明晟 (MSCI) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this 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, Victor.

Good day, everyone, and welcome to the MSCI Fourth Quarter and Full Year 2018 Earnings Conference Call.

Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2018.

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're cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they're 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 disclaimer in our most recent Form 10-K and our other SEC filings.

During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including but not limited to, financial measures excluding the impact of foreign currency, 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 insights into our core operating performance.

You'll find a 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 23 to 27 of the earnings presentation.

We will also discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

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?

Thank you, everyone, for joining us today.

I hope that you're all staying warm in this frigid weather.

The volatility of the U.S. market over the last several months gave us the opportunity to demonstrate the resiliency of our diversified business model and the effectiveness of our capital allocation strategy, all of which have shown tremendous strength.

I would like to spend a few minutes shedding some light on how we have managed through this recent market volatility.

First, and very formally, across almost all areas of MSCI, we have seen little to no impact.

Despite the elevated market uncertainty, we have seen continued strength in the selling environment across client segments with no noticeable changes to client behavior, which is reflected by the fact that we drove our second-highest quarter ever of both recurring sales and recurring net new sales as well as our highest quarter ever for index sales and onetime sales.

In addition, we witnessed relatively low cancels and our highest Q4 retention rate ever, coupled with the strong payment behavior from our clients, which accelerated our receivables collection efforts and generated record free cash flow.

This strength and resiliency was fairly consistent across all regions of the world in which we operate, even though many international markets have been in a sustained period of market pullback and volatility for as long as 10 months.

Furthermore, after relatively soft cash inflows in Q3, we have seen fairly healthy inflows in Q4 into ETFs linked to MSCI Indices.

There has been about $31.7 billion of total inflows since Q3 through last Friday, January 25.

AUM of equity aimed -- equity ETFs linked to our indices are now back to over $740 billion.

On the other hand, this volatile environment has put tremendous pressure on the valuation of ETFs linked to our indices.

In Q4, we saw nearly $95 billion of negative market movement on the level of AUM in ETF linked into MSCI Indices, which was driven by the market selloff and compounded by the appreciation in the U.S. dollar.

Conversely, we saw tremendous volumes in listed futures and options contracts based on our indices, with a 27% growth quarter-over-quarter in contract volume.

As we have indicated in the past, this is an area of significant focus by MSCI and tremendous potential.

On a particular note, our continued discipline on the capital front, including the opportunistic financing transaction we did in May, and the modest level of repurchases during the benign environment earlier in the year allowed us to take full advantage of the recent volatility and repurchased $755 million of shares since the beginning of October and through January 25.

This is a clear demonstration of the confidence and belief that we have in our business model and the franchise of our company.

While we're only about 4 months into this period of market choppiness in the U.S., let us remind ourselves the developed markets outside of the U.S. and for sure emerging markets have been under significant pressure for most of 2018.

Our recent successes highlight the outstanding resiliency of our business model and our franchise, the differentiated and mission-critical nature of our solutions as well as the strong secular tailwinds that are propelling many parts of our business.

The MSCI franchise remained incredibly strong and getting stronger.

The Q1 pipeline looks pretty healthy, the rest of the year pipeline also looks pretty healthy, and we feel confident about our prospects in 2019.

We all look forward to providing additional insights and perspectives into the strength of our franchise and the significant opportunities ahead of us during our Investor Day on Thursday, February 28.

Let me turn the call over to Baer now to talk some more about how we're executing and how we're continuing to fund that significant growth of opportunities that we have.

Baer?

Thank you, Henry.

I'm pleased to share with you some key accomplishments we achieved in Q4, driven by the consistent execution of our strategy and supported by our diversified business or all-weather franchise.

A large focus for us over the last several years has been enhancing our internal capital allocation processes to allow us to effectively allocate resources and ensure we are concentrated on high return growth initiatives, increasing speed to market with new products, enhancements to existing products and improvements in our technology.

We've established the systems and processes to rigorously measure and track our investments, which has enabled us to drive growth by allocating our resources to the most strategic and highest return areas.

We have focused on driving efficiencies and scalability in our cost base, utilizing the most recent technologies and continuous expansion of our emerging market talent base.

Additionally, we have been expanding the portion of our expenses allocated to growth initiatives, affording us the ability to enhance our value proposition and provide our clients with the right tools to manage their portfolios during these volatile times.

We have been keen on ensuring that we have a balanced portfolio of short-term, high-return projects as well as longer-term strategic bets that will fuel growth in different markets and time horizons.

The success we have had on this front is clearly evidenced with the index in the most recent quarter where we delivered 11.4% subscription run rate growth, 16.9% growth in recurring sales for the fourth quarter and 18.5% for the full year.

This quarter marked the 20th consecutive quarter of double-digit subscription run rate growth.

Our growth is increasingly fueled by the areas we've been investing in.

In the fourth quarter, the subscription run rate growth of our ES&G, factor, custom and specialized index modules was 20%, and sales of these modules represented approximately 30% of new sales for the full year, compared to 19% for 2015, showing our ability to generate new sales within the Index segment.

Similarly, $12 billion or close to half of the Q4 inflows into the ETFs based on our indexes were into funds based on our Factor and ESG Indexes.

Furthermore, 30% of total sales for full year 2018 were for wealth managers and broker-dealers as compared to 23% of sales in full year 2015, helping drive some acceleration in the subscription run rate growth.

