increase, and asset inflows accounted for $17 billion. We saw asset inflows into all of our major ETFs linked to our indices, with the exception of those linked to our Japan single country index. ETFs linked to our emerging market index was the biggest beneficiary with $9 billion of inflows. For all of 2009, AUM, and ETFs linked to our emerging market index increased to $63 billion, from $23 billion at the end of fiscal year 2008.

Over the course of 2009, more than 50% of all inflows in to equity ETFs went in to those linked to MSCI indices. As a result our overall market share of equity ETFs rose to almost 30% at November 30th, from 28% at the end of August, and 23% at the end of our fiscal year 2008. We recorded market-share gains in both US-listed ETFs to 33% from 32%, and in those listed in Europe to 28% from 27%. The number of ETFs linked to MSCI indices rose to 268, an increase of 15 during the quarter, with most of that growth coming in Europe. The top 25 ETFs linked to our indices had a combined AUM of $175 billion, and 43 ETFs linked to our indices at AUM balances greater than $1 billion. At November 30th, BGI, now part of Black Rock, accounted for approximately 59% of the AUM linked to our indices. That is down from 62% a year ago, and they represented 69% of our ETF run rate. The AUM and ETFs linked to our equity indices at the end of the quarter was $234 billion, and our run rate was $78.5 million.

Our weighted average basis points fee, excluding minimum fees was approximately 3.2 basis points, unchanged from Q3 2009. Revenues from our subscription business grew 2.2%, versus Q4 2008, and 2.9% for the full-year 2009, versus 2008 reflecting the modest increase in our subscription run rate during the last 12 months. As new reoccurring subscription sales increase and retention rates improve, revenue growth from our subscription business will increase, but on a lag basis versus run rate growth. In the fourth quarter we generated $59.3 million of adjusted EBITDA, up 9.8% from $54 million in Q3, and up 22% from $48.6 million a year ago. Our fourth quarter adjusted EBITDA did benefit slightly from two offsetting non recurring compensation items. The first non recurring item reduced compensation expense by approximately $3 million.

In summary, the cash component of compensations for higher-paid employees was reduced, and replaced by higher stock-based compensation. Stock-based compensation is subject to a three-year vesting period. It is not expensed immediately, but rather over the vesting period. This change was reflected in the fourth quarter in the $3 million benefit results from the reversal of cash compensation expense accrued through the first three quarters of 2009. Offsetting this benefit was $2.1 million in higher Company payroll tax expenses associated with the vesting of the first tranche of the Founders Grant award during the fourth quarter. Excluding these nonrecurring items, our adjusted EBITDA would of been $58.4 million, and the adjusted EBITDA margin would of been 49.2%. Our expense management efforts continue to be effective in the fourth quarter. Overall, total cash operating expenses that exclude depreciation and amortization, as well as Founders Grant costs, those costs rose 1.2% to $59.5 million in Q4. Compensation costs rose 16%, while non-compensation expenses declined by 19% versus the fourth quarter of 2008. Compensation expense increases were driven by adding headcount to product sales, and work efficiency initiatives.

Non-compensation cost declines were lead by a reduction in outside professional costs which fell by $2.4 million, the absence of any Morgan Stanley allocation in the fourth quarter of 2009, versus the $2.3 million allocation we had in the fourth quarter of 2008, and lower IT costs, which fell by $1.8 million. Looking forward, it is important to note that we are likely to incur higher compensation and non-compensation costs in 2010. Moreover, we expect adjusted EBITDA expense growth to exceed revenue growth in the first quarter, reducing our adjusted EBITDA margins from the level achieved in the fourth quarter 2009. I make this point for the following reasons. First our head count is higher going in to 2010, than it was going in to the fourth quarter of 2009, 878 versus 850 heads between those two comparisons. And we plan to increase it further, albeit in lower-cost locations. These new employees likely will be the largest driver of compensation cost increases. In addition, the benefit from the reduction in the Morgan Stanley allocation is significantly smaller going in to 2010, than it was a year ago. The strict expense controls we initiated beginning in the fourth quarter of 2008 will also be anniversaried and our selling costs should increase consistent with any improvement in the pace of new sales. Finally, some of the investment spending Henry laid out earlier in the call will also impact our non-compensation cost structure in 2010.

