明晟 (MSCI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2015 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 conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Stephen Davidson, Head of Investor Relations. Sir, you may begin.

Thank you, Shanice. Good day, and welcome to the MSCI third quarter 2015 earnings conference call. Earlier this morning we issued a press release announcing our results for the third quarter 2015. A copy of the release and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. These documents include our new segment reporting and activity costing disclosures.

Let me remind you that 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. For a discussion of additional risks and uncertainties, please see the Risk Factors and forward-looking statements in our most recent Form 10-K and our other filings with the SEC.

During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide a base line for the evolution of results. You'll find a reconciliation to the equivalent GAAP term in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures on pages 32 to 40 of the earnings presentation.

We have provided you with a lot of new disclosures this quarter. So to allow more time for the Q&A, we have tried to limit the prepared remarks to incremental information not already included in our earnings release. On the call today are Henry Fernandez, Chief Executive Officer, and Bob Qutub, Chief Financial Officer.

With that, let me now turn the call over to Mr. Henry Fernandez. Henry?

Thank you for joining us today. In my opening remarks, I plan to discuss some of the highlights from our strong third quarter, which builds upon the momentum that we have been developing over the last several quarters. Then, I would like to share with you the bigger picture of MSCI. Our Company's exciting strategy for the next several years is designed to lead to even greater revenue growth and profitability, as well as increased cash flows. This strong financial performance should allow MSCI to continue its policy of returning significant capital to our shareholders. I am very excited to provide you with this look ahead.

But first, our Q3 results which start on slide 3. As you saw from our press release, MSCI reported a strong third quarter. Among other things, we delivered much higher levels of profitability, driven by solid revenue generation and a strong cost discipline, resulting in double digit growth in adjusted EBITDA and continued margin expansion.

The highlights of Q3 include revenue growth of 7%, which combined with a 7% decline in adjusted EBITDA expenses drove a 740 basis point increase in margin to 48%, which is the highest margin recorded by MSCI in almost three years. Total run rate growth was 6% and the recurring subscription run rate was up 8%, excluding the negative impact of foreign exchange.

Net income was $64 million or $0.59 in diluted EPS. Adjusted net income was $66 million or $0.60 in adjusted EPS. Our basis model continued to deliver a strong cash flow. Furthermore, our well timed $800 million each months of senior notes in early August, just before the spike in market volatility, position us to repurchase 8 million shares for a total value of approximately $480 million in the quarter and through October 2014.

Since December 2012, we have repurchased over 22 million shares, and with the completion of our $850 million share purchase authorization, our Board has approved a new $1 billion authorization.

In summary, on the financial perspective, we're extremely pleased with MSCI's overall performance in the first three quarters of 2015. On the personnel front and to better position MSCI to achieve its strategic goals, we recently announced that Baer Pettit will assume the role of Chief Operating Officer, and Diana Tidd has been appointed Head of Equity Index Products Worldwide reporting to Baer. We're very pleased to have leaders like Baer and Diana to step into these important roles.

Now I will turn our attention to the long-term targets we have set for ourselves on slide 4. Taking you through each of our segments and the growth we aspire to for each of them over the longer term. This is the way we're running the Company and the segments will provide you with greater transparency and insight into our performance as we have promised earlier in the year.

We believe we're a growth company with a strong recurring revenue model. Aspiring to achieve double-digit revenue growth over time. We have, in our view, multiple levers to drive that future growth. In our Index segment, where MSCI's global equity indexes are considered the gold standard for global investing, it is our long-term goal to grow our revenue annually in the low-double digits, with adjusted EBITDA margins ranging from 68% to 72%. This range is below the margin level that we're reporting today for Q3, this is our long-term target, which reflects the impact of important investments that we may need to make to enhance and expand our market position and indexes, just as we have done in the past by differentiating ourselves in new areas, such as factor indexes.

We're excited to report that we believe our Analytics segment is now on the path to both revenue growth and improved profitability as a result of the steps we have taken this year and the steps we will continue to take in 2016. It is our goal to move our revenue growth to the high single digits over time. It is also our long-term goal to move adjusted EBITDA margins to the 30% to 35% range. Our clients rely on Analytics products to meet the demands of an increasingly complex and global multi-asset class investment world. And therefore, presenting us with significant opportunities to serve them and to grow our business.

Lastly, in now in our All Other segment, which consists of our ESG and real estate products, we see high growth opportunities in our ESG products and the potential to achieve higher levels of growth and improved profitability for our real estate products. Our long-term goal is that the All Other segment will be an engine of future growth for the Company and we hope to grow revenues in this segment in the low double-digits. And over the longer term, we also would like to move our adjusted EBITDA margins from negative levels today, given our significant investments in this area to the range of above 15% to 20%.

