明晟 (MSCI) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MSCI fourth-quarter and full-year 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.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Mr. Steven Davidson, head of investor relations.

You may begin.

Thank you, Katherine.

Good day, and welcome to the MSCI fourth-quarter and full-year 2015 earnings conference call.

Earlier this morning, we issued a press release announcing our results for the quarter.

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.

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 baseline for the evolution of results.

You will find a reconciliation of the equivalent GAAP terms 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 26 to 29 of the earnings presentation.

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?

Thanks, Steve.

And thanks to all of you for joining us today.

I am very pleased to share our strong fourth-quarter and full-year 2015 financial results with you.

In my opening remarks, I will provide an update on how we are executing our strategy by focusing on the levers that will grow revenues, make us more operationally efficient and continue to return capital to our shareholders.

I will also provide a strategic update on each of our product segments and then focus on innovation, which is at the core of MSCI.

I will then conclude my remarks with an update on our operational efficiency gain in 2015 and a summary of our capital return to date.

If you turn to slide 3 for a review of our results, revenues increased 9% in the quarter and 8% for the full year.

These strong results were driven principally by indexed products, which boasted double-digit revenue increases in both subscription and ABF, and both in the quarter and full year.

Innovation continued to be a focus across all of our product lines, with particular strength in index.

In analytics, we continue to innovate in our core use cases of investment differentiation, operational efficiency, risk management and regulatory compliance.

These are the most prevalent use cases that we are solving for in terms of the needs that our clients have.

We are also innovating by developing services to address new use cases that our clients face.

As ESG continues to move into the mainstream of investing, we are developing new products and services to meet that strong demand.

In real estate, we are building out new products around global real estate market information and global real estate market risk analytics, and a new technology platform to deliver them to our clients more efficiently.

Turning to efficiency, cost discipline is a high priority at MSCI.

We are ensuring that our cost base is rationalized and that we have the right resources lined up against our fastest-growing, highest-return opportunity.

We also deliver on our commitment to begin lowering our operating tax rate, which was reduced for 2015 at roughly 100 basis points compared to 2014.

And finally, capital, my favorite subject.

MSCI continued to generate excellent cash flow, and we have strong growth prospects ahead that would only enhance our ability to create more value, whether it is from returning excess capital to shareholders, investing in organic growth opportunities or making a small bolt-on acquisitions that complement the growth prospects that we have in our product line.

Our track record on returning capital to our shareholders is very strong.

Since December 2012, we have acquired approximately 25 million shares of MSCI and returned $1.5 billion to our investors.

In summary, we are pleased with MSCI's performance in the fourth quarter and the full year of 2015, and we believe that the foundation continues to be set for further growth in 2016 and beyond.

Turning to slide 4, we have provided you with a strategic update on our product line and the opportunities that we see for each of them in 2016.

I am not going to hit every item, but let me highlight the key takeaways for each segment.

In our index product segment, we continue to drive adoption of our global investing framework.

And our success is reflected in the strong growth in a small cap and cost-of-index products.

In 2015, product development continued to be exceptional, with a total of 56 new indices and product enhancement, representing an increase of 14% over 2014.

EPS based on our indices captured $88 billion of inflows in the year 2015, or 35% of the overall market, up from $49 billion a year earlier.

Our development efforts have been focused on factor investing, where the estimated AUM linked to our factor indices increased 17% to about $143 billion, compared to $122 billion in 2014.

In 2016, we believe there are several growth levers in our index products.

The new broad pipeline remains strong, and we continue our relentless effort on innovation to change the investment wall.

Factors in ESG continue to be incorporated into the mainstream investment process.

The globalization and international investing trend is expanding.

And, lastly, we expect continued growth for a change [traded] MSCI link futures and options as demand for multi-country, multi-currency exposure and hedging grows.

In analytics, our team has done a great job in undertaking a major transformation of the product line across multiple dimensions from strategy, product development, to expense management to drive profitability.

While off to a strong start, we look forward to continue progress each quarter in this product line, and we will report accordingly.

MSCI won Market Risk Technology Product of the Year at the 2016 Risk Magazine awards.

Our liquidity metrics product, the first commercially available tool for measuring liquidity risk across asset classes, was cited as an important innovation by Risk Magazine.

The analytics team will build on the successes of 2015 by creating new products and services that serve the operational and risk management use cases that we are seeing the most traction in with our clients around the world.

The major data center migration we completed in the fall will bolster the capability we bring to our largest clients in processing their portfolios.

Profitability will continue to be a focus as we reallocate resources to initiatives that drive future growth and profitability.

In 2016, we believe there are several growth levers in analytics -- continued growth from our core use cases, developing new partnerships, and products and services.

We started a systematic program of price increases that reflect the great value we are providing clients.

And, again, profitability will be a continued focus as we set the foundation for a stronger revenue growth after 2016.

Lastly, in our all other segment, in ESG we saw increasing interest from clients in the integration of ESG factors into the mainstream investment strategies.

As the leading provider of ESG data, ratings, research and tools worldwide, MSCI is well-positioned to continue to benefit from this trend in 2016.

