明晟 (MSCI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI third quarter 2013 earnings conference call.

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

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this call is being recorded.

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

Sir, you may begin.

Thank you, Samio.

Good morning, everyone, and thank you for joining our third quarter 2013 earnings call.

Please note earlier this morning we issued a press release announcing our results for the third quarter of the first nine months of 2013.

A copy of that release may be reviewed at www.MSCI.com under Investor Relations tab.

You will also find on our website a slide presentation that we have prepared for this call.

This call may contain forward-looking statements.

You're cautioned not to place undo you 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 uncertain the that may cause actual results to differ materially.

For a description of additional risks 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 the fiscal year ending December 31, 2012, today's earnings release, and our other filings 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; restructuring costs, the lease exit charge, the amortization of intangible assets, and non-recurring stock based expense.

Adjusted EBITDA excludes depreciation and amortization of property, equipment, and leased-[hold] improvements, while adjusted EPS also excludes debt repayment and refinancing expenses and the income tax affect of the excluded items.

Please refer to today's earnings release and pages 14 through 17 of 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'll be referring to run rate frequently in our discussion this morning, so let me remind you that our run rate is an approximation at a given point in time of the forward-looking revenues for subscription 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 the indices, or changes to our foreign currency rate.

Please refer to table ten in our press release for a detailed explanation.

In our discussions about revenue and run rate we will also be referring to organic growth rates.

As a reminder, organic growth calculations exclude the impact of acquisition of IPD and InvestorForce and the disposition of the CFRA product line.

With that, let me now turn the call over to Bob Qutub.

Thank you, Edings.

Good morning, and thank you for joining us.

I would like to share some highlights from our third quarter 2013, thoughbefore we dive into the number zone, here are some key points.

Revenues grew 10%, with that growth split between organic and acquisitions.

Net income grew 15%, and diluted EPS grew by 18%.

Adjusted EBITDA grew 4%, and adjusted EPS, boosted by lower debt cost and a lower share count, grew by 8%.

On the operating side we had a strong third quarter.

Run rate grew by 12% to over $1 billion.

Our growth was driven by a sharp increase in asset based fee run rate and 10% growth in subscription run rate.

Our organic subscription run rate growth was 4%, and retention rates increased to 92%, where they've held all year.

MSCI continued to benefit from the strong demand for MSCI linked ETFs.

Asset based revenues grew by 8%.

On a run rate basis, where the comparisons have now lapped the impact of the Vanguard loss, ABF grew by 28%.

We continue to be active in managing the Company's capital.

MSCI repurchased a total of 2.7 million shares as part of the conclusion of the December 2012 accelerated share repurchase program and the opening of a second ASR in early August.

We have also retained Morgan Stanley to help us explore strategic options for the governance business, and Henry will have additional comments on that decision last in the call.

As has been the case all year, we'll highlight the effects of acquisition and CFRA divestiture in the context of organic growth as well as the continued impact FX has had on our run rate.

So now let's get into the numbers.

MSCI reported third quarter revenues of $258 million, up 10% from third quarter 2012.

Adjusted EBITDA was $113 million, an increase of 4% versus 2012, and adjusted EPS rose 8% to $0.53.

Net income was $55 million, and diluted EPS was $0.46, representing an increase of 15% and18% respectively over the third quarter of 2012.

Our third quarter revenue growth was led by the performance and risk segment, which reported revenue growth of $23 million or 11%, driven by higher growth in index and ESGand RMA revenues, partially offset in a decline of PMA.

On an organic basis, performance and risk revenues rose by 4%.

Our governance segment rose 7% on organic basis.

On reported basis, however, governance revenues declined 1% as a result of the divestiture of CFRA.

By revenue type, MSCI's total subscription revenue grew by 10% over the third quarter of 2012, driven primarily by acquisitions of IPD and InvestorForce.

On anorganic basis subscription revenues rose 4%.

Asset based fees rose 8% despite the impact of the Vanguard loss, and non-recurring revenues grew $1 million or 19%.

On a run rate basis our subscription business grew by 10% to $879 million.

On an organic basis subscription run rate grew by 4%, led by a 9% increase in index and EFT subscriptions, 6% growth in RMA, and a 5% growth in governance, partially offset a decline of PMA.

The growth in our run rate was driven by an 11% increase subscription sales, rising to $30 million this quarter.

MSCI's retention rate increased over 2012 second quarter to a very strong 92%, where it has held all year.

Changes in foreign currency rates continue to have a negative impact on our year-over-year comparisons, lowering our run rate by $2 million versus the third quarter of 2012.

However, they did have a positive impact on sequential basis, resulting in a $6 million benefit relative to the second quarter of 2013.

Now let's turn to the performance of each of our four major product lines, startingwith our index and ESG products, where revenues grew by $22 million, or 20%, and by 9% organically.

Index and ESG subscription run rate grew by 23% to $360 million, or 9% on an organic basis, driven by growth in equity index benchmark and data products.

ESG products run rate continued to grow at double digit rates.

