明晟 (MSCI) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your MSCI fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct and 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 turn the call over to your host, Edings Thibault, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and thank you for joining our fourth quarter 2010 earnings call. Please note that earlier this morning, we issued a press release describing the results for the fourth quarter 2010 and fiscal year 2010. A copy of that release can be found on our website 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 are made, which reflect management's current estimates, projections, expectations or beliefs, and which are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see the description of risk factors and forward-looking statements in our form 10-K for our fiscal year ended November 30, 2009, and updated on our Form 10-Qs and 8-Ks filed with the SEC.

Today's earnings call may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Adjusted EBITDA and adjusted EPS exclude the following. Third party transaction expenses resulting from the acquisition of RiskMetrics, restructuring costs related to the acquisition of RiskMetrics, and nonrecurring stock-based compensation. Adjusted EPS also excludes debt repayment expense costs resulting from our decision to repay our pre-existing term loans prior to the acquisition of RiskMetrics, and the amortization of intangibles resulting from all acquisitions.

Please note that we have made a slight change in our definition of adjusted EBITDA and EPS to exclude the impacts of performance awards and restructuring costs. The total value of the performance awards, which are stock-based compensation issued to select employees following the acquisition of RiskMetrics, was $15.9 million. The change resulted in an exclusion of $2.1 million of performance award expense in the fourth quarter, and $4.2 million for fiscal year 2010. The restructuring costs totaled $1.9 million in the fourth quarter, and $9 million for fiscal year 2010.

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 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, changes in the assets and ETF license to our indices, or change in foreign currency rates. Please 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 fourth quarter, and then David Obstler will provide some details on our financial results. 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 fourth quarter results reflecting the combination of MSCI's historical fourth quarter ending November 30, 2009, with RiskMetrics' fourth quarter ending December 31, 2009.

Pro forma fiscal year 2010 results consist of MSCI's fiscal year ended November 30, 2010, as well as RiskMetrics' fourth quarter ending December 31, 2009, and first quarter ending March 31, 2009. Pro forma fiscal year 2009 includes MSCI's results for the fiscal year ended November 30, 2009, and RiskMetrics' fiscal year ended December 31, 2009. All operating metrics discussed in this presentation reflect the Company's results on a combined basis.

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

Thank you, Edings. Good morning, everyone, and thank you for joining us. I apologize in advance for my scratchy voice and occasional coughing. I am delighted to welcome you to our fourth quarter earnings call.

We reported fourth quarter revenues of $213 million, adjusted EBITDA of $99 million, and adjusted EPS of $0.36. Our fourth quarter 2010 revenues grew by 9% versus pro forma fourth quarter 2009, and our adjusted EBITDA rose 17%. Our adjusted EBITDA margin rose to 46.4% from 43.3%. For the full fiscal year, our pro forma revenues grew by 9%, to $816 million. Our adjusted EBITDA rose 14%, to $357 million, and the margin expanded to 43.7% from 41.9%.

MSCI ended fiscal 2010 on a high note, with strong fourth quarter operating results. Demand for our products was strong. That demand was driven by both long-term, secular trends like the growing allocation of capital to global markets, and the increased importance of risk management and reporting, and by the continued gradual recovery in global financial markets.

New recurring subscription sales across the Company in the quarter increased in three of our four major product categories, with Index and ESG subscription sales up 58% year-over-year, risk management analytics sales rising 37%, and portfolio management analytics sales increasing 34%, all of them versus the fourth quarter of 2009.

New or recurring subscription sales of the combined Company were $37 million, an increase of 34% versus the fourth quarter of 2009, and up 8% sequentially. For the full year, new recurring subscription sales rose 40%. New recurring subscription sales of Index and ESG products rose 56%. Sales of risk management analytics products increased 63%, and sales of portfolio management analytics products rose 19%. But governance recurring subscription sales fell 9%. The aggregate retention rate rose to 85% from 82% in the fourth quarter of 2009.

In dollar terms, cancellations fell 11% versus fourth quarter 2009, and fell 19% for the full year. The 2010 full year retention rate rose to 87% from 84% in 2009. While cancellation rates have declined, they remain elevated, and our retention rates are below the levels that we saw in the pre-crisis periods of 2006 through 2008.

We ended the fourth quarter with approximately 5,800 total clients, including 5,200 subscription clients and 600 non-subscription clients. We added a net total of 36 clients during the quarter.

To sum up, I am very pleased with MSCI's performance during the fourth quarter. Our subscription run rate, which excludes the impact of asset-based fees, grew 3% sequentially, and 9% year-over-year. Our total run rate now stands to $823 million, up 4% sequentially and 10% year-over-year.

