明晟 (MSCI) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Inc. third quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Edings Thibault, Head of Investor Relations.

Thank you, Operator, and good morning to everyone on the call. I am joined here this morning by Mr. Henry Fernandez, the Chairman and Chief Executive Officer of MSCI; the Chief Financial Officer Mr. David Obstler; and Mr. Ethan Burman, the former Chief Executive Officer of RiskMetrics. Please note that earlier this morning we issued a press release describing our results for the third quarter 2010. A copy of that release can be viewed on the Company's new website address at www.MSCI.com under the investor relations tab.

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're 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 this Company, please see the description of risk factors and forward-looking statements in our Form 10-K in our fiscal year ending November 30, 2009, and Form 10-Q for fiscal quarter ending May 31, 2010.

Today's earnings call may also include a discussion of certain non-GAAP financial measures including adjusted EBITDA, adjusted EBITDA excluding restructuring costs, adjusted EPS, and adjusted EPS excluding restructuring costs. Adjusted EBITDA and adjusted EPS exclude the following -- third party transaction expenses resulting from the acquisition of RiskMetrics, and founders grant expense. Adjusted EPS also excludes debt repayment expense costs resulting from our decision to repay our existing preexisting term loans prior to the acquisition of RiskMetrics and the amortization of intangibles resulting from acquisitions. Adjusted EBITDA and adjusted EPS excluding restructuring costs also exclude restructuring costs related to the RiskMetrics acquisition. 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 is an approximation at any given point in time of the forward-looking fees for subscriptions and product licenses that we will record over the next twelve months assuming no cancellations, near sales or changes in the assets and EPS licensed to our indices. Refer to table 12 in our press release for a detailed explanation.

Henry Fernandez will begin the discussion this morning with an overview of the third quarter and then David Obstler will provide some details on our financial results. In their prepared remarks Henry and David will discuss the combined companies operating and financial performance as if the acquisition of RiskMetrics had taken place prior to the reporting period unless otherwise noted. In the case of financial accounting metrics, the discussion will focus on pro forma results which assume the acquisition of RiskMetrics occurred at the beginning of MSCI's 2009 fiscal year. Pro forma third quarter results reflect the combination of MSCI's historical fiscal third quarter ending August 31, 2009, with RiskMetrics' third quarter ending September 30, 2009. Pro forma 2010 nine-month results consist of MSCI's nine months ended August 31, 2010, as well as RiskMetrics' fourth quarter ending December 31, 2009, and first quarter ending March 31, 2009. Pro forma nine months 2009 include MSCI's results for the nine months ending August 31, 2009, and RiskMetrics' nine months ended support 30, 2009. All operating metrics reflect the Company's results on a combined basis. RiskMetrics' operating results including run rate, sales, cancels and retention rate have all been conformed to MSCI's reporting methodology and reporting dates for all periods discussed.

Before we begin our discussion of the business, I would also like to highlight some of the changes we have made in our financial reporting. We now have a broader suite of products and as a result have made changes to our reported product lines. Let me summarize the changes. Our index and ESG products category includes all of our equity index product line including asset based fees, and we have added the environmental, social and governance, or ESG, business that formerly was reported in RiskMetrics' ISS segment. The risk management analytics product line is the new line of our multi-asset class product group and in addition to our legacy MAC products includes all the products that RiskMetrics formerly reported in its risk segment. Portfolio management analytics includes our equity portfolio management analytics products with the fixed income portfolio management analytics products previously reported in MSCI's other products category. Energy and commodity analytics, which was historically reported in the other products category, is now a standalone product line. The governance products includes RiskMetrics' legacy ISS products with the exception of the ESG products.

I will now turn the call over to Mr. Henry Fernandez.

Thank you, Edings. Good morning and thank you all for joining us. I am delighted to welcome you to our third quarter earnings report, our first to reflect the impact of the acquisition of RiskMetrics. As you may recall, we completed the acquisition of RiskMetrics on June 1st of this year, the first day of our fiscal third quarter. The results we reported this morning reflect a full quarter of operations as a combined company. As Edings mentioned, most of my discussion this morning will focus on the financial and operating metrics of the combined company, so as to enable a more accurate presentation of MSCI's performance.