The index and ESG sales rose 21%, aided by acquisition, and retention rates remained strong at 95%.

Changes in foreign currency lifted our run rate by $2 million sequentially but only had a minimal impact versus third quarter 2012.

Let's take a look at our asset based fees and the related run rate.

The 22 Vanguard ETFs that switched their index benchmarks completed their transition in the second quarter, so this third quarter was the first full quarter without any impact of those funds.

We've been reporting to you for the past two quarters that the loss of those ETFs was clouding the strong growth in other MSCI linked ETFs, and that story became evident in this quarter's run rate comparison.

Our ABF run rate rose 28% versus third quarter 2012, andthat growth rate was in line with a 30% increase in the assets under management, excluding those Vanguard ETFs.

There was a total of $303 billion of assets under management in ETFs linked to MSCI indices at the end of the September 2013.

A year ago, if the exclude the Vanguard AUMs, that number was $233 billion.

That's a $70 billion increase over the past year, and $47 billion or two-thirds of it resulted from inflows into MSCI linked ETFs, with the remainder being accounted for by market appreciation of $23 billion.

MS -- asset base fee revenues grew 8% during the third quarter of 2012, driven by a revenue growth from passive funds.

Revenues from ETFs grew slightly, as the loss of revenues from the Vanguard ETF was more than offset by an increase in revenues from other ETFs.

The other basis point fee at the end of the third quarter was 3.7 points.

Turning to RMA.

Revenues rose by 7% year over year and by 3% on organic basis.

Run rate of $288 million rose $27 million to -- or 10% and by 6% organically.

The increase was driven by a combination of robust organic growth as well as contributions from InvestorForce.

Organic sales growth in Americas and in Asia-Pacific was partially offset by lower sales in Europe.

Notable sales during the quarter included a major US pension fund and a large sovereign wealth fund.

Retention rates remained a positive story, rising to 92% from 89% a year ago.

FX changes had a positive impact on the third quarter, lifting run rates sequentially by $2.5 million and by $1.3 million on year-over-year basis.

Switching to PMA, revenues fell 10% to $26 million, and run rate also 10% to $105 million.

PMA run rate did increase slightly from second quarter 2013 levels, with virtually all of that change driven by FX benefits.

Net sales were modestly positive during quarter for the first time since the first quarter of 2012 as a result of higher sales and improved retention rate.

Looking at the year-over-year decline in the PMA run rate of $11 million, justunder an a third of that was the result of changes in FX.

An additional third was the result of product swaps and cancels in our Cosmos fixed income product.

Down sales rather than client losses accounted for most of the remaining $3 million decline in run rate.

Now moving to governance.

Revenues rose by 7% on an organic basis.

On a reported basis revenues declined 1% to $30 million as a result of the sale of our CFRA product line at the end of the first quarter.

Run rate rose 5% organically to $113 million, driven by higher sales of executive compensation data and analytics products and services, along with continued strength in retention rates.

Before we leave our discussion of operating results, let me remind you that while we're pleased with our year-to-date run rate, we have historically reported lower retention rates during the fourth quarter due to the timing of contract renewals.

Now let's turn to expenses.

Our adjusted EBITDA expense rose by 14% to $145 million, with growth in both compensation and non-compensation expenses driven primarily from acquisitions.

Total compensation expenses, which excludes non-recurring stock based compensation, rose 12% to $103 million.

The growth in compensation expense was driven largely by the acquisitions of IPD and InvestorForce, which were offset only partially by sale of CFRA and lower severance.

Our head count rose 6% to 3,123 from the second quarter, as we continue to make organic investments in our client facing activities, product development and infrastructure.

We continue to make process in our efforts to leverage lower cost centers, including Mumbai and Manila.

The percentage of work force in those areas rose to 45% from 44% last year and a year ago -- last quarter and a year ago, whichenabled us to keep our organic compensation costs below the rate of the increase in our organic head count.

Non-compensation expense, which excludes depreciation, amortization, the lease exit charge and restructuring cost, rose 21% in the third quarter 2013.

The increase was driven by acquisitions and increase in travel, marketing, and recruiting costs among other items.

Adjusted EBITDA rose by 4% to $113 million in the third quarter of 2013.

Other expense of $6 million in the third quarter was down from $8 million a year ago as a result of lower interest expense.

Our tax rate was 39.9% (sic -- see press release) in the third quarter and 32.8% for the first nine months, reflecting the nature of how the first quarter discrete items impact the rate over the remainder of the year.

We continue to expect our full-year tax rate to be approximately 34%.

This means we expect our tax rate in the fourth quarter to be in the range of 37.5% to 38.5%.

Now let's turn to our balance sheet and cash flow.

We finished the third quarter with total debt of $807 million and total cash position of $284 million, ofwhich $90 million is held offshore.

During the third quarter MSCI generated operating cash flow of $69 million, bringing our year-to-date total to $226 million.

During the quarter we spent $12 million in capital expenditures, repaid $11 million in debt, and spent $100 million for the accelerated repurchase program.

