明晟 (MSCI) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to you, Mr. Stephen Davidson, Head of Investor Relations. You may begin.

Thank you, Sonia. Good day, and welcome to the MSCI Third Quarter 2017 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the third quarter 2017. A copy of the release and a 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 and are governed by the language on the second slide of today's presentation. 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 other SEC filings.

During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including, but not limited to, 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'll find reconciliation to the equivalent GAAP measure 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 25 to 30 of the earnings presentation.

On the call today are Henry Fernandez, our Chief Executive Officer; Baer Pettit, our new President; and Kathleen Winters, our Chief Financial Officer.

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

Thanks, Steve, and good day to everyone. We reported another strong quarter, driven by the continued execution of our growth strategy, our focus on research-driven innovation and our continuing efforts to create innovative content that we can integrate across our applications and services.

Please turn to Slide 4 for third quarter 2017 highlights. First, in terms of revenue growth, we returned to strong double-digit growth in revenue once again this quarter. We are particularly pleased with this very strong growth in asset-based fees where we saw robust growth across all types of index-linked investment products, particularly with respect to revenues from ETFs linked to MSCI Indices.

We continue to believe that growth in the ETF market is still in the early innings, and the year-to-date record cash net flows into ETFs linked to MSCI Indices is a testament to the growth potential of this market for us. Year-to-date through October 31, 2017, there has been record cash net flows of $114 billion into ETFs linked to MSCI Indices, already 3x larger than the full year 2016 levels.

Turning to operational efficiency. On the expense front, we continue to strive to make efficiency and productivity gains across the entire company in order to free up resources to enhance our products and services and applications and further improve profitability.

I would like to briefly comment on the efficiency initiatives that were announced today. We have been keenly focused on efficiency and productivity efforts across the company, which have allowed us to optimize our capital deployment for shareholders. With our announcement today, we're stepping up our focus on capital deployment by repositioning and reprioritizing capital, particularly in the Analytics segment. Kathleen will provide you with additional detail in the call.

Finally, in terms of capital optimization. There has been no change to our approach to returning capital to investors. Last quarter, our Board of Directors authorized a 36% increase in the regularly -- in the regular quarterly cash dividend, as you all know. We continue to be very opportunistic in repurchasing stock to ensure we're optimizing the deployment of capital for shareholders. This means, as we have said before, that we expect to repurchase more shares when there is softness and volatility in the market and fewer shares when volatility is low. And we will continue to follow this approach for the time being.

In summary, third quarter 2017 was another very strong quarter for us characterized by strong revenue growth, continued gains in productivity and efficiency, continued strong investment in our firm and a disciplined deployment of capital.

Please turn to Slide 5 now where we highlight the power of the integrated franchise that MSCI brings to clients. Our franchise is very powerful because we offer products, services and research that help our clients address some of the most important and critical investment problems in the world. We will not be able to generate an additional $43 million in run rate related to Factor Indices without analytics, which is a key part of that integrated franchise.

And we're also able to generate an additional $16 million in run rate related to ESG Indices because of the power of our index franchise and our ESG franchise and as a result of the combined power of this integrated franchise. This quarter, I will focus some of my remarks on our research and content development capabilities and how they drive the creation of our differentiated content.

Let us now turn to Slide 6, where we highlight MSCI's strategy for meeting the needs of a changing market, and an important part of this strategy is the leverage of our content. We are witnesses tremendous changes throughout the investment industry, and these are creating enormous opportunities for us. We provide truly innovative, mission-critical content that is necessary for investment institutions to design and implement current and future investment strategies.

For example, we are expanding our suite of indices. We are continuing our factor innovation. We're looking to achieve broader and deeper ESG security coverage and we're expanding our fixed income analytics for fixed income portfolio managers. At the same time, all these differentiated content is delivered through client applications, third party applications and our own proprietary applications to help managers operate more effectively and efficiently.

In terms of our proprietary applications, our goal is to create an integrated platform that combines all the technology, all the content and all the analytical assets of MSCI through a single interface and client experience. And we continue to make progress in the development and the creation of that integrated platform.

In terms of providing services and solutions to clients, our goal is to provide those tools and those services to help clients use and recognize the full value of our content and our applications and to help them become more effective and efficient in their investment processes.

Please turn to Slide 7, where we highlight the breadth and depth of our research and content development. Our research and content development group, spread across 23 cities and 16 countries, is responsible for creating our innovative content, and therefore, they're very essential to our growth strategy. There are a total of 175 employees in research and content development, and 36 of them have Ph.D.s in various sciences.

In this past quarter, these group of research and development content colleagues held over 1,000 research meetings with clients and presented at 123 conferences around the world. On this slide, we highlight the areas where we help our clients address issues relating to their equity portfolios, fixed income and alternative portfolios and multi-asset class portfolios. We believe that this view of our offerings, in addition to our segment reporting, provides valuable insights for shareholders into what clients find valuable about our offering.

On Slide 8, let me now bring our differentiated content to life for you through 3 case studies. With case study #1, one of the largest asset owners in the United States approached MSCI for a custom multifactor index that reflected their specific investment strategy. In essence, they like our diversified, multifactor index methodology. But they also wanted some customization to eliminate size as a factor and to adjust the weightings of various factors in order to better reflect their strategy. Over the course of 1 year, our team conducted many simulations, and through discussions with the client, designed a custom strategy index to support a $300 million allocation.

With case study #2, a large global fixed income asset manager approached us to implement a fixed income portfolio construction, performance attribution and risk management tool across multiple locations globally. We provided them with the software and the data to model their portfolios, construct portfolios using a fixed income factor model and calculate performance and risk attribution using a consistent methodology.

