明晟 (MSCI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter and Fiscal Year 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 Mr. Andrew Wiechmann, Head of Investor Relations, Strategy and Corporate Development.

You may begin.

Thank you, Daniel.

Good day, and welcome to the MSCI Fourth Quarter and Full Year 2017 Earnings Conference Call.

Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2017.

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 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 our 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 measures 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 30 of the earnings presentation.

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

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

Henry?

Thanks, Andy.

And apologies for a little bit of scratchy voice and cough.

Like many in America now, I'm battling a cold.

As Andy indicated, Baer Pettit, our President, will be -- join us in this call and will be joining us going forward.

As some of you know, Baer has worked side-by-side with me for over 18 years in building this great company.

I will provide a brief intro and then pass it on to Baer for -- go a few slides, and then Kathleen for the financial review.

As you can see by the full year results on Slide 4, we are seeing the enormous potential and power of the MSCI franchise, and the progress that we have made perfecting this -- our go-to-market strategy, our continued content innovation and the enhanced capabilities that we've been building across our software applications and services, all of which have been delivered as one integrated company.

These record results and strong performance have not happened by accident.

They reflect a very strong progress that we've made over last few years, that we've been reporting to you on our organization, and how we're executing against our -- both our strategic and financial road map.

So we saw also an acceleration in some of our key leading indicators, with subscription run rate growth of 11% versus 7% in 2016.

We saw record recurring net new sales for the quarter and the year, with growth of 60% in Q4 and 37% for the full year, reflecting again the strong progress we have made as an organization and as a team, in this particular case, in product development and client engagement.

We remain absolutely committed to continue to generate positive operating leverage for our shareholders through our relentless focus on enhancing productivity throughout the company.

Kathleen will discuss in more detail, but it's also worth noting that we will be benefiting significantly from the newly passed U.S. tax reform law in 2018, both in terms of a lower effective tax rate going forward, and very importantly, the ability to repatriate a meaningful amount of our international excess cash.

As in prior calls, we want to tell you we remain absolutely committed on optimizing and having the most efficient capital structure in our company and returning any excess capital back to shareholders along the lines of the same principles that we have outlined in the past.

So in sum, we expect all of this will further enhance, what we call, our financial algorithm and will continue to drive very attractive long-term shareholder returns.

Let me turn it over to Baer now.

Thank you, Henry.

Slide 5 illustrates the increasingly important role that we play within the investment industry.

The content, applications and services that we provide to our clients are mission-critical to their core investment activities, such as allocating assets, constructing and optimizing portfolios and understanding and managing investment risk and performance.

Because we are central to our client's core activities, we have gained unique insights into their investment needs and key objectives.

Furthermore, because of our success, our products have become established within the industry as a common framework for defining and measuring investment risk and return.

The framework that we deliver to our clients provides, for example, a framework for defining the universe of investable equity securities provided by our All Country World Index, or ACWI, a common language for defining and measuring the performance of a specific market or strategy, such as that provided by our equity and real estate benchmark indexes; a common language for understanding the absolute and relative environmental, social and government attributes of an issuer of securities, such as that provided by our ES&G content and indexes; and a common language for defining and understanding the systematic drivers of risk and return in a security or a portfolio through our widely accepted, multi-asset class risk platform, our world-renowned factor models and our recently introduced factor box and factor classification system for commonly used factors.

Because our offerings provide frameworks for analyzing aspects of the investment process, a broad range of participants within the investment industry provide us with their thoughts and insights.

They provide viewpoints on how to more effectively measure a market or calculate risk and return, as well as their thinking around the latest investment trends and additional tools that may be required to capitalize on those trends.

Our ability to synthesize this feedback from all parts of the investment industry increasingly positions us as a thought leader around emerging investment trends.

This feedback allows us to create new content, applications and services and modify our existing ones to make them more effective.

This virtuous circle had allowed us to stay at the forefront of key industry trends, like global investing, ES&G and factor investing and multi-asset class risk and performance management.

Because of this feedback loop, clients increasingly want access to tools and knowledge across the firm, not just from a single product line, with the large majority of our clients using products and services from more than one of our product lines.

During 2017, we achieved several key milestones and witnessed several notable events that reinforced the growing relevance and importance of MSCI.

As previously reported, in September 2017, there were approximately $12.4 trillion of assets benchmarked to our indexes globally.

As of January 30, there were over $807 billion of ETF assets, or 1/5 of the equity ETF market into our indexes.

The ETF assets linked to our indexes are up more than 57% from 1 year ago.

Additionally, we have received an unprecedented level of industry attention and media coverage around index inclusion events, such as the announcement of the coming inclusion of China A shares, the consultation on the potential inclusion of the Saudi Arabian market into our emerging market index, as well as around the growing significance of ES&G investing and the value of MSCI ES&G content and indexes.

Please turn to Slide 7, where we highlight some of the recent initiatives that we have been pursuing to fuel our integrated franchise.

We are increasingly taking an integrated approach to engaging with our clients and are spending more time with C-level executives, where we are becoming an even more important partner by helping them to understand emerging trends and how MSCI can help them to take advantage of those trends.

We have also introduced regional operating committees, which help to optimize our go-to-market strategy for each region to address the specific needs and business models of our clients.

In addition to increasing levels of engagement in sales process by MSCI senior executives, notably by Henry, our Chief Operating Officer, Laurent Seyer, and myself, we are continuing to hone a consistent approach to delivering the full suite of MSCI products and capabilities.

As a result of this senior-level approach to selling, together with the introduction of our coverage incentive plan compensation program and our senior account manager program, we have achieved increased levels of growth from our largest clients, with 19% year-over-year run rate growth from those clients who have greater than $2 million in run rate and a 14% improvement in sales productivity since 2015.

We have also been heavily focused on providing innovative content and enhanced applications and services across the organization to better serve our clients.

By having integrated client coverage, research, data and technology groups supporting all product lines, we are better suited to share our unique IP and leverage our differentiated know-how to deliver innovative and high-quality content.