So, I will review our financial targets for each of our segments. What does this all mean for MSCI as a whole? If we reach our long-term financial targets, we believe that we will be in an even more competitively advantaged position in the future. I will be better positioned to deliver deeper insights and superior tools to the leading investors in the world. If we can grow at a faster pace, we believe we'll be in a position to solidify and enhance market leadership in all our products, including indices, equity and multi-asset class analytics, and ESG and private real estate products.

From a financial perspective, it is our goal that the respective contribution from each of these segments will help us achieve our long-term goal of low double-digit revenue growth and EBITDA margins of over 50% for the whole Company. This trajectory to our goal of 50% adjusted EBITDA margin will obviously not be a straight line. For example, even though we reached 48% margin in Q3, we expect Q4 to be lower by some 200 basis points to 300 basis points. However, please keep your focus on the destination of 50%.

On the slide 5, we provide you with more detail on how we intend to achieve the adjusted EBITDA targets in the analytics segment. As you know all too well, this is an area of keen focus for us. The focus for analytics in the near term will continue to be on improving profitability. We have started by reducing the cost structure. We have achieved over $10 million of cost reductions so far in 2015, which annualized to about $20 million of the $25 million to $30 million that we hope to achieve. We have therefore made significant headway already in 2015 in achieving our cost target for analytics products.

On slide 7, we provide you with a sense of how much the new analytics management team led by Peter Zangari has accomplished in the last six months. The team has put the segment on a path to improve profitability and subsequent revenue growth.

Lastly, jumping to slide 8, we highlight for you the strong track record of capital return that we have established for MSCI. From our earlier days of capital return in 2012 until the present, we have returned over $1.2 billion in capital to our shareholders by repurchasing over 22 million shares at an average price of $51.34 and paying accumulated dividends of $85 million. We certainly hope to continue our strong record of returning capital to our shareholders over the long-term.

Now, I would like to turn it over to Bob, who will walk us through the third quarter results in more detail.

Thanks, Henry, and good morning to all of you on the phone.

Please turn to slide 10, and we will begin my overview of our financial results. Our results this quarter were strong with a 7% increase in revenue and a 7% decline in adjusted EBITDA expenses. This drove a 26% increase in adjusted EBITDA and a 740 basis points increase in our adjusted EBITDA margin to 47.9%, including the impact of foreign exchange fluctuations.

Just a couple of quick comments on the results, our results include higher interest costs from our bond offerings in the fourth quarter of last year and August of this year. In our GAAP numbers, we recorded a $6.3 million gain on the sale of an investment, which is excluded from our adjusted EPS. The 7% decline in weighted shares outstanding over the year added about $0.04 to our adjusted EPS. We anniversaried GMI in August, and as of the third quarter, it is considered part of our organic revenue stream in ESG.

Lastly, just a comment regarding our tax rate. We are now in the process of aligning our tax profile with our global operating footprint, we believe this project will reduce our effective tax rate by a number of percentage points over the coming years. As we move forward, we will update you on our progress.

In the slides that follow, we adjust our reported results for foreign currency fluctuations on our subscription revenue and costs, but we do not provide the impact on foreign currency fluctuations on our asset based fees tied to the assets under management, of which, approximately two-thirds are invested in securities denominated in currencies other than the US dollar.

Before I get into the results, let me talk for a moment on the changes in our disclosures. The disclosures of our product segments and the related profitability are in line with the commitment we made at the beginning of the year to provide this information in the second half of 2015.

In line with these enhanced disclosures, we spent considerable time focusing on the activities that drive our costs. Those activities are now reflected in our income statement and show what we incur to, one, support our existing products and clients, expand and grow our client relationships and finally, develop and build new products. We believe this increased transparency will provide you with more insight into MSCI.

Now let's turn to slide 11, where we will provide you with a bridge for the year-over-year change in our revenues by segment and revenue type. Total revenues increased $17 million or 7% to $269 million, but declined slightly from the second quarter of 2015. The year-over-year increase was driven by an increase of $14 million or 7% in recurring subscription revenues, and an increase of $4 million or 9% in asset-based fees, partially offset by lower non-recurring revenue.

Adjusting for the negative impact of FX, our subscription revenues, which includes recurring subscription and non-recurring revenue would have increased 8% overall, and index would have increased 10% and analytics and all other would have each increased 7%.

The $4 million or 9% increase in asset-based fee revenue to $51 million was driven by a $32 billion increase in average AUM and ETFs linked to MSCI indices to $418 billion, as well as growth in non-ETF institutional passive funds based on MSCI indices. On a linked-quarter basis, asset-based fees declined slightly, driven by a 5% decline in average AUM in ETF, linked to MSCI indices. The linked-quarter decline was mitigated by higher revenue from non-ETF institutional passive funds linked to MSCI indices.