Lastly, with case study #3, a large global asset manager was already working extensively with MSCI on index and analytical tools but not around ESG. The clients concluded that MSCI ESG ratings and data should be leveraged internally across asset classes to help the investment teams evaluate the ESG risks and opportunities of their portfolios. The ESG integration use case was the main driver for this sale. In the addition, the client has also decided to launch ESG-specific products in 2017 using ESG Indices.

MSCI ESG content is now being rolled out to hundreds of analysts and portfolio managers within this client organization. The ESG ratings and data are delivered to this client through multiple channels. So just MSCI ESG Manager, our own application; Barra Portfolio Manager, another one of our own application; and via a third party application platform. These 3 case studies demonstrate the power of our research-driven approach to helping clients address their most pressing investment challenges.

Now you can see why we are so excited about the growth prospects of MSCI and why we are delivering such strong financial results. As we announced earlier this morning, we're very excited that Baer Pettit has been appointed President of MSCI; and Laurent Seyer has been appointed our Chief Operating Officer. Each of these appointments became effective on October 31.

As President, Baer will directly oversee the day-to-day management of all of our business functions from client coverage and marketing to product management, research, technology, data and content operations and project management.

Furthermore, to better align our operating structure with our focus on client relationships and client experience, one of the key pillars of our long-term strategy, we have repositioned the role of Chief Operating Officer within our company from a products and operations approach to a client and go-to-market strategy approach.

Accordingly, in addition to serving as Chief Client Officer, Laurent Seyer will become our new Chief Operating Officer reporting to Baer Pettit. These appointments are intended to acknowledge both Baer's and Laurent's many contributions to MSCI and to prepare MSCI for the growth opportunities that we see ahead and, therefore, our desire to broaden and deepen our senior management team to take advantage of all of those great opportunities. Please join me in wishing them well in their new roles.

With that, I would like to turn it over to Baer to say a few words to all of you.

Thank you, Henry, and good day to everyone on the phone. I'm pleased to join the call today as we communicate our strong third quarter financial results. This is a very exciting time for MSCI as we continue to execute our growth strategy and capitalize on the many opportunities that we have before us as a firm. Furthermore, I'm looking forward to speaking with our investors and analysts in the quarters ahead as we continue to communicate the compelling strategy and successes of MSCI.

Thank you, Baer. I also would like to bring your attention to another announcement we made this morning. This past Tuesday, October 31, our Board of Directors appointed Marcus Smith to serve as a new independent director effective today, November 2. Marcus has over 20 years of experience and leadership in fundamental equity investing and international portfolio management and will be an invaluable asset to MSCI and our shareholders. We are thrilled to have somebody with Marcus' deep experience in this -- in the asset management industry join at this exciting time in our firm's growth.

With that, I would like to pass the call to Kathleen. Kathleen?

Thanks, Henry, and good day to everyone on the call. I'll start on Slide 9 and take you through to our performance for the quarter.

Revenue growth of 11.7% was driven by strength across our segments. We had strong growth in asset-based fees and recurring subscription revenue. Operating expenses and adjusted EBITDA expenses increased 5% and 5.8%, respectively, as we continue to make investments and drive productivity. We're delivering substantial operating leverage, as you can see, with our operating income and our adjusted EBITDA growth as well as diluted EPS and adjusted EPS growth of 36.8% and 29.9%, respectively.

Free cash flow generation in the quarter was $90 million, $45 million lower compared to the prior year, primarily driven by 2 items, which were in line with our planning. These items were, one, higher payments for interest; and two, higher payments for taxes as Q3 2016 benefited from tax refunds and lower quarterly tax payments.

Fourth quarter is typically one of our strongest free cash flow quarters due to strong cash collections, and our free cash flow guidance remains at $310 million to $370 million, with the midpoint being above the prior year normalized free cash flow of approximately $330 million. So Q3 was a very strong quarter as we continued to execute our growth strategy.

On Slide 10, you can see the drivers of adjusted EPS growth. Adjusted EPS increased 30% in comparison to the third quarter 2016. The biggest driver of the increase was our strong top line growth, which was partially offset as we continued to fund investments. Additionally, the positive impact of lower share count, with average diluted shares being down 4% partially offset by higher interest expense, resulted in a net $0.03 benefit to EPS. The ongoing progress in aligning our tax profile with our operating footprint and the impact of other discrete items, combined with a positive impact of share-based compensation excess tax benefits, benefited earnings by $0.05. This was partially offset by FX and other.

Now let's turn to our segment results. Let's begin with the Index segment on Slides 11 through 13. Index revenue grew 17% this quarter, the highest rate of growth since Q1 2013. Revenue growth was driven by a 30% increase in asset-based fee, which included strong growth in ETF-related revenue and also strength in non-ETF funds and exchange-traded futures and options products. Once again, ETFs linked to MSCI Indexes were ranked #1 for cash flows in equity ETFs globally, both quarter-to-date and year-to-date as of September 30, 2017. So we continue to be the market leader in equity ETF cash flow capture.

Recurring subscription revenue grew at 9.5%, driven by growth in core benchmark data products as well as our newer products, including Factor and ESG Indexes as well as custom index products. Index recurring sales increased 32%, mainly driven by growth in core products and strong demand for new products, including Factor and ESG Indexes. We're continuing our track record of growth with another quarter of strong double-digit growth in index subscription run rate, and retention remains high at 95.5%.

In summary, this was another very strong performance for the Index product line, reflecting the benefit of the investments that we have made to enhance existing products and create new ones.