With all of that as a background, let us proceed to the third quarter 2010 results. We reported revenues of $203 million, adjusted EBITDA excluding restructuring costs of $86 million and adjusted EPS excluding restructuring costs of $0.32 per share. Total year-over-year revenue growth of 86% was comprised of legacy MSCI organic growth of $16 million or 14%, and $78 million resulting from the acquisition of RiskMetrics and the much smaller measure risk acquisition. For the first nine months of fiscal 2010, our revenues were $450 million and our adjusted EPS grew by 24% to $0.98. Total revenue growth of $125 million, or 86%, was comprised of legacy MSCI organic growth of $47 million, or 15%, and $78 million resulting from acquisitions. On a pro forma basis, our third quarter 2010 revenues grew by 11% and our adjusted EBITDA excluding restructuring costs rose 13%. Our adjusted EBITDA margin excluding restructuring costs rose to 42.2% from 41.5%. Adjusted EPS excluding, again, restructuring charges rose by 14% to $0.32. For the nine month period our pro forma revenues grew by 9% to $603 million. Our adjusted EBITDA excluding restructuring costs rose 12% to $256 million and the margin expanded to 42.4% from 41.4%. Adjusted EPS excluding restructuring charges rose by 24% to $0.98, as I said before.

MSCI delivered strong operating results in the third quarter. Demand for our risk management analytics was very strong as evidenced by new sales strength. Our index and ESG products sold well. We see reasons for optimism that our portfolio management analytics and governance products can return to growth. Our retention rate has improved significantly from the lows of the financial crisis. Finally, our asset based revenues were steady on a sequential basis and up significantly from a year ago driven by inflows into ETFs linked to our indices. As I noted, we are seeing good demand for our products. New recurring subscription sales of the combined company in the quarter rose by 47% versus last year's third quarter to $35 million. New subscription sales in the quarter increased in three of our four major product categories, with risk management analytic sales up 108%, index and ESG product subscription sales rising 30%, and governance sales increasing 14%. New subscription sales were generally flat sequentially from the prior quarter which is in keeping with seasonal norms. Legacy MSCI subscription sales rose by 15% versus the third quarter of last year and legacy RiskMetrics sales rose by 107% from last year's third quarter.

On a fiscal year-to-date basis, new recurring subscription sales have risen by 43%. New subscription sales growth in risk management analytics, index and ESG products and portfolio management analytics were partially offset by a decline in governance subscription sales. Legacy MSCI subscription sales have risen by 41% and those of legacy RiskMetrics have risen by 44%. The aggregate Company-wide retention rate rose to 88% from 82% in the third quarter of last year. In dollar terms, cancellations fell by 33% versus the third quarter of last year. cancellations increased by 9% from the second quarter of this year as the volume of renewable business increased in keeping with seasonal norms. Year-to-date cancellations have fallen 21%. For the first nine months of the year the retention rate was 88%, up from 84% in 2009.

Our asset based fee business had a good quarter despite lower values in global equity markets. The average assets under management during the quarter were unchanged sequentially at $252 billion. Asset inflows were $14 billion in the quarter bringing total inflows for the nine months of the year to just over $31 billion. Total assets under management in MSCI linked ETF closed last night at $290.5 billion, up 7% from the third quarter close. Our combined Company-wide net new subscription sales, or new subscription sales net of cancels, were $15 million in the third quarter of 2010 versus a decline of $5 million in the third quarter of last year. The biggest positive changes came in risk management analytics and portfolio management analytics. Net new subscription sales rose by $5 million for legacy MSCI and by $10 million for legacy RiskMetrics. On a year-to-date basis net new subscription sales were $40 million compared to a decline of $6 million in the first nine months of 2009. By product climb the biggest growth in net new subscription sales came in risk management analytics which saw a $24 million increase. Net new subscription sales rose by $10 million in the index and ESG product line and the portfolio managed analytics line.

Our combined total run rate Company-wide grew 6% to $792 million from the second quarter of this year, and increased 10% compared to the third quarter of last year. Our subscription run rate grew by 5% to $692 million and the run rate in our asset based fee business rose 9%. The growth in our subscription run rate was comprised of combined organic growth, meaning legacy MSCI and legacy RiskMetrics combined, of 3% and an increase of $13 million or 2% from the acquisition of Measurisk. The run rate for all of our index and ESG products increased 5% sequentially to $325 million and 18% compared to the third quarter of last year. The index and ESG subscription run rate which does not include the asset based fees rose 3% sequentially to $224 million. The increase was driven by strong demand for ESG products which rose 6% and benchmark subscriptions which rose 3%. Run rate related to financial products fell slightly. Index and ESG product subscription sales rose 30% versus third quarter of last year and have risen 56% year-to-date. cancellations were up 7% from the third quarter of last year and have risen 12% year-to-date. Net new subscription sales rose 60% year-over-year to $5 million in the quarter and have risen 95% year-to-date to $22 million. The retention rate in index product subscriptions rose slightly from third quarter of last year to 91%. Index product subscription run rate grew across all major client types and we recorded a gross across all regions of the world. Later in this call David will provide additional details about the other part of our index business, the asset based fee business.