In terms of growth levers for the year, product enhancements will be a driver of upsells sales, and we will continue to leverage our deep relationship with asset orders around the world to drive further adoption of ESG.

In real estate, we are strongly focused on realizing rapid improvements in this product line and are making changes in almost every area of the business.

We completed the integration of the real estate sales team into MSCI?s overall sales organization.

We are accelerating development of a strategically important products, and we are moving operational headcount to lower-cost centers.

We expect this product line to go from a loss in 2015 to breakeven in 2016 and set the foundation to return to profitability beyond the year.

I would like to spend a moment now disclosing how MSCI leverages our content across our ecosystem.

This is an important for the times misunderstood element of value creation in our business model.

On slide 5, I can tell you that, at the core of our Company, MSCI is a content Company that leverages and shares content across the entire MSCI ecosystem to innovate new products and services.

The generation of that content starts with understanding the investment problems of our clients, designing a solution to them in the form of a model of some kind.

We call them methodologies and index and models in analytics.

And then, that model can be then turned into either data or analytical calculators such as performance attribution calculators, prepayment models, pricing libraries, and so on and so forth.

And in terms of the data, it could be equity in big data, equity risk model data, fixed-income risk model data, multi-asset-class model data, and so on and so forth.

We deliver our content to our clients, as I said, in the form of indices, risk models, valuation models, ESG research, real estate data or benchmarks.

All of our content, our software applications and our services are designed to help our clients improve their overall investment processes and make better investment decisions.

Our content sits at the very center of our clients' investment processes.

It provides them with the insight and tools they need to build and manage their portfolios.

A key part of my own job is to build senior-level relationships with our largest clients around the world.

In my conversations with them, they tell me that the quality of our content is what sets MSCI apart.

It is why they choose MSCI to help them with their biggest and most complex investment problems.

It is easy to look at our business in the way we present ourself in financial reporting, sort of broken up between index and analytics and ESG and real estate, et cetera.

But content is a unifying element, and it will be our ability to integrate that content across all of our product lines that will unlock incremental levels of growth and profitability for MSCI in years to come.

On slide 6, is a concrete example of how we leverage this virtual circle of content I just discussed within the MCSI ecosystem.

The investments that we have made in the past several years, combined with the content that we have brought to index from our other product areas, such as equity analytics and ESG and real estate and like, have positioned us to significantly grow not only in terms of AUM linked to global equity products, but also significantly in MSCI factors, ESG, and thematic indices.

This growth has been at a rate that is about 5 times the growth of our core market cap franchise, which itself is growing at a very healthy base of around 15% CAGR.

So this case study in innovation serves to diversify our franchise and represent another layer of growth for MSCI in years to come.

Before moving to the next slide, let me take a moment to comment briefly on the market volatility that we are seeing as it relates to EPS linked to MSCI indices.

Like all of you, we are continuing to monitor the market, but we are very pleased with the performance of EPS linked to MSCI indices.

Of the $34 billion-plus in decline in AUM, in MSCI linked EPS since the beginning of the year, about 97%, 98% of that -- or about $33 billion-plus of that decline is due to market depreciation and not outlooks.

As you all know in your own businesses, outflows or inflows are the true measure of the health of an investment product, and, therefore, we are pretty satisfied to see that we are holding up very well there despite the decline in valuations.

As we highlight on slide 7, the innovation that I just discussed has led to a strong leadership position, as index provider to the EPS marketplace worldwide.

The share of total equity ETF AUM linked to MSCI indices increased to about 19% at the end of 2015, compared to 17% at the end of 2014, driven by strong inflows.

During the year, equity EPS linked to our indices capture $88 billion in net cash inflows, up from $49 billion in the prior year.

So the share of investment flows in ETF linked to our indices increased from about 20% in 2014 to about 35% in 2015, making us the number one equity index provider in 2015 by this measure.

We are also the index leader for full-year 2015 in terms of net cash inflows to ETF based on currency-hedged indices, net cash flows in ETF linked to factor indices, which increased almost 3 times compared to 2014 levels, and also our leadership position as number one in ETF -- in the launch of new ETF linked to equity indices.

So we are very pleased with the positioning of our index franchise for ETF managers, and we are not resting on our laurels.

We will continue to innovate and work to create the next wave of products that will drive our future growth.

On slide 8, we highlight our cost discipline.

We saved $21 million of costs in 2015, which allow us to focus our resources on higher-growth, higher-return opportunities while keeping overall cost growth, including the impact of foreign exchange, within our 5% to 7% growth range.

The key take away is that we are hitting the right balance between cost management and investing for the future.

Lastly, on slide 9, we highlight the strong capital return track record that we have established.

As I said earlier, we returned $1.5 billion in capital to investors since late 2012.

And we intend to keep returning capital to our shareholders over the longer term.

In summary, we registered strong growth in the quarter.

We are continuing to focus on the levers that we believe will drive revenue growth, improvements in operational efficiency and the continued optimization of our capital base with a strong capital return program.

With our relentless focus on these areas in the quarters and years to come, we believe we can enhance the growth and profitability of MSCI over the long term.

All of us at MSCI believe that we are still on the ground floor of what is possible to achieve with this Company.