As part of the ASR we put into place in August 2013 with the conclusion of the December 2012 ASR, MSCI repurchases a total of 2.7 million shares.

That brings the total number of shares we have repurchased as part of those ASRs to 4.9 million over the past ten months.

Share repurchase activity continued to -- contributed to a 2.3% decline in the number of diluted weighted average shares outstanding in the quarter.

The August 2013 ASR program remains in place and is expected to conclude in December 2013.

And of course let me remind you that we still have an additional $100 million remaining on our existing share repurchase program.

And again, I just want to remind you on the tax rates in the -- this year our tax rate was 35.9% in the third quarter, and it's 32.8% year to date, and we're still anticipating a 34% rate for the full year, which means 37.5% to 38% is our range for the fourth quarter.

Now let me turn it over to Henry.

Thank you, Bob.

Good morning.

As I have done over the past few quarters, I would like to provide brief update on the current operating environment.

I would also like to speak about our investment program and the positive impact that program is having on our results.

And finally, I would like to discuss our decision to explore strategic alternatives for the governance business.

The operating environment has slowly improved in this past quarter.

That improvement in tone has led to an increase in client activity, but it has not yet translated into significant improvement in sales.

Broadly speaking, the tone from asset manager and hedge fund in the Americas has brightened, andthey're feeling optimistic.

European asset managers and hedge funds remain cautious though.

Our business in Asia is doing well, but I attribute that as much to the investments we have made in that region than to any broad recovery in business conditions.

And importantly our pipeline remains healthy.

In an operating environment in which our clients remain cautious we have focused on innovation as a means of improving our growth.

To support that innovation we have invested and will continue to invest in our businesses.

Since the beginning of 2012, or over 18 months or so, we've grown our head count by 700 or about 30%, withmore than half of that coming in the form of net new hires and the balance of our acquisitions.

About half of our new hires have come in the form of sales and client service personnel, and the rest have been split between new product development and technology.

These investment are starting to have a positive impact on our results.

Over the past two years we have opened sales offices in markets like Canada, Korea, Taiwan, and have expanded our sales efforts in areas like Russia and Eastern Europe.

That investment in those markets has led directly to an increase in sales from those regions.

We have also focused heavily on increasing our level of client service, which we see as an important differentiator.

Those investments are helping to drive our retention rate to 92% for the first three-quarters of the year, a level that in the past we would have considered much more aligned to a very strong market rather than the current environment that we're operating in.

Our investment in product development is also paying off, andI want to share a few examples with you from each of our major product lines.

In index we have talked a lot about our development of risk premium indices, which we are now calling MSCI factor indices.

If you recall we launched the first of these factor indices in 2008.

As is often the case with our business, the initial progress appeared slow, but over the last two years these products have really started to generate significant momentum.

Asset owners -- pension funds in particular -- have embraced the use of these new indices.

The assets under management in ETFs and other passive funds in these indices have grown significantly, and our run rate tied to these indices has more than doubled since the beginning of the year to about $8 million now.

Institutional investors are now embracing this data and this indices to help them achieve their investment objectives at a lower overall cost of investing.

Encouraged by this strength, we at MSCI have continued to invest in these products so we can extend the factor indices to cover more markets and to develop new indices in new areas.

In the RMA business we saw some of the results of our investment come through in the form of new revenues.

We have been focused on enhancing our clients views of risk since we acquired RiskMetrics in 2010, and that focus has paid off with several new deals.

We continue to win business with regional banks in the US seeking more visibility into [counter-party] risks.

We launched a new liquidity risk module during the third quarter and have recognized an early sale from that product as well.

Other investments, particularly in distributions of the RMA product line, have faster paybacks.

Over the past two years we have significantly increased our investment in Asia, adding senior management to the team there, and a more dedicated sales focus.

Our risk management analytics business in Asia is now growing at a double digit pace.

In our PMA product line total sales have exceeds cancels for the first time since the beginning 2012, and some of the currency pressures have also eased.

While our sales numbers for this product line are not where we would like them to be, our new Japan equity model appears to be gaining some positive traction in the marketplace.

This model is the first in a series that incorporates some truly differentiated and significant factors in the development of these risk models.

So the level of interest in them bodes well for the additional models that we expect to launch over the next few months.

In addition, we continue to our functionality to our buyer portfolio manager software, and BPM has already started contributing in new sales to our overall market in PMA.

We have also invested in our senior management team, with the recent additions of a new Chief Information Officer and a new Chief Marketing Officer.

Chris Corrado and Darla Hastings will help us to continue to scale our infrastructure and deepen our relationship with our clients and develop further expertise in the way we market our products.

Before I conclude, I want to discuss our announcement about ISS.

As stated in the press release, we have started to explore our options for this business, and we will update you when that process is completed.

But for now let me give you some context of how came to this decision.

Over the past three years MSCI has worked hard to return ISS to growth.

Our early investments were aimed at expanding the sales force, acquiring new clients, building a more competitive offering, and building the voting platform.