Let me now discuss the performance of our key product lines in a little more detail. The key drivers of our run rate growth in the fourth quarter were the strong performance of our largest businesses, Index and ESG, and risk management analytics. The run rate for our overall Index and ESG products increased 8% sequentially, to $350 million, and 17% compared to the fourth quarter of 2009. The Index and ESG subscription run rate, which as you know does not include asset based fees, rose 5% sequentially to $235 million. The increase was driven by strong demand for benchmark subscriptions, which rose 5%, and ESG products, which grew by 3%.

Index and ESG new recurring subscription sales rose 58% versus fourth quarter 2009, and rose 56% for the full year. One driver of this growth was the growing acceptance by long-term investors across the world, to (inaudible) plans, of the use of MSCI All Country World Index, Investable Market Index, as a policy benchmark for both international and domestic equities. We continue to ride that trend by the recent launch of a new global total market index by MSCI, which includes micro-caps in the developed markets.

Cancellations in the Index and ESG business fell 23% from fourth quarter 2009, and were flat for the full year. Net new subscription sales rose 183% year-over-year, to $10 million in the quarter, and for the full year rose 115%, to $32 million. The retention rate in Index subscriptions rose by 4% from the fourth quarter of 2009, to 92%. The full year retention rate rose to 92% from 91% in all of 2009.

The asset-based fee run rate rose 14% sequentially, and 20% year-over-year, to $114 million. Similar to prior periods, most of that run rate increase was related to our equity ETF business. We saw [other] inflows of $24 billion US into ETFs linked to our indices in the fourth quarter. And strong inflows into ETFs linked to our emerging market indices were the biggest driver, with $11 billion of inflows.

Our overall global market share of equity ETFs rose slightly to 32%, from 31% at the end of August 2010. A year ago, we estimated our market share to be approximately 30%.

The number of ETFs linked to MSCI indices rose in the quarter by 62, to a total now of 403 globally, with most of that growth coming in Europe. At the end of November, 50 of those 403 ETFs had assets under management of greater than $1 billion US. The assets under management in ETFs linked to our equity indices at the end of the quarter were $311 billion. The weighted average basis point fee, excluding minimum fees, was stable at approximately 3 basis points. Total assets under management in MSCI linked ETFs closed last night at $340 billion.

Like the Index and ESG product lines, our risk management analytics business also delivered strong operating results in the fourth quarter. Risk management analytics run rate increased 5% sequentially, toward the number of $235 million, compared to the third quarter of 2010. The weakening of the US dollar during the quarter increased run rate by $3 million, or 1%. The run rate increased 19% compared to the fourth quarter of 2009, with 7% of that growth coming from the acquisition of Measurisk.

The primary driver of the sequential run rate growth in the risk management analytics business was strong growth in both BarraOne and RiskManager from the acquisition of RiskMetrics. The run rate of BarraOne grew 9% sequentially, and 30% year-over-year. RiskManager grew 4% sequentially, and 11% year-over-year.

Risk management recurring subscription sales grew 37% during the quarter, to $16 million from the fourth quarter 2009 levels. Some of the increase in the year-over-year quarterly sales should also be attributed to the change in the timing of the year end, which positively impacted sales in November 2010 versus the same period in 2009.

For the full year, risk management analytic sales rose 63%. The increase in subscription sales was led by Risk Manager, which saw a 51% growth in annual sales during 2010, including a 19% year-over-year gain in the fourth quarter. BarraOne sales also remain strong.

The aggregate retention rate for risk management analytics was 85% in the fourth quarter, up from 80% a year ago. For the full fiscal year, the retention rate stands at 87%, from 81%. Total cancellations for risk management analytics fell by 18% from the fourth quarter of 2009, and by 25% for the full year from the prior year.

While the performance of Index and ESG and risk management product lines was very strong in the fourth quarter, and in the full year, the performance of the portfolio management analytics and governance product lines were not as robust. Our portfolio management analytics run rate declined 4% sequentially, and 4% year-over-year to $117 million. Recurring subscription sales improved, rising 34% versus the fourth quarter of 2009, and 19% for the full fiscal year.

But the progress we are making in growing sales rather rapidly was more than offset by a sharp increase in cancels during the quarter. Cancellations rose to $9 million in the quarter, an increase of 27% compared to the fourth quarter of 2009. A single client, a single large cancel by one client, accounted for $3.5 million of that total. For the full fiscal year, the cancel picture looks a little brighter, as total cancels declined by 24% compared to 2009.

The high level of cancels in the quarter pushed our retention rate down to 69% in the fourth quarter, versus 78% in the fourth quarter of 2009. The full fiscal year retention rate improved to 82% from 79%. The single cancel that I had mentioned before, by one client, lowered our retention rate by 12% in the fourth quarter, and by 3% for the full year.