All of these index areas are benefiting from the resources of the entire MSCI franchise, and these key growth areas were built through very deliberate and targeted investments in new content, the build-out of our client coverage team across new client, segments, geographies and use cases, and proactive engagement with our clients and industry participants.

Enhancements and investments to our data and technology infrastructure were required and have enabled continuous improvements to quality, accessibility and scalability.

With continued investments in areas such as ES&G research and factor analytics, our index offerings have been the clear beneficiary of our strategic bets across multiple product segments.

Some of our recent key launches and client wins highlight the success we're seeing in these new areas.

During 2018, we launched a significant number of new products including new thematic indexes that allow investors to get exposure to trends such as cybersecurity; robotics; the aging society; and efficient energy; a wide range of additional ES&G products; new data modules such as our USA module targeting-specific exposures; the MSCI Tadawul 30 Index as well as several China index series; and our factor classification standard and Factor Box, which has already been adopted by 50 clients.

In addition to these product launches, we continue to enhance our data and technology delivery model with improvements to our index production capabilities and the release of an important API that improves access to our content and which is fully integrated into our analytics platform.

This continual evolution and reinvention in not unique to index and it has been a key driver of the strong growth we're seeing across all parts of the business.

I look forward to providing further updates on future calls.

With that, I turn the call over to Kathleen.

Thanks, Baer, and hello to everyone on the call.

I'll start on Slide 6. We had a very strong Q4 and finish to the year, resulting in 2018 full year revenue growth of 12.5%, adjusted EBITDA margin expansion of over 200 basis points and adjusted ETF growth of 34%.

In Q4, we delivered solid results across all of our key metrics.

Recurring subscription revenue grew 9% in the quarter, ex the impact of FX and 12%, ex the impact of FX and divestitures, driven by continued strength in index and ESG, up 11% and 32%, respectively, as we continue to see particular strength across our newer modules such as custom and Factor Index modules and the increasing adoption of ESG into the investment process across client types, geographies and asset classes.

ABF revenue grew 4% and was driven by the strong cash inflows into ETFs based on our indexes, growth in the AUM and non-ETF passive funds particularly from higher fee products and increases in the volume of exchange-traded futures and options contracts linked to our indexes.

This was slightly offset by declines in market levels of the AUM in equity ETF linked to our indexes and a decline in the average basis point fees year-over-year resulting primarily from product mix.

Our 2018 expenses were in line with our expectations and guidance.

We continue to take a very disciplined approach to expenses and prioritizing investments.

Our Q4 expenses reflect our normal run-the-business type spend as well as additional discretionary activities we executed in the quarter to better position us for 2019.

This includes about $5 million of severance, which is more than double our quarterly average.

We took actions to optimize our organization and streamline as well as reallocate resources in our client coverage team to better serve some of our fastest-growing client segments such as wealth management.

We also make strategic investments in our IT infrastructure and marketing activities.

We upgraded parts of our IT infrastructure and migrated legacy systems to newer and more advanced technologies to increase productivity.

These investments are expected to yield benefits in 2019 such as faster time-to-market with new product features and increased back office productivity.

Excluding these discretionary investments and incremental severance, our Q4 adjusted EBITDA expense growth compared to Q4 2017 would have been about 4.8%, excluding the impact of FX.

Moving to Slide 7, let me highlight the key drivers of our adjusted EPS growth.

Growth in our core subscription business continues to be driven by exceptionally strong sales and elevated retention rate, and we've not seen any changes to our clients' buying behaviors.

Adjusted EPS also benefited from the lower share count as we ramped up our repurchase activity to take advantage of the volatility in our share price.

Now let's turn to our segment results on Slide 9. Starting with our Index segment, subscription revenue growth was driven by strong demand across all of our sub-products, particularly for our custom and specialized indexes, and Factor and ESG Indexes as we see a growing number of investment institutions using indexes as the basis of their investment strategies as well as the increasingly mainstream adoption of ESG and factor considerations within portfolio construction.

Our Analytics segment grew 4%, excluding the impact of FX and 10% excluding the impact of FX and the divestiture of our IF and FEA businesses.

A key driver of this growth was due to the strength in multi-asset class and equity analytics as well as a large number of client implementations that were completed in the quarter.

Additionally, we're very excited about the momentum we continue to see in multi-asset class solution sales with strong demand for our risk and liquidity analytics as clients are increasingly focused on sophisticated risk management.

In our All Other segment, the growth was heavily driven by our ESG ratings offering, a direct result of our investments in this area.

We also continue to make strides in our real estate product segment, enhancing client experiences with our new enterprise analytics offering, improvements in data quality and a new client onboarding process.

Real Estate revenue was up 19% versus the prior year, excluding the impact of FX.

Slide 10 provides the summary of our key operating metrics by segment.

Organic subscription run rate growth was strong across all major client segments and regions.

Asset owners and asset managers, which together contribute about 2/3 of our subscription run rate, were each up 9%.

In Index, subscription run rate crossed the $500 million mark for the first time and was up 11%.

This growth was driven by demand for custom and specialized modules, with run rates growing 22% and 13%, respectively.

Also, run rates for Factor and ESG modules grew by 47% and 48%, respectively, as a growing number of clients and client types continue to incorporate Factor and ESG considerations into their investment processes.

Within the index subscription run rate, our largest client segment, asset managers, grew 10% as we helped them measure performance with broader and enhanced content.

We've also had great success with asset owners and wealth managers with subscription run rate growth of 28% and 22%, respectively.