Slide 12 presents detail on our asset-based fees. Starting with the upper left chart, we recorded strong growth in asset-based fee revenue across all index-linked investment products. Revenue from ETFs linked to MSCI Indexes was up 35%. There were a total of 983 ETFs benchmarked to MSCI Indexes, an increase of 12% from the prior year or roughly 23% of the equity ETF market.

Revenue from non-ETF asset products was up 15%, reflecting growth in AUM and an increased contribution from higher fee products. And revenue from exchange traded futures and options increased 47%, driven by a strong increase in total trading volumes and a favorable product mix. Today, the MSCI Emerging Markets Index Future listed on ICE U.S. is the fourth largest equity index futures contract globally by open interest with 1.1 million contracts.

Turning to the upper right chart, we've captured 30% or $101 billion of year-to-date global equity ETF net flows. Since the end of the quarter and through October 31, 2017, ETF AUM linked to MSCI Indexes has increased to a record $701 billion, driven by $12 billion in net flows and $15 billion in market appreciation. As shown in the lower left chart, quarter-end AUM by market exposure of ETFs linked to MSCI Indexes reflected strong growth across all market segments. The developed markets ex U.S. segment experienced particularly strong growth of $112 billion, 48% year-over-year. This growth was driven primarily by net flows of $66 billion, which represented 37% of global net flows into this segment. Within this segment, MSCI EAFE Index linked ETFs grew $53 billion or 52% versus Q3 2016.

Lastly, on the lower right chart, you can see the average run rate basis point fee for the period at 3.05. Our strategy is to maximize revenue through differentiated licensing and optimize the price volume trade-off over the long term. Accordingly, as lower average fee products continue to grow at a faster pace, you can expect to see the overall average fee decline while revenues continue to grow.

Slide 13 illustrates the different ways we monetize our index content, providing multiple sources of strong double-digit growth in index run rate. This slide shows our index content and use cases for the content. As you can see, growth in every category is double digit. Looking at our growth through the content view, our fastest grower Factor and ESG content representing roughly 11% of total run rate, grew at 29%. Our research-driven index content gives us many ways to drive strong growth, and we're constantly looking for additional ways to monetize content. And we will continue to increase the integration of index content with our other content and applications.

On Slide 14, we highlight the results for the Analytics segment. Analytics reported revenue growth of 3.3% or 3.7% when adjusted for the impact of FX. Revenue growth was driven by higher equity and multi-asset class analytics products. Run rate growth ex FX, was 5% in the quarter, as we had another quarter of favorable sales adding to our book of business. We're continuing to invest in our new Analytics platform and other discrete initiatives to drive revenue growth to higher levels.

Slide 15 provides you with the key metrics for the Analytics product segment for the last 5 quarters. On the upper half of the slide, you have sales and cancels history. You can see that sales growth is trending up since Q1. Analytics recurring sales were up 15% in Q3 compared to the previous year, driven by growth in both equity and multi-asset class Analytics products. From a client segment perspective, the increase in sales was driven primarily by strength in the asset management client segment across our multi-asset class offering, including BarraOne and RiskManager, supported by our new equity analytics and fixed income capabilities.

Cancels were lower by 29% compared to the prior year, primarily due to the elevated cancels we experienced in Q3 last year in our multi-asset class Analytics product as well as our improved focus on maintaining high retention rates. With higher recurring sales and lower cancels, we had a 192% increase in net new recurring subscription sales. Aggregate retention rate continues to be strong at 93%, up 300 basis points compared to prior year.

As indicated on the lower half of the slide, we're seeing an improvement in Analytics performance. Both the growth of subscription run rate and subscription revenue growth rate has moved slightly higher this quarter, growing at 5% and 4%, respectively. We're cautiously optimistic that these trends will continue in the fourth quarter as we continue to see increasing sales, diminished impact of cancels and a continued focus on managing our costs, which we expect will translate into improved revenue and profitability over time.

Performance in the Analytics segment continues to improve, and key metrics including sales have increased this quarter. However, we're still in the middle of an ongoing repositioning of Analytics, and the efficiency initiatives we announced today are designed to achieve greater levels of growth and profitability. These actions are giving us the flexibility to reprioritize and reposition a portion of the Analytics cost base towards higher return key initiatives like fixed income, our Analytics platform and our managed services offering. We're doing this while maintaining overall cost discipline and delivering continued positive operating leverage.

Turning to Slide 16, we show results for the all other segments. Revenue growth was up 16% year-over-year on a reported basis. First, in terms of ESG, revenue was again up more than 20%, driven by continued strong recurring sales, which were up by 18% year-over-year, principally driven by ESG ratings. A growing number of asset managers are integrating ESG into their processes, and new sales are also being driven by existing clients who are broadening the use of ESG content to additional teams. We're very optimistic about the continued growth of this product line (inaudible) to invest in marketing and to build efficiencies by investing in technology infrastructure.

Next in terms of Real Estate. Revenue was up 9% on a reported basis and up approximately 8% on an FX adjusted basis. The increase in revenue was primarily driven by growth in our market information products. We continue to focus on restructuring the product offering and our cost structure to improve the performance of the product line. The continued strength in ESG revenue was the primary driver for the year-over-year increase in the adjusted EBITDA margin for all other.

Turning to Slide 17, you have an update on our capital return activity. In Q3 2017 and through October 27th, we repurchased and settled a total of 87,000 shares at an average price of approximately $104 for a total value of $9.1 million. There has been no change to our approach to capital return.