Turning to slide 12, we provide you with the year-over-year adjusted EBITDA expense bridge. Third quarter adjusted EBITDA expenses decreased $10 million or 7% to a $140 million and declined $12 million or 8% compared to the second quarter of 2015. The impact of 2014 hires and same store inflationary compensation noticed here on the chart as net carryover inflationary increased as well as incremental severance was more than offset by a $7 million benefit from foreign currency exchange fluctuations and costs savings of $12 million, driven primarily by lower compensation and benefits as headcount was lower by 133 year-over-year. Lower non-compensation cost also contributed to this decline.

Excluding the impact of foreign currency exchange fluctuation, our adjusted EBITDA expenses would have decreased $3 million or 2%. The decline on a linked quarter basis was driven entirely by lower compensation and benefit expenses, reflecting lower incentive compensation accruals, lower wages and lower severance related to our efficiency efforts and higher capitalization of compensation related to various strategic projects underway.

On slide 13, we provide the run rate bridge for the quarter. Our reported run rate increased 6% to $1.62 billion consisting of a 6% increase in subscription run rate to $874 million and 6% ABF run rate to $188 million, compared to the second quarter of 2015, however, run rate was flat, driven by a 7% decline in the asset-based fee run rate and a 5% decline in average AUMs and ETFs linked to MSCI indices.

Adjusting for foreign currency fluctuations, subscription run rate grew 8% year-over-year. In the quarter, a combined $3 million increase of index and record ESG sales was offset by a $4 million decline in analytics and real estate sales. Lower analytics cancellations, however, helped mitigate the decline in analytics gross, aggregate retention rates increased to a record 95.3%. Overall, retentions remained very strong at 95%.

On slides 14 through 18, I'll walk you through our segment results. Let's begin with index on slide 14, revenues for index increased 9% on a reported basis and the recurring subscription portion index revenues increased 11% on an FX adjusted basis. The adjusted EBITDA margin for indexed increased to 73%. We saw a continued strong growth in our core market cap index products, factor and thematics and derivatives as this growth continues to be supported by a growing pipeline of new products.

Our core market cap index products, factors and thematics and derivatives reported strong year-over-year results and run rate growth. Growth in factors and thematics is helping to diversify our revenue base and is driving growth in both subscription and ABF revenue types.

Open interest in MSCI index-based futures and options increased to 1.6 million contracts, up 29% year-over-year.

In terms of new products in the quarter, we launched three new index families and we expanded 20 index families, mostly factors. Year-to-date, we have launched 50 new index families and 44 index families have been expanded compared to 22 in the prior period. In the third quarter, ETF providers launched 47 ETFs based on MSCI indices, compared to 19 in the prior year. Lastly, on the client side, we are continuing to focus on diversifying our client base and growing new client base.

On slide 15, we provide you with some detail around our asset-based fees. The upper left chart, despite the spike in market volatility in August, our asset-based fee revenue remained fairly stable on a linked quarter basis due to higher revenues from non-institutional passive funds linked to MSCI indices. As shown in the upper right corner, third quarter inflows in ETFs remained positive in the quarter, despite depreciation of $48 million.

As shown in the lower left corner, we have seen significant declines in emerging markets, related to AUM, both year-over-year and quarter-over-quarter. And while developed market AUM is up year-over-year, it declined on a linked-quarter basis.

Turning to the lower right, reported average basis point fee for ETF, AUM linked to MSCI indices was 3.40 basis points at the end of the third quarter, down from the 3.51 reported at the end of the third quarter, and down slightly from the second quarter of this year. The decline year-over-year and quarter-over-quarter was driven by fee structure, as well as the negative mix shift I mentioned earlier and assets that moved out from emerging markets and moved into developed market ETFs.

On slide 16, we highlight our position as a leading index provider in ETF markets, where we are number one year-to-date globally in terms of new assets gathered, net flows into ETFs to MSCI indices were $3 billion during the third quarter, down from $24 million in the second quarter. Year-to-date ETFs linked to MSCI indices captured $59 billion in net flows.

Number one new assets and currency-hedged indices, assets at ETFs linked to MSCI currency-hedged indices have more than doubled year-to-date, growing from $17 billion to $41 billion as of the end of the third quarter. Number one in new assets linked to factors, despite lower assets and equity factored ETFs generated during the quarter, mainly due to negative market movement, there was positive demand for ETFs linked to MSCI factor indexes.

Assets in ETFs linked to MSCI factor indexes was $21.8 billion at the end of the third quarter, up $1.6 billion from the end of the second quarter. Year-to-date ETFs linked to MSCI factored indexes have captured $9.1 billion of net flows. And lastly, we were number one in the total number of equity ETFs was 774.

On slide 17, we highlight the financials for the analytics segment. Revenues for analytics increased 5% on a reported basis and 7% on an FX adjusted basis and the adjusted EBITDA margin increased to 27%. To reiterate what Henry mentioned earlier, we expect that higher cost across all segments in the fourth quarter will lower the analytics margin to a range of 24% to 26% in the fourth quarter.