GAAP earnings per share for the fourth quarter were $0.24, or $0.80 for the full year. Our cash earnings per share, which is a non-GAAP measure were $0.31, up 41% from the fourth quarter of 2008. The absence of certain charges in the fourth quarter 2008 totaling approximately $4.3 million helped the comparison. We derived cash earnings per share by adding back to net income, the after-tax cost of both the Founder's grant expenses, and amortization of intangibles. As of November 30, 2009, we had $471 million in cash and cash and cash equivalents, and $380 million of debt outstanding. During the fourth quarter, our total cash and cash equivalents grew by $110 million, including $116 million in proceeds from our November equity offering.

During the quarter, we paid approximately $27 million towards amounts owed to Morgan Stanley. In addition, we withheld 536,000 vested Founder's grant shares from employees, and paid approximately $17 million on their behalf for taxes due on that income. At November 30th, we had 104.8 million shares outstanding, an increase of 4.7 million shares, or 5.5% from August 31st. Most of the increase was attributable to the $3.8 million equity offering completed in November, and the first vesting of Founder's grant shares on November 15th, which added 810,000 shares. Looking forward to 2010, we expect total capital spending to be in the range of $13 million to $15 million. In addition, quarterly scheduled principal payments on our debt will increase from $5.5 million to $10.5 million, beginning in Q1 2010. For Q1, we expect our all in effective interest rate to be approximately 4.2% based on LIBOR rates at the end of November. With that, we will be happy to take questions. And I will turn it back over to the operator.

Thank you, Mr. Mike Neborak.

(Operator instructions).

We'll take our first question from Andre Glukhov with Brean Murray.

Congratulations on a very solid quarter, guys. I guess a couple of questions on the index business. Can you maybe characterize what you are seeing in the pipeline for the new ETF linked to the MSCI indices going forward? And also talk about what are your current thoughts about implementing another price increase on the index subscriptions at some point this year?

As it relates to the second part of your question in terms of price increases that we might implement here in 2010, we really haven't come to any conclusion as it relates to that. As you know we implemented a price increase back in May 2009, and also in May of 2008. But at this point right now, we don't have a -- really a plan for that here in 2010. But we'll develop one in the next three months or so.

And we couldn't hear the first part of your question.

Oh, I'm sorry. Can you talk about the pipeline of the new ETFs linked to MSCI indices that you are seeing right now for the year?

Yes the pipeline remains -- remains robust as we had -- as it did remain like that in 2009. We have not not yet seen evidence of significant increase or acceleration of that from the -- our various partners in that. But we're cautiously optimistic that as the markets are recovering, and the -- these kinds of products are in very high demand, that, the activity of -- the activity of the additions to the pipeline could increase. I would like to point out on -- or make note that there was a press release in Tokyo, by the Tokyo stock exchange that there will be two ETFs launched in Tokyo on MSCI emerging markets and MSCI Kokusai, basically the world index, ex Japan. And they will be launched at the January for the MSCI Kokusai, and the end of February I believe, for MSCI emerging markets by Nikko Asset Management.

Great. And if I may sneak one follow-up, you did talk about growing adoption of the managed services offering on the risk side of the business. Can you talk about what percentage of the customer base there is penetrated with the managed services kind of platform? And what uplift in run rate, apples to apples, you are seeing when the customer goes there?

Yes, this initiative is still in the early stages. We have a handful of clients that are in this program. And we have plans to ramp up quite aggressively, the a -- that this is part of the investment initiative, some of the headcounts that we need to be able to make this offering available to a lot more clients around the world. And this is -- at times relatively new -- new sales that may not otherwise have taken place, if we had not offered the -- this managed service to our clients to help them load up the data and custom some of the reports. So at the moment, the -- the sales numbers are not material. They are meaningful, but not material. But we anticipate that this is going to ramp up throughout there this year and next year.

And we'll take our next question from James Kissane with Banc of America.

Yes, hey, Henry and Mike. Just a follow-up question on the investment spending there. Is this a spike in your investment spending that will moderate as the revenues come through, or is this a new level, say as a percentage of revenue?

I don't know -- I don't know how I would define it based on your options. The way I would look at this is that we clearly maintain a healthy level of investing in our business. In 2009 even with the crisis, and the way we funded that was by very, very significant expense controls. And clearly, the remixing and reallocation of our stock from developing market centers to emerging market centers. We will continue clearly to do that. Now, the investment spending that we see going in to 2010, is a continuation of what we have done in the last nine months. It's not a significant ramp up to the last nine months, and obviously, it will be moderated to the extent that our revenue expectations don't materialize, we will slow down the pace of it. And if -- and if the revenue expectations -- if the revenues become higher than our expectations, we -- we may try to ramp up a little bit. But I think it will be hard for us to -- to execute much more than this investment that we are currently doing.