Before I end, I want to offer my personal appreciation to Bob Qutub for his years of service to the Company during a time of tremendous growth and change.

As we announced a couple weeks ago, Bob has decided to retire from MSCI to spend a bit more time with his young family and consider new opportunities in the future.

I am pleased Bob will be with us until we on-board his successor to ensure a smooth transition.

Bob?

Thanks, Henry, for the kind words.

It has been a tremendous pleasure to work with MSCI team, the Board and our investors.

But let's get into the results here.

So let's turn to slide 11, where I will begin my overview of our financial results.

Our results this quarter were strong, with a 9% increase in revenue and a 1% decline in adjusted EBITDA expenses, driving a 22% increase in adjusted EBITDA and a 500-basis-point increase in our adjusted EBITDA margin, 46.5%, including the impact of foreign exchange -- foreign currency exchange fluctuations.

Just a quick couple of comments on the results.

We closed the acquisition of Insignis in the fourth quarter, and the contribution to revenues and expenses was negligible.

So we are not adjusting our numbers to derive an underlying organic growth number.

Our results also include higher interest costs from our bond offerings in November 2014 and August of 2015.

As we stated last quarter, we are in the process of aligning our tax profile with our global operating footprint, and I am pleased to report that we already are seeing benefits, which are reflected in the decline of our operating tax rate for the full year 2015.

On that note, tax benefits in the quarter contributed $0.04 to adjusted EPS, which includes the impact of discrete items from prior periods as well as a positive impact on our 2015 operating rate, which was 34.8%.

The 9% decline in the weighted average shares outstanding year over year added about $0.06 to our adjusted EPS.

Again, as a reminder, in the slides that follow, we provide the impact of foreign currency fluctuations on our subscription revenue and cost, but we do not provide the impact of foreign currency fluctuations on our asset-based fees tied to average AUM, of which, approximately two-thirds are invested in securities denominated in currencies other than US the dollar.

Turning to slide 12, we provide you with a bridge for the year-over-year change in our revenues by segment and revenue type.

Total revenues increased $22 million, or 9%, to $273 million year over year, driven by an increase of $15 million, or 7%, in recurring subscription revenues, an increase of $5 million, or 10%, in asset-based fees and a $2 million increase in nonrecurring revenue.

Currency fluctuations had about a $2 million negative impact on our overall subscription revenues, which includes recurring subscription in nonrecurring revenue.

And this negative impact was mostly split between the analytics and all other product areas.

Excluding the impact of FX, subscription revenue would have increased 9%.

The $5 million or 10% increase in asset-based fee revenue to $50 million was driven primarily by a $50 billion increase in average AUM in ETFs linked to MSCI indices to $423 billion, as well as a growth in non-ETF institutional passive funds linked to MSCI indices and the growth in trading volumes in exchange-traded futures and options contracts linked to MSCI indices.

Turning to slide 13, we provide you with a year-over-year adjusted EBITDA expense bridge.

Fourth-quarter adjusted EBITDA expenses decreased $1 million, or 1%, to $146 million but increased $6.1 million, or 4%, compared to third-quarter 2015.

Excluding the impact of foreign currency exchange fluctuations, our adjusted EBITDA expenses would have increased $4 million, or 3% year over year and 5% for the full year 2015 compared to full-year 2014.

The increase in costs on a linked quarter basis was driven by higher general and administrative compensation and benefits, increased development costs, as well as higher selling and marketing costs.

As shown in the lower half of the chart, we registered decreases of 7% and 2% in cost of revenues and selling and marketing, respectively, partially offset by increases in general and administrative and research costs.

Lower cost of revenues was primarily driven by lower headcount, generally across the board, reflecting a more efficient management of our product set.

Lower marketing costs contributed to the decline in selling and marketing.

On slide 14, we provide the run rate bridge for the quarter.

Our reported run rate increased 8% to $1.1 billion, consisting of a 7% increase in subscription run rate to $888 million and a 15% increase in ABF run rate to $201 million.

Adjusting for foreign currency fluctuations, subscription run rates grew 8% year over year.

We were pleased by the record growths in new recurring sales for the full year 2015 and the fourth quarter.

Both sales in the quarter were stronger and net new recurring declined slightly due to higher levels of cancellations.

Price increases represented a larger percentage of recurring sales up from a prior periods, driven primarily by price increases and analytics.

Cancellations in the quarter were higher, primarily due to an increase in closures and strategy changes.

Based on the dialogue that we are having with our clients, the uptick in cancellations, above the seasonal norm, does not appear to be carrying over into the first quarter, and our pipeline of deals remains strong.

While we are pleased with the strong sales in the quarter, it is too early to determine if this quarter represents the beginning of a new trend in sales.

For MSCI overall, aggregate retention dipped, as is customary in the fourth quarter, to 90%, but the full-year retention of 93% was in line with full-year 2014.

On slides 15 through 18, I will walk you through our segment results.

Let's begin with index on slide 15.

Revenues for index increased 11% on a reported basis, with negligible impact from FX.