Capturing executive-level feedback from our integrated approach to clients, we are leveraging our integrated research and data teams to deliver differentiated new index models, as well as differentiated multi-asset risk and stress testing models.

Additionally, we are levering -- we're leveraging our integrated research data and technology teams to release new applications and services that empower our clients to use our content more efficiently and more effectively.

For example, services like index metrics and our custom index development offerings help our clients understand the factor in ES&G attributes of an index and to build new indexes.

Additional analytics capabilities released in recent years, like benchmark aggregation, performance attribution, data management and reconciliation and enhancement to our regulatory services, including our liquidity analytics and services that help clients meet their N-PORT regulatory requirements, help our clients to address key operating challenges.

These additional capabilities, together with enhanced content in areas like fixed income analytics, have helped drive 11% year-on-year run rate growth in the fourth quarter within our multi-asset class analytics offerings.

We saw $46 million of total gross sales in 2017 for multi-asset class analytics, where fixed income capabilities were a key driver of our success, with $12 million of total new sales associated with fixed income analytics.

Our integrated franchise continues to be a significant competitive advantage for us and an important driver of our attractive growth trajectory.

On Slide 8, we wanted to highlight 2 of the more notable areas of content innovation, where having an integrated franchise has allowed us to benefit across products and client use cases.

By having a well-established position, reputation and research team in factor analytics, we have been able to create a cohesive and systematic multifactor set of index families that is being rapidly adopted as benchmarks and for passive mandates and ETFs.

We are uniquely positioned to provide tools for analyzing, communicating and implementing factor strategies.

As of December 31, 2017, we had over $208 million of run rate related to factors across all of our products, and we have seen a 2-year CAGR of the factor-related run rate from 2015 to 2017 of 16%.

Our factor analytics tools help investors to understand the factor attributes of a portfolio and to construct portfolios to achieve specific objectives, while our factor indexes provide the mechanism to implement those portfolios.

Similarly, as ES&G considerations are increasingly central to the investment process, MSCI's established position in ES&G content, our broad and deep security coverage and our consistent systematic ratings framework provides a natural foundation for ES&G indexes.

Furthermore, our established research and deep relationships with asset owners have accelerated the adoption of ES&G indexes within the investment process.

As of December 31, 2017, we have over $83 million of run rate in ES&G content and ES&G indexes, and we have seen a 2-year CAGR of the ES&G-related run rate from 2015 to 2017 of 31%.

Of note, the iShares MSCI KLD 400 Social ETF became the first and only ES&G ETF to cross the $1 billion mark in AUM.

We believe we are well positioned to continue to identify and benefit from emerging trends in the investment industry in the future.

With that, I'll turn it over to Kathleen to discuss our financial results, segment results and guidance for the year ahead.

Kathleen?

Thanks, Baer, and good day to everyone on the call.

I'll start on Slide 9 and take you through our financial performance for the quarter.

We delivered another quarter with double-digit revenue growth, 14%, driven by growth in asset-based fees of 41% and recurring subscription revenue growth of 9%.

During 2017, we saw AUM and ETF linked to our indexes grow to $744 billion, 55% increase.

More than half of that increase came from cash inflows into ETF linked to MSCI indexes.

Operating expenses and adjusted EBITDA expenses, which included elevated nonrecurring severance expenses in the quarter, increased year-over-year by 8.4% and 10.5%, respectively.

Full year expenses of $615 million were in line with our most recent guidance provided during our last earnings call.

Severance expense was $7.7 million for the quarter, an increase of $6.9 million from the prior year, of which $4.8 million was within Analytics.

These efficiency actions have an associated cost base of approximately $13 million, with $9 million related to Analytics, and will enable us to allocate resources to our key growth areas.

We delivered attractive operating leverage with adjusted EBITDA margin expanding 170 basis points and adjusted EPS growing 42%.

On Slide 10, you can see the drivers of adjusted EPS growth in Q4.

The biggest drivers of the increase in adjusted EPS were our strong top line growth and continued alignment of our tax profile with our global operating footprint.

This growth was partially offset by an increase in expenses related to ongoing investments in severance to achieve efficiencies.

The alignment of our tax profile with our operating footprint, the impact of various discrete items and the positive impact of share-based compensation excess tax windfall benefits, contributed $0.11 to the adjusted EPS growth.

This was partially offset by FX.

We recorded a net estimated charge of $34.5 million associated with tax reform, which included a tax charge related to repatriation of foreign earnings, partially offset by the revaluation of our net deferred tax liabilities.

This charge is excluded from adjusted net income and adjusted EPS.

Similarly, we expect that any future charges resulting from refinements to and further guidance on tax reform will also be excluded from adjusted net income and adjusted EPS.

Exclusive of these nonrecurring tax reform-related charges, our adjusted tax rate for the fourth quarter and for the full year were 22% and 27.5%, respectively.

Slide 11 provides the full year summary financial performance.

As you can see, we delivered very strong results for the full year, with revenue growth of 10.7% and adjusted EPS growth of 31.4%.

Free cash flow came in at $355 million for the year, consistent with our guidance.

As a reminder, 2016 free cash flow experienced several favorable nonrecurring and timing-related items related to tax refunds, prior period tax overpayments, as well as early payments from clients that drove an elevated free cash flow level in 2016.

Adjusting for these items, the normalized 2016 free cash flow was $340 million.

The growth relative to the prior year normalized free cash flow reflects the strong financial performance for the year, partially offset by higher interest payments.

Although collections were higher, they were somewhat slower than anticipated, attributable mostly to our tax realignment work as we adjusted billing entities for some of our international clients.

Overall, we are very happy with our execution and results in 2017, and we're excited about our momentum heading into 2018.

On Slide 12, we'd like to share the exceptional sales and net new sales performance we saw as we closed 2017.

We delivered record gross sales, recurring sales and recurring net new sales in the fourth quarter and for the full year 2017.

We executed well in the quarter and converted a significant amount of pipeline into signed deals, particularly within Analytics.

Index run rate grew 23%, with Q4 being another quarter of double-digit subscription run rate growth.