There were three primary use cases around which we are focusing our products and services in analytics are; one, clients looking to differentiate themselves; two, operations and risk management infrastructure; and three, regulation. As we think about the use cases, what we're seeing from our clients is that, they are spending to save money and they are spending to comply with the increasing complex regulatory environment.

Given this, the sales dialogue with most of our clients is focused on the operations and risk management use case, as well as the regulatory use case. The federal bank's comprehensive capital analysis and reviewing done with CCAR and the proposal liquidity rules for asset management by the SEC are the primary drivers of the regulatory chain, in dialogue. As a result, we are seeing strong sales from our bank and large asset management segments with some weaknesses in hedge funds.

And lastly for our segment, on slide 18, we have the all other segment, which consist of ESG and real estate. Revenues for all other increased 2% on a reported basis and 7% on an FX adjusted basis and the adjusted EBITDA margin continue to improve.

First, in terms of ESG, we are continuing to see a growing demand for deeper ESG, analytics and client portfolios across asset classes. In terms of sales, we have a very strong quarter, especially for the Americas, and we secured global deals with several very large global asset managers.

We also recorded our first sale in Japan to a large global asset manager. Carbon continues to be an area of strength. As a result of the strong collaboration between Index and ESG, The Montreal pledge deadline in the approach of COP21 in Paris appear to be drivers of increasing demand. Lastly, growth at ESG continues to be fueled by the addition of new clients.

Turning to real estate, we are continuing to focus on improving the profitability of this important product. We have reorganized the sales team and are reviewing the product portfolio to eliminate non-core products. We are also in the process of upgrading our platform to improve the value proposition for our clients and drive revenue growth. Lastly for real estate, we are continuing to automate client data workflow, which drives increased efficiency.

Turning to slide 19, we provide our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $993 million, which includes cash held outside of the United States of $102 million and as a general policy we maintain a US cash cushion of approximately $125 million for operational purposes.

We continued repurchasing shares in October for a total of approximately $135 million. So, that leaves us approximately $630 million in excess cash to be deployed. It's important to point out that through today, we have now completed 96% of our commitment to return $1 billion in capital to our shareholders by the end of 2016. Now with the completion of our $850 million authorization, our Board has just approved a new $1 billion authorization under which we expect to continue to repurchase shares in the open market.

The very high pace of repurchases in the quarter and in October was driven by the pullback in the stock price due to the spike in volatility. But we expect to continue to repurchase shares in the open market, we expected that if the stock goes higher from these levels, the pace of repurchases will decline and if it moves lower, the pace will increase. Our goal is to deploy the remaining cash in a manner that generates highest return for shareholders. We will continue to regularly evaluate a method to achieve this objective with our Board. And as of October 22, shares outstanding were 102.7 million.

On slide 20, we provide you with the progression of our full year 2015 adjusted EBITDA expense guidance. Through the third quarter of 2015, annualized foreign exchange benefit we have registered relative to our original full year 2015 guidance of $620 million to $640 million based on year end 2015 plan rates is approximately $7 million. The primary driver, therefore, of this decline in the current range of $595 million to $600 million is the cost savings that we have achieved based on the deliberate actions we have taken to reduce headcount and improve overall cost efficiently.

On our second quarter call, we expected that we would see increased cost from new hires, higher technology infrastructure spend, higher professional fees and severance and would keep us at the low-end of our previously stated range of $620 million to $640 million. These costs came in lower than expected in the third quarter due to two factors.

First, there was an element of timing or higher costs of new hires, professional fees and technology cost were delayed and we now expect these costs to come in the fourth quarter. Second, the actions that we have taken in the first half of 2015 by reducing headcount and prioritizing projects have had a more significant impact on the quarterly run rate of expenses. In fact, of the $24 million to $29 million in costs savings that we expect this year, analytics represents a little more than $10 million of that savings.

Although we do expect to see incremental cost flow through in the fourth quarter based on our guidance, the fourth quarter adjusted EBITDA expenses are now expected to be between $148 million and $153 million in the fourth quarter of 2015. As Henry mentioned earlier, we expect that we'll have a negative 200 basis points to 300 basis points impact on our adjusted EBITDA margin in the fourth quarter.

One final comment on costs. The long-term goals that Henry outlined earlier, involved solid growth in revenue, as well as a sustained cost discipline. In the near term, we now aspire to annual cost growth at the low end of the 5% to 7% range we provided you within the second quarter on a constant currency and constant portfolio basis. We believe this level of annual expense growth will enable us to strike the right balance between investing to fuel future growth and maintaining strong cost discipline.

On slide 21, I'll close out with prepared remarks on our updated guidance for the full year of 2015. As I just stated, we now expect adjusted EBITDA expenses to come in between $595 million and $600 million. Interest expense for the year is now expected to be approximately $63 million. Free cash flow is now expected to come in between $255 million to $270 million for 2015. CapEx is now expected to be in the range of $45 million to $50 million, reflecting lower technology infrastructure spending and finally the effective tax rate is still expected to come in between 35% and 36%.