Okay. Great. And just a quick question on the multi-asset class attrition, I mean it was around 60% retention rate there. Do you think that the worst is behind you?

Yes, let's just define it first. As you know -- well, multi-asset class category is composed of largely BarraOne, and is more (inaudible) which I think is like $5 million run rate now of TotalRisk. We are -- we continue to have this -- discussions with the TotalRisk clients, indicating to them that we are -- we are in the final stages of the decommissioning that product, and that we want them to move off of that product as -- as soon as practicable. In some cases, they ask us to work with them so that we don't do it abruptly and the like. So some of that run rate, the $5 million, will transfer to BarraOne, and some of that run rate will disappear because the client will either decide not have a system, or will develop a internal system ,or could potentially go to a competing system. So therefore, the total run rate and the total retention rate and cancellations of the entire category of multi-asset class gets a little bit worked by this very strong performance in BarraOne, and this detraction from these things in TotalRisk.

Got you.

Now, and we're hoping that -- that this is -- we're hoping that maybe this is the last year that we keep TotalRisk. I think we may have to extend it for one or two more clients going in to 2011. But we're definitely hoping that $5 million of run rate, either part of that goes in to BarraOne or part of it gets canceled in the course of 2010, in order to try now to be -- to put this issue of the migration of TotalRisk largely behind us in 2010. Again, we may have to extend it for one or two large clients a little bit into 2011, but the bulk of it, hopefully will get resolved in 2010.

Great, got you. And one last question. An update on the use of cash and maybe some of your thoughts on the acquisition pipeline?

The use of cash generically has not changed, meaning we're not intending to pay down debt, or buy back shares, or pay dividends or anything like that. We continue to accumulate the cash. Having a net debt position of only $90 million or so, we don't think to be that significant. We also don't think the negative carry on the cash is that meaningful, given the abnormally low rate of short-term conservative investments in which we're invested in. So it's not a big drag on our profitability at this point, and the like. Now in terms of acquisitions, yes, we continue to have a very healthy dialogue in acquisitions, more than it has been. In the last three, six months, it has been more than the last few years, but there is really nothing to report there.

Now we'll here from JMP Securities, David Scharf.

Good morning. Henry, I wanted to get a little bit more color on the -- kind of your expectations for the client count next year on a couple of fronts. I think last quarter you had mentioned both within index and within portfolio analytics. I think about a third of the cancels were a result of M&A and closures. I suspect we have already kind of moved past the peak of closures, but you did reference consolidation still being a pretty big force in Europe. Do you expect that to continue out throughout this year what you are seeing? Is there still a fair amount of consolidation that is ultimately going to put pressure on renewals, or do you think we are going to trend back to the 90% level across all of your product categories sometime in 2010?

I think the -- my -- my sense -- again, a lot of this is looking in to the crystal ball here, right? But my sense is that -- that we'll continue to see a recovery on sales. We will -- we will see a recovery of the renewal rate, but in 2010, not to pre-crisis levels will be my guess. So we'll remain in the 80s would be my guess overall, rather than go back to the low 90s during 2010. And the reason for that is that you still have asset managers out there whose business model has not either fully recovered, or structurally have had problems with it. And they need to resolve that either in -- in restructuring the firm or selling the firm or things like that. And you still have clients out there being pretty cautious about -- about their cost structure and cutting costs. So -- but having said that, it -- there is also a feeling among us, that -- that maybe a lot of what we will call the weak hand, a lot of the less essential products in many of the -- inside of the client bases have been already canceled. And therefore, we're reaching the bottom of what can potentially be canceled in the universe of subscriptions.

But, again, it's too early to tell. We clearly started the year -- the calendar year with a little bit of of optimism around the world as to the global economy and recovery on the equity markets. But there's still a number of people out there, who believe that the global economy is still in trouble, and that will be reflected in earnings and equity, and therefore, in equity values, and therefore, clients are going to be cautious. Now the last point is, I think that -- I personally don't think that there's any evidence unnecessarily at this point there will be an increase in M&A activity in our client base, meaning consolidation activity. But I think the consolidation story among our client base will remain a little bit higher than -- than pre-crisis levels particularly in -- in Europe. But we don't know exactly how it's going to pan out, but I just see a continuation of what we have seen, but I don't see the spiking up. And I don't see it subsiding dramatically in terms of consolidation.

