明晟 (MSCI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your MSCI fourth quarter 2012 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Edings Thibault, head of investor relations.

Sir, you may begin.

Thank you, Shane.

Good morning, everyone, and thank you for joining our fourth-quarter and full-year 2012 earnings call.

Please note that earlier this morning, we issued a press release describing our results for fourth quarter, full year 2012, and a copy of that release may be viewed on our website at msci.com, under the investor relations tab.

You will also find upon our website a slide presentation that we have prepared to accompany this call.

This call may contain forward-looking statements.

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

For discussion of additional risk and uncertainties that may affect MSCI's future results, please see the description of risk factors and forward-looking statements in our Form 10-K for fiscal year ended December 31, 2011, and other SEC filings.

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, lease exit charge, restructuring costs, and nonrecurring stock-based expense.

Adjusted EPS also excludes the amortization of intangibles, resulting from acquisitions and debt repayment, and refinancing expenses.

Please refer to today's earnings release and the relevant slides in the investor presentation for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures.

We will be referring to run rate frequently in our discussion this morning.

So let remind you again that a run rate is an approximation at a given point in time of the forward-looking revenues 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 or analyses, or changes in foreign currency rates.

Please refer to Table 10 in our press release for a detailed explanation.

I will now turn the call over to Bob Qutub.

Thank you, Edings.

And thank you, everyone, for joining us in this call.

Earlier this morning, MSCI reported strong financial results for the fourth quarter of 2012.

Our operating results were highlighted by another strong quarter for our performance and risk segment, with the index and ESG subscription run rate increasing by 25%, paced by the acquisition of IPD and 11% organic growth.

Our government segment continued to make progress on a path to sustainable growth.

While there remains work to be done, we are pleased with the trend and the results we have reported in the past few quarters.

MSCI's results benefited from strong net inflows in the MSCI-linked ETFs during the fourth quarter.

The vast majority of these flows came after Vanguard announced their decision to switch indices for certain ETFs.

Since the switch was announced, MSCI has seen the assets under management and other ETFs linked to MSCI indices increase.

As MSCI-linked ETFs gained almost two-thirds of all flows into US-listed cross-border ETFs, that kind of vote of confidence in the value of MSCI indices is extremely gratifying.

The run rate of our portfolio management in our analytics business, which accounted for 11% of our total, continued to decline, with much of that decline in run rate can be traced to foreign currency moves and the impact of product swaps.

The combination of tough conditions for our clients and ongoing price competition has proved to be strong headwind.

We do not believe that we're losing ground to our competitors, and we will work to continue to [harvest] to stabilize this important product line.

Another topic I want to highlight is the deployment of our capitals.

Over the course of 2012, we did a great deal of talking to our board, investors, and others about how we can deploy our capital to support our medium- and long-term growth while balancing the needs for our shareholders.

I'll review the details of how we used our capital in 2012 later in the call.

But the result of that process was a balanced approach that funded our internal investment, and enabled us to take advantage of limited strategic opportunities and return capital.

Now, let's get into the numbers.

MSCI reported fourth-quarter net income of $54.5 million, representing an increase of 22% over fourth-quarter 2011.

Revenues were $247.1 million, up 9% from fourth-quarter, 2011.

Adjusted EBITDA was $116.6 million, up 12% year over year, with adjusted EPS rising 16% to $0.52.

For the full year, MSCI reported net income of $184.2 million, an increase of 6% over 2011.

Revenues were $950.1 million, an increase of 5% from 2011.

Adjusted EBITDA was up $434.5 million, up 4%.

And adjusted EPS was up $1.94, up 5%.

Our fourth-quarter revenue growth by segment was led by our performance and risk segment, which reported revenue growth of $18.4 million or 9%, driven by a higher growth in index and ESG, and risk management analytics revenues.

Partially offset by a decline in portfolio management analytics, and energy and commodity analytics.

Our government segment revenues rose $2.6 million, or 9%.

Our revenue type.

Overall, quarterly subscription revenue grew by 6% over the fourth quarter of 2011, or by 5% organically, and asset-based fees rose by 23%.

At a run rate basis, our total subscription business grew by 10% to $840 million.

That growth is aided by the acquisition of IPD, which added $35.3 -- excuse me, $39.5 million.

On an organic basis, our subscription run rate grew by 5%, led by an 11% increase in index and ESG subscriptions, 8% growth in governance, and 4% growth in risk management analytics.

This was partially offset by run rate decline in portfolio management analytics and energy and commodity analytics.

On a sequential basis, run rate grew by 1% organically.

MSCI's growth and run rate continues to be impacted by a tough selling environment and by a seasonal uptake in cancels.

Total sales of $37 million were down 13% from fourth-quarter 2011, and subscription sales declined 16%.

Our overall retention rate remains solid at 85% for the quarter, and 90% for the full year.

Just as a reminder, nearly one-third of our annual renewals come due in the fourth quarter, and as a result, we have generally recorded the highest level of cancellations in that quarter, leading in turn to a sequential decline in retention rate.

Given the seasonality of the fourth-quarter retention rate, we believe that the year-over-year comparison is more appropriate than looking at the sequential trend.

Now, let's take a look at the performance of our four major product lines.