The double-digit increases in subscription and ABF revenue in the quarter were driven by strong sales from our market cap product and continued fast growth in our innovative factor, ESG and thematic products throughout 2015, and strong inflows into ETFs linked to MSCI indices.

The adjusted EBITDA margin for index was 69%.

The decline of the adjusted EBITDA margin compared to the third quarter of 2015 was due to three factors.

One, higher incentive compensation.

Two, higher severance cost.

And, three, higher corporate allocations of the professional fees primarily related to corporate tax planning.

Excluding discrete items in these areas, index margin would have been approximately 70%.

So with 70% as an exit rate, and factoring in the lower expected asset-based fees due to the decline in equity values, as well as the seasonal first-quarter increases in compensation and benefits, we would expect to begin 2016 with margins around fourth-quarter levels.

We ended the full year with adjusted EBITDA margin of 70%, which is in line with our targets.

Index ended 2015 with a very strong retention rate of 95% and in line with the full year 2014.

On slide 16, we provide you with detail around our asset-based fees.

First, in terms of revenue from ETF linked to MSCI indices, a 13% in average ETF AUM drove a 9% increase in ETF revenue, with the increase in AUM offset by a decline in average basis points, as shown in the lower-right chart.

Inflows in the quarter were very strong at $29 billion.

And while the start of 2016 has been rocky, we are pleased with our overall performance.

The decline in average basis points year over year and quarter over quarter was due to two factors.

First, the movement away from higher-fee emerging-market products to lower-fee developed-market products, including the US, as illustrated in the lower-left chart, as well as mix shift within developed markets to lower-fee products.

And, second, there was some erosion due to total expense ratio changes by several clients, which impacted our average fee.

These same drivers offset the 1% increase in AUM linked to MSCI indices on a linked quarter basis.

In terms of weighting these two drivers, the vast majority of the change is due to mix.

Institutional passive revenues are up year over year, but declined on a linked quarter basis.

And, lastly, in terms of futures and options linked to MSCI indices, increasing levels of adoption and an increase in market volatility in the second half of 2015 has driven increases in trading volumes, with average daily volume of 200,000 contracts in the second half of 2015.

That is up 29% compared to the second half of 2014.

And the year ended with 1.5 million contracts of open interest, up 20% versus year-end 2014.

Turning to slide 17, we highlight the financials for the analytics segment.

With the consolidation of product groups within analytics segment and the focus on solving client use cases, the legacy product lines of portfolio management analytics and risk management analytics no longer reflect how the segment is being managed.

As a result, we are no longer breaking out the results with those segments -- for that segment in these two legacy product lines.

Revenues for analytics increased 5% on a reported basis and on an FX adjusted basis, and the adjusted EBITDA margin increased to 28% and compared to 19% for the quarter of prior year.

The increase was primarily driven by higher risk manager, equity models and investor (inaudible) revenues.

A higher-than-anticipated margin, relative to the guidance provided in the third quarter, was driven primarily by higher-than-anticipated nonrecurring revenue and the reversal of prior-period accruals for long-term incentive compensation related to the departure of a senior executive.

Adjusting for these items, normalizing the analytics margin would have been 25%, which is in line with the guidance we?ve provided and we believe is a good exit rate for 2015.

Then you can factor in customary first-quarter seasonal impact of higher comp and benefits.

Adjusted EBITDA margin was 22% for the full year 2015 and at the end of 2015 analytics retention was 93%, up from 92% in 2014.

And lastly, for our segment -- our other segment on slide 18, we havethe all-other.

Revenues for all-other increased 14% to $19 million on a reported basis and grew 17% on an FX-adjusted basis.

And the adjusted EBITDA margin continued to improve.

First, in terms of ESG, a $1 million or 15% increase in ESG revenue to $10 million was driven by record sales for ESG research.

In terms of ESG sales, it was a very strong quarter, especially for the Americas.

Run rate growth in US of 17% year over year surpassed EMEA growth of 15%.

This is the first time since 2011 that this has happened and reflects the mainstreaming of ESG into the investment process.

Growth in ESG continues to be fueled by the addition of new clients.

Now turning to real estate, a $1 million or 14% increase in real estate revenue to $9 million was driven by a strong increase in custom data reports for clients.

Excluding the impact of FX, real estate revenue would have increased 20% compared to fourth quarter last year and would have been up slightly for the full year 2015 compared to full-year 2014.

Beginning in the first quarter of 2016, we will consolidate ESG and real estate in our reporting, but we will continue to provide you with color on the performance on each product within the segment.

On slide 19, we provide our key balance sheet indicators.

We ended the quarter with cash and cash equivalents of $778 million, which includes cash held outside of the US of $128 million.

And as a general policy remain in domestic -- we have maintained a domestic cash cushion of approximately $150 million for operational purposes.

Free cash flow was up slightly for the year with higher cash from stronger operating results, partially offset by higher interest and cash taxes.

As a reminder, interest payments on our outstanding debt are paid quarterly in February, May, August and November.

Just a quick refresh on levers.

Our goal is to remain gross leverage between 3.0 and 3.5, with the only constraint for net leverage not equaling gross leverage being the cash we hold offshore and for domestic operating purposes totaling approximately $275 million at this time.