The operating environment for the portfolio management analytics business remains challenging and competitive. We have yet to see signs that qualitative investors have begun to increase their levels of investment. The good news for MSCI is that we have made some very important strides in refreshing our product portfolio, as evidenced by the recovery in new sale levels during fiscal 2010.

We are cautiously optimistic that the launch last month of our new web-hosted software, Barra Portfolio Manager -- which eventually will replace our server-based software, Aegis -- will begin to address some of our weaknesses in the software product offering. We are also focusing on accelerating our risk-model pipeline, and we think that we should begin to see some results of this focus in the second half of 2011.

Governance products run rate was steady sequentially at $106 million, and declined by 6% year-over-year. A fall in institutional governance and forensic accounting products run rate were the drivers of the decline. Overall, governance run rate was stable, in large part because cancellations have declined. Cancellations declined 39% from fourth quarter 2009, and fell 19% for the full fiscal year, as the new voting system introduced last January gained acceptance among our clients.

New sales activity in the US in governance was disappointing, but it was offset in part by continued strength and growth in Europe. New recurring subscription sales in the fourth quarter declined by 15% year-over-year, and by 9% for the full fiscal year. In addition, nonrecurring sales declined 16% versus the fourth quarter 2009, and by 8% for the full year, largely as a result of more concentrated security holdings among our governance clients.

The weakness in nonrecurring sales, as you know, has a more immediate impact on our accounting revenues, because it gets expensed right away rather than amortized, which explains why accounting revenue for the governance business has been weaker than the trend in our run rate during the quarter. The decline in cancels puts our retention rate up to 86% in the fourth quarter, versus 79% in the fourth quarter of 2009. The full fiscal year retention rate improved to 83%, from 80%.

In the governance business, we are rebuilding a fully dedicated sales team, particularly for our proxy research and voting, which until last summer was partially integrated and diffused within the broader RiskMetrics sales organization.

During the first quarter, we will be rolling out a new product aimed at the low end of the market. We anticipate a continued acceptance of ProxyExchange, more feet on the street for our sales and renewal efforts, and an expanded product portfolio, and some recovery on the budgets of clients for governance products, all of which will have an impact on the sales pipeline over the course of 2011, we hope. In addition, we expect to benefit from growth in other governance product areas, such as our securities cap action unit, which has experienced some good growth, and our sales to corporate clients.

With that review of the operating performance of our major product lines, I would like now to provide you with an update on the progress we are making on the integration of the RiskMetrics organization.

Our integration process continues to go very well. We have plans in place to realize almost $40 million of the cost synergies, and we remain committed to achieving the $60 million in total cost synergies by the end of 2011, as initially programmed.

I noted on the last earnings call that we had largely completed the integration of our front office, including our sales force, and our product and corporate management teams. We are now in the second phase of our integration, which is the integration of our back office systems and processes and procedures, in areas such as human resources, information technology, the corporate services, and especially our finance and accounting functions. When we have finished with this second phase, the integration process that we laid out as part of achieving our synergy targets will be complete.

The final phase of the integration of RiskMetrics, for which we have begun to plan now, will be the integration of our risk product offering on a combined basis, and on an integrated basis in that new technology platform. This last step will take several years to complete, and any cost savings resulting from that were not included in the synergy targets announced at the time of the acquisition of RiskMetrics.

In summary, MSCI delivered a strong financial and operating performance in the fourth quarter, driven by our larger businesses of Index and ESG, and risk management analytics. Our integration process is going well. We did see some weak sales and elevated cancels in the month of December, but we attribute those primarily to a number of organizational changes and procedures due to the change in our fiscal year end for 2011, which created a one month stock period that is not part of either 2010 or 2011 fiscal years.

Looking ahead, our sales pipeline is building, and we anticipate growing demand for our products, and a continued, gradual recovery of our retention rates, albeit not yet back to pre-crisis levels, as I mentioned at the beginning of my remarks.

With the integration process well underway, we are now turning our attention to the opportunities we see across our businesses. To take advantage of these opportunities, as we have commented in the past, we are committed to stepping up the level of investment in our business. Let me give you some examples of what we are referring to.

We believe that the demand for our risk management analytics products will be strong in fiscal 2011 and beyond. I think we will be talking about risk management for at least the next 10 years, if not longer.

We need to invest in order to continue to build our coverage of additional asset classes in our offerings. We also need to continue to scale our ability to process an ever larger number of positions in securities by our clients, in order to meet the increasing demand of our existing clients, and attract new clients. That would require investment in our product management team, in our operations, in our hardware, and our data.

Another example is a key part in returning the portfolio management analytics business to growth, which we are committed to, is accelerating the pace of new product development and new product introduction. We have similar plans also in product management and sales capabilities in our governance unit, which we are committed to turning around. Those plans require an additional investment.