Once those steps were in place, our focus then turned to new products, the first of those products was an executive compensation data analytics product suite, which we launched in the middle of 2011.

That product launch was among the most successful in ISS history, and it remains one of the business's primarily growth drivers today.

We're continue to go expand our capability in that area.

And more recently ISS launch QuickScore, a quantitative governance rating covering US companies.

We also bolstered the senior management team of ISS, naming one of our most seasoned executives, Gary Retelny, to head the business.

Finally, we divested CFRA, which was the most challenged part of that unit.

These investments have enabled us to put the governance business on a more sustainable growth trajectory.

During the third quarter the governance segment reported organic revenue growth of 7% and EBITDA margin of 29%.

So we think the time is right to explore our options.

I would like to add that we plan to retain the MSCI ESG business, which was also acquired as part of RiskMetrics group at the time, and which is reported in our index and ESG product line.

In summary we are pleased that our previous strategic investments are driving strong results and are enabling us to position MSCI very well for an eventual full recovery in our marketplace.

We remain excited about the many opportunities we see ahead of us.

With all of that, let me now pause, and I will be happy to take be happy to take your questions.

Operator?

Thank you.

(Operator Instructions).

Our first question George Mihalos of Credit Suisse.

Your line is now open.

Hey, guys.

Congrats on a nice quarter.

Thank you, George.

I think for the first time since I've been on these calls, I'll kick it off with the governance business.

Henry, you talked about the sustainability of the growth trajectory there.

The margins have moved up significantly year-over-year.

I think you're around 29% EBITDA margins right now.

How sustainable is that, and should we think about this business as being a 30% EBITDA business going forward?

George, we continue to remain very optimistic in this business.

We have clearly done a great deal to position the business for this growth,have spent a significant amount of time in the business with investments in sales and client outreach and competitive offerings, pricing.

We have invested in the technology, voting platform and the like, evenat the same time that we have increased the profit margins of it.

So a quite successful effort of turning the business around from the quarterly declines that we saw back in 2010, 2011.

We also feel that the opportunities here in this business are pretty large.

Governance is something that everybody talks about every day.

The end market of this product line is slightly recovering, like the marketing of our risk and performance products.

So I think the time is right now to be able to explore our options of separating this business from us.

We don't know yet, obviously, what the ultimate outcome of all of that will be, but we feel positive about the business and its prospects and where it can head.

George, one other comment I would add is, remember, when you're looking at this a year ago, that included the CFRA margin, and the margin now does not.

Got you.

And then also the PMA business, that seems to be stabilization on a run rate basis.

Obviously some of the pressures on the FX side are dissipating.

It sounds like you guys do feel better about that business and prospects going forward.

Am I interpreting that correctly?

Yes, we do -- we definitely feel better about it in the last few months -- couple quarters.

But we have also feel better in the past, and I think that double dips are there.

I think this time we feel better for a variety of reasons.

One, the market for quantitative asset managers has improved.

From basically the beginning of this yearyou've seen that many quantitative managers are gathering assets inflows to them.

They've been launching new products and the like.

Not a -- it's not a major quantum leap, but definitely a little more life into the market.

Secondly, the fundamental managers that have [won] support have begun to feel better about their business, and have begun to have dialogue with us about additional tools that they need to provide that quantitative support to the fundamental managers.

So that may bode well.

Also, from our side we have developed quite a lot of new models that have been introduced in the marketplace, and a lot of new models that will be introduced in the near future, and that has gotten the market pretty excited about new innovations that we're bringing.

And the last piece for us has been the continued development of the software applications that we couple at times with the content and the risk models.

And we feel that we are the tail end or the lower -- the back end of being able to finish quite a lot of the functionality in BPM and make it a product that is pretty robust compared to Aegis.

And that is beginning to show in additional sales of BPM.

Again, it's early.

We have some way to go, but I feel good about that.

Okay, great.

And just last question from me.

The non-comp expense, I know it's up year on year because of the acquisitions, but it also increased fairly substantially quarter on quarter.

2Q to 3Q I think it was up 16% in the SG&A segment.

Can you talk a little bit about the drivers there and how we should be thinking about that now in the fourth quarter?

Thank you.

The sequential increase, George, was driven by largely some of the items I highlighted in my comments.

We've had some more out of pocket costs as we've expanded through our recruiting efforts.

And Henry mentioned, we made some investments in people.

Our global footprint has continued to broaden, going to 45% up from 44%.

We've made some investments in technology, the non-compensation side that would reflect our ability to stay up to speed with our capacity as well as our stability out there as we continue to grow our client base.

Occupancy has gone up a little bit too.

So you're starting to see the benefit in terms of what we talked about in run rate, but it comes with some expansion in our capacity to support that.

Thank you.

Our next question comes from Kevin McVeigh of Macquarie.

Your line is now open.

Great, thank you.

And congrats on the buyback as well.

I just want to make sure that I understand the mechanics of that.

It sounds like we've repurchased about 2.7 millionshares, bringing the total to 4.9 million, and that's over the $200 million.