Analytics demonstrated a nice acceleration in subscription run rate growth of 8%, or 7% ex FX.

The 7% ex FX run rate is up from 3.8% in 2016, a clear acceleration of growth rate.

We experienced particular strength in EMEA and Asia with subscription run rate growth in Q4 of 14% and 13%, respectively, while the subscription growth in the Americas remained in line with the growth in past years at 8%.

We're seeing the benefits of our enhanced go-to-market strategy, our continued innovation and product enhancement and the increasing power of our integrated franchise.

One point to mention is that we've seen a higher percentage of our annual sales occurring in the fourth quarter and a lower percentage in the first half of the year.

Specifically, we've seen about 1/3 of our annual recurring sales booked in the fourth quarter in each of the last 2 years compared to 27% to 28% in each of the prior 3 years.

It's difficult to say whether this will be a continuing trend, but this change in linearity has possibly been driven by the budgetary processes of our clients, as well as our coverage incentive plan that was implemented in 2016.

We're keeping a close eye on it as we build the pipeline for 2018.

We're very pleased with the strong performance in 2017 sales, and the team is now focused on continuing to build and execute on the 2018 pipeline.

Now let's turn to our segment results on Slide 14.

Index revenue grew by a significant 22% this quarter, the highest rate of growth since 2011.

This included strong growth in ETF-related revenue due to cash inflows and market appreciation, growth in non-ETF passive product revenue and exchange-traded futures and options product.

Index subscription revenue grew at 12%, reflecting our continued sales momentum and high retention rates, with growth in new products and traction in new client segments.

In the Analytics segment, we delivered revenue growth of 3%.

The growth in revenues typically lag the growth in run rate.

Contributing to this lag, we've seen the onboarding and implementation periods for some large client lengthen, reflecting growing complexity of client needs.

We're beginning to see the benefits of our fixed income investments, with $12 million of total gross sales in 2017.

Also, we continue to invest in our new Analytics platform, additional service capabilities and our go-to-market effort to drive revenue growth to higher levels.

Finally, our All Other segment delivered revenue growth of 21.5%.

ESG revenue was up 24%, driven by continued strong recurring sales, which were up 47% for the quarter and 32.5% for the year.

We believe ESG is in the early stages of its evolution.

ESG has the potential to become a key component of investment mandates throughout the world, and we're well positioned to provide a framework for analyzing ESG issues that will be widely adopted.

As we have discussed in the past, we're investing to leverage new technologies in natural language processing and machine learning to enhance efficiency and drive productivity in this product.

Next, in terms of Real Estate, revenue was up 17% on a reported basis and up approximately 12% on an FX-adjusted basis.

The increase in revenue was primarily driven by growth in our market information product and strong momentum in North America.

We continue to focus on further improving the performance of the segment with initiatives to enhance sales, product capabilities and productivity.

We believe there is an attractive long-term market opportunity for this offering.

Slide 15 and 16 provide some additional detail on the Index segment.

On Slide 15, we show 4 main categories of index modules and the full year run rate CAGR for each category.

Despite fee pressure and headwinds on traditional active asset managers, we continue to deliver consistent revenue growth, driven by the strength of our offerings and new products and some high-growth client segments.

Newer modules, such as our factor and ESG modules have been increasingly in demand.

We're seeing more and more investment mandates, which include factor and ESG considerations, such as minimum volatility, value, momentum, low carbon, as well as socially responsible and governance-related considerations.

Similarly, we're witnessing very strong demand for our custom and specialized index offerings, which help clients achieve a differentiated or unique objective.

We're also continuing to gain traction, further penetrating client segments, such as broker-dealers, wealth management and hedge funds.

More broadly, as passive and index-based investing represents an increasingly larger portion of global assets, there is an increasing need from all market participants to understand the underlying indexes.

We continue to be excited by the ongoing prospects of our subscription revenue business.

Turning to Slide 16, we show additional 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.

As of December 31, there were a total of 992 ETFs benchmarked to MSCI indexes, an increase of 9% from the prior year or roughly 22% of the equity ETF market.

Revenue from non-ETF passive products was up 28.3%, reflecting strong growth in institutional passive and index-based mutual fund AUM, including higher fee type products, like factors and ESG.

Revenue from exchange-traded futures and options continued its exceptional growth, increasing 41% and reflecting the developing liquidity pool and broadening trading community around multimarket, multicurrency index futures and options.

On the bottom left, you see that in addition to the very strong cash flows into -- and market performance in the developed markets outside the U.S., we experienced strong AUM growth in both emerging markets and the U.S.

In the lower right chart, you can see the average run rate basis point fee for the period at 3.04.

While the decline in fee rate have slowed, our primary focus is not on driving higher fee rates or moderating the decline in fee rates.

We are very focused on increasing volume and market shares and driving long-term growth in run rate.

Turning to Analytics, Slide 17 provides you with summary of the margin and growth trajectory over the last several years.

On the upper half of this slide, we show the Analytics margin progression starting with 2014.

During 2013 and '14, we invested heavily to bolster the technology infrastructure in the client service organization.

We then undertook a series of restructuring initiatives during 2015 and '16, which combines [several] products and sales organizations, rationalized and streamlined several functions, as well as prioritized investments into the key products in client growth areas that were most strategic for the firm.

We continued the restructuring in 2017 with our Q4 realignment and reprioritization initiative, which resulted in a slight decline in the margin in 2017 to 27.4%.

Excluding the increase in year-over-year severance expense, the Analytics margin would have been above 28%.

We've largely right sized the expense base and have focused our investments in key growth areas.

We're now working on achieving acceleration in revenue growth to drive further adjusted EBITDA margin expansion into our long-term targeted range of 30% to 35%.

Over the last few quarters, we've seen a gradual improvement in the run rate growth to the current level of 8%.

In the fourth quarter, we saw recurring sales up 35.5% and recurring net new sales up 178% as a result of having both strong sales and a reduced level of cancels.