We continue to drive adoption of our indexes as benchmarks and our indexes are increasingly being used to develop investment strategies.

Index recorded its highest quarterly recurring sales ever and 2018 was the first time we had 2 quarters with recurring sales of more than $20 million, resulting in a 19% full year sales growth.

Within Analytics, run rate growth was driven by strength in both multi-asset class and equity products, up 7% and 6%, respectively, on an organic basis.

Our strength in multi-asset risk and factor analytics, coupled with our research-driven content, have been a tremendous competitive advantage for us as we close new business.

We saw some of the fastest growth with asset managers, our largest client segment within Analytics, up 7% organically.

Asset managers, while under tremendous industry pressures, are turning to our solutions to help them with their risk management and portfolio construction efforts and to drive overall efficiencies within their organizations.

Recurring net new for Analytics had the second-largest quarter in the last decade, but was down year-over-year given Q4 2017's record quarter with several large deals closing.

Our pipeline remains healthy and retention remains strong at 93%.

On Slide 11, we provide an update on Factors and ESG.

In ESG, over 50% of new sales in 2018 was driven by new clients to ESG.

We've also seen great success with upselling content to existing clients.

ESG demand was strong in Q4 across all client segments and geographic regions, with 21% and 16% subscription run rate growth in our largest segments, asset managers and asset owners, respectively.

In Factors, AUM and equity ETF linked to MSCI Factor Indexes grew to $83 billion, up 21% year-over-year, driven in part by increasing usage by wealth management firms.

Turning to Slide 12, we highlight the drivers of our asset-based fees in more detail.

Overall, growth in ABF revenue has been moderating the last few quarters.

On a full year basis, we've seen market depreciation reduce AUM in equity ETFs linked to our indexes by $110 billion, driven by a decline in the emerging and developed markets outside the U.S., while cash flows increased AUM by $62 billion.

I'll cover this in more detail shortly.

In non-ETF passes, our strong institutional investor relationships and coverage efforts are driving a growing number of mandates tied to indexes.

In futures and options, run rate broke through $20 million in Q4 and we're excited about the increasing volumes as we work with key partners to drive demand and improve liquidity.

We remain confident in the long-term growth prospects in equity ETFs.

In 2018, we licensed our indexes for 141 new equity ETFs, 79 of which are based on our Factor and ESG Indexes.

Total AUM of these equity ETFs linked to our Factor and ESG Indexes have grown by 18% versus prior year, bringing the total to $106 billion as of December 31.

While favorable long-term secular trends remain intact, we expect headwinds on ABF revenues in first half 2019 compared to 2018 due to significantly higher equity values last year.

In Q4, we saw average basis point fees increase sequentially by 0.02 basis points, primarily due to mix.

Although we saw a modest increase in average basis point fees as a result of strong flows into international exposure and factor funds, coupled by market declines in U.S. exposure products, we continue to expect lower fee products to capture a disproportionate share of new flows into equity ETFs.

We expect a further decline in our average basis point fee levels as part of our efforts to capture volume and achieve continued run rate growth.

Our ETF partners are continually evaluating their market opportunities for existing and new products as well as the optimal positioning and pricing of those products.

As such, we have discussions with all of our key partners about our fees and fee constructs on an ongoing basis.

Now let's turn to Slide 13 where we provide some additional detail on quarterly and yearly net cash flows.

Across the global ETF landscape, there was about $400 billion in net inflows into equity ETFs in 2018, down nearly 20% compared to 2017.

Earlier this year, investors favored the U.S. markets, particularly in Q2 and Q3.

This shifted in Q4 with flows moving back into emerging and developed markets outside the U.S. We benefited from this shift in flows in Q4 and saw a significant increase in cash inflows into equity ETFs linked to our indexes.

Equity ETFs linked to MSCI indexes are well diversified across strategies and geographies.

About 47% of these ETFs have exposure to developed markets outside the U.S., about 30% to emerging markets and the remainder exposed to the U.S. market.

We continue to see strength across equity ETFs linked to our indexes and factors and ESG, which contributed to the strong cash inflows that we saw in the quarter and for the full year.

In 2018, equity ETFs linked to our Factor Indexes captured roughly 38% of the market's cash inflows into Factor ETFs.

While equity ETFs linked to our ESG Indexes captured over 80% of the inflows into ESG ETF.

We remain confident in our strength in the market and believe we are well positioned to capitalize on the long-term trends towards index-based investing.

Turning to the next section, we provide an update on our capital liquidity and 2019 guidance.

On Slide 15, we provide our key balance sheet indicators.

In 2018, we repurchased about 6.2 million shares at an average price of about $148 for a total of $925 million.

Since 2012, we've returned nearly $4 billion of capital to shareholders through both dividends and share repurchases.

Turning to Slide 16, let me provide you with our 2019 guidance.

I'd like to first remind everyone about the vesting in Q1 of the multiyear PSU awards granted to our executives in 2016 that we discussed on our Q3 earnings call.

These awards will cliff vest in Q1 and while the award is accrued over the performance period, which is between Q1 2016 and Q1 2019, there will be a related payroll tax upon vesting offset by a substantial income tax windfall benefit.

The actual impact will be dependent on the share price over the measurement period and on the vesting date.

Between the stock price of $140 per share to $170 per share, the payroll tax impact is expected to be between $12 million and $15 million.

At this range of stock prices, we expect the benefit between 8.5 to 9.5 percentage points to our effective tax rate, which is assumed in our ETR guidance of 11.5% to 14.5%.