As a reminder, in Q2 2017, we increased the dividend 36%, in line with our target range of 30% to 40% of adjusted EPS. The lower pace of share repurchase activity was driven by lower levels of volatility in the market. We'll continue to approach share repurchases in line with past practice by repurchasing more shares when there is softness in the market and fewer shares when volatility is low.

On Slide 18, we provide our key balance sheet indicators. Recorded cash on the balance sheet was $799 million at the end of the quarter. After deducting non-U.S. cash and our minimum cash balances for operating purposes in the U.S., the deployable cash is roughly $240 million. In terms of leverage, this quarter, we were at 3.3x, well within our stated range of 3 to 3.5x as a result of growth in our adjusted EBITDA.

Lastly, on Slide 19, we have our full year 2017 guidance. Adjusted EBITDA expenses are now expected to be at the higher end of the previously announced range of $605 million to $615 million. This refinement of our guidance is primarily reflecting higher severance in the fourth quarter associated with certain efficiency initiatives. The fourth quarter will include additional nonrecurring severance of $5 million to $6 million above what was initially planned. We continually work to manage our cost base effectively, and these actions are part of this cost management.

Part of the savings from these actions will be reinvested, and a portion will generate productivity sales. The extent to which savings will be reinvested will be determined as we complete our 2018 planning cycle. This will be determined as we refine our assumptions about run rate growth, revenue growth, investment requirements and continued margin expansion.

Our full year effective tax rate guidance remains at 30% to 31%, but given our year-to-date performance and outlook for the rest of the year, we're trending to the lower end of the previously stated range. We're maintaining the previously stated ranges for our full year net cash provided by operating activity and free cash flow guidance. We expect 2017 free cash flow to be above the $330 million in normalized free cash flow reported for 2016, which was adjusted for approximately $60 million of discrete items. We're also affirming our long-term targets.

In summary, we continue to execute against our strategy and delivered another quarter of very strong financial performance. We're achieving productivity and efficiency gains and investing for growth. Our industry is transforming and MSCI is uniquely positioned to assist our clients with the transformation and help them address their investment challenges and meet their evolving needs. We're very optimistic about our growth opportunities for the remainder of 2017 and beyond.

Before I open the line for questions, I'd like to take a few moments to share another change with you. We're very sad to say that Steve Davidson will be leaving MSCI after 3 years, and so this will be Steve's last earnings call with us. I personally would like to thank Steve for all of his hard work and dedication to MSCI. He's made tremendous contributions in terms of helping us tell our story to the investment community in a clear and transparent manner.

Steve, speaking on behalf of the MSCI team, I'd like to thank you for your leadership and many contributions. Taking over for Steve as Head of Investor Relations, Strategy and Corporate Development will be Andy Wiechmann. Andy's been with MSCI since 2012, most recently as Head of FP&A and Business Development. I know Andy is eager to take on this new role and is looking forward to getting to know all of you.

With that, we can open the line for questions.

(Operator Instructions) Our first question comes from the line of Alex Kramm of UBS.

Very quickly on the -- well, maybe not quickly. On the Analytics business, obviously, we got the inflection point here positively that you had promised, and it sounds like you're fairly optimistic that, that will continue. So obviously, I see the numbers around retention and new sales. But can you give us a little bit more color in terms of where you're seeing success in terms of regions, customers, et cetera? And particularly, I think one of the themes this quarter has been kind of like sales cycles in Europe, given MiFID II et cetera, coming in. So maybe you can share with us what you're seeing in that region in particular.

So Alex, first of all, we're cautiously optimistic. We're not fairly optimistic. We've been there before. And as you know well, this is a product line that gets lumpy quarter-to-quarter based on the size of the ticket sales, right, which are much larger than the rest of the company and obviously, the size of times in our renewal rate. But we -- as I said, we are cautiously optimistic. We are seeing strength in multi-asset class, risk management, asset managers. We've done well in Europe, actually, as an example. We are also seeing strength and logically so in equity analytics. This is also part of the factor of evolution. Equity analytics is about factor investing. It's about understanding your own portfolio based on the (inaudible) and on return on risk factors in your portfolio. So we're seeing strength there across the different client segments. And we also have seen tapering of the cancellations and, therefore, higher renewal rates. A lot of this is -- and across the company is really as a result of the global operating environment. You have -- we are a barometer of the investment patterns of investment institutions across the world. And as you see the global economy yielding and gradually producing more growth, which is providing more earnings for companies, which is obviously propping up values in all asset classes, our asset management clients and our asset owner clients are less prone to slash and burn expense control and has benefit also from that. We're also repositioning the Analytics product line, particularly the multi-asset class, risk management and performance attribution, not only in terms of its functionality, but also as a platform for asset managers of all types to create efficiencies and productivities in their investment processes as opposed to them collecting data, building models, building technologies and the like. We are putting this proposition forward to them that a platform like MSCI can help derive a lot of gains in efficiencies and cost management and produce significant outside benefits in portfolio construction, portfolio management and risk management.

Yes. So Alex, let me just add a couple of data points for you to that and thanks for the question. I mean, Henry's right. This can be lumpy quarter-to-quarter. But importantly, you can see the trend up in terms of the operating metrics that we look at since Q1 of this year. But regionally, we've seen some good strength, particularly in Europe. In fact, recurring sales in Europe were up quite substantially, 46% for the quarter over prior year Q3. And from a client perspective, we've seen some really nice strength in the asset management segment. On a year-to-date basis, with the improved sales and with cancels declining on a year-to-date basis, total net new asset management segment is up 132%.