How does it work with kind of the remaining incremental $100 million under the ASR?

What's the potential there?

And then ultimately for the additional $100 million out there, should we think about that as another ASR or just more general market?

Let me -- this is Bob, Kevin.

Hey, Bob.

Look at the [2.7 million and 2.2 million traunch] as one.

The 0.7 of that was the closeout of the ASR that we started in December of last year, where we had an initial delivery of 2.2 million shares, and as the purchase program was completed we received an additional 0.7 million.

So that first program gave us 2.9 million shares.

With this program we got just under -- of the first traunch we got just under 2 million shares in August.

So that's where the third quarter number gets to 2.7 million.

We still have to finish the program out through the end of the year, so therecould be some shares potentially delivered to us, and there could be -- we would never be in a situation where we have to give any back the way the deal is structured.

With respect to our -- the remaining $100 million on the shelf, glad you pointed that out.

That is still out there, and we'll be in this market through the end of this year.

And come the first of the year we'll be talking to our Board about 2014 and 2015.

Got it.

And then, Bob, as we think about the potential proceeds from the governance business, should we think about that in terms of capital returns or organic growth or -- as that comes clear into focus?

Well, let me say our capital -- basically our capital strategy has remained unchanged.

I mean, our adjustment strategy is around organic investments and bolt-on investments that we can make to help facilitate capabilities that we need or expedite capabilities or gain capabilities that we can get.

We maintain a balance on that.

With our by back program westill have $100 million on the shelf.

And with respect to whatever happens with ISS, it's really just too early to tell.

Okay.

And then just if I could, the retention rates, seems like it ticked up nicely.

There is seasonality in Q4.

How should we think about that into the Q4 and then a bit longer term too as we think about 2014?

I'll take you back to Henry's comments.

I mean, we've made a lot of investment on our client side and coverage side to really focus in on our clients staying with us.

I wouldn't say that we're defying gravity, but I think that we're feeling pretty strong about how we approach our clients.

Our retention rates at 92% all three-quarters is very strong.

Now, having said that, about a third of our contracts, give or take, renew in the fourth quarter, so you get a higher proportion of them in the fourth quarter.

And if you look back over time, you tend to see a little more volatility in the fourth quarter.

Now, remember, the retention rate construct is an in-quarter number annualized, so it tendsto get exacerbated in a quarter, and why it's looking at it over a full year is a much better perspective.

And taking that, two-thirds of our contracts this year have renewed at 92% retention rates.

Super, thank you.

Thank you.

Our next question comes from the David Togut of Evercore.

Your line is now opened.

Thank you.

Good morning, Bob and Henry.

Good morning.

Do you expect to generate operating margin expansion in 2014?

And if you could walk us through some of the puts and takes?

It's -- we're in this business to grow.

The best indicator I can provide for you in that is we generally don't give guidance on that.

But take a look at our key operating metric and our discussions around the growth in our run rate on a year-over-year basis.

That really gives you a window out there on the forward-looking 12 months in terms of what we would bringing in terms of driving up revenue growth.

As always, we continue to maintain discipline on the compensation.

We have taken a step up in non-compensation expenses that I mentioned earlier.

We will continue to make organic investments, which will require investments, but we need to balance that out to make sure we [term] profitability.

As balancing out our whole capital process that as I mentioned earlier to Kevin.

I think the revenue side is pretty clear just from the run rate, but I think -- I guess I still have a question about spending for next year andthinking about whether you're going to get operating leverage.

Is there anything that you can add to kind of clarify possible margin trends looking out beyond Q4?

Kevin, this is Henry.

I'm sorry, David, this is Henry.

The --I think it's important to recognize that, away from the volatility that could exist with the asset base fee business, in which if the markets rally, we get showered by a lot of cash flow that drops to the bottom line.

Or if the market turns negative overseas, it declines.

So if you put that aside, because that's an element that is, even though secularly improving for our business, on a cyclical basis or seasonal basis sometimes is not controllable.

I think that we're at the view that we are at the beginning of a very gradual recovery in the investment universe of the world, inwhich you're seeing better tone, better momentum in asset managers, hedge funds, pension funds in the US.

You're seeing a bit of that in Japan and Australia.

You're seeing a tad of that in Asia ex those countries.

Obviously Europe is still a little bit challenged, but we're hoping over time that we're going to see a gradual recovery there.

And our clients are asking us to anticipate that recovery and investment in the business.

I think our best view to you is away from the volatility that could be provided by the asset based fee business, which we control we're not likely to see an expanse of the margin.

We're not likely to see operating leverage in the business, because we will want to continue to position the Company for that up turn, and the demand that we see -- that we're beginning to see reflected in the tone of the dialogue and the actual dollars and cents that client's want to spend with us.

That's very helpful.

Just a quick related question.

Do you have an early read on head count target for 2014?

Not at the moment.

Not at the moment.

We haven't finalized our plans for 2014.

Got it.

And then two quick housekeeping questions.

Bob, do you have a share count at the end of the quarter?