This vesting will also result in a net cash tax benefit in 2019.

As discussed last quarter, we'll be excluding the payroll tax expense as well as the income tax windfall benefit for these multiyear awards from our adjusted figures in 2019 given the uniqueness of the size of the grant.

The dilutive impact of these shares is already accounted for in our diluted share count.

Adjusted EBITDA expenses are expected to be in the range of $685 million to $705 million, an increase of 3% to 6% versus 2018.

Please note that we expect our year-over-year expense growth rate versus 2018 to be slightly higher in the first half of 2019, primarily driven by the timing of investments and carryover impact of new hires made in the second half of 2018.

Our guidance is a reflection of our balanced and disciplined approach to margin expansion and funding for growth.

This approach has paid off as we've seen with higher subscription growth rates and substantial margin expansion over the last few years.

We expect to continue to fund high-return projects to accelerate top line growth.

And with possibly lower ABF growth in the near term, we may see a slower pace of margin expansions than we've seen over the last few years.

Turning to free cash flow.

Some of our exceptional 2018 cash flow performance was driven by the lower collections at the tail end of 2017 as well as strong collections at the end of 2018.

Our 2019 guidance, therefore, reflects the expected timing of cash collections and the cash tax benefit related to the vesting of the multiyear PSU awards granted in 2016.

In summary, 2018 was another outstanding year for MSCI, delivering double-digit top line growth, healthy margin expansion, record cash flows and attractive return of capital.

Our Q4 and full year results demonstrate our track record of execution and our ability to deliver substantial shareholder value.

Our disciplined approach to funding growth and managing capital have paid off, and we expect to continue to invest in high-return projects to drive top line growth in 2019 and beyond.

We believe that the long-term market trends remain very favorable.

We're confident in our long-term growth prospects and we look forward to keeping updated on our progress.

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

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

Maybe just start on the expense guide a little bit, it will be helpful if you can flesh this out a little bit more.

In terms of the puts and takes, how we should be expecting the year to trend.

I guess, what I'm really asking is, we've seen some of this volatility in the ABF fees.

So what are you kind of -- what are the other kind of opportunities to push back if you need to, if the markets work against you?

And what are you actually assuming right now in terms of the market performance?

Because, clearly, AUM is already up more than 6% year-to-date.

So just talk a little bit on how you're thinking about expenses in a good or bad environment.

Yes.

So let me give you the general direction and then Kathleen can comment more specifically on the numbers, if any.

Look, I think the -- first of all, we continue to see enormous growth opportunities in our franchise and our business.

We started [the variance] 3 years ago, looking very heavily, and we found many, many more opportunities than we even expected and have been funding them and growing them as you see evidenced in the top line growth.

So we want to continue to do that.

With respect to the outlook for this market, we expect 2019 to be -- with respect to the AUM, or at least the passive management part of the AUM, remember AUM also has futures and options in there.

But with respect to the passive management part of the AUM, we expect the 2019 to be a flattish kind of year.

Put maybe a slight amount of cash inflows going to the ETFs.

And therefore -- and the reason is because bear in mind that the developed markets outside of the U.S. and the emerging markets have already dealing highly depressed levels for a lot of 2018.

Can they go lower?

Sure, they can go lower.

But we've estimated that at this point, that they may not correct much more than that.

We do expect a significant volatility in the U.S. market, but not a bear market.

So we think that there will be a lot of volatility up and down but not a sustained bear market.

So that's what is embedded in our thoughts processes into the conclusion of a flat or so market level with an increasing amount of inflows that they give you a little bit of a positive impact on AUM.

Therefore, based on that, our projection and the guidance we're giving you on expenses is around those assumptions.

And since we don't assume that there will be either a U.S. bear market or a global bear market to further than it already is outside of the U.S., we do not anticipate changing any of the expense numbers as a reaction to volatility in the markets.

Now if throughout the year, we see a change of those assumptions that is impacting our recession and a bear market is coming, we'll wait a bit before we see evidence of -- a total evidence of that and we'll adjust our expenses.

But for now, you should assume that we're not -- that if there is up and down volatility per quarter, we will not be adjusting our expenses.

Yes.

So let me just add to that a little bit.

It's a really important question, Alex, so thank you.

Look, it's a somewhat more challenging planning environment than we had at this point in time last year, challenging planning in terms of more uncertainty in the market with potentially slowing global growth.

But as Henry shared, we're very confident in the top line growth opportunities that we have.

And so very focused on continuing to fund those growth opportunities.

I shared with you the expense guidance at 3% to 6% and I think you're asking about kind of how you think about that during the course of the year and also how we can flex that up and down, if needed.

The 3% to 6%, think about it closer to the higher end of the guidance range in the first half of the year and closer to the lower end of the guidance range in the second half of the year.

In terms of should conditions be different than we're expecting or planning right now, I mean, flexibility is certainly the key here.

We've got a strong franchise, but we certainly need to make sure we have the flexibility to go in either direction, either kind of ratcheting things up or down.

And on the downside, that's where our downturn playbook comes in, and we're ready -- we're constantly looking at that and ready to go as needed.

We've got lots of granularity and numerous -- a couple of different tiers of levers in the downturn playbook that we can go to.

All right.

Very helpful.

And then maybe just secondly, Henry, you gave a lot of detail around the fourth quarter and the environment, I was actually positively surprised how good the sales performance was.