Great. Then maybe just quickly, on the cost side, I heard the word investing a lot today. And I think you just clarified that it is more like shifting around than a lot of new investment. But when I think about the long-term cost guidance, I think it's been kind of like 5-ish percent is the long term algorithm part on the cost equation. Any reason why that should be changing because of all these investments you're talking about here? Maybe an early look into next year?

There's -- Alex, no change at all in our approach to the business. We are investing significantly, but it's all being self-funded by significant amount of efficiency gains, productivity gains, reprioritizing, reallocating. We're being very, very dogmatic and disciplined about all of that and that allows us to talk more bullishly obviously, about investments and also about continued margin expansion.

Our next question comes from Bill Warmington of Wells Fargo.

So in hearing you talk about the Analytics business and mentioning the word platform, it sounds like this is your competitive response to BlackRock's Aladdin product. And I wanted to just see what you thought of that? And if I'm characterizing that correctly. And I mean, if so, they seem like a tough competitor, big, deep pockets and a large client. So I guess my question is how do you compete against them?

More than anything, I mean, this is our response to the needs of our clients as opposed to any kind of view on competition. Our clients in this space are mostly active manager clients. Their business models are evolving, their cost pressures are enormous, mostly for what we do on the other side, which is passive management, right? And therefore, we have stayed very close to them to see what kind of transformations they're going through and how do we help them on that transformation. Many of these asset management clients are multinational global institutions that have grown tremendously in the last 30 years -- 30, 40 years from basically small boutique cottage industry type of players to big global players. And through that period of time, with relatively high margins, they were insourcing, they were doing a lot of things themselves. And we see a huge strength of streamlining that, refocusing the product line, refocusing their customer areas. And particularly, refocusing their operations. And therefore, what we can offer them is not only the ability to do portfolio construction and performance attribution and risk management as core functions, but also doing in a way that they can create a lot of efficiencies in their investment processes. So we believe that there is plenty, plenty of opportunities there for us and anybody else because there are thousands of these kinds of institutions around the world that are facing the same problem. So I don't see any of this as a zero-sum game with anybody.

Got it. And so last question is on Slide 17 on the buyback. Looking at the buyback, it's kind of like what's going on there? I mean, you're at the level that's pretty close to where you were back in 2012 and 2013 and barely above that. And so I guess my question is what will it take, since we're almost kind of coming to the end of the year, to see that become more active?

Well, the first thing, Bill, to sort of recognize is that as Kathleen indicated, the net-net total amount of excess cash, or therefore, excess capital is $250 million, right? Even though the total cash aggregate is almost $800 million but a lot of that is outside of the U.S. and some of that is for operations outside of the U.S., some of that is for operations inside of the U.S. So with the $250 million or so, we have decided to be very selective and be very jealous of that. And therefore, we're going to deploy it when we see significant opportunities of volatility and softness in our stock is not a valuation issue. We believe our stock presents good value and we're very, very bullish about the long-term prospects of the company. These are tactical issues associated with how much cash we have and therefore, how we view the market. And as you know very well, volatility has been exceedingly low in the last couple of quarters, and it hasn't presented those opportunities. So we want to keep discipline, and that's the best way that all of us, shareholders, including me, as the largest individual shareholder in the company, we want to deploy our capital.

Yes. It's really consistent, Bill, with the way we've deployed the capital and have applied the strategy over the last several years. When you see more volatility, you'll see us being more active in the market.

Our next question comes from Chris Shutler of William Blair.

This is actually Andrew Nicholas, filling in for Chris. Just wondering if you can talk about Barclays POINT and Bloomberg's decision to sunset that about a year ago now, a little over a year ago. Just wondering how much you think that contributed to the strong sales quarter. And if so, is that something you would expect to benefit from over the next couple of quarters?

Yes. So what we've done over the last 1.5 years or so has been make meaningful investments in our fixed income analytics, at all levels, obviously from our traditional fixed income factor models, which we are always been a leader in, to pricing models and prepayment models and all that. And apply or incorporate all of that into our applications, particularly BarraOne in this case, and have significant amount of dialogue with our customers about that and offering that as an alternative to Barclays POINT. So there have been a few sales in that direction, but what is -- what we have benefited the most of is that -- is because of that increased fixed income capability, we have gained more clients and more market share in the sort of whole spectrum of multi-asset class risk and performance. So, yes, we've made that investment. A little bit of that has been paid back through fixed income portfolio managers in terms of POINT replacements, but very glad to see that, that investment is paying off significantly in higher sales across the whole analytics platform because of that fixed income capability. And therefore, that has embolden us to continue with that investment plan, again, all self-funded in order to see if we can continue to increase sales in the overall product line.

Okay. Thank you. And then regarding EBITDA expense guidance and the onetime severance costs, can you talk about where that activity will be focused? And I apologize if I missed it, but can you quantify the annualized savings you expect to come from those changes?

Sure, Andrew. So it's a broad program, but it's primarily, in large part, it's related to Analytics. So there's going to be some incremental severance, about $5 million, $6 million incremental versus what we had originally planned or forecasted in Q4. And we will be going forward with the plan in the coming weeks here. And it will generate savings, still kind of finalizing things here, but I would say in the $13 million range. Some of that is going to be redeployed, reinvested. Some of it will be -- will generate productivity savings. We're still kind of working through some of the details and working through it as we go through our 2018 planning cycle, right? Because importantly, we want to understand what our top line looks like, what our run rate growth looks like, our revenue growth, the investment need, looking at margin expansion and taking all of that into consideration.

Our next question comes from Manav Patnaik of Barclays.