And just the read on 4Q and 2014 tax rate?

Thanks.

Let me get back to you on the exact share count.

That's going to be on our Form 10-Q that we'll file later this week, okay?

Okay.

And tax rate?

Tax rate is the guidance that we talked about.

For 2014?

No, we don't have guidance on that yet.

I just talked about what we'll -- 34% was what we expect for the full year.

We maintain an aggressive approach, focused approach of how we can optimize our global tax rate, and as we continue to grow more and more internationally, we should see some benefit of that.

Got it.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Alex Cram of UBS.

Your line is now open.

Hey, good morning.

Just sorry to come back on the expenses one more time, but I think, Bob, you talked about what drove it higher in the third quarter.

I think for the most recent question you talked a little bit about next year and the longer-term outlook, which I think -- we appreciate.

But can you just talk very specifically about the fourth quarter again?

Like, was there some seasonality in the third quarter in terms of the recruiting?

Is the run rate a pretty good run rate to use now, or are some employees come on late that will drive this even higher?

Is there hiring that you've doing in the fourth quarter?

So just a little bite more specific on the fourth quarter, if you may.

Thank you.

On the fourth quarter, or more of the third quarter, Alex?

No, on the fourth quarter in terms of expectations for, in particular, SG&A.

I mean, we've -- our head count coming up tends to slow down in the fourth quarter.

Obviously the second and third quarter are your strongest times in which you get people in your seats, and when you make a lot of your hirings.

It's the most economically -- the most efficient, so --You kind of take -- you couple that with related costs that would around recruiting and things of that sort.

We've had some internal one-time items that have occurred.

Nothing significant, Alex, but again we'll maintain a tight discipline on cost into the fourth quarter.

Okay, good.

And secondly, I think good color again on the selling environment I guess improving.

Can you be a little bit more specific in terms of how that is manifesting itself?

Is the pipeline of new sales shortening?

Is -- are pricing discussions getting -- I mean, are there lower pricing discussions?

Are people not pushing back as much?

Are you seeing less from -- on the competitive side?

So a little bit more color on what's happening on the sale side here.

Starting with pricing, we remain strong in our pricing of our index products.

RMA, we're remain our pricing.

PMA, we still have the competition out there that really, as I mentioned earlier, a lotof the decline in our run rate has not come from lost clients.

It's come larger from -- that third has come from repricing of products that have been out there driven by competition.

Again, RMA products, governance products, index products remain strong and to an certain extent index is continuing to maintain its pricing strength.

With respect to the pipeline, the pipeline, as Henry said, remains healthy.

That's the tone that we've held out there for the last couple-three quarters.

In fact, the tone, that's something that we introduced in our conversation last quarter, and we maintain that there is a lot more active conversations.

And we have seen some two-way movements in the pipeline.

What I mean by that is up and back, though in the past we saw more deals pushed out, but we've had discussions about trying to pull some deals in.

So the active conversation is really important.

It's around the conversations that we're having with them, and the real key is manifesting those into sales.

So the sales cycle itself seems to be kind of -- it goes back and forth?

It's fairly unchanged on average, I guess?

Is that what you're trying to say?

Let me add to what Bob said.

That -- what was happening for about six, seven quarters, starting back in the spring of 2011 was that every --taking seasonality away or that putting it aside -- every quarter there would be a very slight deterioration of the operating environment.

And that was manifested into items in the pipeline, not necessarily even, but more and more items in the pipeline being pushed to the next quarter.

And the next quarter.

And more approval by clients.

More debate and discussion whether they should buy the product or not, and the like.

And it was also manifested in a bit more cost consciousness and price pressures, because our clients reporting to their own internal people were under huge amount of pressure to contain costs.

What we began to see about a quarter or two ago -- let's say two quarters ago, is that gradual deterioration that was happening quarter after quarter after quarter began to ease.

It wasn't that it was improving.

It was that the deterioration was less two quarters ago, slightlyless last quarter, and that therefore the items that would otherwise have been pushed to the next quarter, some of them were staying in the current quarter.

And then, secondly, the number of approvals began to decrease a little bit, and the willingness of clients to try to get the deal done and close and move on increased.

And the overall tone of the discussion, the overall tone of trials and -- show me new things, show me new ideas, show me the new things -- the dialogue has improved in the US and in Asia.

A little less so in Europe.

So that makes us cautiously, very cautiously optimistic that we're beginning to see a gradual -- a very gradual return to a more active dialogue, less deterioration of the pipeline quarter to quarter.

As we said, the pipeline remains healthy, and like -- now, we have helped all of this by creating new products, because when you have a new product, the client wants to engage.

The client wants to have a discussion.

And sometimes the client creates budget when we have a new product that when they think is going to differentiate them in their investment process.

So the factor indices have been an extremely important dialogue with a lot of our clients.

The liquidity metrics and the counter-party risk has been a good dialogue with our clients.

And the [obviously]market moving to centrally clear products.

The margining and the products that we can offer on margining has been a good dialogue.

In PMA, the new Japan model, we had a road show in Japan.