The risk management analytics run rate increased 14% to $225 million compared to the second quarter of this year with organic growth of 7%, supplemented by the acquisition of Measurisk which added $13 million to the run rate, or 7%. The weakening of the US dollar during the quarter increased our run rate in this product category by $2 million or 1%. The run rate increased 17% compared to the third quarter of last year. The primary driver of the sequential run rate growth in risk management analytics was strong growth in both the risk manager and BarraOne products. Risk manager run rate grew by 9% sequentially, and BarraOne grew by 10% sequentially. Risk management subscription sales more than doubled to $17 million from the third quarter of last year. The increase in subscription sales was led by sales of Risk Manager which increased by 171% and to a lesser extent by sales of BarraOne which rose 35%. Sales of Risk Manager are up 65% on a year-to-date basis which we view as a clear sign of a strong demand for this product.

The average retention rate for risk management analytics remained at 90% in our third quarter, up from 80% a year ago and down slightly from 91% in the second quarter, again in keeping with seasonal norms. The overall retention rate was modestly impacted by expected cancellations of TotalRisk which is, as you know, a product we are in the final stages of decommissioning. The core retention rate was unchanged from the second quarter of this year. Total cancellations fell by 48% from the third quarter of last year and have fallen 29% year-to-date. By client type risk management analytics run rate increased at asset managers, at hedge funds, and asset owners. Our portfolio management analytics business includes analytics tools for equity and fixed income portfolio management, as Edings described at the beginning of the call. The run rate was largely unchanged in the third quarter compared to the second quarter. Run rate growth for equity portfolio management analytics was 1%, offset in part by a 3% decline in the much smaller run rate of fixed income portfolio management analytics. The weakening of the US dollar during the quarter also had a modestly positive impact of $2 million on sequential run rate growth for this category.

The overall operating environment for the portfolio management analytic business remains challenging as evidenced by a 14% year-over-year decline in new subscription sales in the quarter. But the pressures at our clients continue to have an impact and we have yet to see a sustained period of out-performance by quantitative strategies that could trigger a cyclical rebound in demand for quantitative tools by asset managers. What we do see, though, are several positive indicators. Year-to-date new subscription sales have risen 14% and cancellations fell 52% from the third quarter of last year and have fallen 42% year-to-date. The retention rate was 84%, up from 69% a year ago. Year-to-date the retention rate increased to 87% from 79%. As a result, net new subscription sales while negative for the quarter have improved by $5 million in the quarter and $10 million year-to-date which has helped to stabilize the run rate.

In addition, the launch of our new Asia Pacific equity risk model was a success, and we're achieving select price increases with the help of new products launched over the last few quarters. We also remain on track to beta test our Barra portfolio manager web hosted software application at year end which we believe will help position the equity portfolio analytics product line to return to run rate growth in 2011. By client type, run rates increased at asset managers and hedge funds and declined at asset owners and banks and broker-dealers and creditors. On a geographic basis we experienced growth in Australia and in Japan.

Our governance business run rate was steady sequentially at $105 million as foreign currency gains of $1 million offset a small decline in net new subscription sales during the quarter. By product, the run rate of governance products sold to corporations grew by 3% to $13 million offsetting a decline in the run rate of forensic accounting research products. Institutional governance products, which are typically sold to asset owners and asset managers, the run rate rose slightly in the quarter. New subscription sales in the third quarter rose 14% year-over-year which is encouraging given that new subscription sales have declined 7% year-to-date. cancellations declined 12% from third quarter '09 and have fallen 11% year-to-date.

With that review of our operating performance on a business by business basis, I would like now to provide you an update regarding the integration of RiskMetrics. As I noted at the beginning of my remarks, we closed the acquisition of RiskMetrics on June 1st of this year, the first day of our first (inaudible) quarter. In the last 122 days we have made great progress in bringing our two companies together. We completed the integration of the management structure across the Company with clear lines of reporting for every employee in every business, function, and location in the world. Functional groups are now co-located with legacy RiskMetrics employees sitting alongside their MSCI co-workers in the major offices around the world. As an example, we completed the integration of our front office sales, client service, consulting and marketing teams within 60 days of closing the acquisition. In all of our major market centers around the world we now have a single sales force operating from a common location with common systems and a common management structure. Our ability to achieve a 50% sequential increase in new sales in our RiskMetrics analytics product line in the midst of the integration process is a testament to careful planning, the ability of our salespeople to stay focused on serving their clients and the strong underlying demand for risk management products.