My first question is, so firstly, congratulations on all the management changes. Just out of curiosity, Henry, does this change your focus of priorities in terms of going forward?

Not a lot. I mean, I'll continue to be the same chipper self that I am. I am as excited to come to work every day as I was 22 years ago when we created MSCI. So no change in that. Secondly, we have been operating like this for the last couple of years, with a lot of the day-to-day managerial decisions being handled by Baer, Laurent and Kathleen. That has freed me up to spend about half of my time on the road visiting C-level clients, which have helped us, and we'll see a lot more of the benefit of that in our go-to-market strategy, which is in addition to the subject-matter expert in our company talking to the users. We're going to the top of the house in our clients, the C-level, CIO, CEO, CRO, et cetera, and present them with a holistic partnership with MSCI. So I'll be spending a lot of time with that. I will be spending even more time in our strategy and our competitive position. And lastly, and very importantly, I think we want MSCI to be one of the unquestionable leaders in our industry in terms of technology and applications, so I've been spending a bit of my time at some of the big IT universities in America, some of which I went to, to try to understand, how do we get them to leverage us in doing this. It's early days in all of that, but I continue to do a lot of the same things in the management of the firm, and this is more of a division of labor in order to position the firm to capitalize on the incredible opportunities we have ahead of us. And this has always been a team effort at MSCI, even though you tend to hear from me quite often, but my partners in this company over the years have been incredibly -- the factors that have created this incredible performance in the company, so we want to continue doing that.

Got it. Helpful. And then just, broadly you talked about it before as cost pressures and the business model evolution with all your clients, particularly your active managers. And on our side, all that sounds like there's going to be a lot of shrinkage in the industry. And I guess, my question is in terms of at least on the Analytics side, is the growth over longer period of time more a question of share shifts as opposed to penetration, just curious on your broad thoughts there?

Look, the investment industry as a whole is one of the most important industries of any society, right? The savings of society needs to be professionally invested. So the investment industry as a whole is growing and attracting among the best and the brightest in our global society. What happens is that there are parts of the investment industry that are growing by a lot, like passive management, wealth managers, sovereign wealth funds and the like, and there are parts of that industry that is either on a cyclical or a secular basis have to rework their models, their business models. We, at MSCI, benefit from serving the entire spectrum of that industry, and therefore, benefiting from the ones that are growing by leaps and bounds, and giving them tools, and helping the ones that are not, deal with their cost pressures and the like, particularly in creating efficiencies and productivity gains through technology, data, modeling and the like. And even creation of products like ESG products and factor products and like. So we are -- we look at the totality of this industry and we're only seeing incredible opportunities, a lot of people focused on clearly the areas of the industry that are under stress, like obviously, some active management. But that's not the whole investment industry. The investment industry is huge and global and we have that footprint, we have that brand, we have all the products, and all of that. So -- and in Analytics, it will be analytics for wealth managers, analytics for pension funds, analytics for asset owners of all types like sort of wealth fund and in addition to more analytics for active asset managers that will need to retransform their operations and we will be one of the key suppliers to them.

Our next question comes from Toni Kaplan of Morgan Stanley.

Henry, this is a great quarter for new sales. And I was hoping -- you mentioned the strengths in the asset managers segment. Have you seen any shortening in the length of the sales cycle at all? Any changes in the pipeline? What do you think was the real sort of catalyst for the success this quarter? And is there any reason to think that there was any pull-forward from the fourth quarter?

Analytics, our global pipeline remains robust. And again, it's a reflection of our go-to-market strategy, top-down/bottom-up, is a reflection of the significant investment that we make in innovation and new products and new service models, new pricing models and all of that. And it's also as a result of the global operating environment that it is, as I said at the beginning, is gradually getting better, at least as it relates to cost management, right. So we're very -- we continue to be cautiously optimistic. Obviously, people talk about whether certain asset classes are trophy or not, but we believe that this recovery that we're seeing from the 9-year financial crisis has taken hold around the world and a lot of people are looking to do things and the like. So we feel very good about that and our pipeline reflects that. Now there could be geopolitical events or market corrections or things like that, that will slow it down. So we're seeing a little bit of a shortening of the sales cycle. Obviously, bigger pipeline, all of that is boding -- is going to bode well for us. But again, it's all gradual and it's all lagging a little bit, right? Obviously, part of our business is leading, such as the ABF, some part of our business lags the recovery in the global markets like the subscription business.

And you mentioned number of obviously leadership appointments, changes this morning. And so what are sort of the initial things that you're hoping to accomplish, I guess, or accelerate maybe just over the next year or so?

Well, first of all, as I said before, we have been operating like this for 2 years already or so. So from that point of view, the incremental sort of change is marginal because when we appointed Baer to be Chief Operating Officer and Laurent Seyer to be Chief Client Officer, they had a very strong partnership. And when Kathleen came on board, I began to delegate a lot of the day-to-day decisions to them and I will spend a great deal of time with them every month or every quarter going through every part of the company so that is already happening. So what I'd like to do is to continue, to what I said before, which is, we have enormous opportunity, and we need to take advantage of them and reposition the company, reimagine the company for continued growth and profitability. I go around MSCI telling people that we're still in the ground floor, what is possible to achieve with this firm. I'm saying it to all of you now, because I truly believe it. And the investment industry, in all these changes and all these dynamics of what is going on today, and the recovery to a more normalized global economic environment and global financial environment, only bodes well for us to capitalize on those opportunities. And I need to spend more time shaping that.

Our next question comes from Hamzah Mazari of Macquarie.