Very well attended.

People were interested.

We have a Korean model coming out.

A lot of our Korean clients are interested in that, and we're rolling out a whole series of models.

We're in more active dialogue on BPM because now the software is much more complete than it was a couple quarters ago.

So overall it feels better.

And therefore this makes us feel that we got to continue to progress in the pace of the investment in the business -- back into the business in order to continue to capitalize on those [trends].

And if those trends accelerate, accelerate the level of investment.

But that's where we are in that gradual small recovery process.

That's very helpful.

Just one quick last one here.

One of the things we are hearing more and more now in our business is that I think we have the best start up [face] for new hedge funds that we've seen in ten or 12 years or so.

SoI'm not sure if this is a big focus for you or how material it can be, but are these guys not big enough yet, or areyou actually focusing on new sales into that channel as these guys are starting up and obviously need a lot of tools to run their business?

We've definitely seen year-over-year a marked improvement in our dialogue activity with hedge funds, particularly in the US.

A bit less in Europe.

And we have heard and seen clients leaving -- personnel leaving from one to another to set up new hedge funds.

And we're in active dialogue with many of them.

That has not, though, yet translated into significant sales to those potentially new startups.

I think that they are potentially in fundraising mode at the moment.

So, remember, there is always a lag.

If we have someone who wanted to start a hedge fund, they may leave, they may put a business plan in place, butthey have got to go and raise the money, andthat may take three, six, nine months.

So we're seeing some of that, but it has not translated into them purchasing the tools at this point.

Excellent.

Thank you.

Thank you, sir.

Our next question comes from Chris Shutler of William Blair.

Your line is now open.

Good morning.

Good morning.

I wanted to focus for a second on the head count growth.

So 6% growth sequentially, 29% over the past 12 months.

The top line over that time has grown at 10%.

So just thinking about it rationally, does that mean that you're going to potentially hire considerably fewer people over the next 12 months than you have over the prior 12 months, I guess ex acquisitions?

Chris, let me -- you got the 6% correct, but the 29%, remember, goes back to the beginning of 2012.

So that's over a two-year period.

(Inaudible -- multiple speakers).

Okay, sorry.

You've got to remember, out of that 700, half of that was through acquisitions.

So that growth has been recent in terms of what we've been picking up, but the acquisition contributed to more than half of it.

The important thing that we highlighted in there that Henry talked about is half of those hires -- nearly half of those hires came in the form of clients facing and getting out on the street, working with the clients, as well as on retention side as well too.

So retention is a valuable investment payoff for us, and staying at 92% means it's one less sale we have to make to retain the run rate.

So that we find very important.

The other thing I'll make -- and, Henry, you can throw in a couple of things here -- is that [all]organic growth is built on people.

All organic growth is built on capability in the most efficient way we can, and the comment that we've made that, while we have grown our head count organically, we've grown our compensation cost related to that head count less.

And that's by focusing on lower cost centers that are out there and continue to drive that from 44% to 45%, both on a link quarter and year over year.

And if you remember, last year year-over-year we didn't have the impact of IPD and InvestorForce.

We've actually brought that down in the interim quarter.

So we continue to push out on that capability, because we have to have the innovation, and the innovation comes from people to be able to build the products that Henry was talking about so we can sell into this gradual recovery that we're seeing out there.

What I would add is to say we're very much focused on meeting the current demand from our clients and anticipating the immediate demand the next six, nine months, ten months from our clients with existing products and new products.

And when you work backwards from there, you then need to make incremental investments to position yourself for that demand and that -- hopefully -- increase in revenue growth.

And investments to us is all people.

So -- mostly people.

Like, there is some technology investments, space and other, but people or people-related things.

And therefore we say how do we make this investment in a way that is balanced and in a way that doesn't meaningfully handicap our profitability, and that's why we rely heavily on our emerging market centers.

The next phase that we do is how do we make those investments in a way that is balanced?

Let's make our investment have a quicker payback first, such as newsales in markets where we see demand and such as client servicing and solutions personnel that we see continued improvement and retention rates and renewal rates.

So about half of the past investments have gone into that.

Then the next layer that we focus on is, okay, we now have to enhance products or create new products.

How do we balance that out?

How do we make some incremental prudent investments to invest in those products and the like?

So that's what we've done.

Where we are at right now is that we're saying that's what we've done in the last year and a half, almost two years, since the beginning of 2012.

We anticipate that is the philosophy we're going to continue to have going into 2014.

Because we -- it's working.

The paybacks of those investments has generated incremental revenue and run rates.

We actually have seen in our RMA and factor indices and PMA and slowing down the decline there, and governance and the like.

And not only that, but we're -- if we see [further] improvements in the tone, further improvement in the sales effort, we want to make sure that we capitalize on them.

Okay, makes sense, guys.

I appreciate it.

And then just one more on the CIO and CMO hires, just can you talk about each of those a little bit more and why was now the right time to make those hires as opposed to six or 12 months ago?

Thanks.

On the CIO, we are a technology company, as you all know very well.