It's important to remember, however, that quarters can be lumpy, but we continue to remain cautiously optimistic about this momentum.

We saw strength in equity analytics as clients increasingly need our content sets and applications to differentiate themselves by more effectively constructing portfolios to achieve their desired investment objectives.

Similarly, our multi-asset class content applications and services help clients manage, understand and support risk and performance across single or enterprise-wide multi-asset class portfolios.

We are helping clients manage and reconcile data, as well as meet regulatory requirements, such as N-PORT, and our applications and services also help our clients operate more efficiently, offering -- often delivering services and capabilities at a fraction of the cost of internal operations or multiple vendor solutions.

Turning to the next section, Slides 19 and 20 provide an update on our capital, liquidity and our 2018 guidance.

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

As a result of tax reform, we can now more efficiently access a significant portion of our cash held outside of the United States.

In terms of leverage, this quarter, we are at 3.2x, well within our stated range of 3 to 3.5x, as a result of growth in our adjusted EBITDA.

Although there are significant benefits for us from tax reform, we are not making any changes to our capital allocation strategy.

Even with the access to additional cash overseas, we will continue to approach share repurchases in line with past practice by repurchasing more shares when there is softness in the market and when we have more excess cash, and fewer shares when volatility is low and we have lower excess cash.

We continue to view repurchases as an important part of our return on capital strategy and will continue to repurchase shares opportunistically.

On Slide 20, we share our 2018 guidance.

As you can see by our expense guidance, we will continue to be diligent at balancing investment activity with controlling costs.

In addition, I'll point out that our long-term targets remain the same.

As we reflect on 2017 and the company's ongoing evolution, I want to highlight one element of the company's transformation of which we are particularly proud.

We've been intensely focused on creating an organization with world-class financial management that will enable us to effectively make and implement decisions based on appropriate information and ultimately, to allocate capital to its highest return uses.

I'm excited to say that we have made enormous progress enhancing our financial and process discipline.

We've improved our systems, processes and culture, which has enabled us to quantitatively track and manage our investment and expense base to drive continued innovation, effective capital allocation and enhanced return on investment and shareholder returns.

Of course, there are always additional improvements to make, and we very much have a culture of continuous improvement, but we are very proud of the progress the teams made in this area.

In summary, 2017 was an exceptional year for MSCI and reflects our commitment to executing against our strategy.

We're uniquely positioned to continue to innovate and assist our clients by providing mission-critical tools and services to meet their evolving investment needs.

We remain excited about our growth opportunities for 2018 and beyond, and we very much look forward to keeping you updated on our progress.

With that, we'll open the lines to take your questions.

(Operator Instructions) And our first question comes from Alex Kramm with UBS.

I want to start where you actually closed, which is the capital side.

I think, Kathleen, you mentioned there's no change to capital allocation.

However, you're building up a lot of cash, and I hear you that markets could get more volatile and you want to have some dry powder for buybacks.

But we've been saying that for a year and markets keep on going up.

So at some point, I wonder how much it is in the best interest of shareholders to keep piling up cash.

I mean, if you're really excited about growth, maybe you should be buying back your stock.

Or maybe you should raise a dividend.

So maybe you can address it a little bit.

And maybe also, Henry, how does M&A factor in this?

Because, again, you're building up some cash here, and there might be some things out there that could fit nicely into your offering.

So thanks, Alex.

That's a good question.

Look, we're very, very keenly focused on organic growth in the company.

We believe that we have a lot of the footprint necessary to capitalize on all the opportunities that we see in the market.

And if there is any M&A, it's kind of fillers here and there.

But there's also a lot of ebullience in the M&A market, so we look at certain assets and the evaluation has been stretched.

So we have felt that we can do that organically, and fixed income analytics is an example of that.

For ESG, extensions are examples of that, et cetera.

So we're not really canvassing to play there for any kind of bigger acquisitions.

If anything, it's just smaller tuck-ons and the like.

And one area we're very focused on is technology, natural language processing, artificial intelligence and things like that, right?

So therefore, that brings the question of the capital back to what do we do if it's not there, right, if it's not for any kind of acquisitive growth.

Look, I -- we believe that we are in a bull market, and sooner or later, there's going to be a correction and we want to capitalize on that.

And obviously, if a long time goes by and it doesn't happen, then we'll have to reassess and move forward.

But for now, we -- the tax law just passed, the excess cash currently on the balance sheet to date in New York or in the U.S. is $250 million.

We have not been yet able to bring it back.

It'll take few months to bring it back, because there are a lot of procedures associated with it.

We think it could be up to a $350 million or so that we can bring back.

We're still analyzing all of that because we don't want to pay large withholding taxes in various places.

And that now creates a little bit of a larger amount of excess cash that we can deploy, and we'll be patient.

I think at the end of the day, look, I realize what you're saying, but I also don't want to wake up and say, we deployed all this cash, buy back the shares and then a month later, there was a correction and we didn't capitalize on it.

Yes.

Just to echo what Henry said, look, we think there's about $350 million, possibly more than that, that we'll bring back, but it doesn't come back immediately.

It does come back most likely in the first -- by the end of the first half.

But a lot has to happen to get that back in terms of auditing of legal entities, their withholding tax in local jurisdiction.

So we want to make sure we are smart and diligent and we're bringing it all back in the most cost-efficient manner that we can.

And we'll continue to be disciplined from a capital allocation standpoint and wait for those moments of volatility.

Fair enough.

And then just secondly, I guess, just shift on to the cost guide, I think you didn't give a lot of detail there.

So two things really that I'm curious about.

One, how about FX?

Like what kind of -- I mean, I think, FX -- historically, when the dollar weakens, that's not a good thing for your cost base and your margin.

So just wondering what you kind of build in, in terms of rate there?

And then secondly, we've been in this Goldilocks environment as we just talked about, and obviously, your asset-based fees are going up, et cetera.

If that actually turns around, like Henry is waiting for, it sounds like, I mean, what kind of flex do you have on the cost base?

Yes.

Couple questions you have there.