To fund the investment we want to make, while at the same time enabling our margins to expand at a measured pace, we anticipate deploying many of the synergies realized from the RiskMetrics acquisition. We will also be leaning heavily on our emerging market centers in Mumbai, in Beijing, Manila, Budapest, Monterrey and others to help reduce the marginal cost of these investments.

Finally, as we always do, we will be looking very hard at our existing prospects to determine where we can shave costs to free up additional resources, to redeploy them into investment opportunities.

If we are successful in achieving our investment goals, the growth in our overall profit margin is likely to slow over the coming years and the coming quarters. As I said, we are talking about the growth of the margin likely to slow down over the coming quarters, even above and beyond the seasonal factors in our margins that David will be highlighting in a few minutes.

The payoff, especially in terms of accounting revenues, would not be felt in the near term. But we do expect that this investment should contribute to our growth over the next three to five years in this great business.

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

Thank you, Henry. MSCI reported pro forma revenues of $213 million in the fourth quarter 2010, and $816 million in the full fiscal year. Fourth quarter growth was driven by organic growth of $16 million, or 13%, and the acquisitions of RiskMetrics and Measurisk added an additional $79 million. For the full year, MSCI's organic growth was $63 million, or 14%.

On a pro forma basis, operating revenues grew by 9% in the fourth quarter. Revenues were driven by a growth of 20% in the Index and ES&G product area, and 15% in the risk management analytics area. These gains were offset by a 13% decline in governance revenues, impacted in part by seasonality effects I will discuss below.

Revenues from portfolio management analytics fell by 3%. Also on a pro forma basis, subscription revenues grew 7%, asset based fees increased 24%, and nonrecurring revenues grew 6%.

Fourth quarter revenues grew by $11 million, or 5% sequentially from the third quarter. The sequential increase in revenues was driven by strong net new sales in the third and fourth quarters, which led to a 3% growth sequentially in subscription revenues, coupled with a 13% increase in asset based fees. Nonrecurring revenues grew by $2 million or 32%, thanks in part to $2 million of nonrecurring revenues recognized in the asset based fees subcategory of our Index and ES&G product revenue category.

On a pro forma basis, performance and risk revenues grew by 14% year-over-year, to $185 million in the fourth quarter of 2010. Adjusted EBITDA for that segment rose by 19% to $91 million. The adjusted EBITDA margin expanded to 48.9% from 46.7% in the fourth quarter of last year. Pro forma fiscal year revenues expanded 13% in that segment to $693 million, and adjusted EBITDA grew 16% to $324 million. The margins for the performance and risk segment for the fiscal year expanded to 46.8%, from 45.5%.

On a pro forma basis, governance revenues declined by 13%, to $28 million in the fourth quarter of 2010. In making this pro forma comparison, we are comparing the three months of September, October and November in 2010, versus October, November and December in 2009, creating a seasonal mismatch, because of a greater proportion of nonrecurring revenues that are generally recognized in December. If we were to compare on an apples-to-apples basis the September to November period in both periods, the revenues would have declined by 9%.

Adjusted EBITDA fell by 3%, to $8 million for the quarter, and margins expanded to 29.6% from 26.5%. For the full year, pro forma revenues declined by 7%, adjusted EBITDA declined by 3% to $32 million, but the adjusted EBITDA margin expanded to 26.2% from 25.2%.

Overall, pro forma total adjusted EBITDA expenses, excluding depreciation and amortization, nonrecurring stock-based comp, restructuring charges, transaction expenses, rose 3% year-over-year in the fourth quarter to $114 million. Pro forma compensation costs rose by 4.5%, while non-comp increased by 1%. During the quarter, compensation expenses benefited from a reversal of $1.5 million in the bonus expense line.

For the fiscal year, pro forma adjusted EBITDA expenses increased 6%, with compensation growing 7%, and non-compensation costs increasing 4%.

In the fourth quarter, we generated $99 million of adjusted EBITDA, a pro forma increase of 17% from the fourth quarter last year. Our margins expanded to 46.4%, from 43.3%. For the fiscal year, the adjusted EBITDA increased 14% to $357 million, and our margins increased to 43.7% versus 41.9%.

Moving down the income statement, we incurred $17.5 million of interest expense in the fourth quarter. Our effective cost of debt was 5.5%. We also incurred $2.4 million of non-cash foreign exchange losses during the quarter, most of which was related to the impact of foreign currency volatility on intracompany accounts held in foreign currencies by various RiskMetrics subsidiaries.

Our reported effective tax rate in Q4 was 40.7%, up from 38.1% a year ago. For the fiscal year, our effective tax rate was 40%, versus 37.9%. The main reason for the difference was that our 2010 blended tax rate was impacted by the non-deductibility of transaction expenses related to the acquisition of RiskMetrics. If we exclude the impact of those transaction expenses, our effective tax rate would have been 39.9% in the fourth quarter, and 37.4% for the full year.