For the full year 2015, we paid out 35% of our adjusted EPS as a dividend and at the midpoint of our ?- and is at the midpoint of our payout range.

On slide 20, we have our new guidance for the full year 2016.

We expect adjusted EBITDA expense to come in between $610 million and $625 million, and this implies a year-over-year increase in costs of approximately 4% using the midpoint of the 2016 range.

FX spot rates at the end of 2015 are the basis for rates in this expense guidance.

Interest expense is expected to be approximately $92 million.

CapEx is expected to be in the range of $40 million to $50 million.

And free cash flow is expected to come in between $270 million and $310 million.

And, lastly, the effective tax rate is expected to come in between 33% and 34%.

In terms of our financial policies, we are reaffirming our dividend payout ratio of 30% to 40% of adjusted EPS.

And, lastly, as a follow-up to the issuance of our long-term targets last October, we are reaffirming those targets as of this call.

And with that, I would now like to open up the line for your questions.

(Operator Instructions) Alex Kramm, UBS.

Can you -- I guess both of you made some quick comments on the sales environment.

So maybe you can go back to that a little bit and provide a little bit more detail.

And, clearly, your core customer base is probably suffering a little bit so far this year over the last few months.

So what are you hearing from clients in terms of willingness to buy new products?

And also, pricing, I believe, is going to be a big component on the analytics side this year.

So what is the pushback you are hearing on that in particular?

Thanks.

Alex, first of all, the market volatility that we have seen has not had any impact on our pipeline.

Our pipeline continues to be healthy and solid, and no impact on that.

Secondly, is that we have started rolling out price increases on analytics, and it has gone fairly well.

So we do not anticipate, for now, any kind of pushback by our client.

We did have very strong sales quarter, both in one time sales and also in recurring sales, in the fourth quarter, which focus (inaudible) of that range of sales that we have had for quite a few quarters.

And it is too early to tell whether that break is sustainable.

We did well, but it is too early to tell.

And, therefore, we feel good about the quarter, but we have got to execute this quarter and the future quarters to see if we can break out of that range bound that we had -- that we have had for some time.

In an environment of significant volatility, it is actually sometimes a positive environment for us, even though our clients are not feeling well, because there is a lot of focus on risk.

There is a lot of focus on understanding the performance of portfolios.

There is a meaningful amount of money that flows into passive investments from active that would benefit.

And the like.

And, obviously, on the other side, budgets get a little more tight, approvals get longer and the like.

But, on balance, it has not affected us.

The last thing that I would say, though, Alex, is that we are typically a very light indicator of any of this.

It typically takes several quarters before any meaningful market volatility affects us on a subscription business.

We obviously have seen the decline in values in ABF but, fortunately, not any meaningful amount of outflows.

Okay.

Great.

That's helpful.

Then, I guess maybe secondly, just for Bob real quick on the tax rates, obviously a nice guide down on the year-over-year perspective.

Is that a good -- at the midpoint, is that a good point to use for the full quarter -- I'm sorry -- for the full year every quarter?

Or do you think the tax rate has kind of trickled down throughout the year as you get, I guess, smarter with the tax rate?

And then, related to that, what are you current thinking as we exit 2016 and look forward to 2017, 2018, 2019, as you probably do a little bit more aggressive tax planning?

We have been focused on the operating rate, Alex.

And we did see some benefits, as I talked about in my comments.

We did also get some benefits from discrete items that we went back and actually got some deductions from prior periods.

And that got all reflected here, so it magnified the effect on the effective tax rate.

But we are guiding down, it's safe to say.

Generally, when we give you a range, we like to look at the midpoint.

And that is what we expect our rate to be next year, plus or minus discrete items if they come through.

We have more certainty in our planning this year than we did last year.

For example, the R&D credit is now permanent, so that helps us a lot.

So I feel that is a pretty sustainable rate throughout the year.

There are things that can change it, Alex, the mix of international profits and things like that.

But right now, based on what we are seeing, we will look at 33% to 34%.

And if things change, we will let you know appropriately, but we feel comfortable at this point right now.

And no comments on ongoing work to reduce that even further beyond 2016?

We will always -- we are going to continue to focus.

We see more upside out there.

But as some of the work that we need to do is more extensive and requires a lot more work with our advisors, but we continue to press on.

It is not something we're going to take our eye off the ball.

And if we have positive surprises -- positive developments, not surprises, we will update you accordingly.

Bill Warmington, Wells Fargo.

I wanted to ask about the index business, specifically.

It looked like the sales had been strong on a year-over-year basis, but also the cancellations were up.

You had mentioned this in your comments.

I just wanted to see if we could get a little bit more color there.

Fortunately, it was offset by some improvement in analytics, but I thought we should start out with index.

Yes, Bill, there is -- with respect to cancels, right, there is absolutely nothing to read into these numbers in the fourth quarter.

There are times in which you pick up a little cancel here and there, and it exacerbates the numbers.

So we are not concerned about it.

We don't think this is a trend.

We think these are just sort of quarter-to-quarter variations and the like.