So from an FX standpoint, I mean, you're right in terms of the impact to us, but it's typically very minimal.

We are -- typically have some good natural hedges in place, and so we see really small impacts from an FX perspective.

In terms of the ABF environment and AUM level, if that does turn around and we see a correction downward movement, obviously, yes, we get impacted by that.

And as the percentage of our ABF fees grow as a percentage of the total company, there is more of an impact there.

So we are really, really diligent at doing scenario planning and saying, okay, we're going to build a base plan, but let's scenario plan for both an upside and a downside.

And if a downside happens, what do we do and what are our levers.

So we've been pretty detailed about looking at what levers we do have in terms of variable expenses.

And in particular, we would look at things like the variable component of compensation, and we watch very closely.

And furthermore, we kind of track as we go.

We plan the year and we say, yes, we want to do a certain level of investment spending, but we are tracking it very closely as we go before we kind of pull the trigger on each level of spending.

And our next question comes from Joseph Foresi with Cantor Fitzgerald.

I was wondering if you could talk about the improvement in Analytics.

How sustainable is that?

I know we were building up to this for a couple of quarters.

And what's really paying off you there?

Good question, Joseph.

Obviously, this is -- has been hard work for the last 3 years or so.

And I just want to reiterate what Kathleen said, which is a quarter doesn't make a year.

We feel very pleased and very proud of what we did in Q4, but this is the kind of product line that gets lumpy or not, so don't normalize the fourth quarter yet.

I mean, we've got to wait that 4 or 5 quarters of similar performance before we feel like that, right?

And that's how we look at it internally, right?

So what has worked for us is an extreme focus on repositioning the product line, right?

And focusing on the areas of the product line that are core and we want to grow and harvest parts of the product line that we want to invest in or spend.

And obviously, the core of the product line is equity analytics, fixed income analytics and multi-asset class risk and performance.

And we do have, I don't know, $20 million, $30 million of run rate that is not the core that is being harvested, and that's growing at a lower growth rate.

And that's also that, obviously, we're managing.

So that's one thing that has helped us put the resources in the right places.

Then the positioning with the product line with the client base or let's say, equity analytics, everyone is trying to invest along factor lines and understand what their factor portfolios are.

So we are more proactively talking and consulting with clients as to how they can use these set of risk models and these set of analytics to be able to help them, particularly the active manager clients and the hedge fund clients, and so long -- equity long-short hedge fund clients.

So that has created meaningful amount of growth for us on equity analytics.

On multi-asset class analytics at risk, the initial position of this product line was, okay, we're going to put up a tool in your shop, it's going to grow performance, attribution and risk analysis, and we're going to use it for that.

And that's, obviously, is primary use case.

But a lot of our active manager clients are saying, it has to be more than that.

I got to be able to use this framework to help me scale the business and cut a lot of cost inside the organization, cut a lot of cost.

So we go in there and help them integrate the thing and that's why some of the delays in recognition of revenue, right, integrate the thing in a way that, that fulfills those 2 objectives, that it is a platform for them to scale their business, communicate internally and report to their clients and understand risk and performance.

But at the same time, it's got to be a way for them to create efficiencies and lower their cost structure and eliminate a lot of resources.

So that has helped us a lot.

Lastly, has been fixed income analytics.

We started initially investing in a lot of fixed income analytics portfolio -- fixed income portfolio analytics in the context of the changes that are going on in that place with the acquisition of POINT by Bloomberg, and that was the initial focus and we continue to do that.

But what we found out was that we had a lot more payback if we took a lot of that fixed income analytics and play it hard on the multi-asset class risk and performance and go get large mandates for banks, for example, or big fixed income players.

So this past quarter, we're extremely proud that 2 of the more significant fixed income managers and banks subscribed to our multi-asset class risk and portfolio analytics, largely on the basis of our fixed income offering.

One large, large, large bank in Asia and one of the largest fixed income asset manage -- dedicated fixed income asset manager, particularly with a lot of our loan offerings and things like that.

So that has driven the revenue growth and all the efforts and integration with the client has driven the lower [cash flows].

So let me just reiterate a little bit of what Henry touched on.

Look, Q4 was obviously a great quarter for analytics, and frankly, we've seen some really nice momentum during the course of the year.

If you look at the recurring subscription sales for Analytics, remember, we started Q1 being down from a year-over-year perspective, and then trended upward each and every quarter this year, so really nice improvement.

And while we're seeing some improvement in the operating environment, we also are seeing that the coverage organization is executing really well.

And remember, we have our sales incentive program in place now since 2016.

So great quarter.

We're beginning to see what we've been talking about for a couple of years now in terms of returning to higher growth.

But I really want to stress, as we know, the quarters can be lumpy in terms of sales and cancels.

Q4 had a great combination where we saw both high sales and low cancels, so we certainly shouldn't take the Q4 performance and try to extrapolate that or assume every quarter would be that good.

We will get some variability on it from quarter-to-quarter.

Got it.

And then my second question, just can you talk a little bit about the demand for passive investing heading into 2018?

What stage do you think we're in on this trend and how prepared are you for a downtick in AUM or a slowdown in momentum?

Now you're going to have more cash available so I'm wondering how diversified do you thank you are if this is the year that things finally slow?

Sure.

It's Baer here.

So clearly, we have to distinguish the market movement, which we're not going to take a specific position on, and you can make a judgment yourself as to how you feel that might end up.

But in terms of passive and indexed investing, we don't see that there is a change in the outlook.

We continue to see increasing allocations from investors, both from institutional and advised investors.

So I would say, the trend is continuous, the market level correction could have a slight impact on that.

But in terms of the overall direction, we're not seeing anything that's different from what we've seen over the last quarters or years.

And it's also migrating.

Obviously, the big part of all of this was market cap.

So think of it as transition exposures in markets and sectors around the world.

And we're doing very well there with DM part and the EM part and all of that, the country and everything.

But that's the one chart that we show you there and now we're seeing that going into factors.

So these are more -- less -- almost like less supply driven, meaning not supply securities, but we now have an objective in investing in momentum and investing in low -- in high-quality stocks or whatever.