Starting with our index and ESG subscription products, revenues there grew by $10 million, or 14%, with IPD contributing $3.6 million to growth.

Run rate grew 25% to $338 million, or by 11% on an organic basis.

We saw an uptick in sales in Europe, offset by weaker demand in other regions, especially the United States.

We continued to benefit from increasing sales, ESG products, and overall retention rate stayed strong at 90% in the fourth quarter, and 93% for the full year.

Before I get into the discussion of asset-based fee run rates, let me clarify that we continue to reflect the Vanguard revenues in our reported P&L, along with the related AUMs of measured performance.

However, for our policy of reflecting known cancels, we have adjusted our run rate, which is a forward-looking measure, as of the third quarter 2012 to reflect the loss of the Vanguard ETFs.

The AUMs of the Vanguard ETFs was, as you may recall, $131 billion at the end of third-quarter 2012, with an estimated run rate of $24 million.

Our asset-based fee revenues and run rate benefited from a combination of solid market performance and strong influence in the ETFs linked to MSCI.

Revenues rose 23% on the back of an increase in overall assets under management, and higher revenues from non-ETF asset products.

Asset-based fee run rates rose 6% year over year, and 11% sequentially to $127 million.

If we also exclude the run rate attributable to the Vanguard ETFs from the company's run rate at the end of the fourth quarter of 2011, our annual asset-based fee run rate growth would have been 25%.

There was over $402 billion of assets that are under management in ETFs linked to MSCI in the end of December 2012, up 33% year over year, and 11% from the end of December 2012 [sic.

-- see slide 7].

$138 billion of that AUM was in the Vanguard ETFs, leaving $264 billion in AUM and those ETFs that will remain linked to MSCI industry.

Excluding the Vanguard ETFs, our average pricing on MSCI-linked ETFs remained constant for the third quarter at 3.7 basis points.

I want to spend a moment discussing net flows in ETFs linked to our indices.

For the full year 2012, those ETFs saw a total of $57 billion of net inflows, equivalent to 19% of the total AUM at the beginning of 2012.

In the fourth quarter alone, ETFs linked to MSCI indices experienced $26 billion of net inflows, and only 15% of those flows, or $3.9 billion, were into those ETFs that will switch indices.

So the big driver of our sequential run rate growth was the performance of and flows into those ETFs that will remain linked to MSCI.

Speaking of those Vanguard ETFs, the transition is underway.

Earlier this week, we reported that our January month-end balance for AUMs and ETFs linked to MSCI indices was $334 billion, down from $402 billion at the end of December.

The latest balance reflects the migration of approximately $100 billion in ETFs.

As of January 31, there was approximately $48 billion of AUMs and [fourteen-eight] ETFs, which remain to be transitioned.

The remaining ETFs account for approximately 25% of the $24 million run rate that we identified in October.

Our risk management analytics revenues rose 7% year over year, and run rate rose 4% to $262 million.

RMA sales were $11 million during the quarter, essentially in line with a level that we have seen all year, but down more than 20% on the fourth quarter of 2011.

We experienced strong interest in our hedge fund reporting product, and solid demand from banks and broker dealers offset by continued softening from asset managers and slower sales to pension funds.

Cancellation trends remain viably stable, as our retention rate rose to 84% for the fourth quarter, and remained 89% for the full year.

While recently we spent $23.5 million to acquire Investor Force.

Our investment in Investor Force will open up new opportunities for RMA throughout the risk and performance products retention fund.

We had a tough quarter in our PMA product line, with revenues down 5%.

Run rate declined 7% year over year to $110 million, with most of that decline coming in the fourth quarter.

There are several factors behind the decline in run rate.

Changes in FX rates, most notably the weakening of the Japanese Yen, lowered run rate by $1.8 million during the fourth quarter.

The business was also impacted by product swaps into our risk management analytics product.

These swaps lowered our PMA run rate by $3 million year over year, including almost $1.6 million during the fourth quarter of 2012.

You can see that there is a difference between our annual aggregate retention rate of 78% and our quality retention rate of 84%.

Taken together, these two factors resulted in a net impact of PMA rate of $3.4 million in the fourth quarter of 2012, or just half of the $6 million sequential decline with net cancels accounting for the remainder.

Looking beyond those FX changes, and the impact of product swaps, the PMA business remains very competitive.

While the new products we have launched are having an impact, the struggles of asset managers broadly, and quantitative asset managers more specifically, continue to have a dampening effect on our sales.

We see these conditions continuing through the first quarter of 2013.

On a very positive note, we are encouraged by the progress being made by our governance segment, which was reported a 9% increase in revenue.

Governance run rate grew by 8% to $117 million.

The growth in our governance business continued to be driven by the success of our executive compensation data and analytics products, and by an improvement in retention rates.

The core proxy research and voting market remain competitive, where we saw a marked improvement in our retention rates in this product, which is an indication that the efforts we have made to improve the quality of our products and the level of service we provide are being appreciated by our clients.

Now, let's turn to our expenses.

As I mentioned earlier, our adjusted EBITDA rose by 12% to $116.6 million in the fourth quarter of 2012.

Our adjusted EBITDA expense rose only by 7% to $131 million, with all of that growth coming from higher compensation expense.