GAAP earnings per diluted share for the fourth quarter were $0.25. Our adjusted earnings per share, which is a non-GAAP measure, and which we derive by adding back the after-tax cost of restructuring costs, nonrecurring stock compensation, amortization intangibles, and third party transaction expenses related to the acquisition of RiskMetrics, was $0.36 per share, up 16% from the fourth quarter of 2009. For the full year, our GAAP diluted EPS was $0.81 a share, up 1%, and our adjusted EPS was $1.35, up 21%.

Our operating cash flow for the fiscal year was roughly $183 million, up $52 million from 2009. Our operating cash flow in the fourth quarter was $62 million, versus $10 million in the fourth quarter of last year. The increase was driven by the impact of the acquisition of RiskMetrics, which increased cash earnings, and the absence of the $28 million cash payment made to Morgan Stanley in the fourth quarter of 2009. Please note that we anticipate operating cash flow to decline in the first quarter from the fourth quarter, primarily as a result of the cash portion of employee bonus payments, which are paid in January.

We ended the fiscal year with $1.263 billion of total debt outstanding, of which $445 million was swapped into fixed-rate instruments. We expect to repay approximately $56 million of debt during the first quarter, in line with the terms of the cash sweep in our credit agreement. We also had cash and short-term investments of $300 million at the end of the 2010 fiscal year.

I would like to add a few more figures in order to help you with your earnings models. First, please remember that there is a seasonal impact on our EBITDA margin. Typically, in the first quarter of the fiscal year, we increase our compensation cost accruals to account for changes in base salaries, benefit changes, and the bonus expense. As a result, the sequential change in compensation expense from the fourth quarter to the first quarter is higher than the change in our subscription revenue, lowering our adjusted EBITDA margin in the first quarter versus the fourth quarter. Barring a significant increase in AUMs linked to our indices, we expect a similar pattern in the first quarter of 2011.

Also impacting our sequential margins will be the impact of new hires, and the absence of nonrecurring revenues and expense items I discussed above, in part offset by continued realization of synergies.

Next, we expect our effective tax rate, excluding the impact of transaction expenses and discrete items, in the fiscal 2011 year to be in the range of 38% to 38.5%.

Our average diluted share count was 121.2 million in the fourth quarter, and we expect our average fully diluted share count in the first quarter to be 122 million. Our capital expenditures were $13 million in fiscal 2010, and we expect 2011 capital expenditures to be in the $20 million to $25 million range.

Before we open it up to your questions, I want to provide you with some additional details about the accounting impact of the synergies we have achieved to date. As Henry mentioned, we have plans in place to achieve almost $40 million in run rate of synergies, meaning that they are the current estimated benefit of an action that has been taken, or for which there is a firm plan to take that action. We estimate that the savings realized in the fourth quarter from synergy actions taken was $5.5 million, and we expect to achieve an incremental $2 million to $3 million in the first quarter of 2011.

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

Thank you. (Operator Instructions) Our first question comes from Suzanne Stein with Morgan Stanley.

Hi. I'm just curious about the impact on your business of the shift in investor demand to lower-fee ETFs. I know these are long-term contracts, but is there any reason that there wouldn't ultimately be pressure on the asset-based fee business as a result?

Yes. Let's -- that's a good question. And let me try to elaborate on it.

There are potentially three different things that we could be referring to. There are trading fees on ETFs that online brokers and the like are engaged in a price war. Those are commission -- trading on ETFs and things like that. There are management fees -- or I should say expense ratios, and obviously -- consequently, management fees that are being reduced in some cases by the different providers. And then lastly, there is the index fee that is paid by the exchange credit fund, which is obviously what we care the most about.

We have not seen any tangible evidence of any reduction or proposed reduction in our pricing abilities in ETF fees for MSCI-linked ETFs. If anything, as we have contracts coming up for renewal we've been able to establish a strengthening terms and conditions of those ETFs, such as minimum fees, including new floors, the provision of basic set-point floors, and the like. Which, obviously, even though they may not, at times, directly impact the average -- weighted average basis points that we charge, but they are a reflection of an ability to have some pricing power in this business. So that is -- so we haven't seen -- we see what is happening, clearly, in the ETF world, but we haven't seen that.

Secondly, in many of the larger ETFs that we -- some of our larger clients, our fees are a relatively small component of the overall expense ratio. And therefore, we believe and we hope that there will have to be a significant decline in the total or overall expense ratio for anything to affect us.