So that is just in the early stages of huge evolution.

And behind that is now is the ESG component, which is kind of take the market caps and we weigh them on the basis of ESG and manage the portfolio, either passively or actively and that's in the early stages.

And we are, by far, in the best position to capitalize on that.

And we're already beginning to get a little bit of -- still very early stages of at least institutionally.

Our clients saying, oh, you've got to help me combine the factors and the ESG into one holistic portfolio, so we got a long, long way to go here that will significantly expand the market and our presence in it.

And our next question comes from Toni Kaplan with Morgan Stanley.

Baer, I think you mentioned 19% growth from large clients.

Would you attribute that to more like competitive wins or pricing or budget expansion or is there something else driving that because I thought that, that was a very strong statistics?

Sure.

I think it's all of the above because there's such a significant portion of our revenues that it's hard to attribute one particular factor.

I think it really -- the most significant element is the deepening of the relationship and their consciousness of what we can offer across the various product lines, and critically, the connectivity between those.

So clearly, we've -- there's been some price component in it.

But less for them than for some of the medium-size clients actually, but it is cheap -- chiefly the deepening of relationships where they're using more of our tools more broadly within the organization.

And a big component of that has been the, again, the approach that we take, that Baer indicated, the deepening of the relationship, which is traditionally, MSCI has been built by subject matter experts in MSCI, talking to the individual user in the organization of the client.

And therefore, obviously, that made it into a product sale very specific tool there equities, or a fixed income or risk or whatever.

So the approach that we're taking and is led by Baer, and Roveen, and me on the road constantly is to go see the C-level people, the CIO or the CEOs of our largest clients, and basically, we go there with a value proposition and the value proposition is look, we are a -- we have an incredible franchise that can help you achieve your strategic goals and objectives of creating new products and generating revenue, cutting costs, meeting regulatory requirements.

Do you want to be a strategic partner?

Do you want us to be a strategic partner to you or not?

And if you do, let's do a one-day brainstorming session and let's come up with all the various areas that we can help you achieve your goals and objectives.

And so we've done a few of those, and they are incredibly powerful.

And a laundry list of things come out, out of that.

So that, we're now trying to -- obviously, we've done it in quite a lot of cases, but we're now scaling it to the top.

I think we have about like 125 clients or so in this category.

Obviously not all of them are yet for sure at a strategic partnership level, there's a big commitment of time, resources and for them and us.

But a dozen of those have told that yes, they want to embrace us in strategic partnership.

That's great.

And could you also gives us an update on pricing?

I think in Index last year, you were raising prices about 5% to 7% and also in Analytics, you were raising prices, so could you tell us the sort of price increases this year for both segments?

Yes.

Toni, it was pretty consistent this year with prior year in terms of both the price increases and price as a percentage of sales for both Index and Analytics.

I mean, we typically try to plan pretty conservatively in terms of how much we'll get from price.

But in fact, in Analytics, we did quite well this year versus how we planned the year.

So we're pretty happy about that.

And our next question comes from Chris Shutler with William Blair.

On the new Factor style box, which we saw in the press releases over the last couple of weeks on that, just talk about what the go-to-market plan is?

And then also just stepping back on the factor ETFs, what's the good kind of average fee rate to use for the factor ETFs relative to the plain vanilla flagships?

Okay.

So let me take the first one there.

So the go-to-market strategy, on the factor box, so first of all, the launch that we had was extremely positive.

And there's clearly a big demand in the market from clients to have a common language.

And I think that, that is true to -- definitely for the institutional market, but even much more so in the adviser market.

So the plan is to both work on communicating, first of all, because we've just launched it, this framework, across all of our client types and then work with them to adopt this chiefly as a method of communicating to their clients about the nature of their portfolios.

So we're early days on this, but the initial response has been extremely positive and we've had quite a number of meetings set up even in the last week or so since we launched it.

And obviously, these things don't happen -- I mean, everything at MSCI, as Baer went through in his slide is a looping system, right?

So we have been consulting with a large, large number of clients on this classification for the last 1.5 years or so.

So we got enormous amount of feedback and excitement from them, so that's already baked into even before the kind of official launch of it.

Look, on fees, for example, ETF fees on factors, we take a fairly similar pricing approach to market cap on ETF and retail funds and things like that, so that's not that different.

And obviously, in some domestic markets, if we're saying we're launching a factor ETF on MSCI USA or in Japan or whatever, it has to be congruent with the pricing of domestic portfolios in ETF as opposed to our government pricing, right?

The area where we have done exceedingly well is it is in the institutional market for factors and ESG, which is -- given the market cap indices, we make good money, but it is relatively lower compared to ETF and others, and the ABF.

What we've been able to do is significantly ramp up the fees that we get paid in those index portfolios that are institutionally managed, mostly separate accounts or with vehicles by passive managers on factors and ESG.

And the principal reason for that is when we engage with institutional clients on this topic, typically, these decisions have a very material impact on their investment outcomes or process and the alternatives that they would have to do that are higher fee, so we can both have an attractive fee for ourselves, add value to the clients and provide them with an economic incentive to work with us.

Okay.

And then going back to analytics, just maybe another way of looking at it.

I mean, as you look at your -- the pipeline stats, I mean, how does the pipeline look today versus in the last couple of quarters?

And maybe refresh us on the incentive plan change that you made a couple of years ago and how that could play into seasonality in that business?

Yes.

So the pipeline is looking pretty strong right now.

And as we look at kind of how pipeline looked going into Q1 last year versus how it looks going in this year, we're at about the same position.

And remember, as I said, and this gets in to your seasonality question and your question on the incentive plan, we're seeing a bigger percentage of sales, new sales coming in, in the fourth quarter and less coming in, in the first half.

So the sales incentive plan now has the entire sales or coverage organization aligned to sales and cancels metrics.

And we think that's being very effective.

And like I said, you're seeing that come through in the strengths in the Q4 results.