Our adjusted EBITDA margins was 47%, up from 46% in the fourth quarter 2011, driven by an increase in revenues and strong expense management.

Please note that we expect our EBITDA margins to decline sequentially in the first quarter, as a result of the impact of the IPD Investor Force acquisitions, both of which have lower margins, the impact of lower asset-based fees, resulting from Vanguard index switch, as well as normal sequential increase in cost, including the flowing through of inflationary compensation increases, and seasonally higher benefit costs.

Compensation expense rose by 10% to $93 million.

The increase in compensation expense was driven by an increase in overall compensation levels and benefits expense, and by the addition of IPD.

In addition, the change in compensation expense was exacerbated by MSCI's decisions in the fourth quarter of 2011 to reduce its accrued bonus expense, which lowered compensation costs in that period by $3 million.

Also, the addition of 312 employees at IPD slowed the progress we are making on leveraging our low-cost centers, but even after factoring in those additions, we still increased the percentage of our headcount in those centers to 41%, from 39% a year ago, but down sequentially from 44% in the third quarter.

While we're on the subject of compensation, let me remind you that MSCI is now fully amortized with non-recurring stock-based compensation, issued in the wake of the Riskmetrics acquisition.

Non-compensation expenses declined by $1 million, or 2%, as a result of lower IT spending and recruiting expenses, which helped to offset the impact of higher occupancy expense and the impact of IPD non-compensation expenses.

MSCI's tax rate increased to 38.3% in fourth quarter of 2012.

Driving the uptick in quarterly taxes was a $1.7 million charge to cover our portion of additional tax liabilities incurred when we were part of Morgan Stanley.

We also incurred certain acquisition charges related to IPD that are not tax-deductible, which raised our effective rate.

We expect an operating tax rate in 2012 (sic.), net of discreet benefits or expenses, to be in the 34% to 34.5% range.

Now, turning to our balance sheet.

We generated $347 million in operating cash flow in 2012, benefiting from our profitability and increased working capital efficiencies of $52 million.

We use that money to fund our organic investments in our analytic platform and index branch.

We spent $45 million in CapEx, and invested $125 million in IPD.

We also returned a total of $324 million of invested capital in the form of a $224 million reduction in debt, and in December through the $100 million accelerated share purchase agreement, which is part of the authorized $300 million share buyback in December.

With the ESR in place, we did not utilize any of that additional authorization, as of the end of the fourth quarter.

Just a reminder about the mechanics for the accelerated share repurchase agreement we signed in December.

We paid $100 million to Morgan Stanley on the date of the agreement.

They delivered to us 2.2 million shares, which we withdrew from our share count.

The balance of the shares to be delivered to us, if any, is expected no later than July 2013, and is based on the daily average volume wage share price, during the repurchase period.

And MSCI may be required, in certain limited circumstances, to deliver shares, or at its option, to pay cash at the settlement time.

Because of the timing of ESR, and the reduction of our share account -- the reduction of our share account had little impact on fourth-quarter or 2012 results, but it will have a modest benefit to our EPS growth in 2013.

Looking ahead in the spirit of providing more insight on our capital deployment, we ended 2012 with $254 million of cash, cash equivalents and short-term investments, with approximately $84 million of that cash held offshore.

We have already invested $23.5 million to acquire Investor Force, and under the terms of our current loan, we are scheduled to repay $44 million in 2013 of our outstanding debt in four $11 million quarterly increments.

And after an uptick in the -- in 2012, we expect our capital expenditures to be lower in 2013, in the range of $30 million to $35 million.

And of course, we have the authorization granted by the Board to repurchase up to 200 million of our shares.

Now, let me turn it over to Henry for some additional comments.

Thanks, Bob.

Before I speak to you about some of the initiatives we have underway for 2013, I would like to reflect a bit more on the past year.

The operating environment was difficult for much of 2012, and the fourth quarter was no exception.

MSCI experienced a slowdown in sales across our major product lines, as we saw clients delaying their decision-making processes.

This trend, which began in the middle of 2011, remained constant throughout 2012.

Throughout that time frame, however, our overall retention rate has remained largely stable, a trend that has also continued in the fourth quarter.

So in our view, we think we're experiencing a broad hesitation on the part of the participants in the financial market to make significant budgetary decisions.

We continue to believe that this hesitation is largely a function of macroeconomic uncertainty, and some of the more micro challenges faced.

We believe that both confidence and spending will rebound at some point.

It is important to keep in mind that MSCI's business is evolving.

Financial markets are becoming more integrated, both globally and across asset classes, increasing in complexity our clients [make].

Clients and regulators are demanding more transparency, both internally across portfolios and externally between managers.

At the same time, the cost of processing data is dropping fast, which is going to drive innovation and increase the value of unique data sets and analytical tools.

All of these factors are driving underlying demand for tools which can provide insight and linkage around performance and risks for single asset class and multi-asset class investors and managers.

It is our goal at MSCI to meet that demand and to provide those tools.

The same factors are also driving our need to invest, both organically and through acquisitions.

So at MSCI, we're not sitting still, waiting for market conditions to turn.

We are taking a proactive but balanced approach to our investment plan.

To meet the needs of our clients, we made sizable investments in our products and services over the course of 2012.