Now, one other point that I'd like to mention, and we will be providing more information in the months and quarters ahead, is that in many of the larger ETFs, we do have breakpoints that -- on margins and (inaudible) assets, the incremental ETF basis points that we charge declines by some amount to capitalize the economies of scales by the providers. Those have been contractual for many years, or a decade or so. And, that is why you probably see a gradual, small decline in the weighted average ETF fees that we report to the marketplace, as an example. But those are not any evidence that our pricing ability has declined in this business whatsoever.

Okay. And, just one more question. As far as the cancellation of the single large client, do you have any insight into the reason for that cancellation?

Yes, this is a single client that we have been working with for quite -- quite a long time. They are -- there were two or three reasons for that cancel. One was the cancel -- the client eventually gave up on our promises that we were going to be coming up with a lot of new products. And as we have said in the past, the investment that we have made in this business, which has been significant already and therefore has some cost, was slow to translate into a new software, and new models, new analytics, and things like that, particularly during the financial crisis.

And we're obviously at the cusp of benefiting from all of that, but it was not in time for this client.

Secondly, they were able to replace us with a lower-cost provider that they had been working with for some time. You know, those were the two reasons that I can attribute to -- the cancellation to.

Thank you. Our next question comes from David Scharf with JMP Securities.

Hey, good morning. A couple things to follow up on, Henry. First, I just wanted to get a little more clear on -- maybe directionally in 2011, how we ought to think about EBITDA margins. I mean, it sounded like, broadly, you spoke about cost synergies, obviously funding what looks like some stepped-up investment spending in that what -- we would be looking at a lower rate of growth, not an absolute flattening of margins. But can you give us a little better picture of a -- of a range, perhaps? Should we still be thinking mid to high 40s? You know, is it a little tighter range that we should be modeling this year, and perhaps even into 2012, based on the magnitude and timeline of this spending?

Let me attempt to give you some level of indication, which is always hard. But -- particularly, I will give you some qualitative direction here.

Let's start from the point of view that we currently have an $800 million-plus revenue business, with pretty healthy margins. We believe that as the growth Company that we are, and a dominant player in this ever-growing space of providing sophisticated tools to the investment management world and investment industry, that there is a wide range of opportunities. And that we feel -- we feel that there is a wide open field for us to build a very large and sizable Company out of here in the next ten, 15 years. But like any growth company or any big aspirations to continue to grow into a fairly large company, it requires a meaningful and significant amount of investment to achieve that.

We are extremely ecstatic about the progress we've made in risk management, because the combination of the BarraOne product line and the RiskManager product line, and all the things that we can do with that, are phenomenal in getting us to a large level of operation in that space, that is badly needed in the investment world.

Same thing in equity indices and to a large -- to some extent then in governance and equity-portfolio analytics, even though we have been challenged by turning those businesses around, partly because of the financial crisis but partly because of internal decisions or lack of focus that either MSCI or RiskMetrics had in these businesses in prior years.

So, therefore, then we say, okay, how do we do this in a way that we have our cake and eat it too? I.e., that we continue to provide a small and gradual progress of margin increase to our shareholders, which I include myself into that category. And secondly, do high levels of reinvestment in our Company, which, obviously, means a lot -- people investments.

The way we get to that is to say, let's cap the -- an amount of the incremental growth to reinvest it into the business. But also, and very, very importantly, we also go inside the Company and say, what can we reprioritize? How can we lower costs? How can we be tighter on non-compensation expenses? How can we move more positions to emerging market centers? How -- in order to free up resources to do that high level of an investment.

So, now, in the past, we have been talking about this. And, fortunately for us, but fortunately for you, we haven't come to the numbers that we have been promising in terms of EBITDA. It's been a high-class problem. And a lot of it is because growth is hiring, and we are challenged in the Company by increasing levels of hiring around the world. And we are reevaluating the hiring models and the recruiting models in order to get to those high levels of hires around the world, and to still have highly qualified people. So, that is a big challenge.

And the second challenge is that the ETF business has been, obviously, ahead of us, providing more revenues to the top line that drop to the bottom line. And therefore, we've been talking about margins of X, and in the quarter we end up providing margins of X plus Y. And people have said, why have you not been performing to what you promised? Right? Again, a high-class problem.

So, I think, away from the issue of the seasonality of the market, which we want to continue to reinforce that issue, that it starts lower in the first quarter and then gradually builds up to the fourth quarter, which is where we are now. Away from that issue, I think that any kind of margin expectations, if we are successful, in the mid to high, or re-emphasizing the high 40s, should not be an expectation. And away from that, it's hard to say, because this is going to be volatile.

That's helpful. I guess, as we think about the growth opportunities, you've laid out a fair number of business segments where you are going to be investing more. And, obviously, portfolio analytics and governance were highlighted, and it's a catch-22. Obviously, you have to refresh the product suite in order to reinstate growth. Should we view the majority, more than half the investment, centered on portfolio analytics and governance? Or is it pretty evenly distributed among all of your businesses?