But just curious if there was anything you could highlight that maybe weighed a little bit.

I mean, clearly the fourth quarter was a -- must have been somewhat of a tougher sales environment.

So did anything get pushed at all?

Were client discussions different?

I saw the index retention was down just slightly, I mean, almost hard to be negative on that.

But, like, anything where you saw some sort of weakness or anything getting pushed?

Or was it really almost the same as throughout the year?

Really, Alex, it was very consistent.

So I think the type of investments our clients are making with us are typically fairly infrastructural.

They're not the type of thing that is affected by momentary market volatility.

So for sure, we didn't see any changes in the normal pattern of business, nor did we see evidence that people were freezing anything or anything of that kind.

So very consistent with previous quarters and exactly as you see reflected in the numbers.

And our next question comes from the line of Manav Patnaik from Barclays.

I guess, I just wanted to hone in on the cost a little bit more.

I think you talked about that you have, I guess, an ongoing base of expense and then investments on top of that.

I don't know if you want to call that fixed cost, variable cost just to address your kind of downturn playbook.

Like, what -- can you help break out what those expenses -- breakout into -- just to think about where the levers are should you need to pull them?

So I think the way we think about it internally is: change-the-business expenses versus run-the-business expenses.

Obviously, change-the-business are investments not just expenses versus run-the-business.

And what we've been able to achieve in the last 3 years or so is a significant squeezing of the run-the-business expenses and freeing up of resources to go into change-the-business.

So when you look at our new investment plans for 2019 compared to the prior year, in the change-the-business, it's up something like 25% as an example of that.

And we want to continue hammering that.

We went to operate as efficiently, we think we still have some ways to go there in creating technology and data sets internally to operate better.

Obviously, at some point, there are diminishing returns of that efficiency and productivity of running the business, but we keep at it, in order to increase the amount of money that we put in the change-the-business.

And some of those initiatives are the ones you know.

I mean, we cannot spend enough on ESG in terms of the expansion of the equity universe of ESG, the continuation of the expansion and fixed income, we still have a lot of runway there.

We currently are rating about 15,000 issuers between equity and fixed income, and that's going to go on to a significant number above that.

We are -- we're getting requests for by clients to do ESG ratings in private equities and in real estate and so on and so forth.

So that's an area.

Obviously, factor investing, we're getting requests for not only factor investing in indices but also in factor investing between -- combining factors and ESG into portfolios and to market cap portfolios to build them.

So we have a lot of demand there and we need to fund that substantially.

We're getting a lot of demand on the increasing our -- accelerate our development of the MSCI Analytics platform, which enables a lot of our Analytics content.

We cannot -- the demand there of pushing us hard into expanding that is more than we can do at the moment or we can afford to put in there.

So there's a tension there going on.

We are doing exceedingly well in EMEA, even in the context of a troubled region, if you want to think about it.

Actually, EMEA is probably the best region of the world right now for us.

We have reorganized dramatically our Asia-Pacific client organization with a lot of new leadership, a lot of new hires.

So we're very hopeful that Asia, which was a high growth area, could be an even higher growth area and the like.

And therefore -- I mean, we're giving you -- we're trying to strike a good balance between the expansion of the margin, the base of expansion of the margin and the funding for growth and all these opportunities that we've uncovered, that we'll uncover, and that's why I want to note again the comment that Kathleen made -- or the 2 comments in terms of the EBITDA expense guidance that we're giving you, which is probably higher in the first half of the year and lower in the range in the second half.

But we are -- we're really intent on not letting the margin expansion accelerate.

So in a timing which the AUM goes up, we have a lot of projects to fund for growth.

Obviously, we're more focused on the AUM coming down and having a playbook there.

But if it goes up unexpectedly, we're doing that because we need to fund this significant growth area so therefore, as Kathleen indicated, you should continue to see less of an acceleration in the margin -- the pace of margin expansion.

Yes.

So just adding on to that a little bit.

It's really important what Henry mentioned in terms of we're working really hard to say how do we spend less in the run-the-business type of spend so that we can spend more in the change-the-business type of spend.

So we really have a great culture of continuous improvement and really kind of amping up the focus on eliminating waste from a process, right?

So as we keep looking at what we do every day, we're constantly looking for opportunities to say, okay, how do we automate this to drive productivity.

Whether it's front office or back office, we're doing more and more automation, how do we find opportunities to stop doing things so we can continue to bring down the cost on the run-the-business side of the house and devote it and dedicate it and reallocate it to change-the-business.

Okay, got it.

So maybe just a quick follow-up, the 25% increase in the change-the-business you talked about, would you say most of that was still in the ESG and Factor?

I guess what I'm trying to understand is, what could be the next ESG, I suppose?

Well, it's a cross.

We're always running a balance, a meaningful amount of factors, a meaningful amount of ESG, a meaningful amount is also the Analytics platform that we're investing in.

We're putting some money into wealth management, which is a rapidly growing client segment for a lot of people including us.

And we're just underweighting a lot of our growth there.

At the moment, we need to do a lot more over time.

Real Estate, that's a story that we haven't talked about.

We'll tell you more about that in the Investor Day, but it's really coming nicely and therefore, that is encouraging us to put a lot more effort into the private asset classes.

Think about it this way, we build the MSCI with the public asset classes, we wanted to build the MSCI with the private asset classes.

So that's an area.

So there's a lot that is happening in the company.

And our next question comes from the line of Toni Kaplan from Morgan Stanley.