We have consistently added to our sales and sales support organizations, which we think has had a very positive impact on our retention rates.

On the broad product development side, we are benefiting from a range of new products that were launched throughout 2012.

At the same time, we're working hard to limit the impact of this investment on profitability by leveraging our low-cost centers and our technology, and keeping a very tight rein on discretionary spending in the Company.

In our index unit, we have continued to expand our offering of risk premium and other strategy indices, which integrate the intelligence of Barra analytics with a comprehensive market view of our global indices.

We also introduced economic exposure indices, which has generated a lot of interest from clients who wish to know more about where the companies in their portfolio make their money.

In our risk unit, we significantly upgraded the hardware platform underlying our risk analytic in order to expand the processing power and flexibility we offer our clients.

That upgrade gives us a more robust infrastructure and a scalable architecture.

We also rolled out new services to help hedge funds meet disclosure requirements to investors and regulators.

We have also taken steps to integrate Barra's equity and multi-asset class insights into the risk metrics, risk management platforms.

Finally, we continue to work on broadening our product offering to include multi-asset class performance and distribution of analytics in addition to risk management analytics, which is a key step in linking performance and risk for multi-asset class investors.

In governance, we have invested to expand the breadth of the compensation data analytics products and services that we provide to include more companies and in more countries.

We also added to our sales and client service organization, improved the stability and performance of our proxy voting system and upgraded the look of our proxy research offerings.

In portfolio management analytics, we continue to launch new models, and will shortly enhance our Barra portfolio manager software by adding back -- by adding critical portfolio back-testing functionality, that is much in demand by our clients.

In addition to making this important organic investment, we also invested $125 million to acquire Investment Property Databank or IPD.

To understand why IPD fits with MSCI's strategy, it is necessary to go back to what I said earlier.

MSCI's goal is to provide mission-critical investment decision support tools that link performance and risk across portfolios that are invested in any single asset class, and those composed of multiple asset classes.

In order to provide insight about multiple asset class portfolios, we need to bring together best-of-breed tools for measuring performance and risk in each asset class.

IPD's unique data indices and analytics, and its strong client base broadens our performance management tools to include commercial real estate, and will help us bring additional insight and global comparability to the managers of this asset and the institutional investors who fund it.

At the beginning of 2013, we spent $24 million to acquire Investor Force, which provides pension fund consultants with critical portfolio performance measurement tools to service their pension fund clients.

This acquisition will deepen our penetration into this important part of the pension fund community, and will give us a platform to which we can add data, analytics, and especially risk-measurement tools into that platform to serve pension fund clients.

The combination of Investor Force's platform, the current tools and the incremental insight that MSCI can provide should enable these consultants to significantly expand the quality of advice they provide to their pension fund and other asset owner clients, further embedding MSCI in the investment process.

We will continue to invest in a proactive but balanced fashion in 2013.

As always, we'll be investing in new products, including additional risk [premium] strategy indices, new governance tools, and enhanced risk and performance analytics across our various asset classes.

We will also be making additional investments in our client outreach and distribution channels, in order to expand and deepen our relationship with our largest clients, extend our geographic reach, especially with an emerging market client, and bolster our client services.

We're also expanding our marketing and advertising efforts, especially to financial advisors in the US, as we seek to continue to build our brand and make them aware of the many factors that differentiate MSCI's global indices from those of the country and regional players for [all their low-price, new entrance.]

Finally, we will be making additional investments in our technology infrastructure, and are launching a multi-year effort to evolve our two existing risk management software platforms -- BarraOne and RiskManager -- by knitting them together, closer over time.

Many of these investments will extend beyond 2013.

But as I said before, we will be working very hard to ensure that this investment does not significantly affect the levels of profitability of our company.

These investments are a part of a larger financial strategy of balanced capital deployment that Bob described earlier.

We are fortunate that our strong cash flow will enable us to make organic investments, both on acquisitions like IPD and Investor Force, while at the same time pay down debt and return capital to shareholders.

We view the $100 million accelerated share repurchase agreement and the incremental $200 million share repurchase authorization that we announced in December as the primary means for that return of capital to shareholders.

Let us go ahead now and take your questions.

Thank you

Thank you.

(Operator Instructions)

Our first question comes from Georgios Mihalos from Credit Suisse.

Just a couple of questions.

You guys referenced the difficult selling environment that's been going on for about a year and a half now.

Is -- are you sensing any sort of change in the environment early in the year, whether better or worse?

And just to kind of jump on that point, what do you think or sort of -- how do you think about the long-term growth prospects for the risk manager business, in terms of growth and kind of the competitive profile that's out there?

I think, on the first one -- I'll take the first one.

You know, indications are we're seeing a continuation, George, on -- in terms of the pipeline remaining strong.

It's just getting corporations to continue to spend the money.

We indicated, you know, in the past quarter, we saw the cancels remain kind of seasonally reflective of what they've been before.

You know, we're looking at the macroeconomic environment to get more certainty.

I think that Henry talked to, you know, on that point.

And from your perspective, if you want to offer something up on that.

Yes.

You know, we are hopeful that the current rally in equity markets around the world and some lifting of the macro economical uncertainty will eventually benefit us.