The way we look at it, David, would be a good and reasonable amount of investment in the risk management analytics, because that's a business that we are very positive on. I mean, we are very excited about. We are even more excited about the equity-index business, but it's a business that doesn't require large amounts of investments, so we will be investing as much as we can there. And anything beyond that, I think, is probably more through acquisitions rather than organic investment.

And then, there definitely is some level of investment, but I won't necessarily say the majority, in portfolio analytics and governance, in order to turn those businesses around. And we are committed to do that, and being very disciplined and very diligent internally in all the steps that we need to take to do that.

Thank you. Our next question comes from Aaron Teitelbaum with KBW.

Hey, good afternoon, guys. Thanks for taking my question. I am actually just curious, drilling down a bit deeper, can you guys provide us an update on a business that you talked about a little bit last year, but I just wanted a quick update on the managed service offering for BarraOne. I'm just curious what kind of interest you are seeing there from clients, and how the growth is progressing in that initiative.

Good question. Basically, a lot of the BarraOne product line, as you know, is positioned equally to asset-management companies and to what we call asset-owner companies -- pension funds, endowments, foundations, sovereign wealth funds, and the like.

In a lot of these asset owners, they are asset-rich, but they are staff-poor. And therefore, they look to us to help them in the logistical part of running BarraOne -- inputting data, cleaning data, formatting reports, understanding why assets get rejected, and modeling those assets so that they don't get rejected. We clearly do not get involved in making editorial or investment decisions for them. That is their business.

So, the managed service offering or outsourcing of those logistical, administrative functions by these clients, and by some, as the manager clients have helped us continue to grow BarraOne. And when you see those growth rates -- nice growth rates in BarraOne, that I mentioned before, and the run rates, some of that is coming by the expansion of those managed services.

So this year we are committed to continue to do that. It is not very expensive for us, because a lot of this is in our emerging market centers. So -- and the payback, it's significant, because we end up helping clients and having them subscribe to a product that they would not otherwise be able to subscribe, if they had to do all the work themselves.

Great. I appreciate the color. Switching gears a bit to the Index business. I'm just curious, particularly since we won't hear from you guys until May, which is, I believe, the timing of annual price increases, what your thoughts are in the Index business about the pricing power this year, versus the past couple of years.

Yes, the -- there are two parts, right? The ETF business, which pricing is the same, we don't change, except in the renewal of the contracts we put these other things like floors and minimum fees and all of that that I mentioned to Suzi before. But on the benchmark part of the business -- sometimes people refer to that as the data part, but it is really sell the data for benchmark purposes -- it's too early to tell right now, but our plan is to have an annual price increase every year, to consistently do that in the single-digit numbers. We will target mid-single-digits, but at times it will be lower than that, other times it will be a little higher than that. But we haven't made any final decisions on that yet, but that is the -- that's the practice that we want to follow.

Thank you. Our next question comes from George [Mulhallos] with Bank of America.

Hey, guys. I just want to delve a little bit more into the portfolio analytics business. One, with that large customer, can you classify what kind of customer it was? Investment bank, asset manager? And then, on the remaining $6 million, $6.5 million or so in cancellations, how much of that was competitive losses versus funds just shuttering or desks just shuttering?

Yes, the large client was an asset manager, and it was a competitive loss, as well. The remaining cancels -- I would -- I don't have the details in front of me, but I would say the majority are probably not competitive cancels. We do have competitive pressure in this business, but -- but it is split between people canceling the program because they fired their quant staff, or they, they're -- if it's a quant shop, but if it's the quant support of a fundamental shop that they decided to downgrade the product or -- or users or locations, or whatever, so it is not competitive from that point of view.

Like the majority of the business, most of the businesses were in the asset management world, and most of the cancels were. And as Henry mentioned, other than that large, they were mainly tinkering with the number of users or the amount of data purchased in -- in their operation.

Okay. Got you. And you guys are talking about investments in the governance business. Should we assume that you guys are now committed to keeping that business longer-term?

Excuse me. We haven't decided one way or another if we are going to look for the longer-term. What we have decided, and -- because it is our obligation, is that we own the business today, and we need to be good stewards of that business, including making -- making investments in that business and having the focus and attention to improve it and turn it around and return it to growth or high levels of growth going forward.

Okay. And I guess my last question would just be, in terms of the hiring plans you guys are sort of putting forward here, can you give us a sense as to the scope, in terms of additional headcount? How -- is it sort of a multi-year expansion you're looking at? And is the infrastructure in place now to put that kind of hiring in place that you guys are targeting?

Yes, the -- I think the theme that you have been hearing us talking about all the time is continue good, healthy levels of investments in our business. Again, we are a growth Company, and growth companies need investments to continue to grow.

