明晟 (MSCI) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would like to now turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you, operator. Good day, and welcome to the MSCI Fourth Quarter and Full Year 2019 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full year 2019. This press release, along with our earnings presentation, which we will reference on our call and a brief quarter fourth -- a fourth quarter update, are available on our website, msci.com, under the Investor Relations tab.

Let me remind you that this call contains 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 disclaimer in our most recent Form 10-K and in 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, organic operating revenue growth rate, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons that provide insight 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 25 to 33 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 COO; and Linda Huber, our Chief Financial Officer. I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

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

Thank you, Salli. Hello, everyone, and thank you for joining us today. Before I go through my prepared remarks, I would like to give you some reflections as we enter this new decade and what we should expect from MSCI.

As many of you know, I've been at the helm of MSCI almost 25 years. And I can categorically tell you that today, I am more excited and more optimistic about this franchise than I have ever been. And I'm sure that it's not only me, but my partners here, Baer and Linda, share on that optimism. Our franchise is getting stronger at an accelerated pace. And in terms of what we do for clients all over the world, the type of problems and opportunities we help them solve, what industry bodies would like to know from us and learn from us, what government officials and regulators want to learn from us, everyone wants to talk to MSCI about how we are helping change the investment industry.

Our strategic investment choices at MSCI are vastly wider and deeper than they are -- than they were 10 years ago because of the more central role that we play in the global investment industry. Our financial model is not only very resilient and diversified but is presenting us with significant new organic opportunities of investments with even higher rates of return and short to medium-term paybacks. The reason for this is that what we do is normally built upon on top of an existing infrastructure and cost base at MSCI, and that infrastructure is more and more developed. Any incremental investment for new things yields a much higher incremental payoff and, therefore, an acceleration on internal rates of returns. This is clearly the case in index and ESG, for example. So we are, therefore, positioning ourselves to take full advantage of this dynamic and hopefully, accelerate shareholder value creation throughout this new decade.

Well, with those reflections, let me now go through my prepared remarks. In the fourth quarter, we delivered strong performance across our franchise with year-over-year growth of 12% in operating revenues, 16% in adjusted EBITDA, and 27% adjusted EPS. In the fourth quarter, assets under management in equity ETFs linked to MSCI indices hit a record high of $934 billion. The increase of $119 billion from the third quarter was driven by both strength in the global markets and very healthy cash inflows into ETF linked to MSCI indices.

Since the start of the new year, we have continued to see growth in AUM levels in equity ETF linked to MSCI indices. At the end of last week, they exceeded $950 billion, setting a new record and come close to the $1 trillion mark, which would be good -- be great to achieve so. Notably, although inflows to global equity ETFs were lower throughout 2019 compared to 2018, MSCI actually saw a 48% increase in equity ETF flows -- inflows linked to our indices, demonstrating the power, the diversity of our ETF investing franchise.

About a year ago at this time, at our Investor Day, we shared with you 3 pillars of our strategy. Today, I'm excited to give you an update on our progress. At that time, we told you we will: one, grow our core business; two, execute in-flight opportunities; and then three, capture new wave of opportunities in order to serve a wider and deeper variety of clients' investment problems and opportunities and, therefore, in turn, fuel the growth of the company and the creation of shareholder value. We have been delivering on our promise to execute on these areas of growth while serving as responsible stewards of your capital.

In the core business, we have produced significant growth as we continue to innovate and add content in response to changing markets and client interests. You can see evidence of this continuous progress in our well-established solutions like our equity market cap indices, our equity risk and performance analytics as well as our multi-asset class risk analytics. In fact, as of December 31, 2019, we reached a combined run rate for our index analytics segment of almost $1.5 billion, up 13% year-over-year.

In addition to accelerating our core business, we have executed on a number of in-flight growth opportunities to meet the needs of our customers and the investment community more broadly. Let me give you a few examples. First, within our futures and options business, we expanded our strategic partnerships with key derivative exchanges in the U.S. and Europe. The run rate from futures and options grew over 56% compared to the prior year.

Second, with respect to our ESG business, the October 29 -- the October 2019 acquisition of Carbon Delta provided us with an essential climate value-at-risk capabilities for our ESG franchise. And of course, the climate change segment of the ESG franchise is an area that we're intensely focused on, as the world is focusing on the impact of climate change in a variety of areas, in our case, on portfolios of our clients. So thus far, we are very pleased with the progress we have made with our integration efforts in Carbon Delta and the level of client interest that we're already seeing.

Third, in fixed income, we recently launched 15 MSCI fixed income ESG and factor indices, leveraging our 30-plus years of extensive experience in fixed income risk and performance analytics as well as our leadership in index construction and in state-of-the-art data capabilities and, of course, on our expertise in ESG.