So we continue to be positive about the continued growth of the subscription business on the -- what we call the market data, the market capitalization indices -- and are very focused on the incremental growth of the franchise into new areas such as the factor indices, the ESG indices, the thematic indices, the cost of indices.

We are also very focused on the expansion of our -- of the futures and options franchise linked to MSCI indices that, we do well.

We think we're going to continue to do well given the market volatility that is happening and the like.

So the franchise is -- continues to be very strong, and I would not read too much into those numbers.

Well, you touched on my second question, which was going to be about the futures and options opportunity for you.

I know that, with some other indices, some of your competitors, they have a higher percentage of revenue coming in from these types of products.

And the challenge had seemed to be, at least initially, that it was a more complex product, meaning that you were going across multiple currencies.

And so maybe you could talk a little bit about how you?ve solved that problem and what you think the opportunity is.

How big is it now in terms of what you are doing, and how fast is it growing?

Most listed futures and options in equity indices around the world are national, meaning single-country, single-currency; or multi-country, but single-currency, like in continental Europe where the euro (inaudible) 50.

So I think that has been the nature of the futures and options industry.

And you require typically a very healthy amount of list of futures and options to develop a large-structure product -- structure-derivative product business because related products are the ones that are used to hedge the positions in the structure products.

So that's a business that maybe some of our competitors who are more -- who have developed more into national index businesses have benefited from.

We have been hard at work on developing with our partners the industry of multi-country, multi-currency futures.

We started with the New York Stock Exchange life exchange that was acquired by ICE.

So we are working pretty closely with ICE now in the US to develop that.

The volumes on the MSCI emerging market index futures and the MSCI EAFE futures, trading in New York, have been increasing rapidly and steadily.

So we like that.

We are trying to see if we can do the same in Europe and Asia as well.

So this is an area of good growth in the double digits, but it is from a very small base at the moment.

And it is not going to be a huge growth driver immediately, but it will be a steady build.

As I have said in the past, there are always three big legs that you can build an equity index franchise around.

There is the active leg, which is what we call subscription.

There is the passive leg, which is institutional passive and ETF.

And then there is the hedging or exposure leg, which is futures and options and other forms of structured products.

So we have been very good at the first two, and we are now really attacking with a hard right the third leg to see if we can capitalize on the breakthroughs that have been made in the creation of multi-currency futures.

Toni Kaplan, Morgan Stanley.

Analytics margins, the margins in analytics were extremely strong again this quarter and, I think, above what you had previously been guiding to.

It sounds like FX was a contributor.

But is there anything else to call out?

And, really, if I look at that segment, the first half and second half were so different in terms of the margin profile.

So how should we think about 2016 for analytics margins?

Yes, Toni, that is a good question.

We tried to address that, and we were fully cognizant of the margin came in a little bit different than we had guided in the third quarter.

Two things.

On the top line, sales again were very strong in the fourth quarter, as you saw both recurring and nonrecurring totaling $40 million in aggregate.

So we did have one-time sales came in in Q4 that helped the analytics that we were not anticipating, which is -- that is a good thing.

Secondly, I did refer to the reversal of an incentive compensation, have closed significant for a senior executive that left in the fourth quarter after our call.

And then we did file an 8-K on that in Q4.

Those were two of the principal drivers.

There was a few one-times in there, but we knew about most of them.

But I would say those two items really steered the margin the other way.

Having said that, I tried to give you the normalization of around 25% as we enter into 2016 for Q1, adjusted for some tax inflationary costs related to compensation.

Hopefully, that helped a little bit, Toni.

Yes.

It does.

Thank you.

And you have been doing a number of repurchases, especially in the second half of last year.

How should we think about pacing of buybacks in 2016.

And, if you could just remind us, how should we think about repurchases as a percentage of free cash flow, just on a normal policy basis?

Thanks.

I think the way to think about it, Toni, are, one, is we are not in the mood of desire to store excess capital in the Company or on the balance sheet to begin with.

Secondly, we want to be opportunistic with our repurchases, which -- at higher share prices, we do less, but we still do some.

And at lower share prices, we do more -- the volume.

And, therefore, every quarter is going to be different, depending on where our share price was trading and where the volumes are because, obviously, we want to do this in a way that we are not impacting the national demand-supply and price discovery in the stock.

So that is kind of the balancing act that we have, but we have done well so far.

We have done really well in the last six, nine months or so with this strategy, and we definitely intend to continue to do that if we can.

Chris Shutler, William Blair.

On the EBITDA expense guidance for 2016, what exchange rates have you used for the pound and euro, and what would cause you guys to be at the low end versus the high end?

We use the -- same as last year, we use the spot rates of December 31 to convert all of our currency.

So we are really starting out afresh.

That was the basis for $610 million to $625 million.

So that is something you can get pretty easily.

I don't have it here in front of me, but we have got those for you.

And, regarding the -- I think as Henry talked about, we remain vigorously addressing our cost base, making sure we are as efficient as we can to provide ourselves opportunities that are out there.

And, as with all years, Chris, we are going to hit one times.

But we still want to stay whole and true to our 5% to 7%, and 4% is guiding to our midpoint.

That gives us room if need be.

But we're going to keep our eye on the markets, along with the question that Alex dropped in the first part of this call here.