How do you think about the active asset management environment over the next year?

Do you see things getting harder for your clients?

You have a lot of new products to help get them through challenging times and new products that could help them grow revenue.

But at the same time, if it is a challenging environment, budgets could tighten or maybe it's harder to drive new sales, so just help us think about your outlook on active this year?

Sure.

I think our -- I would say thematically, our main focus is on helping our clients be more efficient.

So a lot of our tools are helping both within the investment processes of our clients within their infrastructure and looking at the range of information, software, et cetera, that they use in their investment process and finding ways of making that more efficient and more streamlined.

So I think just about everything we do fits into that category one way or another.

But I think that, that is the main approach that we're taking.

And notably, we are doing that at more senior levels at our clients than we've done historically with the CIOs, the CEOs, et cetera, and working on that in a kind of a holistic manner.

So -- and I think then the other question is that -- it may be that a more volatile market, while providing challenges, can also create opportunities in active management, and that's where a lot of our research, et cetera, comes in to help our clients.

Great.

And you mentioned on the last call that you're investing in private asset class content.

Can you talk about how you view the opportunity in maybe nontraditional areas over the next few years?

Okay.

There was a question earlier, what is the next ESG or even bigger than that, and that is one of them, private asset classes.

As we know well, private asset classes, particularly the bulk of private asset classes is private real estate and private equities.

I mean, clearly, we have private credit and infrastructure and other aspects, but private real estate and private equities are the lion's share around the world.

And we're already in one of those, which is private real estate that we haven't talked a lot about as we were reengineering that effort.

And we want to expand that dramatically.

We're trying to find ways into getting into private equities in a much bigger way.

Obviously, we occasionally see our clients using our risk models for private equity investing.

Obviously, our asset owner clients take it into account in the multi-asset class risk.

So -- but we're looking into things organically and inorganically.

And we believe that if you look at the global pension funds around the world on an aggregate basis, they have about 14% allocation into private asset classes.

That number over a 10-year period can easily be 25% to 30%, and we want to be in that area.

Hopefully, many of our clients want to be that area because that's where the management fees will be as well.

But in order for that allocation to be that big, the industry needs to really -- they need an MSCI to achieve that.

They need pricing models, they need performance attribution, they need benchmarks, they need understanding of market, they need understandings of risk and that's what we want to provide.

And our next question comes from the line of Chris Shutler from William Blair.

A question we get pretty frequently from investors is: How can MSCI continue to post double-digit subscription growth, particularly in index, when your active manager clients which represent a majority of the client base are under pressure?

So just curious to get your perspective.

I think the way to think about it is that when that question gets asked is, people are sort of focused on one aspect of our index franchise, which is market cap indices, developed or emerging markets, and sometimes, they're focused on only one client segment in a particular region of the world.

And the thing that we need to sort of remind us, is that this franchise is big and expanding, in which we have a fast-growing business in license, in Factor Indices for our clients, our active management clients.

We have large, obviously, growth in ESG indices.

So you should think of indices as basis of portfolios and therefore -- unless we believe that the active management world will have less portfolios, less exposures to equities around the world, then there's an explosion of benchmark, so to speak, of underlying basis for building portfolios and the like.

The other thing is that our job is to help clients build portfolios one way or another, whether it's a benchmark to actively beat it or a passive all sorts -- whether it's Asia, Europe, the U.S., Latin America, whatever, and whether it's ESG or factors or fixed income or equities or whatever.

But what we're also doing is we're renting the kitchen.

We're going to clients and say, "We're building this as based on this infrastructure, what are you building on in this -- under that infrastructure for your own use?" So we have a little bit of money coming in that way, but we see that as a huge expansion of our franchise.

So that's why this thing is a very multi-faceted franchise that can benefit a lot of our clients and generally double-digit growth.

And then how much of the index subscription growth in 2018 was kind of pricing related?

And how do you expect 2019 to compare?

Yes.

Pricing has been pretty consistent.

If you look at the last couple of years, '16, '17, '18, it's been pretty consistent.

New sales, it's about right around 25% to 30% of new sales each year.

So yes, we're seeing that as a consistent driver.

Okay.

And lastly, on the free cash flow guidance, $545 million to $585 million, would you assume for the ETF asset levels -- it sounds like pretty flat average AUM at the midpoint, is that fair?

And then what would the free cash flow guide be without any onetimers or tax benefits?

So the only onetimer there would be the tax benefit.

It's large, but it's not a huge number.

We had some pretty substantial good guides in 2018, right?

And so that's why you're seeing a free cash flow guidance at the midpoint is about flat when you look '18 to '19.

So in 2018, we had weaker 2017 cash that helped us in 2018, we also quite frankly, made some really good process improvements and saw DSO improve quite substantially in 2018.

So I'm just not counting on that same level of change in DSO going into 2019.

Down the ETF side, Kathleen, pretty flat at the midpoint, it sounds like?

Chris, we'll follow up with you offline on that.

And our next question comes from the line of Bill Warmington from Wells Fargo.

So a question for you on the Analytics piece.

You referenced the tough comp.

But I wanted to ask, the gross sales were down about 23%, the cancellations were better, and the net sales being down about 19%.

Is there any change in the competitive environment?

Is it becoming more difficult to win clients?

Anything like that going on?

Yes.

So I think you're looking at Q4 comparisons.

And again, we had a couple of really big deals Q4 last year.

Probably better to look at longer time period than to just isolate a particular quarter.