The speed by which we have been able to implement our integration plans means we are ahead of our initial goals in terms of realizing cost synergies. We have identified over $30 million in cost synergies to date out of the total 2011 year end target of $50 million. The bulk of the cost synergies realized to date have come from compensation costs. We're also making progress towards achieving our non-compensation synergy targets. To that end we continue work on integrating a duplicative feature into one of our product lines and have added plans in place to close redundant office space and reduce our IT footprint among other projects. The progress we have made in the realization of cost synergies since the closing of the acquisition leaves us confident that we can realize additional synergies going forward.

In summary, MSCI delivered a strong financial and operating performance in the third quarter. Our strong results while undertaking the integration of a transformational merger and in the midst of what remains a mixed economic recovery speak very loud to the strength of the underlying secular trends that are driving our business, mainly the increasing allocation of capital to build our markets, special emerging markets, the growth of passive investment vehicles, the increasing need to manage and report risk, and the increasing emphasis on sound corporate governance practices. We are continuing to invest in our business in order to take advantage of the medium and long-term opportunities that these trends present to us. Even while realizing cost synergies in the wake of the RiskMetrics acquisition, we are actively seeking to improve our capabilities in sales and marketing, product management, research and product development, as we have spoken about before. If we are successful in achieving our goals these investments may slow the growth in the overall profit margins over the coming years. The pay off from these investments should come over the next few years in the form of accelerated revenue growth and as a result accelerated and higher overall profit margins.

Let me now turn it over to David for a review of our financial highlights.

Thanks, Henry. As Henry mentioned, MSCI reported GAAP revenue growth of $94 million in the third quarter of 2010 and $125 million for the nine-month period. The third quarter growth was driven by organic growth of $16 million or 14% and the acquisitions of RiskMetrics and Measurisk which added an additional $78 million. MSCI's organic growth for the first nine months of 2010 was $47 million or 15%. Legacy RiskMetrics revenues grew by 6% versus the third quarter of 2009 and by 2% year-to-date. On a pro forma basis, operating revenues grew by 11% in the third quarter. Revenue growth was driven by growth of 15% in the risk management analytics revenue business and 17% in index and ESG subscription revenues. These gains were offset by a 4% decline in governance revenues. Revenues from portfolio management analytic products were flat. Also, on a pro forma basis subscription revenues grew by 9%, asset based fees increased by 25% and nonrecurring revenues rose by 4%, asset based fees which rose 25% or $5 million to $25 million in the third quarter. Similar to prior periods a substantial majority of that revenue was related to the equity ETF business.

Before I go into more detail regarding our ETF business, I want to point out that we made a change in the way we calculate our ETF assets under management for reporting purposes to better align our external reporting with what we believe is industry practice. The change had only a very small impact on the level of assets under management. It did, however, have an impact in our calculation of changes in assets under management resulting from market performance and cash inflows. We have retroactively applied the new methodology to our reported AUM from the beginning of 2010 in both our current earnings release as well as on our website. It is worth noting that the changes were for external reporting purposes only and have no impact whatsoever on how we collect fees from our ETF partners. Those points made, let me discuss trends in that business.

First, we saw asset inflows of $14 billion into ETFs linked to our indices in the third quarter. Strong inflows into ETFs linked to our emerging markets index were the biggest drivers with $11 billion of inflows offsetting modest outflows from ETFs linked to our IPA, Japan and Brazil indices. Our overall market share for equity ETFs rose to 31% from 29% at the end of May. A year ago we estimated our market share to be 28%. The number of ETFs linked to MSCI indices rose by 32 to 341 with most of that growth coming in Europe. We also added five new listings in Asia bringing our total count up to 15 in that region. The AUM ETFs linked to our equity indices at the end of the quarter was $269 billion and our ETF run rate was $84 million out of the total asset based fee run rate of $101 million. The weighted average basis point fees, excluding minimum fees, was unchanged at approximately 3 basis points. Finally, total assets under management in MSCI linked ETFs closed last night up to $290.5 billion and the third quarter average to date of AUM is $278 billion, also up 10% from the average AUM in the third quarter and up 7% from the end of the quarter.