Okay. That's helpful. I know in the past you have mentioned within equity index, that the number of custom indices is usually a pretty good barometer of the spending environment and the looseness of the purse strings in your clients. And that started to get cut back, obviously a year ago. I think last quarter you said custom indices were up 8%. Did you see that trend, that positive trend continue with the end of the year?

Yes, largely -- largely the same continuation. Not necessarily a big spike at all, but -- but a gradual recovery in that -- and also, even though the -- what we would call the more discretionary equity index modules are not -- are not growing as much as the more essential index models of the developing markets, emerging markets, and small cap. We're not seeing necessarily a wave of cancellations or anything like that in the discretionary -- the discretionary index modules.

And now we'll hear --

Which is again another indication -- it's again -- if you use the custom indices as a discretionary index modules as an indication of tone of the market, it's just a gradual recovery as I said about the custom indices.

And now we'll hear from Andrew Fones with UBS.

Yes, thank you. I wanted to ask a question about the EBITDA margin guidance, and kind of your thoughts or philosophy there. It sounds as though your increased capital spending, or chances are you are looking for the similar level of CapEx this year and last year. You mentioned about $9 million of incremental fixed costs for this year, which was only about 2% of last year's revenue. If I assume you have got 7% incremental margin, you would only need about 3% revenue growth to cover those costs. So coming off of last year with a 10%, 11% revenue growth in Q4, and looking for more of a mid-teens growth moving forward, I'm just wondering why with a 50% EBITDA margin in Q4, you are not looking for something higher than what you have guided to?

I am not sure I followed all of that, Andrew, because you talked about some of the -- you said capital -- CapEx -- capital expenditures which I say is to be $13 million to $15 million for the full-year. And then I -- and then you were talking about some of the investment initiatives that Henry described that had a $7 million or so annualized run rate associated with them. So it was a little bit -- it was hard to follow with the two -- because the CapEx as you know it really gets depreciated. So I think your question centered around why our margin wouldn't be as high or higher than it is here in the fourth quarter.

And basically its because our compensation expense in the first quarter is going to be higher than the fourth quarter. We have higher number of people going into the year than we did going into the fourth quarter y about 25. And then, if we get close to hiring those 100 people, obviously that will be spread throughout the first quarter. That's going to raise the compensation expense versus the fourth quarter, so based on that, plus some additional non-compensation expenses, unless you want to really be aggressive on the growth of our asset-based fee business which we are not, we are fairly conservative there, you won't get the margin that you are referring to in terms of 50%

Well, it just seems to me -- that you would only need about 3% or 4% revenue growth to cover those additional fixed expenses for this year. And therefore, if we get revenue growth anywhere near close to what you are guiding to it would seem that unless you kind of significantly increase further those -- those -- the investments that you would probably expect to see some margin expansion this year?

Let me clarify one thing, when Henry mentioned the revenue growth target, he was talking about the long-term target of the Company, which back at the IPO, we established to be the mid teens. And he was just making the comment that we have not changed that. That is not to say next yea,r that we are expecting to have mid teen revenue growth. That was not the point that he was making.

But you have had like a -- over 10% growth in the fourth quarter. So it sounds like you are kind of moving in towards that range already.

Well, I would just say one thing, Andrew, it was 10% driven on the strength of the asset-based fee business, and look at how those revenues grew versus our subscription business So if you want to make assumptions about that kind of growth going forward on the asset-based fee business, I can agree with you. But those are large assumptions, and we are more conservative in terms of how we think about the asset-based fee business. As I mentioned before, the subscription business, while we believe that our sales -- our sales will increase, and that our retention rates will increase as well, those -- counting revenue for that business, which is about 80% of the total lags. So you have to make very, very strong assumption about the asset-based fee business to get to the 50% margins.

Let me also add another amplification on the EBITDA -- the adjusted EBITDA margin target. And that is when we say high 40s, we really mean high 40s. We don't mean high 40s because it will be much higher than high 40s, or higher than high 40s. Unless, unless there's a surprising development in the market such as -- which we don't anticipate -- such as another record rally in global equity markets this year, that significantly increase the ETF balances and the ETF fees, going in to our products. We are cautiously optimistic that the ETF balances and fees will remain good this year. But it will be extremely hard to imagine any kind of continued rally, similar to the one that we saw in 2009 going into 2010. So that's -- so therefore, we are guiding our sales and all of you, on the basis of high 40s which is, you know, 47, 48% or some number like that and not 49, 50, or beyond.