So, again, right now, $610 million, $625 million as we move through the year, similar to last year.

We will definitely steer you on a tighter path.

The other thing is if you sit back and look at the totality of the Company in terms of cash flows and balance sheet and all of that, if you put aside for a minute the ABF, which I will comment on in a second --.

But if you put aside the ABF, our revenues are largely in the hard currencies.

Obviously, most of them are in dollars and euros and pounds and in yens, right?

And our cost is also in those hard currencies, but it was also a meaningful amount of cost is in the soft currencies of various emerging markets.

So on a net net basis, a stronger dollar ends up being mildly positive for us.

And particularly the way it has evolved, which has become strong relative to the hard currency, but not as strong as compared to the appreciation relative to the weaker currencies -- the soft currencies.

Yes, just on that point, just to give you something concrete, in terms of subscription revenues, our billable in dollars for our revenues is 83% in dollars.

So that leaves 17% for non-dollars.

And those exposures are euro, yen and sterling on an absolute basis.

On expenses, our billable currency other than US dollars increased slightly to 44%.

We?ve talked about that being 40% in the past.

And our larger exposures are sterling.

But then, again, that gets offset by the revenues.

So, really our net exposure on EBITDA and revenues for subscription revenues would be mainly year-over-year base one out there.

Having said that, we don't factor in the AUM, although two-thirds of those are denominated in other currencies than the US dollar.

And that's kind of the clearly the issue that is always hard.

Because a lot of the AUM is in non-dollar, in the passive products.

And so when the dollar strengthen against that, you will see an immediate weakening of those AUM levels.

But typically, more assets flow into those because of the exchange rate, and, over time, they kind of come back up to prior levels.

So that is always harder to do that.

But net net, we are not worried at all about the strength of the dollar because it is a mild positive, and we are not worried about reversal of the strength of the dollar because it is not a big impact on us.

We're largely hedged -- not totally, but we are largely hedged.

All right, great.

And then can I just ask a question on analytics.

Maybe -- you?ve talked a lot about this in the past, but can you just flush out some of the -- you talked about opportunities for 2016 in analytics, whether it be core use cases, new partnerships, pricing, et cetera.

Can you just flush some of that out a little bit more?

And then I also was hoping to get an update on the technology platform that you guys have talked about in the past.

Thanks.

Yes.

On analytics, we are trying to gradually transform the product line from selling risk models and software applications and things like that to understanding very specific client needs.

And then offering them a solution to that client need by packaging our content and our applications.

Not on a bespoke or customized basis, but just -- with certain adjustments, but addressing a specifically a client need.

The four client needs that we are very focused on is a lot of our clients, particularly asset managers, are very content of creating differentiation in their performance and showing that differentiation to their own clients.

So that is one.

Another one is a lot of our clients are under cost pressures and profit pressures, and therefore they are trying to reduce cost.

So a lot of what we do, it creates transparency, efficiencies and, therefore, reduction of costs.

So, many of our clients are tackling the issue of how do they deal with risk and how do they report risk and how do they manage risk.

So that is another one.

And, lastly, huge amount of regulatory burdens on all forms of clients from asset managers to hedge funds to banks and the like.

So we go to them and say, let's fully understand what the regulators are asking for from you, and how do we help you create the reports -- the content and the reports that help you with that.

So, very much -- and that has resonated very well with our clients.

And we are trying to push that mode of service at them.

And we continue to clearly innovate in terms of new risk models, new performance [attribution] models and so on and so forth.

So we can spend more time on that off-line.

Now, all this content that we create has to be enabled by applications.

Pretty much everything we do at MSCI has to be enabled by applications.

But, especially, a lot of the analytics content, a lot of the models have to be enabled by what I call workflow applications.

So you have got to think of BarraOne and Risk Manager and BPM as kind of workflow applications.

But there are not the only one.

There are also -- we also give the content to our clients and they use their own applications, particularly the large passive managers, many of the -- some of the hedge funds and the like.

So we work with them on that.

And, lastly, and this is where the partnerships come in, is that we are trying to work with other providers of workflow applications of different types to put our content in them to serve the needs of the client.

And, therefore, is either in areas that we do and we also compete with, or in areas that we don't do.

So how do we put our applications side-by-side with OMS applications, for example, or for an office applications that could be helpful to the client.

So we are working in that in order to, again, facilitate the serving of the needs of the client.

And, lastly, (technical difficulty), we are -- it is difficult to [have had] in this product line.

And a part of the lower profitability on this product line is because, given the nature of the way we grew, which was by acquisitions, we still have quite a lot of legacy applications that are all similar to one another, built in different languages, and different use -- different interfaces and all of that.

So that -- maintaining -- first of all, innovating on them and maintaining them is costly, and that it is a way a meaningful amount of the profit margin on our content.

So, what we are doing is building a overlay application which we call new interface, new architecture -- an overlay application that we put on top of this with a user interface so that that is what the client eventually sees.

And, therefore, we then go to the engine room and link the current applications and make the current applications more of engine to that.

So we are going to be launching the first release of that next quarter, which is still -- obviously it doesn't have everything, but it is just step by step.