Now with that, I'd like to open up the lines for your questions.

Thank you. (Operator Instructions) Toni Kaplan, Morgan Stanley.

I'm going to skip over index, just because there is a really strong number in line with the targets anyway. Just on analytics, just the run rate in the quarter ticked down a little bit on a constant currency basis. So I just want to know if you could remind us of some of the initiatives that will drive you to the higher growth rate that you're looking for?

We had a slightly soft quarter in analytics sales, probably it is just -- in the quarter, there was clearly a lot of volatility in the market and when that happens client's focus is intensely on the volatility and sometimes some decisions about the budgets and closure of contracts and the like slow down a little bit. Our pipeline on analytics is actually pretty extensive and therefore that gives us optimistic caution. We are cautiously optimistic that our sales pace will pick up.

In terms of what are we doing to drive that even higher structurally, not just with the existing product line, there is a slew of new product development that has taken place in analytics, from the launch of a lot of new models in the equity risk model area to particularly the revamping of our applications with a new interphase, and a new layer of application on top of some of our older applications, we're hoping that we can launch that in a selective basis in the first quarter of 2016 and over time we hope that that's going to drive analytics higher.

One other key area that we have been focusing on in the last six months with the new management team in analytics is, how do we really look at use cases in our client and drive strong sales efforts in each one of these use cases. And I think as Bob mentioned, we're very much focused on investment differentiation. So, we go to our client and say, our tools are going to help you build better performance.

The second one is operational efficiencies, the complexity and global nature and multi-asset class nature of portfolios is creating significant complexity in our clients operationally, and we want to drive our products to help them reduce that complexity and create efficiencies. And the third one is, certainly regulatory compliance, with all of those efforts, so I'll give you a little bit of answer in the short-term in terms of the sales of the pipeline and longer term, while we are very optimistic about the sales in this program.

And then in all other, it looks like the non-recurring revenue has been sort of a drag there on the growth rate. Can you just remind us what's included in that non-recurring part? Because it looks like the run rate trend has been sort of low-double digits on a constant currency basis?

In the other side, what we have ESG and real estate. And the real estate tends to dominate the one-times and we spent a lot of time trying to move those more into recurring and we have seen some tapering off with the platform, we're expecting us to be able to generate more product capabilities across the regions that are out there. But most of those are coming out of the real estate segment, and they tend to be one-time sales, one-time subscriptions that are out there.

And just lastly, just wanted to see if you have any updated thoughts on capital deployment now that you have almost $1 billion in cash on hand. So if any areas of M&A that you're more focused on?

No, we look at -- we try to bring it down to where our cash is, now obviously we continued to deploy cash all the way past through the quarter end, we used up the rest of our $800 million authorization. We've got about $600 million of cash on our balance sheet that's available.

The acquisitions are obviously a good deployment of capital that can be done either synergistically or they can be done to filling gaps or they can be done to excel capabilities like most recently we hired a few. But we still -- we are looking for the highest return and we've been deploying capital through buybacks, with the $1 billion authorization, as I indicated earlier, we intend to continue to buy that back. Until opportunities come up our way that are different, but hires are best uses where we are focused on.

Chris Shutler, William Blair.

On the new $1 billion buyback plan, what are your thoughts on timeline there? Is there a date that you have to complete it by or just how fast do you think that that will get deployed?

We're going to -- we kept it open and we are committed to returning and just we're going to basically face ourselves over the course of the next few periods. As I said Chris, we're way ahead of our original commitment of returning the $1 billion, we are 96% on the initial $1 billion and we remain committed to returning that and using our recently issued debt to the highest and best use.

Okay. I'm just thinking through this Bob, I mean, if it was going to be longer term in terms of the timeline for usage. Why would you raise $800 million of debt given that you could buy back that $1 billion over a period of a year, little bit over a year with free cash and revolver, which would probably be a lot cheaper?

It goes back to -- when you look at our balance sheet, and when we talked about at the second quarter, working with the Board, we felt that more appropriate level of leverage was 3 to 3.5 was better match to our cash flows, and we had a great opportunity to raise $800 million as Henry mentioned, extremely, efficiently and first part of August, before the volatility struck. And we've always remained committed, Chris, that we are not here to store cash, we are here to deploy as efficiently and effectively as we can. And I think our record in the third quarter here shows that we did deploy a lot of capital as the market moves and the volatility enhance then we were able to efficiently buyback a lot of share, 8 million shares to be specific, since the beginning of the third quarter.

Also look at, as Bob indicated, our plan is to try to be in the market with lower levels of share price. And be in the market that is less with higher levels of share price. So, I think the pace of which we affect our program will depend quite a lot on where things turn out.

And then just a couple more quick ones on -- Bob, did you give the ETF yield in the asset-based fees?