Now we'll open the floor up to Suzi Stein with Morgan Stanley.

Thank you. Congratulations on the quarter first of all. And I'm just curious to date have you had any dialogue with Black Rock on your contract, and when it comes up for renewal? And also how sustainable do you think that the 3.2 basis point fee is over the long term?

The answer to the second one, we believe that it is sustainable in terms of the basis points. And also bear in mind that -- as we have indicated in prior calls, that is not including a number of minimum fees that we are -- that we are requesting that any new product launch have, and some -- and we're negotiating certain other existing products to include minimum fees, that may render the 3.2 a little bit higher when you include the minimum fees in those calculations. And our relationship with Black Rock, it's very, very good. Very healthy. It's a very active dialogue. We speak at all levels of our Company, and their company on a daily basis. We have -- one contract, which is the European listed ETF contract up for renewal that we're discussing about negotiating with them. And that's a contract that has the much smaller number of assets under management. The US contract, which is where the lion's share of the AUM with respect to our shares resides. It's a long-term contract. I think the term of that is 2020, or some year like that.

Okay. And a separate question, are you still providing any discounting to help with customer retention? Or is that now in the past?

A lot less, significantly less. And secondly, we are now starting a number of initiatives to try to claw back the renewal we gave in 2009 at the renewal of contracts in 2010.

Now we'll open the floor up to Aaron Teitelbaum with KBW.

Hi, good morning, or good afternoon. I guss all my questions have been answered, but I'm really just curious how you guys view your Cosmos product, particularly given the demographic factors in developed markets, and demand for fixed-income assets over time? Any color would be helpful. Thanks.

It's a good question. As you know, it's an older technology and older software that is out there. And it has been declining gradually. I think the run rate is close to $5 million now. We are in the early stages of putting into effect plans to transfer a lot of the features and functionality on a product like us -- on a product of Cosmos into BarraOne, in order to eventually be able to offer a Cosmos like product, but under an ASP solution. We may not call it BarraOne, we may call it something else. But it would be basically all built on top of the BarraOne technology infrastructure. Even though from the outside looking in, it appears we have abandoned Cosmos or we do not care about it, that software per se is not worth investing a lot of it. But we for sure have a lot of plans, and we for sure have a lot of ambitions in becoming a large player on fixed income analytics for fixed income portfolio managers.

And the way to start organically is to take the beach head that we have with Cosmos, revamp that technology into BarraOne, and then eventually offer a much wider set of tools. This is going to be slow progress for us, because we clearly have a lot of other investment initiatives with respect to the equity analytics business in which we are developing the BarraOne portfolio manager, which is again we are taking a lot of the functionality in Aegis and putting it on top of BarraOne and calling that software Barra Portfolio manager, again the same concept as Cosmos. But we have that investment, and we continue to make investments in BarraOne for multi-asset class, and also in equity indices. So, there is only so much we can do, but we definitely have plans to ramp that up.

Great. That's helpful. And I guess the only other question I would have is kind of back to the acquisition topic. I know you have spoken in the past about how sellers expectations have been very unrealistic throughout this crisis. Can you possibly update us on the expectations there, some of your conversations, and provide any other color? Thanks.

I think we -- very good question as well, and following up from -- I think Jim's questions too. We are -- we definitely are out there window shopping and talking to a lot of other people. But I like -- I like to also say to also of you, the same thing that we tell ourselves internally, one, we have a great business, and we don't have to do anything. Our organic growth is -- we have our hands full, and we have quite a significant number of opportunities out there. And therefore, you know, anything that we do would have to be something that fits really well in to our backyard, that has significant synergies to what we do, and the terms and conditions of the acquisition are fair to both parties. And therefore we are going to look at everything. We're going to spending a lot of time with a lot of different things. But ultimately whatever we do, we'll have to be very well thought out, extremely close to our backyard with a significant amount of synergies, and hopefully the potential for rev -- for value creation.

Great. Congrats on the quarter, guys.

That does conclude our question and answer session today. At this time, Mr. Fernandez, I'll turn it back to you for any additional or closing remarks.

Well, I would like to again thank you, everyone for participating, for the support that you all have given us, particularly during 2009, which was a year of major challenges to all of us in the financial services industry. And we're now are very hopeful and optimistic that we want to make 2010 a banner year, much different than 2009. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Again, thank you for your participation.