And we're going to start signing up clients on that, but we still are going to sell the existing applications because that is what we have today.

Joseph Foresi, Cantor Fitzgerald.

I was wondering if you could tell us or maybe give us some detail around how the increase in custom indexes or indices is impacting the business.

Is there a different go-to-market for it?

And how you sort of see that playing out?

This is an area of double-digit growth for us, and has always been from a couple of decades.

And what it is is that we have the off-the-shelf market capitalization indices or factor indices or the other ones.

And, therefore, people come to us and say, we want to be benchmarked with something that is more targeted to what our investment objectives are.

Can you help us with that?

And the easy part which is we repackage the countries in a different way or repackage industries in a different way, or through the number of industries that they are concerned about or, in the case of ESG, exclude a different -- a number of companies that are not compliant to what they believe to be ESG criteria.

So this is an area that we have created an industrial-strength organization from the understanding of the client needs to looking at the methodology, to the production environment, which is pretty critical.

Because you cannot have thousands of these indices and all in a mangled way.

So we are very well-set to continue to grow here.

And we see this as a way of the future in which clients will want to rifle-shoot their investment goals and have a benchmark that is tailoring to them.

Okay.

And maybe you could just talk about if you have seen any changes at all in the competitive environment, either on custom indices or in other areas.

And any updates you can provide on sales force additions would be great as well.

Thanks.

Not a lot competitive changes from last year at all.

If anything, some of the types of acquisitions and mergers that have taken place have created options for us to go out and insert ourself, and that has been beneficial to our business.

Now, the factor investing area is an area that we are leading, but we're very subject to clearly more competition at this moment.

Quite a lot of the competition is not coming from traditional sources, but more from asset managers that have (inaudible) teams that built these factor models, for example.

And, therefore, they don't make them available to everyone like we do.

But they go to the client and offer the product, sometimes in competition with our indices.

But we believe that, given the huge expertise that we have on equity risk models, the Barra risk models and know-how that we have --.

Barra practically invented equity risk models and factor investing starting from the mid-'70s.

So we have huge competitive advantage in having leadership in this area.

Doug Doucette, KBW.

Just one question, wondering if you could give us any sense of the timeline on reaching the 15% to 20% margin target for the other segment in light of your commentary about the real estate segment reaching breakeven this year.

These are longer-term targets, and -- but we feel they are intent on getting there sooner than later.

We feel pretty good about the ESG product line.

If anything, that is a product line that we can accelerate dramatically into higher profits.

But it is a huge growth area -- huge.

It's at a $40 million-plus run rate and quite a lot of demand, so we are managing out the increasing of profits relative to investments that we want to make so that we are -- we continue to be the leader there.

And, as we said, in real estate, we hope to break even next year, maybe single-digit margins, and then we want to accelerate from there.

But we can't tell you yet what the trajectory is, but we are fully intent on achieving those margins over a few years.

Hugh Miller, Macquarie.

Just had one question on the index retention.

I know you guys had mentioned that they had some closures and strategy changes had weighed on 4Q and that it was more of an anomaly.

How comfortable are you guys with the historical retention of 95%-ish as we think about 2016?

For the full year, we are comfortable.

We don't -- there is no evidence of any meaningful change to that at this point.

I know there will always be variations from quarter to quarter, so there is no -- we were not thinking about it any differently.

And Q4 (multiple speakers) -- Q4 is always one -- you have got -- you have put to put that in context.

It tends to be seasonally, where a lot of clients will renew their contracts.

You always see it drop a little bit in Q4.

Yes.

Understood.

Thank you.

And then the other was just -- I appreciate the insight on the analytics margins and stuff like that and you guys mentioning the potential to raise prices and not getting a lot of pushback from clients on that.

Can you just help us -- give us a sense of what type of level of price increases are you guys striving for for 2016?

We have pushed in 2015.

In our repriceable portfolio on index, we did 5% to 7%, and we look at that as the opportunity for 2016.

Again, on analytics, the emphasis there is it was really just starting in late 2015 that we were starting to push the price increases on that portfolio.

We expect that to be a good piece of the growth that we are going to see in 2016 over 2015.

And we will update you more each quarter as we get into this -- into the year and we start realizing those price increases.

Okay.

That's helpful.

But do you still also feel confident about your ability to maybe take share and grow the client base as well?

Or is it more a function of just adding value to the current client base and you being able to charge more for that?

All of the above.

All of the above, yes.

Keith Housum, Northcoast Research.

One question for you in terms of the indexes on the asset-based fees.

The pressure that ETFs are getting just from a competitive stance in terms of lower -- having to lower their fees, how tied is their reduction in fees to what you guys recognize for under your fees for asset under management?

The way a lot of our fees are structured is our fee is as a percentage of the management fee.

And but it has (technical difficulty) and it has a cap.

So if we are operating at the high end of that range and the manager lowers their fee, we come down with that lowering of the fee.

But if we have the lower end of the cap, which is where the largest of our funds are, then any lowering of the fee hits the floor.

I am showing no further questions at this time.

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

Thanks for your time this morning, and we look forward to speaking with you all soon.

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 great day.