We have seen very early indications of some of that in the tone of dialogue with clients, but nothing really to report.

And we typically lag.

You know, companies like MSCI lag on the way up, and lag on the way down in our subscription business.

Obviously, the environment is beneficial to us, on the AUMs for the ETFs and other asset products.

But we're clearly not, you know, sitting still.

We keep pushing ahead in many other things that we're doing, in order to see if we can push hard on sales and benefit from that this year, in order to maintain the stable retention rates that we've enjoyed in the past.

With respect to the RMA business, as we've said in the past, this is a business that is always lumpy.

It is -- there's some quarters in which it's going to be better, and some quarters that is not look as great.

And I think the fourth quarter of last year was one of those in which, you know, many of the sales that were in the pipeline have slipped.

We are pretty hopeful and confident that the pipeline remains healthy.

If the macro economical uncertainty lifts more, we may, you know, be able to see some of those deals closing sooner rather than later, but is too early to tell.

We also very confident that the fundamental demand for risk management analytics around the world, in all the various client segments that we serve, is still strong and healthy, you know, from hedge funds to patient plans and other forms of asset owners, to asset managers, et cetera.

But it's clearly a question of converting, you know, that interest in those trials and those elements of the pipeline to actual sales.

And there'll be times in which it is a little easier, and other times in which it is more difficult.

But I believe -- and I think a lot of our colleagues believe, that the fundamental demand for risk management continues to be pretty strong, across the board.

I think the other thing that in general that I'd like to add is that interestingly enough or funny enough, quite a lot of the difficulties in converting sales to the pipeline to actual orders has been in the US.

And we've been fortunate that our business in Europe, even though clearly affected by the soaring debt crisis there, has performed well.

So as we see some of these uncertainties lifting, politically and budgetary in the U.S., maybe we'll benefit from that, in terms of our overall sales.

That is helpful.

And just on the portfolio analytics side, I think you referenced a sizable portion of the decline in the run rate being sourced from product swap to BarraOne, specifically.

How far along do you think we are in that process?

I think in the release, you mentioned some fixed income products.

I guess the old Cosmos converting to BarraOne.

Is that essentially done now?

And how should we think about pricing in that business, going forward?

I think on the product swap between Aegis and BPM into BarraOne will continue.

And a lot of the reasons why that is decayed is one -- BarraOne is fairly advanced in its functionality for both risk management and certain [manual] portfolio management.

That is the product line that we have them putting more investments in, and so forth, and so on and so forth.

So therefore, it is logical to see more -- some clients who have certain amount of risk analysis and risk management capabilities in their front equity portfolio management office, you know, put that in BarraOne.

So we'll see some of that continue.

That may get faded over time, as we develop our portfolio manager, you know, more.

Therefore, it'll make -- may benefit from that.

Secondly is that, there is, in certain parts of the world, especially in Europe and parts of Japan, a bit more of an integration going on between the front portfolio management office and the middle risk management office.

And therefore, we may see some product swaps between Aegis, for example.

I know that the Cosmos and fixed income into BarraOne, because people in those areas would like to have one system serving the front office of portfolio management and the middle office for risk management.

So that's another aspect of product swaps that will continue.

To be frank, you know, to us, we're indifferent.

Many times, the product swaps that they place between PMA and RMA are done at an uptake to sales in RMA, and a lot of this description that we have in terms of RMA and PMA is, at times, artificial.

It may be confusing or misleading, you know, over time, but that's the way we've done it, so far.

Yes, George And there's not much left on Cosmos, at that specific point.

Just a couple $3 million left on that.

That's really Aegis.

Okay.

And just last question for me.

You guys referenced investments in '13.

Just sort of, in aggregates, should we be thinking that those investments will be roughly on par or at the same level of investment in 2012?

I think they will be.

We're continuing an upward trend, George.

We're trying to look more organically at what we're doing.

We see that in leveraging our existing platform.

Henry cited ones that occurred in 2012.

We've got more that carried -- that were completed in 2012 in data centers, but as we go into 2013, we're looking at the network and the platforms.

So we see that as an ongoing trend that's positive.

It leverages, you know, our existing platform, and obviously those type of investments have great payback.

Thank you.

Thank you.

Our next question comes from David Togut from Evercore Partners.

Thank you, and good morning.

Couple quick questions.

First, on client retention.

Even if we adjust for the negative effects and the product swap, wouldn't client retention and portfolio management analytics still be down pretty significantly on a year-over-year basis?

From what we've seen -- like we've said, we've seen pricing pressures come in through the competitive markets has been tough.

You know, we're not necessarily losing ground per se, but these contracts come up for repricing, it's competitive.

There's other interest in the market.

That makes it challenging.

But like I said earlier, the bulk of decline in run rate is driven by the product swaps that we talked a little bit more extensively, that Henry referred to, as well as the FX.

And just on the energy and commodity analytics, which was down about, I guess 15 percentage points year-over-year.

Can you talk about the underlying drivers of that decline in client retention?

To what extent is that one-time, or something sustainable?

You're seeing structural changes in the market with the FTC exchanges and those things going on.

Those are things that have to work themselves out over time.

You know, we continue to work on the models and continue to upgrade and move through it.

As certain things work themselves out, we'll have a better position going forward.