As a result of the acquisition of RiskMetrics, MSCI now reports in two separate operating segments, performance and risk which is comprised of index and ES&G products, risk management analytics, portfolio management analytics and energy and commodity analytics. And secondly, governance which consists of corporate governance products and services including proxy research, recommendation, and voting service for asset owners and asset managers, as well as governance advisory and compensation services for corporations. The governance segment also includes forensics accounting research as well as class action monitoring and claims filing services to eight institutional investors in the recovery of funds from securities litigation. On a pro forma basis, performance and risk revenues grew 14% to $172 million in the third quarter. Adjusted EBITDA excluding restructuring costs rose 13% to $78 million in that quarter. The EBITDA margin contracted slightly to 45.2% from 45.6% in the third quarter of 2009. Also on a pro forma basis governance revenues declined by 4% to $30 million in the third quarter of 2010. Adjusted EBITDA excluding restructuring costs rose 10% to $8 million. The margin expanded to 25.1% from 21.9%.

In the third quarter overall we generated $86 million of adjusted EBITDA excluding restructuring charges. A pro forma increase of 13% in the third quarter last year. Please note that our adjusted EBITDA figures exclude $14 million in transaction expense consisting of third party financial advisory, legal and accounting fees related to our acquisition of RiskMetrics, excludes $7 million of restructuring costs resulting from the integration of RiskMetrics and $2 million of founders grant expense. For the nine months pro forma adjusted EBITDA excluding restructuring increased 12% to $256 million.

GAAP earnings per diluted share for the third quarter were $0.08 a share. Our adjusted earnings per share excluding restructuring, which is a non-GAAP measure and which we derive by adding back the after tax costs of the restructuring costs, founders grant expenses, amortization of intangible transaction expenses related to our acquisition of RiskMetrics, and debt repayment costs, was $0.32 per share, up 14% from the third quarter of last year. Overall pro forma total cash operating expenses, which include depreciation and amortization, founders grants and transaction expenses, rose 10% year-over-year to $117.2 million. Pro forma compensation costs excluding founders grants rose 12% while non-comp expenses increased 5%. For nine months, those numbers of pro forma cash operating expenses were overall 8% growth with comp costs increasing 9% and non-comp increasing 5%.

In addition to the transaction expenses and restructuring costs that are described in our earnings release, our operating expenses in the third quarter were also impacted by the following nonrecurring items, totaling $3.6 million, or accounting for $0.02 per share earnings. First, integration expenses of $0.7 million relating to the acquisition of RiskMetrics p were expensed in the quarter. Secondly, other nonrecurring expenses of $900,000 relating to market data expenses and back tax charges from prior periods were also expensed. Finally, a $2 million nonrecurring increase in bonus accrual relating to the true up of bonus expenses in prior periods was also taken in the third quarter. None of these expenses were added back in computing either our adjusted EBITDA or our adjusted EPS. The total expense of $3.6 million reduced our adjusted EBITDA margin by 1.7% and reduced adjusted EPS by $0.02 per share.

Also, on June 1, 2010, the Company awarded restricted stock units to certain employees. This award will be performance based and vest over time based upon the Company achieving specific performance targets over a measurement period ending on the fiscal year end 2012. The vesting period is 31 months with one half of the vesting on December 31, 2011, and the rest at the end of 2012. The aggregate value of the grants was approximately $15.9 million and the impact on third quarter expenses and adjusted EBITDA was $2.1 million. This new expense reduced adjusted EBITDA margins by 1% and reduced adjusted EPS by $0.01 per share. Combining the nonrecurring and the new stock award effects on adjusted EBITDA margins lowered our adjusted margins by 3.7% and lowered adjusted EPS by $0.03 per share. In addition, for former RiskMetrics shareholders I would like to remind everyone that stock-based comp of approximately $2.5 million per quarter, which RiskMetrics had added back in computing adjusted EBITDA, is now being expensed in the current definition of adjusted EBITDA.

Turning to taxes, our reported effective tax rate in Q3 was 50%, up from 36.6% in the second quarter of 2010 and 37.9% a year ago. For the nine months our effective tax rate was 39.6% versus 37.8% last year. Our blended tax rate in the third quarter was impacted by two factors. The first was $14 million of third party transaction expenses incurred in the quarter, some of which were not tax deductible. And the second was $3 million of net discrete benefits which lowered the cash rate. If we excluded the effect of all of these factors in our calculation, our effective tax rate would have been 37.3% in the quarter.

Our operating cash flow for the first nine months of 2010 was $121 million, up slightly from the same period a year ago. Our operating cash flow in the third quarter was $66 million versus $52 million in the third quarter of last year. The increase was driven by the impact of the acquisition of RiskMetrics which increased cash earnings, and $16 million of a cash tax benefit resulting from the RiskMetrics acquisition offset by $16 million of cash transaction expenses paid in the quarter. We expect the tax benefits acquired in the RiskMetrics acquisition to have a positive impact on our fourth quarter cash flows at a level similar to that of the third quarter.