This is Kayvan, filling in for Hamzah. Can you walk us through your exposure to Asia in terms of revenue. I think in 2013, there was an add of sales people in that region. So we're just kind of curious how that region has scaled up? And what the opportunity there is long-term given the increasing sophistication of the asset managers out there?

Yes, so Kathleen will give you some of the numbers in a minute. Well, if you look at the map, I am extremely bullish on the Asia Pacific region. I've been going to that region for 38 years now, since 1979. I visit that region quite often. Actually, this past summer, I was there 4 times in all the major countries in the region. It's a region that is a very asset-owner rich in terms of pension funds, and sovereign wealth funds, and we are extremely well positioned with many of them, not only in terms of factor investing, which we've done quite a lot with them on their assets under management fees, asset-based fees, but also ESG. We announced what we're doing with GPIF in Japan, with respect to indices that we created for them that they're deploying significant amount of capital. Clearly, the global asset managers we always cover them in the region, and we're increasingly covering well the regional managers, the ones from Japan and Korea and other places and one area, clearly, that we're very focused on is the development of China. China has been a good but a small market for us because it's been closed, not a lot of money from outside of the country goes into the country and not a lot of money goes out. But that is beginning to change. And we believe that, that could present a significant opportunity for us because that's where we -- it's the cross-border flows that we make the most benefit -- benefits us the most. Lastly, we're also focused on the development of the exchange credit options and futures industry in Asia, you're going to see some announcements on our part and our change partners in the next few months about new index futures and options that we will be launching in the region. So hopefully, that will add to that increasing franchise of the derivatives -- index derivatives that we're trying to develop around the world.

Let me just add a data point in terms of the kind of growth we've been seeing there. Typically, whether you're looking at run rate or revenue growth, we've been seeing kind of high-ish single digit growth in the region.

Our next question comes from Joseph Foresi of Cantor Fitzgerald.

I want to get your thoughts on the indexing flow maybe as we go into next year. Can it get better from here? And sort of what's the factors that add to the growth? Is it factor indexing or is it special products that will drive further growth from here? And maybe if you could just give us an update on what factor indexing contributed this quarter?

It's across the board. Clearly, the market beta, which is the largest part of our -- of what we do, has experienced quite significant growth from a large base obviously, in that slide that we gave you, which is Page 13, which is probably one of the best slides here in this presentation, right. It really gives you a good indication of our index content across active, passive, derivatives and across the various categories of factor and ESG, which is obviously a different weighing of market caps, developed markets, emerging markets and the customized and specialized indices. So we're seeing growth in totally across the board. Obviously, some areas have higher growth because they are from a lower base. Factors has experienced significant growth. ESG from a small base, growing in the 40s or 50%, I'm talking about ESG indices. Actually when you combine our ESG footprint between what we do in the segment and the other segment and what we do in indices, it's now about $75 million run rate and growing at a very nice pace, so that gives you an indication of the growth there. So it's really across the board, and so far it continues. I am sure at some point there may be some market correction and the like, but we -- in market corrections what we have seen is people have a flight to indices as well even though obviously the market goes down, the flows continue. So -- but we'll see what happens in the next cycle here.

Got it. And then just on the margins, maybe you can give us some early preview on what you're thinking for 2018? I figured I'd try. And I know it's early, but can you single out some areas of investment versus cutbacks heading into 2018 versus this year?

We're still in the operating plan process, and then we still need to conclude that and present it to our board, so we don't have anything. We will probably be giving you some indications on that in the next quarter. In terms of the investment plan, it continues, is really a continuation of what we've been doing. In indices, it's about factors, it's about ESG indices, it's about -- on that front, it's about wealth management on the client part, it's about futures and options, which we see a lot of potential there. On the analytics side, it's about the platform, this analytics platform, application platform, what we've been talking about. It's about fixed income, it's about providing services or solutions in addition to products and tools. On ESG, it's about everything, right? The key with ESG is how do you scale up that business. Because if we like it at $75 million, we're going to like it a lot more at $200 million run rate, right? So we're trying hard to keep up with the pace of that. And fortunately, for us, we've been able to achieve both, high growth in revenues and good amount of profitability even as we scale up that business. We will continue to invest there. And Real Estate, we're -- we think we are getting close to the turnaround, this sort of uptick of that, maybe next year, we'll give you more of that. But at the end, if you look at the 3 segments, hopefully, someday in the future, we can have all 3 segments hitting us at all cylinders and provide the growth and profitability that we have been aspiring to.

On a margin basis, look, we're still knitted to and sticking with the long-term margin target ranges that we've talked about previously. We're clearly kind of smack dab in the middle of the 2018 planning cycle right now, so there's still a lot of work to do to get through that planning. But look, our very good challenge that we have is how to fund all of the really good investment projects that we have. So we're committed to being really disciplined in terms of how we're allocating capital, how we're prioritizing our investments, and being smart about containing cost. So we're working through the extent to which we've got top line growth, how the run rate is growing, continuing to deliver positive operating leverage, we're very committed to that, and then the areas where we want to invest and how we prioritize that. So we'll definitely be sharing more with you after we get through the planning cycle.

Our next question comes from Anj Singh of Crédit Suisse.

Another question on margins as it relates to your index margins, which were again above your targeted range. I realized you're having really good growth in asset-based fees. But should we be at all thinking that perhaps some lower investment spend is driving some of this, contrary to what you've been talking about on the call? I guess, what I'm trying to get at is, you'll probably see good growth in your asset-based products for quite some time, so are we in a period where index margins could remain sustainably elevated somewhat, or are you going to ramp up some of those investments that could still bring it down to your targeted range despite the good growth in asset-based fees?