And it was about flat a couple of percentage points year-over-year improvement in 2018.

And importantly, though, really steady, strong sales in Analytics each quarter during the course of 2018.

Yes.

And maybe just in terms of some further qualitative observations, we've been very consistent in what we're seeing which is that steady increase in the run rate.

And also I would say the breadth of solutions we're bringing to clients is greater than it's ever been across different client types, different solutions.

So we're very -- everything that we see today, we think that's just going to carry on.

Got it.

And then on the wealth management opportunity that you mentioned, where is the product today versus where you feel you need it to be to compete effectively?

And what kind of investment do you need to make into that product or into distribution to really capitalize on the opportunity?

So we're still at the very early stages of it, just summarizing and we can talk some more on Investor Day, is there are opportunities all over the place.

ESG, we licensed one of the biggest wealth managers in the U.S. for -- to put ESG ratings into the reports of their portfolios to clients.

We see opportunities in index in order to build kind of model portfolios.

So if you find a wealth management firm becomes an MSCI shop, they use our entire sort of framework to make decisions about allocation of assets.

You see it in Analytics in terms of providing -- we may not have the front end in wealth management but we fuel all the calculations and all the risk associated with the platform that wealth management firms use.

So it really is multi-faceted and we're only getting started

And our next question comes from the line of Joseph Foresi from Cantor Fitzgerald.

I guess, I wanted to review or ask about opportunities on the M&A front and anything you might be targeting.

Obviously, the cash flow's been healthy and you've got some new initiatives, ESG fixed, factor, wealth, private that could move the dial.

Are you looking at anything in those areas to that extent you could talk about it?

And then how do you feel about M&A given all the commentary on volatility?

So we always look carefully and intensely and have a draconian discipline and obviously, everything has been fairly frothy in the last 2, 3 years.

So we've done very little.

If anything, we've been on the opposite side selling non-strategic parts of our business.

We are -- and obviously, it's got to be very strategic and value-add financially for us.

We are -- we're wringing our hands a little bit that at some point, if the volatility continues and increases, there may be certain things that may become more actionable.

And we look at them and obviously make the right decisions at that time.

So with that increase in volatility you're mentioning, maybe opportunities present themselves, but it's too early to tell, right?

We only had a few months of volatility.

Got it.

And you talked earlier about, I think, it was $5 million of adjustments that you made, which is the largest, I think you pointed out, in quite some time.

Can you just talk about where those adjustments were being made?

And maybe, strategically, how they fit into the plans and where you're really sort of reducing, I guess, efforts or investments?

Yes.

So I think you're referring to the $5 million of severance in Q4.

And it was somewhat kind of broad-based, but in particular, I'd say it's for the most part, some reductions in analytics and coverage and quite frankly, in functions.

So really just looking at every single part of the organization and looking at how we streamline and reorganize and reallocate resources to be the most efficient we can.

And our next question comes from the line of Henry Chien from BMO.

Just a question on the sort of demand you're seeing for Factor and ESG.

It sounds like that has been quite robust despite the challenges that you spoke about -- or some of the questions you spoke about on the active side.

I'm just curious how is -- I guess at a high level, how is this data being used?

Is it used most as -- like an informative source?

Or is there something going on in terms of this data being used in the investment process beyond just passive management?

Well, it's pretty fundamental.

I mean, the ESG, the way to think about it is, sustainable investing.

We're all in a shrinking world of information and demands from society about environmental controls and social norms and governance of companies.

So on ESG, it's really across -- it's from exclusions, a lot of investors don't want to invest in certain companies.

So we have a big service to give them the list of those companies based on criteria to the ratings per company and issuers, bond issuers to the creation of indices for the basis of portfolios, either active or passive, and to the inclusion of ESG and risk factors to understand the risk of portfolios.

And on Factor, similarly, obviously, the creation of Factors portfolios for ETF.

As an example, $70-plus billion -- or I think $80-plus billion of ETF right now at MSCI or more than 10% of the total AUM is on Factors.

And Factors, one of the areas that we're focused on is how we help active managers incorporate Factors in what they do and report to their clients.

Equity loan [short] hedge funds are being asked by their clients to report along factor lines as well and make investment decisions on factor lines.

A lot of our institutional asset owners have been allocating funds into factor passive allocations directly and we've been working with them and showing them the benchmarks all across-the-board.

And our next question comes from the line of Hamzah Mazari from Macquarie Capital.

My first question is just on fee pressure versus volume trade-off.

You mentioned that's favorable right now, but is there a point where it becomes unfavorable?

Either you're willing to -- you're not willing to go below a certain margin or is there a basis point that we should look at?

Any thoughts as to when that trade-off changes?

Is there any trigger for that or it's sort of just tough to have visibility there?

Yes.

I think we've been very consistent on this topic on the calls over time.

We have seen what we call a natural pattern that has manifested itself in the numbers over time.

We don't see anything that's really at all different.

This quarter, we have no evidence of that changing.

So really, it's just -- I'm afraid just a repetition of what we said before, it's directional, it's steady, and we don't see anything dramatic changing that right now.

Got it.

And just a follow-up, in your prepared remarks, you had mentioned around investment spend certain bigger strategic bets.

Could you size up what you consider large strategic bets?

And is M&A specifically part of that?

Or were you just talking organic?

So I was referring to organic.

At this point, M&A is totally sort of opportunistic, either it comes or it doesn't.