It happens that in our business, the vast majority of investment is people, because it's an intellectual property business, not nuclear facilities or anything like that, right? Therefore, the vast majority of our investment is either people or things that are related to the expansion of people, like [C&E], and they need to know about Blackberry, a laptop, and we have to pay for their space, and things like that. So, this is going to be an ongoing theme. We are going to be talking about investments all the time.

Over time, we are going to try to give you more and more granularity in which are the areas that we are making investments in. Most of our investments are in areas that are not sort of basic research for something to pay back ten, 20 years from now. A lot of it is in distribution. So, a good amount of this hiring we are talking about, it's in distribution, in new salespeople. Hopefully we will open up new offices in the next couple years, and new consultants are out there supporting the sales processes, client services, and the like.

Some of that is also in the data factoring. I'd like to remind everyone that inside MSCI, it's a giant data factory. We get a huge amount of data in. We crunch a lot of data, and distribute a lot of data out. So, we need a good number of people, particularly in emerging markets, to run that fairly large data operation as we expand our product line.

We are -- we decided this year to stay away from giving the number of headcounts that we are going to do and the like, because it hasn't worked in prior years for us to do it that way. We probably created more noise than not. So, we want to focus more on the -- directionally, where the margin is headed, and obviously, on the expense side.

It tends to be over the course of the year, with a slight weighting -- or weighting towards the first part of the year. Most often, the fourth quarter is the lowest hiring period, and the highest would be in the first and the second.

In terms of having the infrastructure in place, we just hired a global head of recruiting, which is -- we're very excited about, and a very experienced person that has come to us, he started this week. And, I think the thing that we need to crack is that the recruiting model that we have traditionally in the past has been a secondary model. We hire people with three, five, seven years of experience in the secondary market. We will continue to do that, but we need to put in place a fairly robust and consistent recruiting process in what I call the primary market, which is directly from the PhD programming universities, the MBA program, the Master in Financial Engineering, Master in Accounting, MBAs, things like that, across the world.

Our next question comes from Drew Gaputis with Davenport.

Thank you for taking my question. My first question is on Barra Portfolio Manager. I'm curious as to whether most of the majority of clients are expected to add or upgrade to this offering, and what would be the timeframe for that conversion? And would there be any incremental revenues associated with that?

Yes, if I remember correctly, we have probably -- what, 800 or so clients in our equity analytics business. We had an outreach program to about 300, 350 of those clients around the world in the last few months, to make them aware of the BPM launch and what they wanted to do. We have a pipeline of about 150 of those institutions that want to go through a trial program of BPM. So, we do expect that, as we said before, that eventually -- this is a multi-year process -- this web-hosted solution becomes a replacement for the older server-hosted or client-hosted Aegis software. And yes, we are hoping that this will help us with retention for sure, and will help us on new sales.

Okay. Thank you. And the last question. Just -- with all the talk of reinvestments and margins, Henry, could you remind us on the potential growth opportunity, or maybe give us some more specifics on the size of the potential markets out there as we look over the longer term and kind of think about the ultimate upside for MSCI? Thank you.

Well, I think if you look at risk management analytics, we are only scratching the surface of what risk management systems could be installed in all sorts of institutions. We have traditionally focused on the buy side, such as asset managers, asset owners and the like. We are -- clearly with RiskMetrics, we are focused on hedge funds now.

We are beginning to focus quite a lot on banks around the world. It's not asset liability, risk management, but asset market risk. We are also expanding beyond market risk to counter-party risk, liquidity risk, and things like that. Clearly, performance attribution.

So, very, very wide open field, and the vast majority of the competition there is not somebody else's internal system or some form of assistance. So, the field is very wide open, and we are very excited about that over the years and the decades.

Then, on equity indices, it's the same thing. The globalization of investing, the need to benchmark investments, or to use indices as the basis of portfolio in passive investments. We are only scratching the surface of what can happen over a ten, 15-year period. And that is an industry that we are creating, because there is no -- there hasn't been a big industry like that in the past. So, it is hard to see how that all develops, but we are very bullish on those two.

We are also bullish on governance and equity-portfolio analytics. Obviously, we are a little bit meek right now, because we are trying to turn these businesses around. But, the ability to use quantitative tools and the fundamental investment management process for equity and fixed income should be a good, sizable investment -- sizable market. We are just trying to just simply tend the castle, grow the sales, before we start talking about expanding into fundamental managers in addition to quant. And governance is the same.

But again, we are kind of focused right now, first thing first. Let's turn it around and figure out how do we expand the business before we talk about the longer-term on that one.

So, I think with that, I think we conclude. Operator, we conclude the Q&A process. And I'd like to thank everyone for participating. We are here to answer more questions as you digest all of these numbers and information on this call. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.