Yes, 3.4 basis points, which is down from 3.43 and 3.51 a year before, on a linked year-over-year basis. It's on in the slides too Chris.

And then on index, just what kind of investments do you guys need to make there to enhance and expand? As you said, the margin targets there just given where you are at seem relatively conservative, so just want to understand the incremental investments?

I don't know, I mean, 70% plus EBITDA margin don't seem conservative to me. But look, I think that we have a phenomenal franchise in index, phenomenal. And honestly, as management of shareholders, you got two choices, you either milk the franchise and over time, you reduce your market leadership, or you invest in your franchise and you'll continue to feel this revenue growth and this level of profitability. We are in the latter half, which is a balance between more Q1 and can invest on an annual basis. But there is still -- if you think about it, there are three areas, where equity indices can be very profitable for us, active management, passive management and the relevancy. So, in active management, you have to reach out to more and more costumers, and deeper into the market cap areas. So for example, in our small cap indices, you want to reach into new territories, like China and Saudi Arabia and other places like that, as they open up to global investing.

On passive management, in addition to the market capital indices, you want to invest in factor indices and thematic, which is a big revolution, we are at the forefront of that. You've got to put some investments in there. And thirdly, an area that has been small for us, is derivatives and listed futures and options around the world. We feel extremely excited about that area over time, from a small base. Because we have demonstrated in the last few years that the market for multi-currency index underlying futures contracts has -- so, it can be very successful and we did that obviously with our fundraiser eyes with the emerging market index features and the [EFA] futures, and in Europe with our partners Eurex with the world futures. And we would like to make some investments in there to see if we can build a fairly large third leg of revenue and profitability for our business.

Alex Kramm, UBS.

I actually want to go back to page 5, and the analytics long-term target. I think some of this was mentioned already, but maybe you can flesh it out a little bit more. First of all, when you talked about long-term target, what are the timelines of some of these buckets here? In particular, when it comes to the cost savings, I mean are those very near term? What's the little bit more backward loaded? And then, coming back to, I think something that was asked earlier, how confident do you feel about the ability to drive that incremental growth at the same time as you are cutting costs?

Well, look we purposely lapped the timeline a bit flexible, because clearly nobody has to pick the ball right up to, toward the future, can predict and the pace by which we can achieve things. The second important component of this slide is that, it starts with the restructuring of the cost, the efficiencies of the line product line and therefore, you notice that the first column on the slide of the left is long-term cost savings, which we are very much on our way to achieve and we're already are on an annualized $20 million cost savings, we've got $5 million to $10 million to go. And those are the things we have identified for now and early but the management team in analytics is also not going to stop there, it's going to keep tightening and tightening in a way that creates further efficiencies.

Then on the right hand side, as you see, we put the incremental revenue targets there, which we think are going to take a little longer than the cost savings and -- but we are confident that at least from today's vantage point that's -- as I mentioned earlier, that a significant amount of new product development and repositioning of the product and utilization of the use cases and the like can help us achieve discounted revenue profiles to get to an EBITDA -- say, think about at a steady state from today's vantage point, EBITDA margins in the 30s. Once we achieve those, that doesn't mean that's where we end. We'll -- then we'll have to reassess is that an appropriate margin. Can we do better? Can we not? I don't know, it's literally too early to tell. Right now, what we can give you is what we've seen in the horizon and then reassess when we get there as to what else can be done.

Maybe just a follow-up quickly on this one as well. You mentioned earlier kind of like the use cases and more focus on that, but I think what's been noted a couple of times is that the sales growth is still lacking in that segment. So maybe just getting beyond some of those use cases, what would you say is like the biggest thing that's missing and if it's macro that's fine too, but what do you think is really the one component that you need to accelerate that sales growth?

Yes. I think the -- first of all, I honestly want to ensure that I'd point out again that the softness in any particular quarter should not be a cause for alarm and the same thing that we have a blowout quarter unless we tell you otherwise shouldn't be a cost for you for the year and so we will be guiding you through that on -- given the segment reporting on a quarter-to-quarter basis. So, I would not -- if I were you, I would not view that much into the softness of this quarter. Remember, we had a huge amount of volatility in the US, Labor Day was a week later and then -- so September was really three weeks to close a lot of deals. So the distraction by our clients and the late return of people from vacation and all of that may have caused some of those things to slip.

And overall, for example, I mean, going into the final week of the quarter, there was like $4 million -- this is not just in analytics, but overall, there was a $4 million, that could have closed in the quarter that slipped into the following quarter and that was about 100% higher than in prior quarters. So that tells you a little bit of the -- some of these artificial sort of line that we put into two quarters.

What is very important is that the pipeline is pretty good. We feel very good about the pipeline. Now, the timing of closing all of that again is a question of working with our clients and getting approval for their purchases and so on and so forth. So we feel pretty good now. My team focus and on the team's keen focus on the various use cases, is so that we rally the resources of the firm to achieve the objectives of the client. Said differently instead of selling products and features and applications and models and the like, we're trying to flip a lot of that completely and say, solve use cases. So okay, a client warrants 10% better cost efficiencies in the way they are managing their risk with their risk management efforts, how do we achieve that with our tools, let's work backwards from that.