I see.

And then, can you update us on the relationship with BlackRock?

They said on the recent earnings call that they were very pleased with MSCI, and yet they want to keep their costs down, as low as possible.

So, you know, how are those discussions proceeding?

Can you sustain the pricing with BlackRock over time?

I think that we have said, over and over, and over again, we have a very strong and close relationship with all of BlackRock.

Probably in this case, specifically iShares.

The level of collaboration and discussion that we've had with them intensified quite significantly in the last quarter, as we were trying to ensure that we were serving our mutual client, in mostly institutional clients in their transition from many of the Vanguard funds to the iShare funds.

So that relationship is very strong, and continues to get stronger, you know, in the life.

So I do not anticipate significant changes of that.

If anything, we continue to launch a lot of new products together.

I do not think any month goes by without iShares introducing new MSCI-linked ETFs in the US, and other locations around the world.

And we're looking at a map of the world, in terms of where are areas in which we are not yet doing as much as we should be doing.

You know, Canada as one example of those, and therefore, we are pushing hard to learn, to see what else we can be launching together in many of these other places.

Final question for me.

On capital allocation, you've shown a lot more flexibility on this score in the last few months with the ASR.

Should we expect you to start paying a dividend, at some point in the near future?

I think Henry gave pretty clear guidance.

With the $200 million authorized buyback, that's our vehicle right now to return our capital back to our investors and shareholders.

And then let me also add, you know, I don't think the flexibility, so to speak, on the fourth quarter was necessarily anything new.

I think what we did throughout 2012, and many of our shareholders and analyst understand that, we engaged in a discussion as to what is it that the right capital deployment on the Company ought to be.

We engaged our board intentionally during this summer, and the strategy about the overall direction of the Company in the areas that we wanted to make investment.

We worked pretty hard at creating a budgetary process in the fall, and therefore, all of that ended up coinciding in toward the end of the year, for the end result that you saw.

We always have a very significant amount of effort going on in capital allocation and capital deployment in the Company, in terms of what is the right balance between organic investment, bolt-on acquisitions, some pay down of debt, if necessary, and a return of capital.

So, I think we're -- we achieved the right balance.

We're pretty happy with it, and I do not think we're going to add dramatically to that.

Thank you very much.

Thank you.

Our next question comes from Toni Kaplan from Morgan Stanley.

-- My question.

You typically implement the annual price increase in May, so I think this is my last chance to ask about it before next quarter.

Can you give us some color on what you're thinking on the index side of the business?

Is it the usual sort of 3% to 5%?

And in the portfolio analytics side, is that still, you know, not really expecting price increases there, because of the tough environment?

Thanks.

I do not think this year will be that significant, in the way we're looking at pricing in the index business.

We have not made any final decisions at this point.

But it is, you know, so far none of our discussions have been not dramatically different.

With respect to, you know, pricing on the RMA business, I think that that's another -- I don't think there's going to be any significant or substantive changes to the pricing that we have on that product line in 2013, as it relates to 2012.

On -- in PMA, you know, the pricing there is looking at every client that we lose.

We went to keep the business with those clients.

Sometimes we add in the functionality, and there's an uptick, and there are many times in which their renewal gets done at a lower price point.

So that will probably continue into 2013.

Okay.

That's great.

And just one other question on portfolio management analytics.

You talked about the tough macro, and customers not really wanting to spend.

Are you changing your strategy at all, in this business in particular?

I know you mentioned some of the initiatives from a distribution side, et cetera.

But is there anything in this business in particular that you're going to be changing?

Thank you.

I think a lot of it is a continuation of many -- sometimes an acceleration of all the strategic moves, you know, that we're making in this business.

One is how do we ensure our tools are in a lot of different software platforms.

You know, not only ours, but other vendors.

So we -- we've done that, and accelerated that.

Secondly, how do we ensure that we keep launching quite a lot of new risk models.

And a lot of the sales that came in 2012 were because of this new risk models, and we have more, many more risk models coming out in 2013, you know, as well.

You know, three is the continued enhancement of Barra Portfolio Manager.

This new one released that is coming up in the next few months of the Barra Portfolio Manager is a very important one, because it gives a great deal of back-testing functionality to a portfolio analysis.

So that is one release in the next few months, and then another one towards the end of the year that continues to enhance that software on making it look and behave a lot more like Aegis, which is obviously desktop, older technology.

So we're doing that.

You know, and I think that in addition to that, we're getting extremely close to clients, you know, in terms of training clients and plan service, and understanding what they're trying to do, and how they use their tools.

Customize, you know, many of the tools that we provide to them.

That's another significant effort.

So I think it's a continuation, but l will say an acceleration in 2013 of a lot of what we've been doing in the past.

That's not to say that, you know, necessarily the business or the environment, or the client base will improve dramatically, but we're hoping that, you know, these efforts that we have in place continue to stop any kind of problems.

And at some point, turns the business around.

Okay.

Great.

And just one last one for me.

Can you talk about your strategy for the sales force this year?

How much would you expect to increase it by?

And which areas are you going to bulk up, and are there areas that you're going to scale down?

Thanks.

I don't think we're scaling down anything of the sales organization.