So you can't plan around it or talk about it that much.

Organically, look, we are underspending -- underfunding the Analytics platform that should be needed for the enabling of our content.

So that's an area that will require more funding over time given the request by clients.

We are -- we could be spending a lot more on ESG in order to put more salespeople to have more consultants with our clients, to have more coverage of the universe.

As I said, we're getting to a good level of ESG in ratings on equity issuers.

We are still low on the fixed income side.

We need to ramp that up and we're getting demand on private companies and on real estate assets and the like.

So that's a big opportunity that needs funding.

We are -- the Real Estate itself needs funding given that we're beginning to succeed there.

So there are a lot of areas -- funding on the geography, we're still not punching at the weight that we want to punch in Asia, for example.

That's a huge opportunity that we've done well, but it could be a lot bigger.

And that's why I want to reiterate that we give you guidance, this is what we plan to do, but over time, it's very important you recognize that the rate of growth of the EBITDA margin that we have seen in the last 4 or 5 years is going to decelerate because we see enormous growth opportunities to fund that growth and the balance we're trying to strike is incremental growth or additional growth over and above what we're doing today or expansion of margin.

I think you will want us to do the former for those opportunities and fund them.

And our next question comes from the line of Craig Huber from Huber Research Partners.

I have a couple of questions.

First, wanted to dig in a little bit deeper on this impressive 9.7% organic growth you have in Analytics area, if you adjust for foreign exchange there.

It's obviously 2x to 3x your historical growth rate in that area.

Can you just flesh out for us what you're doing differently there to help drive the growth at that level?

Sure.

So one sort of long-term story or multiyear story is it has been enhancements in all of our analytics, content, notably in fixed income, which has really created opportunities for us.

The other point I would make is related to the answer I gave to the active manager question which is we find that our clients have enormous need for better tools, greater efficiency in their infrastructure, removement of duplication, consistent way of looking at risk and return, et cetera.

So it's precisely, to a degree at least, this environment that can be challenging for asset managers and for other parts of the investment process that leads them to want to have high-quality tools that are consistent across their firm.

And this is really what is the main theme driving this growth.

Yes.

So let me just add on to what Baer was saying here.

In addition to that, you may recall in the prepared comments, we mentioned that we had a lot of implementations coming to completion in the quarter.

So that helped the revenue growth rate as well.

So you can see that's a little bit higher than the organic run rate, which has been running at about 7% for 5 quarters in a row now.

Also if I could ask, the cost growth sequentially in the index business, up roughly $5 million.

It's pretty similar versus the first 2 quarters.

Obviously, severance was part of that.

If you took out severance, how much would the index cost have been up versus the first, second and third quarter?

Yes.

There's a little bit of -- I don't have the specific number ex severance.

I mean, there's a little bit from severance, but it's really continued investment and funding for growth, particularly as we fund for product development and technology.

Okay.

And my last question, if I can just sneak this in.

Actually, we're -- yes, I apologize.

Can I limit it to 2 questions?

We'll follow up with you.

Appreciate it.

And our next question comes from the line of Keith Housum from Northcoast Research.

Just real quick in terms of the personnel.

Over the past several years, you guys have taken advantage of the opportunity to move in personnel from developed markets to emerging markets.

Is there still an opportunity to do that further?

Or has that kind of played itself out?

For sure, we want to keep moving that higher.

There is a point that obviously, you start reaching diminishing return.

You still need people in sales, for example, to be in front of clients in developed markets and the like.

But as we -- as I mentioned before, in these efficiency and productivity drives inside the company to lower the cost of running the business, we are investing in data and technology internally to run the business.

And that would allow us to continue to increase the ratio into our talent centers and emerging markets.

So there will be more of that but not at the same pace as it was 5 years ago.

And then Kathleen, just as a quick follow-up, in terms of the stock options you guys expect in the first quarter, on a net cash basis, how much cash do you guys expect that to originate?

Do you mean the vesting of -- the cash impact of the vesting?

Correct, net of the payroll taxes.

Yes.

As I said, if you look at $140 to $170 a share, the payroll tax impact is about $12 million to $15 million.

But it's a net cash tax -- a net cash benefit when you include the tax benefit from the [FBC] windfall.

And our next question comes from the line of Hugh Miller from Buckingham.

First, just a housekeeping one.

Wanted to confirm that you guys had mentioned in the prepared remarks that there's no change in the share count expected from vesting of the PSUs for 2019?

That's correct.

It's already reflected in the diluted share count.

Yes.

Great.

And the second question was just -- just as you think about kind of trying to get the Analytics business up to the growth targets that you have for the top line and the strategic investments that you're making, are we thinking about this?

Or should we be thinking about in terms of just slower margin growth on a go-forward basis?

Or is there the potential that you could be accelerating growth and see compression in the near term in order to get that acceleration for that business?

No, no.

We, for sure, would like not to accelerate the margin, although it has been happening despite our efforts in order to fund the growth needed to increase the growth of the product line significantly.

Hugh, just one clarification on your prior question.

There will be a modest decline in the share count when those multiyear awards vest.

We will withhold shares when we issue the awards.

And that those withholdings of shares will reduce the share count slightly.

And I'd like to turn the call back to Andrew Wiechmann for closing remarks.

Thank you, all, for joining us today.

As always, please feel free to reach out with any additional questions.

We look forward to keeping you posted on our progress and look forward to seeing many of you at our Investor Day in a month.

Thank you again, and have a great day.