Our client is looking for 50 basis point better improvement in their portfolios. What can the tools do to achieve that and so on and so forth. Or what we see is, the clients are with a huge deadline by regulators to provide certain reports and the like, how can we rally our resources to achieve that? So all of that gives us a good amount of optimism, but again, this revenue -- the sales process and the revenue process initially will be slow.

And we hope that there are a few quarters you'll accelerate and over time we -- it begins to move fairly more rapidly. But again, we have to see how it all goes in all of this -- I want to make sure our expectations are right that, we are really focusing on profitability first and launching the products that we -- and utilizing the benefit of all the products that we have launched and ones that were coming out and then focus in increasing sales.

I think people have been asking more than two questions. I am going to squeeze one more in if that's cool. For Bob, real quick on the tax rate, you gave us a little bit of a teaser on looking to reduce that. Can you also talk a little bit about the A, the timeline and B, the kind of things that you were thinking about, because I think there's been some things going around like moving the IP of indices and some things that sound a bit more complex than other things I've seen in the past. So, maybe give us a little more color about timeline and what you're actually trying to do here?

The timeline is immediate. We have already started to take advantage of our global footprint and realigning where our leadership is, all in line with what the tax and where we think the value is. In terms of selling IP and moving IP, that's a different conversation. Obviously you're going to explore that, but really right now, it's really aligning where the value is on our footprint. And that will happen -- probably you'll see it, our operating rate is actually pretty strong, we had some discrete items this quarter that reflective of state items with the benefit on the sale of our investment to offset that, and we get inside of the tax rate, have some benefit in the third quarter, that will be continuing and ongoing as it becomes more meaningful, we always talk about guidance next year, we'll talk more about where we think those rates should be.

Vincent Hung, Autonomous.

Few questions, just first maybe I've missed this. Can you talk through possibly the higher margins in the all other segments please?

In terms of the margins in the other segment, the direction of them, Vincent, I'm sorry, just want to make sure -- we couldn't hear you well Vincent.

How you expect to get the 15% to 20% from where you are now?

Two factors, I'll start off and Henry can finish it. You can see that we're directionally moving in that direction, you can see and the best way to look at the other side, Vincent, in my view look is look at it on a year-to-date basis. You can see that the revenue on an absolute basis grew about 2.6% or about a million. But what we saw was efficiencies that I referred to on the real estate expenses actually on a year-to-date basis have decline, driving the margin to coming more towards a break-even.

And as I talked about, ESG is growing significantly. Obviously the reported run rates in ESG are obviously down. Because now with annualized GMIs, you are starting to see them in the high-teens closer to 20%. That's one factor. The other factor that would help drive the growth is the platform that I referred to, on real estate, not only will provide a better client experience. It will provide more efficiency as well as the platform to grow. That's what we see going forward.

And then second question, I was just curious on the segment reporting methodology you've put out today. So you have chosen to allocate the shared cost as opposed to splitting them out, how much did you have in terms of these indirect or shared costs?

The question is, when we went through all of the cost base, we had several dedicated costs, more than half of our costs tend to be dedicated and aligned around the products, we tend to become more corporate and share a lot of the infrastructure costs. What we seal through either time tracking or allocations, costs that you see here from a contribution margin, defined as what I would say is our cost of revenues, inclusive of our selling and R&D, those are really aligned around the products, the overhead or general administrative tends to be, Henry and Bob and some of the other infrastructure that's out there and our goal on that is to keep it low. Right now 7.4% was the general administrative cost of revenues, we continue to drive that out to be as efficient as we can. And continue to maximize the gross profit line when that comes to a combination of specialists within the product, as well as being able to allocate the full corporate benefit and footprint that we have out there.

Keith Housum, Northcoast Research.

As we look at the long-term guidance, long-term target, I know you are low as to a year on that, but should we be thinking about that as a two or three years target or just more of a 10 year target that you guys are thinking of in your heads?

Well, Keith, 10 year isn't [term] for us. So we're for sure not focused on that. So, we're probably closer to the first range, but again we left that totally as flexible at this point, because we can't tell you how all of this will evolve. We can't tell you how market conditions and how product development efforts and so on and so forth. So, it's -- not clear to us that we have a specific set of targets -- timing of the target. What we have is targets that we want to achieve and if they take a while, they take a while. If they come sooner, they come sooner. But we don't have a specific timeframe is that we're always in a hurry. But we don't want a specific time frame. So, we can't provide that to you.

And also, you can see it demonstrated some immediate actions on the cost, but Henry referred to about what we've done there?