Turning a little bit to our balance sheet, we ended the third quarter with $1.26 billion of total debt outstanding of which $466 million will swap into fixed rate instruments. The effective combined rate of our hedged and unhedged debt interest expense was 4.9% in the third quarter. We also incurred and will continue to incur $1.7 million of noncash deferred financing expense and debt discount expense. Taken together, our total cost of debt in the third quarter was 5.5%. We expect fourth quarter interest expense, not including interest income and gains and loss relating to foreign currency movements, to be approximately $17.7 million. During the third quarter we also incurred a nonrecurring $2 million charge relating to accelerated interest expense from accelerated recognition of deferred financing and debt discount costs resulting from a repayment of our preexisting term loan in conjunction with the RiskMetrics acquisition. In addition, third quarter 2010 interest expenses include $0.8 million of nonrecurring third party transaction expense related to the RiskMetrics acquisition. Both the debt repayment costs and the transaction expenses have been excluded from our calculation of adjusted EPS. At the end of the third quarter we had cash and short-term investments of $240 million on which we earned only a small rate of return based on current interest rates.

I would like to add a few more figures in order to help everyone with their earnings models. First, at the end of the third quarter MSCI had 118.6 million basic shares outstanding, a modest increase from the quarterly average of 118.3 million. Based on our current stock price and current share count, we expect our average fully diluted share count to be approximately $120.6 million. Our amortization of intangible assets was $16.4 million in the third quarter. We are currently expecting expense to be the same in the fourth quarter. We also expect our depreciation and amortization excluding the amortization of intangibles to be $5 million. Finally, we expect our effective tax rate, excluding the impact of transaction expenses and discrete items, to be 37% for the full year. We ended the third quarter with approximately 5,800 total clients including 5,200 subscription clients and 600 nonrecurring clients. Finally, in the quarter we added approximately 25 net new clients.

Before we open the call up to your questions, I want to provide some additional detail about the accounting impact of the synergies that Henry discussed earlier in the call. As Henry noted, we have achieved over $30 million in run rate synergies, mostly related to compensation. These are also run rate synergies meaning that they are current estimated benefit of an action that has been taken or for which there is a firm plan in place to take an action. We estimate that the accounting savings realized from the synergies was $3 million in the third quarter and we expect to achieve an incremental $2 million to $3 million in the fourth quarter.

With that, we would be happy to take any questions that you might have.

Thank you. (Operator Instructions). Our first question is from Andrey Glukhov with Brean Murray & Carret.

Thanks so much for taking the question. A couple things, if I may. Historically, the fourth quarter has seasonally been most difficult for the renewal rate calculation. This time around we obviously have some positive macro backdrop for you guys. How do you think that metric is going to play out here near term?

Yes. I think -- we currently think that the fourth quarter sales are going to continue to track but it's still a challenging environment in the budgets of many of our clients, so we are very positive about it, but we're not very bullish, and we haven't been throughout the year. In terms of cancels, we are seeing a moderation of the cancel rate that we saw last year but still at a higher level of cancellations across the board compared to pre crisis levels. David, anything?

Yes, I just want to add to that, in the acquired RiskMetrics businesses the concentration of renewals had been in the fourth quarter mainly due to the governance. That is mainly a concentration in December and with the year end in this case of November that concentration moves to the first quarter. So in the acquired businesses there is not a concentration in the fourth quarter reporting quarter.

Okay. And then you guys highlighted strong momentum in both risk manager and in BarraOne sales, and the fact that you already integrated the sales teams. So can you maybe give us a little bit more color? It doesn't sound like any pipeline conflicts arose to date, but how do you decide going forward which products do you pitch and is there any evidence maybe of if we have an up sale from a BarraOne all the way up to Risk Manager?

The way we pick which products to sell is in partnership with the prospect or client in terms of suitability, what is the best product for their needs. In some cases, as you know, in BarraOne is a product that is, in most cases, more suited for asset owners and pension plans, and in the other extreme in terms of a hedge fund the Risk Manager product is typically more suited for hedge funds. And in between which is the asset management industry, it is again an evaluation of what are the needs of the client and what is the best capability that each one of these products can provide to them. We haven't seen any conflict at all in the pipeline with respect to the two products. There haven't been any significant issues associated with that.

And in terms of sales and pipelines and things like that for the risk management product line, I would like to first of all say that we had a very strong quarter for sure, and that's evidence of the fundamental belief that we had in the combination of these two companies on the risk management side. But sales of risk management products are very bumpy -- or lumpy I should say. They're lumpy in terms of the loan cycle that it takes, particularly in the ones that are multi-million dollar sales, and also in terms of when they occur. So in the third quarter we benefited from three or four fairly large sales of Risk Manager that have been worked on for at least 12 months that all coincided in the quarter.