Big parts of our business rely heavily on technology.

The index business, which is a content business, relies heavily on technology and the manufacturing of the data, so the production of the data and distribution of the data.

And our analytics business does the same, but not only that, our product is actually a software program that will run for people in our ASP SaaS solutions.

So we have been discussing over the past 12 months how do we continue to improve, scale up, and make sure that we have a very strong foundation to continue to go to clients and perform for them highly mission critical processes.

Couple with that is that a few clients have come to us and have asked us to take significantly more of their internal mission critical processing in risk management and in performance, and therefore we feel that strengthening our technology organization will be proven in order to begin to plan for those potential sales.

So that was the reason we hired a CIO, and that's the reason why we'll add a few more senior people in that area.

On marketing, we've grown significantly.

We have now $1 billion in run rate.

We have some 8,000 clients in 85 countries.

We have a multi-product line.

We reach out to many corners of the world, and in the past we've done it kind of the old fashion away, which is one client at a time, one person at a time, talking to people and the like.

I think the time has come that we develop MSCI into a very marketing-focused organization, that wefigure out what are the most effective and efficient means to reach out to clients.

How do we develop stronger client relationships at all levels of our organization?

How do we use branding as a way to deliver our messages?

How do we use advertising, which we've been doing in the US to deliver our message to the financial advisory community so that they can buy MSCI-linked products and the like.

There are a lot of areas that I think that with Darla Hasting now as a CMO, she can help us become much better as a marketing company, and hopefully expand our reach, expand our product line and make it a more coherent as a whole.

All right, great.

Thanks for the color, guys.

Thank you.

Our next question comes from Toni Kaplan of Morgan Stanley.

Your line is now open.

Thanks.

Just a quick one from me.

With regard to IPD and InvestorForce, are there any opportunities to cut costs out of those businesses going forward?

Thank you.

With respect to IPD, there were -- the merger was not really -- it had a lot of [flow on synergies], but yes, there are some synergies, especially as we combine a lot of infrastructure and modernize a lot of the data capabilities that they have.

InvestorForce, less so.

InvestorForce is really a client and revenue play from that perspective, andthat was very easily bolted on to our infrastructure, [with] not for cost savings.

Okay.

Toni, the plan will be though whatever significant reductions in cost we have on IPD we will want to reinvest back into business.

The reason is we believe we're in a cyclical -- I'm sorry, in a secular upswing in real estate across the world, both in terms of the market appreciation, with limited supply in many markets in the world.

Secondly, the increasing institutionalization of real estate [upper class], and increasing globalization of the investment in real estate.

So we bought this business in order to create what we believe to be a very large presence in risk and performance in real estate around the world.

We are right now pretty big in Europe.

We are taking steps to increase significantly our presence in the US and in Japan and in other markets in Asia, and therefore that's going to require continued investment that we plan to make from the cost savings that we have.

Not necessarily, I would say, dropping profitability of the business.

Great.

And also with regard to the other two acquisitions, arethere any areas where you've had either up side or down side surprises?

Maybe additional clients that you wouldn't have necessarily thought would want to cross-sell in sell in something?

Any sort of surprising, either to the up side or down side with those?

Thanks.

I think the positive surprise has been that, one, the business has not really focused significantly on asset owners around the world, pension plans and sovereign wealth funds and the like.

So we have started hiring and putting a dedicated team to do that, andit has begun to pay off well in the last two quarters.

So that's been pretty good.

Secondly is our footprint, the -- quote, unquote -- MSCI footprint in many markets where IPD didn't have the time or the resources or head count to go out and sell has been beneficial to them.

So we've opened doors for IPD in Korea, for example.

Some of these other sovereign wealth funds in the Middle East and in Asia, and clearly our relationship with many of the pension funds in the US have helped to open the doors.

And lastly, we are in the early stages of a major dialogue with clients, especially asset owner clients, about the incorporation of the real estate asset class [and] the total portfolio of the fund -- what are the diversification benefits, what are the risk issues associated with them, and the like -- in order to see if we can become a catalyst for the further institutionalization and globalization of real estate investments by institution investors.

Early days, because that takes time.

But we have research papers, we have research conferences going on and the like, that are attacking that,and that is [one] MSCI team of research people from the performance side, the risk side and the real estate side.

I think on the negative surprises, so to speak, has been we have started to transform the IPD business into the way we look at the world in terms of recognition of revenues and in terms of run rates and the capturing of the rates and the like, and those have been a little bit the volatility that you've seen in the last two quarters or three quarters in the up and downs of the revenue on IPD.

Thanks a lot, Henry.

Thank you.

And at this time I'm not showing any further questions.

I would like to turn the call back to management for any closing remarks.

Thank you, I appreciate it.

Well, I just want to, before we close, remind everyone to please feel free to call me if you have any questions on the quarter.

We want to thank you for your interest in MSCI, and thank you especially for your ownership of our shares.

Thank you.

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

This does conclude today's program.

You may all disconnect.

Everyone have a wonderful day.