Okay. As I think about the all other segment, I guess, is that the area, I guess, where you have the most opportunity for improvement? It sounds like in your index and analytical segments it's operating as expected or perhaps even better than you were planning perhaps even a year ago, but in the all other, especially in the real estate area, it's sounds like you're perhaps lagging there where you're hoping to be and I guess is there any acquisition you are going to make in the area or is that an area you just need to spend more time and effort and you'll be able to get there.

So the way to think about the enterprise is that, we are already at a steady state of EBITDA margin in index. It will go up and down, obviously within the range and beyond depending on certain conditions. We are ramping up the margin on analytics and the milestone is in the 30s% at some point, and see what happens after that.

And then thirdly, this other area -- other problem category, that's where we are putting a lot of our new investments that we think will have a high revenue growth, but we need to have meaningful investments in them, and at the beginning, obviously we will run them on a deficit. But over time, we want to make sure the breakeven and then it could contribute to the overall profitability of the firm. So therefore, where we're focused on in efficiencies and profitability are in Analytics in order to get to where we want to be. And within the other category is real estate because it's an area that we've been investing and restructuring and reengineering the whole product line after the acquisition, so we can bring it back to a positive contribution to profitability of the firm.

Acquisitions, they can happen in any one of businesses, and we at look them all the time for sure, especially smaller acquisitions, but I think I want to emphasize that the footprint that we have at MSCI is enough for now to make us focus on organic growth. So the vast majority of our efforts at MSCI are organic growth, with selected bolt-on extension acquisitions that's what we are right now. Obviously if anything changed, we will be reporting that.

Joel Jeffrey, KBW.

Just looking at the P&L and the R&D expense line, I mean it's up 10% year-to-date, but certainly down meaningfully quarter-to-quarter and year-on-year in the third quarter. Just wondering how to think about that going forward. I mean -- was there just an acceleration of development cost in the first half of the year, and should we be thinking about sort of the remainder year being similar to what we saw in the third quarter?

A couple of things. One is R&D is what we are spending on for the future as opposed to cost and revenues to support the existing book of business and selling and marketing to grow the existing clients and new clients acquisition. Here, two things, in the first half of the year, recall we talked about technology project associated with RMA that we decided to step away from, because the benefits that we had initially identified had diminished and we had a write-off of around $3.5 million to $4 million in the first quarter, which would have inflated the first quarter and you can see that in historical results and also that and place it on a year-to-date basis.

I did talk about the linked quarter decline coming down significantly. One of the components was deferred stock which is on a catch-up basis in the third quarter that would actually have -- depressed the expense or reduced the expense for the in-quarter. So, you would see that come back up slightly in the fourth quarter, one of the contributing factors that we referred to is slightly increasing cost in the fourth quarter.

When you think about that it is just under 6% of revenues. I would say on a more normalized basis that probably would be higher, slightly higher, closer to the 6.5%, 7% that you've seen historically once we get full up and running.

And then just looking back a couple of years ago, I know you guys talked about the investments that you would need to make in the business to kind of ensure that you saw sustainable revenue growth going forward, and that was one of the reasons that margins had come down to levels that they hadn't? Sort of that in prior year or before that, you were less focused on that and that's the reason we saw the margins are actually at current levels of that now. Just wondering, how we think about this going forward in terms of the need for increased spend and the ability to drive those margins up to that 50% level, that you talked about longer term?

If you think about the investment plan that we went through in 2013 and 2014, which was very important to us, we needed some investment catch-up or step-up investment in index, which we achieved, and you noticed in this segment that therefore, the EBITDA margins in index went down to about 64%, 69%, because we needed that. We definitely needed a meaningful of investments, particularly on our data centers and our sort of running of the infrastructure of the applications that we provide in analytics. We want investments there in significantly upgrading the leadership of the technology team in all aspects of that and obviously a lot of investment in capital expenditure, with the datacenters and software and things like that and new applications that we were building.

So that, we are benefiting from that investment in this space right now. There were significant investment in servicing, our entire client base around the world, so there was a step-up of that. So as we look at that period, as a period that has benefited us in getting the retentions rate so high, and it's diabolizing and now growing the analytics product line and maintaining our leadership in the index franchise. So, where we are now is at a point in which that step up of investment has served us well, and we are now on a normal set up basis as opposed to a big set up, a normal cadence every quarter, every year, which tells us that, this has been pretty sustainable for a period of time.

Now, if there were to be a different perspective of that and we need another -- [right] of investment in the future, which we don't see in the immediate future or medium-term future, we'll come back to you. But we feel pretty good about what we did, it was painful, obviously describing it all to you and the share price didn't benefit from that and the like, but there are times in which you got to do that in order to make sure that the long-term value proposition of this business to our client is great and to our shareholders continue to drive shareholder value.

At this time, I'm showing no further questions. I would now like to turn the call back over to Stephen Davidson for closing remarks.

Thank you very much for your time today and your interest in MSCI, and we look forward to speaking with you soon. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.