Well, the algorithm of the optimization program that we have is how do we balance out what we believe to be sustainable revenues from both the subscription part and the asset-based fees, and therefore, you know what -- how much of that related drop to the margin and how much of that we put into investments. Clearly, markets have run up a lot at the moment, and therefore, we have let that incremental revenue just drop down to the margin. To the extent that few quarters go by and we feel that that continue to be sustainable, we'll -- we may step up some investments that we have, but we want to stay within the 68% to 72%. At the higher end of that is to allow or through that plan is to allow for that flexibility in the event of significant spurts in asset values and asset-based fees. And the lower end of that is to allow for the declines in equity markets and not get totally obsessed about redoing the cost structure of the product line. So that's what we're trying to achieve. There is no question that this product line can continue to grow and grow even faster if we continue or even put more investments in it. This is exploding all over the world, right? So we're trying to follow a very balanced approach to profitability and shareholder returns on one hand, and investment into products and clients on the other hand.

Got it. That's helpful, and then another question on the improvement in analytics run rate in light of some of the repositioning and efficiency efforts commentary earlier. Any thoughts on how these efforts may manifest themselves in your results as we look ahead, should we be expecting the top line to continue this sort of accelerating trajectory as well as the profitability increasing, realizing things are lumpy quarter-to-quarter? Any commentary you could give on what a longer-term trend could look like would be helpful.

Our financial strategy on this product line has been what do we do to get to the high 20s EBITDA margin with the revenue growth that we have been experiencing in the last couple of years. But, we'll say, we want to grow faster at the top line, and therefore, it's not going to happen without innovation in services and products and client distribution and all of that applications, et cetera. So what we feel is that -- we got -- again, it's another optimization, we feel that we need to put effort into that, and therefore, we have taken the margin all the way to the high '20s, close to 30, but are not immediately looking to go beyond that until we see an acceleration of revenue growth. And our longer-term target is 30% to 35% EBITDA margin, but that needs to be predicated on higher revenue growth. So the way we're doing that is not taking it from the shareholders and from the margin, the way we are doing that is being extremely anal and dogmatic and disciplined about reprioritizing the cost structure and taking it from a lot of areas that may not yield a lot of results and refocus that money into areas that will give us higher growth. So too early to tell how much of the savings, probably the majority of the savings will be directed for things that can help us accelerate revenue growth as opposed to dropping into the margin. We always like balance, so there may be a little bit of that that drops to the margin. But again, what we want this product line is to grow in the high single digits in revenues and get to 30% to 35% EBITDA margins, and how you get there is this method that I just described to you.

Our next question comes from Keith Housum of Northcoast Research.

Henry, you gave some case studies on Slide 8 that I thought were beneficial, but is it possible to provide a bit of quantification in terms of what type of revenue will this generate for MSCI and is it nonrecurring versus recurring? And perhaps like what buckets would it fill and I know you probably can't go into a lot of detail there, but if you can give us a little bit of perspective to understand a little bit more about the opportunity with the content development here.

Pretty much everything we talk about is recurring revenue. So -- we like nonrecurring revenue. We like it from all sources, but what we clearly focused in these examples has always been recurring revenue as opposed to kind of onetime. Secondly, the first example drops to the index product line, particularly in an asset-based fee structure. The last example in fixed income is fairly meaningful run rate, annual run rate in subscription to our fixed product line. So that's another one. And I think the middle example may go into the ESG product line, if I remember correctly, is that -- no, the second example is the fixed income, yes.

The third one is ESG.

And the last one, we will go into the ESG recurring product line, which is obviously growing 20-plus percent a year.

Is it possible to say like how largely or how much of a contributor they are to the top line?

We -- these are examples, once we aggregate all these examples that's what gives you the run rate growth that we're giving you. We don't want to get too close to an individual client, and an individual run rate or an individual thing, but combined, this was -- this is potentially a few million dollars of run rate there.

Helpful. I guess I will stick one more in here. With the repositioning of our investments in the analytics business, is there going to be a deemphasis on some products that you would perhaps let them lapse or -- because of their margins or how are you guys thinking about your investment there?

That's a good question because what happened to Analytics is, we won't think of us in the analytics product line that first of all it's a little bit of a misnomer when we call it Analytics, but that's the best name we came up with, but secondly it's a very diversified product line with a lot of different types of products and services and a lot of different customer bases from a pension fund, to a hedge fund, to wealth manager, and a bank, and it's very diversified in terms of it. The areas that are growing are the core big areas, such as risk management, which is the bigger part, the multi-asset class risk management, the equity analytics and all of that, and we're benefiting from that, and therefore, putting more efforts into that. The areas that are dragging are those areas that -- that we haven't -- the small product lines that we haven't emphasized as much, like energy and commodity analytics, will be a one example of that, credit manager is another example of that, which is an older product and things like that. And unfortunately, we have a little bit of a huge amount of good banks type of thing, the run rate and a small amount of areas that we're just harvesting and those have either low growth or negative growth and they tend to impact the core areas, but it's what we have and maybe in the future we'll break it out in order for you to get a sense of that, but it's -- the vast majority, which is the area -- the core areas are growing, obviously faster than the 5% because there's a small number of areas that -- but they do have an impact on the run rate that we were seeing canceled because we're not paying any attention, we're not investing in that and the like. And they will eventually run to 0, but when they don't, it impacts the numbers.

And this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Stephen Davidson for any further remarks.

Thank you, everyone, for your time today, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.