If anything, there is quite a significant incremental expansion of our client, what we call client organization in many fronts.

We're adding salespeople in all of these centers where we operate.

We're opening up more centers to go into different to our other client bases that are in Canada.

We're pushing hard in Taiwan.

We're pushing hard in many of the emerging markets.

We've created a dedicated sales force for the emerging markets of AMEA.

Eastern Europe, Russia, Middle East, Turkey, and folks out of Africa.

There's money there.

There's big several well funds there that we are not covering as effectively, so we're pushing hard on that.

We are adding to our consultants, and other people to help train our clients on our analytics.

We're establishing a larger client service centers in the emerging markets, adding into Monterrey and Budapest, and Mumbai, in Shanghai, but especially, we're adding significantly to the client service of the team in Manila.

We established a front there that we didn't have before in that section, and so we're expanding on.

We're going to have a night shift there, to cover the world as well.

All of these efforts have been very effective in keeping our retention stable.

Don't underestimate the challenges that are facing investment organizations in wanting to cut costs and the like.

And the reason -- one of the primary reasons why our retention rates have remained stable is because a lot of these client service and consultant outreach that we have and we are using quite a lot of technology to do that.

And we're positioning -- in terms of the sales conditions, they are to try to grow faster, if we can, and this position is extremely well, that while this uncertainty lives, and the clients' budgets begin to get released, we'll be there to capture a significant upside in growth.

Thanks a lot.

Thank you.

Our next question comes from Bill Warmington from Raymond James.

A couple of housekeeping questions, if I might.

The first.

I just want to double check if we have on the index and ESG revenue run rate, the subscription organic growth at 11%, the AUM at 6%.

What was the total division organic growth for the run rate?

On an organic basis?

Right, Bill.

For the overall description run rate, or just on the index and ESG?

The latter.

Just on the index and ESG.

Organic was 11%, on the overall

So was subscription at 11%, right?

And then--

Subscription was 10%, overall.

And so, the organic -- on an organic basis, it grew by 5%.

Okay.

But I am saying for -- if you take the index and ESG piece, and you look at the run rate, and you look at it just organic for -- it looks like subscription organic.

Within the index and ESG was 11%, and it looks like AUM was up 6%.

Now, it's all organic.

I just want to double check that the total subscription -- sorry, the total index and ESG revenue run rate, organic growth.

If it's in the slide, Dave, then point me to it.

I did not see it.

Let us get back on that.

I just want to make sure we're clear on it.

Okay.

Not a problem.

And then, I wanted to ask if you had updated your thinking around a target debt level?

We are always -- I mean, Henry said we talked to our board of investors, we're looking at our -- constantly looking at our capital structure.

As you know, we've got the $850 million outstanding.

We've got scheduled payments of $44 million this year.

A step up, it matures in 2017.

We'll be evaluating our levels of debt, along with all other factors that would be a part of our invested capital for the Company here, but we're always looking at it.

Okay.

And then on the acquisition front, just wanted to ask if you felt you had any holes that you needed to fill, whether you were still aggressively reviewing opportunities.

If I could get your thoughts there.

Yes.

We are always reviewing opportunities that are what I would call an acceleration of organic investment through acquisitions in our backyard, in the [temporal climb] and on the likes.

So that continues.

And on -- largely, these are largely things that are bolt-on.

We're not proactively looking at anything that is big or transformational, or anything like that.

But no, you know, you never know when those things come.

But a lot of what we're trying to look at is what specific holes do we have in the asset classes per se, and the single asset classes.

We feel pretty good about equities, hedge funds, private - -what was it?

-- real estate.

We are actually -- good that you ask -- we're actually about to announce a consultation process with our clients on private equities.

We've been working with another vendor on private equities, to see if we can join forces to create a private equity indices and performance, and risk management systems for that asset class.

So that's something that, you know, is ongoing.

I think clearly the area where we are strong for multi-asset classes fixed income, but we are not as strong in multi -- fixed income as a single asset class.

You know, I do not think the we're going to launch fixed income indices at this point.

We are having a good partnership with Barclays on ESG for fixed income, but you know, we're not going to go into that space directly.

And I think that, you know, we haven't been able to earmark investments for fixing compartment portfolio analytics.

That's an area that we keep looking, but I'm not sure that -- we keep saying that every year.

I'm not sure that we're do anything necessarily, unless we find something interesting at the right price.

Got it.

Thank you.

Thank you.

Our next question comes from Chris Shutler from William Blair.

Hey guys.

Good morning.

In the EPS business, just curious to get your thoughts on why the MSCI emerging markets ETF EEM has seen such a good pickup and flow, as well as some of the other ETFs.

You know, some of the other ETFs, the Vanguard products that switched to FTSE that haven't suffered as much, or have actually continued to see inflows.

So just curious to get your take there.

And then, also, what's your sense of how sustainable the trend in the EEM ETF are?

Sorry.

Your second question?

In what --

It was just how sustainable do you think the trends in the MSCI emerging markets ETF are, I guess, relative to the competition.

Yes.

No, I think, you know, what happened in the last quarter, since the announcement by Vanguard, is a testimony and a complete understanding of what we've been saying since the announcement of the Vanguard switch.