I just want to add that with the full integration of the sales force by July in the risk management analytics area, their salespeople have both products in their tool kit and therefore everybody is working to find the right use case for the client.

Our next question comes from Aaron Teitelbaum with Keefe, Bruyette and Woods.

Good morning, guys -- or good afternoon. Thanks for taking my question. I am actually curious. Legacy MSCI had a big initiative in place over the years to move employees to lower cost centers and in light of the recomposition of the combined workforce I am just curious to hear your thoughts as to how you guys are thinking about that going forward.

The strategy continues pretty much intact. Clearly the focus in this quarter was consolidating the employee base of the combined company in the existing centers that we operate in. But going forward in the same spirit we had at MSCI we'll continue to evaluate what positions belong in which centers around the world for maximum benefit in terms of the available pool of talent in the place and available skill set, the ability of reducing any kind of turnover, and lastly managing our cost structure.

Again, the press release in table 12 with the key operating metrics, there is a pro forma look at employee base, high cost and low cost centers, and if you look at it you will see the trend continued both year-over-year as well as between the quarters on a combined basis.

Great, thanks. And in terms of the governance business, I am just curious. I know you guys talked a lot about the reinvestment that legacy RiskMetrics did in that business and the ability to generate scale now that you guys are combined. But I am just curious if you guys have any kind of internal goals in terms of the adjusted EBITDA margin in that segment and how you guys are thinking you get there?

I think there are two drivers that have been going on there. One clearly has been a significant amount of cost savings as a result of the investment in technology that was done by legacy at RiskMetrics. On the other side the business has not been having a lot of growth, and in some instances like in the institutional proxy business has been more flat to down, and therefore a lot of the benefits of the cost reduction have been reduced by obviously not increase in sales or lower revenues. We believe that that is a cyclical issue, not a secular issue. We believe that there are a lot of secular wins in the back of this business given everything that we see in the US and around the world in terms of governance and SEC proposals and all the regulatory proposals. So that's something that we clearly will benefit from. And we then therefore we believe that over time as the business begins to grow, as we capitalize on the benefit of the technology investment, that the margin will expand in the business.

Our next question comes from the line of [George Mialis] from Bank of America.

A couple of questions. One, I was hoping to start off on the pricing side. Pricing has been an area of strength for you guys on the index side for a long time. Are you seeing any sort of pushback from the risk management side, from the multi-asset class side on pricing given talk of some asset managers lowering their fees?

None. None. We have a very strong competitive position with the combined risk manager BarraOne product line.

The strong sales performance in those product lines reflected both new customers, up sells, and the ability to continue to achieve strong prices in the market.

Do you guys think going forward you may be able to tweak pricing upwards as you do with index or are you thinking of keeping it flattish?

Our initial thought will be to keep it flattish but clearly over time as we consolidate our position in the marketplace, make sure that the client base still is fairly assured of the investments we're making in the product on a selected basis we will be doing price increases.

Our next question comes from Drew Gaputis from Davenport.

Good morning. I was wondering with the fully integrated sales force at this point, are you guys seeing any increased opportunity for cross-selling or is there any kind of additional clarity into potential top line synergies from the acquisition?

Absolutely. For example, as you know well, RiskMetrics had a very good and experienced seasoned sales force to hedge funds of all types, but particularly multi-strategy hedge funds, and therefore that sales force has now made available to them the ability to sell equity portfolio analytics products to those, either in the context of a multi-strategy or more importantly for the equity long short part of that. So we had a few sales already in that category, but it is obviously early days. We definitely have quite a lot of hopes that that will increase. The second plan is that the -- is in terms of our equity index sales force, having the ability to sell the ESG product line -- ESG indices, ESG data and things like that -- to the front office in addition to the sales of ESG that are being done through the ISS sales force in the middle office and in the compliance office, so to speak, we think that that is going to help us. And we have seen some evidence of that already in the last few weeks.

All right. Then on the portfolio management analytics side, could you give us a little bit more color on the dynamics there? And specifically with regards to competitive pressures are we still seeing a lot of pricing pressure in the marketplace and is that contributing to some of the increased ability to -- inability to get the retention rate back up to historic norms?