There's also -- it is clearly -- this increase in the fourth quarter versus the rest of the year, obviously, it's not just us, right?

It is -- the clients have increasingly designed budgets for the year and wait towards the latter part of the year to see where things are headed in their organization.

And if there is extra budget, they want to spend it, so that is done, right, and going to the following year.

So that has played a bit of a role there as well.

So maybe in a not -- more normalized environment, in budget or process of our clients that gets reduced, but that's becoming a little bit of the new norm right now.

All right.

And then just a couple of quick cleanup questions.

You touched on the cash, the $890 million of cash, assuming that you do repatriate $350 million plus of that, how much of the total cash base should we ultimately view as excess cash?

Yes.

We -- the amount of what I'll call the minimum cash balances, the operating cash, hasn't changed from what we historically have said.

So $100 million, $125 million in the past we've said in the U.S., and about $75 million outside of the U.S, But now it's [fundable], right, so you don't have to think about it in terms of the regions anymore but just in terms of total excess cash balances, so continue to think about it consistent with what we've said previously.

Okay.

And then I'm sure it's going to be in the proxy, but...

Chris, I'm sorry to interrupt you, try to keep everyone to 2 questions here, so we can get everyone's questions, so I apologize.

And our next question comes from Bill Warmington with Wells Fargo.

So a question for you on the Analytics strength that you've been talking about, very impressive.

And I wanted to ask a little bit about where it was coming from specifically as a few big deals versus lots of small deals, and then new clients versus up-selling existing ones?

And then also in terms of the timing, if there was anything there other than the seasonality that you've highlighted in terms of a secular or cyclical change in client demand?

So Bill, first of all, the hero of the quarter within Analytics was, obviously, fixed income analytics in the context of both a multi-asset class offering being subscribed or purchased because of the strength of our fixed income, or the example that I gave of a pure play fixed income manager.

So we have more on the pipeline.

But again, they've been lumpy.

But we're very excited about that because of all the investments that we've made so far, and new investments that we've made but are not yet into the product line.

So a year or so ago, we hired a crack team of mortgage repayment models experts in the U.S. and they developed very, very good passive models and all of that, and we're going to put that into the product line and that may help us penetrate the U.S. fixed income market more, so that's the hero.

Yes, increasingly, our Analytics sales, and that's also why they get lumpy, are larger deals.

So the average or median ticket is moving up.

And now, every quarter, we have a number of $1 million-plus sales that, in the past, was maybe 1. And therefore, that's happening.

But in addition to that, we're also selling to a lot of other smaller-ticket items for medium case uses and the like.

So it's a combination of all of that.

And the other piece to this thing, as I said, is that we're positioning this -- we used to position it as a tool.

We'll give you the tool, you figure out what to do with it and call us when you have issues.

We're positioning this thing as a solution and the services that need to go with that solution to help the client use the tools, right?

And we had some early successes of that, but we definitely are excited about the potential of that coming.

So just to add a little bit to that.

Because we've got this mix of both some bigger ticket items as well as still having a pretty high volume of lower dollar, I'll call it, sales, we've got this high-volume asset where our systems and processes become so important in terms of being able to have the right systems that gives us good, timely, accurate data and the process to use those systems.

The organization has gotten much tighter and we're much more rigorous about how we use our sales force to enable us to look at pipeline, to take that pipeline and put it into the different stages of pipeline and then effectively manage and push those things through pipeline to execution.

So the systems [and] the process is really, really important.

From a -- just to give a little bit more color in terms of regionally, we saw a strength for Analytics in each and every region.

The total net new for the year was very strong across all 3 regions and seeing strength in the asset managers segment and the banking segment in particular.

Got it.

And then for my second question, I wanted to ask about [Slack div].

I've been hearing their name a lot lately and wanted to ask about what their no name, super-low cost model means for the industry and if it means anything for MSCI in particular?

Sure.

So I think that they are a perfectly normal example of increasing competition in a business and industry that's growing very attractively and which clearly is creating enormous opportunity for us.

As of today, they are not a material competitor for us.

But I would say that our general approach is to really look at any client needs that arise from developments in the industry and try to be as flexibility as we can in serving them.

So I wouldn't be surprised if there were more of these that appear over the next few years.

But I think we're very confident about our value proposition and we're very confident that we have a very broad range of index solutions, not merely the name benchmarks, but helping our clients create custom indexes and other types of solutions that serve their needs.

So I think it's perfectly normal, capitalist competition.

We're comfortable with it and it's not having a material impact on us today, but we're not complacent.

And our next question comes from Manav Patnaik with Barclays.

My first question is just on the ESG side.

It clearly sounds like it's getting more and more attention, your numbers are showing it too.

I was just wondering what the organic versus inorganic opportunities there might look like from your perspective?

It's -- there is certainly a revolution happening in this space, which is, in a small integrated world, we all have to be cognizant of the sustainability of all of our institutions whether is that [occasional or] Governments or religions or whatever, political, et cetera, in this case, it is obviously, the institutions of capitalism or free enterprise, which is companies and investors in those companies or issuers of bonds and investors and issuers of bonds.

So everyone is focused on being universal owners that, if I'm a passive investor, for example, I'm going to own a company for a very long time.

I need to ensure the long-term sustainability of that company.

And I want to ensure that they're not going to get into social problems because of sexual harassment or environmental issues or obviously government issues, so this is spreading pretty wild and fast in the investment industry.

And we're aiding that because of our position in the marketplace.

So I see a huge amount of runway there.

Secondly, we're extremely well positioned to use this -- lot of the ESG content into a variety of ways.

Clearly, content itself, like ratings, we're the #1 rating agency, so to speak in the ESG matters, in equities and fixed income right now.

Secondly, the -- turning those ratings into weights, into portfolios in the form of indices.

And then thirdly, which is an area that we're putting in place is how do we use ESG as factors -- market factors that determine incentive risk and portfolio -- incentive risk and return on portfolio.

So we're well positioned to be the integrated provider of all of that to our clients.

So a lot of our growth is organic and is largely going to remain organic.