And that is MSCI is the leading index for global institutional investors, in the way they allocate their assets and they give out mandates for their portfolios.

You know, not only North American, but European, and Asia, you know, institutional investors of all types.

So when the announcement was made, you saw that there were a lot of institutional investors around the world that had found their way into Vanguard ETFs because they wanted to be invested in an MSCI index.

And when they sold those ETF switching indices, they looked around to what other ETFs with MSCI indices were available, and you saw that market switch took place in the fourth quarter, and continues today.

Now, this was very pronounced, even more so, in the emerging market, because if MSCI is strong in terms of -- as an index in terms of general investment in all markets, it is stronger as an index of the emerging markets.

We have a very pronounced reputation in market share and indices got colder in the emerging market.

So that was -- the other part of it is that the Vanguard emerging market ETF was the largest.

Of all the gross quarter ETF's that were being switched to another index, and therefore, it is likely and logical to have seen the largest amount of assets in that ETF going to iShares and others.

So I think that's the explanation now.

That trend continues.

Obviously, it may not continue at the same pace that it did in the fourth quarter.

Because there are diminishing returns as to how much of that money really switches, but it does continue today.

Thank you.

Our next question comes from Ed Ditmire from Macquarie.

Good morning.

My question is, you know, how firm is your conviction of the product portfolio in a broad sense?

And what I mean is index risk, you know, portfolio analytics in governance.

Is the right product set to take advantage of the next step-turn in client demand when it materializes?

In particular, has management moves to decentralize overhead functions, like finance, over the last year, and push some of that, you know, overhead management into the segments?

Is that giving you better flexibility to, you know, make the most of your options, in case you felt that one of the units would enjoy special synergies with a strategic partner, et cetera?

Yes, I think one way to think about our business -- I mean, let me back up.

The way we describe our business typically, is in the form of index and risk, and portfolio, and governance, and all of that.

But you know the other way to describe it, which is more logical, because that's what we're trying to achieve, is to say what are all the things that we're doing for the equity investment asset class?

And put aside the brands and all of that, but what are we doing?

So we create performance measurements in the form of indices.

We create performance attribution models.

We create risk analysis, and we create, you know, portfolio construction, and portfolio organization, and so on and so forth.

And we create -- we overlay a form of ESG investing on that equity -- on those equity portfolios, and we have tools that are both -- that people vote their shares on those equity portfolios.

So that is the vast majority of what we do.

You know, the vast majority of what we do is very synergistic, because the infrastructure -- all of the databases and the understanding of companies, and the understanding of corporate events and corporate actions, and the growth rate of those companies, the value of those companies and all of that is the same underlying structure that goes into an index or into a risk model, or an ESG, or whatever.

And at the moment, our distribution people are talking to the same people.

They're talking to equity portfolio managers, they're talking to chief investment officers for equities, the head analyst for equities, and so on and so forth.

And therefore, the -- it is highly, highly synergistic.

We -- our view is that in the multi-asset class world, in which all of these asset classes are really converging with one another, and the asset owner doesn't look at a single asset class, the asset owner wants to look at a combined portfolio.

I think that saying that we can be a company that only those indices, or only those things for the equity portfolio management is a dangerous place to be.

You have -- for sure for the asset owner, which is ultimately one dictating what happens at the asset manager level.

So you have to go to the asset owner, and provide them a comprehensive solution to risk and performance of their multi-asset class segment.

In equity and fixed income, and alternative.

You have to provide that.

And in order to do that, you have to let investments [breathe] in each one of the asset classes.

You have to be best in equity.

We're okay in fixed income, but that's an area that needs development.

We clearly are becoming -- will become very good at real estate.

We will embrace performance with standardized IPG.

We clearly -- this consultation is successful in private equities, and we are already doing quite a lot in risk analysis of hedge funds.

So all of that is highly synergistic, when you sit down with an asset owner.

When you sit down with the managers of those assets -- if you go see the CIO of a European asset management company, they want to talk to us about what we can do for them in their real estate portfolios and their equity portfolios, and their fixed income portfolios.

And these are all tools that are very similar to one another.

How you measure risk, and how you measure performance is the same similar tools.

The same approach, the same philosophy in each one of them.

So that's what we're trying to build in MSCI.

And therefore, you know, the holes that may exist over this long journey are holes that are either because the particular area is not price attractive.

You know, fixed income indices, for example, and that's never been a place where you make money.

So we stay away from them.

At some point, we will make money, but we stay away from them.

And areas in which we can execute rapidly.

So that kind of the direction of what we're taking in all of this.

And to further your point, you were hoping -- we have a lot of integrated infrastructure whether it's from how we support the product lines.

Whether it is from the functional units, like finance, whether it's data support.

Those have been quite integrated.

Thank you very much, everyone.

Is that the last call?

Yes.

I'm showing no further questions.

We want to provide clarification for Bill.

Just to come back and answer your call with that information.

The organic growth of overall index was 9%.

That was, as I said earlier, 11% on the subscription side, and 6% on ADF.

Just for clarification on that.

Thank you, Sayid, and thank you everyone for joining us on the call today.

Feel free to call me with any additional questions.

Have a good day.

Ladies and gentlemen, thank you for participating in today's conference.

You may now disconnect and have a wonderful day.