I think there clearly were three factors that have impacted the equity portfolio analytics business in the last couple years. By far the largest factor has been the, from the summer of 2007, has been the cyclical decline in not only quantitative investment management but the quantitative support for the fundamental managers as a result of the financial crisis. That is by far the largest impact we have had. The second impact in magnitude has been that our investment in the product line that started three years ago, three to three-and-a-half years ago, only started to come online about a year plus, so not in time to be able to mitigate some of the -- with new products and new functionality and new software, the impact of the crisis. That is beginning to change, as I said in my remarks, and we're hoping that in 2011 we get the benefit of the launch of a lot of new models that we have been doing and clearly the new ASP software in Barra Portfolio Manager.

And the third impact, which is there but it is not as big as the first two is there are some competitive pressures by smaller players, more niche players in the quantitative space, as well. We believe that some of that pressure is also cyclical related to the lower cost provision of those systems by these players in a down market that attracts people that are under budget strains and the like. So we're taking measures clearly to compete more effectively even in price against those and the like. The last thing I will say is that in '09, in the last part of '08 and in '09, we did do some discounting of pricing in the equity portfolio analytics business, as we have described before. Most of that is gone right now. Not all of it, but most of it is gone. If anything, in some cases we're trying to rebound from the price discounts that we gave. And in the new products that we're launching, the GEM, the global equity model, the Asia Pacific model and for sure the new software that we want to launch, we to want use that as an opportunity to strengthen our price position in the market. But the business remains challenging because of the first two factors, the cyclical decline and obviously the investment that hasn't yet paid off in the up turn of the business.

Our last question comes from Robert Riggs with William Blair.

Hi. Thanks for taking my questions. Just a couple quick things. Can you provide us with an estimate for the combined entity on the amount of revenue that is tied to the number of users of your product?

Yes. We used to -- in the legacy MSCI, that number was 10%, I believe, or less in the run rate. That was only the subscription run rate, not including clearly the asset based fee run rate. And combined with RiskMetrics that number drops dramatically because very little of the RiskMetrics run rate is tied to any kind of user fees.

RiskMetrics pricing is not as user or desk-based so very little of it is related to the number of users on the applications.

If you think about the legacy MSCI having, say, roughly $300 million of subscription run rate and $80 million to $100 million of asset based fee run rate, and we used to calculate the use of this obviously only on the subscription run rate, not the asset based fees, and that business therefore has a similar sized profile of the RiskMetrics business. So roughly you're talking about 5% or less will be my guess at this point.

Okay. Thanks. And then you recently completed the Measurisk deal. Can you just talk about your appetite for additional acquisitions and what size and what areas you think you might need to fill in?

We are for sure continuing to look actively at any kind of acquisition that is in our backyard, or said differently in an extension of the product line that we currently have in the four or five segments that I mentioned. That's only the areas that we're looking at proactively. And at this point if something comes down that is attractive to us and we can generate value for shareholders we would definitely look at it, and potentially do that.

Our next question comes from Chris Ross from Macquarie.

Thanks for taking my call. I wanted to circle back to the governance business, just trying to see if I can get any thoughts on the potential sale of this segment or if you guys just are more concentrating on just building out and growing that business?

I think at this point, Chris, what we're doing is we're doing a very thorough and strategic review of the business with a view that as a growth Company pretty much everything we do has to have a good level of growth, on a secular basis. Obviously cyclically sometimes things go up or down. So we're looking at developing a strategic plan for the business that helps it resume growth as we come out of this down cycle. And then secondly we're looking at strategies in which it makes the business closer to a lot of what we do which is investment tools and not just voting. So is there ways to continue to use the huge amount of data and information that is gathered on governance of companies for the purposes of making investment decisions, not just simply voting decisions. An example of that is clearly ESG. The ESG criteria that we're using is to help people not only do compliance of who is doing what in the -- in what companies in the ESG space but help people make investment decisions or provide tools for investment decisions. A lot of that is happening. So we're focused on that with the management team at this point and not on anything else.

At this time I would like to turn the call over to our speakers for any closing remarks.

Thank you very much again for participating in this call. As we said at the beginning of the call, Ethan Burman is with us today and before we conclude the call, I would like to offer a special thanks to Ethan who will be retiring from MSCI as of tomorrow, October 1, per our discussions at the close of the RiskMetrics acquisition. As many of you know, Ethan was the founder of RiskMetrics as a business twelve years ago and led its growth from a 30 person team to a forward company at the time of the merger that employed over 1,000 people in twelve countries, revenues of $300 million and an enterprise value of $1.6 billion. Quite a significant achievement for an entrepreneur for a twelve year period. And since the announcement of the merger, Ethan could not have been a better partner to be on the management team in the integration of these companies. His hard work and commitment has led us to the success of the integration so far and bodes well for the start of life as a combined company. We will miss you, Ethan, and wish you well in the next phase of your life. Thank you very much.

Ladies and gentlemens, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.