We have looked at a few acquisitions here and there.

They were more complicated to buy them and integrate them, that too do it ourselves, so we passed.

And we will continue to look particularly in nice areas, but right now, extreme focus on organic growth, right, not inorganic.

Okay, got it.

And then the other question I had was just broadly around MiFID and maybe it's too early for you guys to see anything, but any trends you're seeing within your clients in response to that regulation going live now?

Yes.

Look, I think it is quite early.

Clearly, the -- there was kind of what I will call the technical first moment of executing on some of the transparency, which I think, in terms of our systems, everything has been fine.

And I think in terms of the competitive landscape and the impact on our clients, it is really too early.

So there's -- really there's been some prognosis amongst market analysts that the impact on, for example, the equity analyst industry could be dramatic, but it's just too early, so we'll have to see how that plays out during the course of the year.

Look, over time, it is not a negative for us, maybe a positive.

There's clearly a change of business model here, and there's intermediation of "research" if you're going to think about it in that way.

So the question is what role will MSCI play?

A nontraditional role that MSCI play to fill in the vacuum of providing a different kind of research to evaluate securities and portfolios and the like.

And we were kicking up sort of brainstorming session about all that but it's way too early to tell.

And our next question comes from Anj Singh with Crédit Suisse.

I wanted to ask the question on the expense guidance earlier another way.

It seems the midpoint of your guidance is implying an acceleration versus the growth that we saw in fiscal '17.

So could you just give us some color on the moving pieces of that outlook?

And how should we think about the level of efficiency initiatives maybe offsetting the base expense growth?

Thanks for your question, Anj.

If you look at midpoint, there's a very slight increase in terms of how we've kind of managed and guided expenses in the past.

Look, we're really focused on balancing both investment and expense growth.

We're very confident in our ability to execute on investments.

We've got an excellent management team in place, our processes as I've talked about previously are even more robust than they were in the past.

And so we've really got a really high level of confidence in terms of being able to execute on what are, quite frankly, some really high return projects.

And we've got a track record now of delivering on those high return projects.

You can see the results and factors and ESG.

You can see fixed income starting to pay off.

So given the high return projects we have, it just makes good economic sense to accelerate these investments.

Okay, understood.

And then for a follow-up, could you just talk about what's causing the on-boarding or implementation periods to extend in Analytics?

Is this just happening with some selected clients, given the larger tickets you referenced, or is it happening more broadly, just trying to understand why it manifested so dramatically this quarter?

Yes, look, this is what I said before and which is, their position of the product line from, here's a tool and we'll implement it to -- here's a solution and the services to achieve that to help you do a lot more inside the client organization, so that are going to take more time.

And therefore, the recurring revenue of those won't be recognized until we're done with that phase.

The implementation phase, which are onetime fees and those will be -- there will be onetime charges that go, the onetime revenues that go, but the recurring gets delayed, and that's a little bit of what is happening with this delay in revenue recognition.

But look, there's nothing to worry about, we're just telling you that's happening.

And our next question comes from Hamzah Mazari with Macquarie.

This is Kayvan filling in for Hamzah.

You may have covered this already, but if you could maybe go back to say, 5 years ago, and maybe give us some understanding of any of the changes of the competitive dynamics in the indices business in terms of new entrants or fees, those type of things?

Well, in Index, it's relatively stable.

Obviously, ESG, 5, 7 years ago, it was a very, very insipid industry, so we've become a huge player in it during that time.

And in Analytics, I think, there's been a rationalization of the equity analytics providers and we've come out on top in all of that.

And in multi-asset class, a little bit like that.

In multi-asset class, it was -- people only in fixed income, not only in equity, I mean, not only in multi-asset class but with strength in fixed income only, or only in multi-asset class with the strength in equity only, there's conversion a little bit, in our case, with the entry into a lot of the fixed income and private asset classes.

So that's what is happening.

And obviously, larger players have come into the picture.

Obviously, BlackRock is a large player here, it has been for a long time.

Bloomberg, I've seen there's some kinds of offerings that they're trying to work and FactSet has some kinds of offerings.

So this will be a competitive landscape, but it's a wide-open field with a huge amount of use cases and uses and each competitors have very unique differentiated sort of positioning that they're trying to capitalize from.

And we feel that even though competitive, is not intense at this point, right?

And our next question comes from Keith Housum with Northcoast Research.

Just one quick question.

A lot of them have been asked, right?

But it sounds like you guys are trying to be a little bit cautious on the Analytical side based on -- some of the sales being more pushed to the back end of the year.

Are we going through a period of just heightened investment as we go through this bull market here, especially on the equity side?

And a little more -- any more commentary given just the overall environment that your customers are going through now?

And will that maybe contributing to their perhaps they too make investments in the technology now?

Well, first of all, I mean, we want to be cautious because we have been here before for 3 years, which we said, things are getting better and then the next quarter, things don't, right?

So -- and we're telling you precisely the same things we've got people internally because a quarter doesn't make a year to begin with, for sure.

So -- but we are cautiously optimistic because there are 2, 3 things.

I mean, legally, every asset manager, pension fund in the world should have a system like we offer in order to make them productive, scale up, understand risk and return and all of that.

So that value proposition, in general, is very strong.

What happens is that it needs to be sort of mixed into the process of what they have internally, their legacy system, their culture, who's using what and all of that, so that gets into a melting pot of things, so we're trying to sort that out with all of our clients.

And then lastly, I -- we are very optimistic about that -- the repositioning of this.

If you go sell a tool for risk and performance, people have to come up with additional budget to do it.

If you go sell it as, yes, it's going to do risk and performance, but it's going to help you streamline your operations, cut costs, communicate better, then it comes out of -- and they have funding, they will restructure, they will get rid of certain people, they will do certain things and they [grew] for us, so that's the process.

So we're cautious for sure, because we've been here and we don't want to be telling you things that we don't believe in.

But we're also cautiously optimistic because everything is going our way.

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

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

This does conclude today's program, and you may all disconnect.

Everyone, have a wonderful day.