Finally, in Real Estate, we continue to grow and expand our offering of private core real estate data and analytics and are optimistic that our growth in this segment will gradually accelerate.

Finally, we have invested in new wave of opportunities that will drive our future growth. Most recently, we entered into a strategic relationship through a significant minority investment in The Burgiss Group, a leading provider of investment decision tools for private asset classes. This was an area of significant focus in our Investor Day a year ago. Our positioning in private assets is critical to supporting our clients who are increasingly looking for solutions that expand both public and private assets. Our alliance with Burgiss is intended to accelerate and expand the use of data, analytics and other investment decision support tools for investors in private asset classes all over the world.

More broadly, we remain committed to providing our clients with tools that would enable them to capitalize on their significant new investment opportunities and challenges. We believe this puts MSCI at the leading edge of modern investing. As we enter the new decade, we're proud of what we have built and the tremendous value that our employees have created for our clients and, in turn, our shareholders.

Before I pass on the call to my partner, Baer, I would like to congratulate him because this month, Baer has celebrated its 20th anniversary of being at MSCI and a partner of mine throughout that time. Mr. Pettit.

Thank you, Henry. 20 very interesting years indeed and doubtless, more excitement ahead of us. So clearly, I share your enthusiasm about the many opportunities to drive growth and shareholder value at MSCI.

Henry talked about the 3-pillar strategy that we discussed with you at Investor Day. At that event, we also highlighted the secular forces that are transforming the investment industry, including the move from active to index-enabled investing, increasing globalization and acceleration of capital flows and the need to incorporate ESG and more specifically climate change considerations into investment processes.

MSCI continues to be well positioned to help global investors build modern portfolios that will capitalize on this transformation. Our sales efforts have led to total organic run rate growth of more than 14% in the fourth quarter year-over-year. Gross sales grew above 20% in each of our segments in the fourth quarter, and we reached record total gross sales of over $75 million. The fourth quarter's retention rate was down from the third quarter but in line with last year's fourth quarter rate at 92.9% as a result of a seasonal decline, given the concentration of contracts that generally come up for renewal in the fourth quarter.

We're working hard to deliver must-have products and solutions to our clients with the aim that such tools become embedded in their processes, analysis and thinking about investing. Our recurring subscription run rate, where we recorded our ninth straight quarter of organic double-digit percentage growth, saw strength across all geographies, notably in Asia Pacific and Europe.

From a client perspective, asset managers and asset owners, which collectively comprise 2/3 of our subscription run rate, grew above 11% each. At a segment level, Index and Analytics subscription run rate grew more than 11% and 7%, respectively. Within Analytics, we recorded strong recurring sales growth in our equity and multi-asset class solutions, notably to asset owners. Within our All Other segment, we crossed milestones of $100 million for our ESG research subscription run rate and $50 million for our Real Estate subscription run rate. Our ability to achieve these strong results and to deliver attractive returns on our investment dollars validate our disciplined capital allocation approach. Our daily focus is to help clients more effectively and efficiently build portfolios.

I'd like to walk you through a few recent examples of this. First, innovation within our ESG and factor categories has been a key differentiator in the cash inflows to equity ETFs linked to MSCI indexes versus our competitors. In 2019, MSCI was the #1 index provider based on cash inflows to equity ETFs.

Second, as we have often communicated, there are significant client benefits to integrating MSCI research and content across various investment use cases. In the ESG space, this integration has driven our combined ESG Research and Index run rate to nearly $150 million in 2019.

Third, our continuous investments in modeling new risk categories has helped bolster our analytics growth. One such example is in the area of liquidity metrics, where our innovative solutions were well received in 2019 and contributed meaningfully to our financial results.

Next, our client interactions with major global asset owners and asset managers show us that our real estate offerings are an important input to their investment decisions. Further, our 2019 client surveys indicate significant improvements in customer satisfaction with regards to our real estate products and services. And finally, last week, we published The MSCI Principles of Sustainable Investing to further equip investors with the framework to integrate ESG into their investment processes amid the global shift towards sustainable investing.

Overall, we have substantial momentum heading into 2020, and we are confident in our ability to continue delivering for our clients. This confidence underpins our guidance, which Linda will review, in addition to going over our financial performance.

Over to you, Linda.

Thanks, Baer, and hello to everyone on the call. I'll start with operating revenue, where we recorded $407 million in the quarter, up 12% from the prior year.

Looking at each of our business units. First, in Index, operating revenue grew approximately 16%. Growth in asset-based fees was a meaningful contributor. In addition, we saw strength in recurring subscription revenue, driven by continued momentum in developed market modules, and in factor, custom and ESG indexes.

Second, Analytics operating revenue increased more than 5%, with continued strong growth in nonrecurring revenue from implementation and other services as well as an uptick in recurring subscription revenue. Finally, for the All Other segment, operating revenues grew 20%, reflecting robust growth across our ESG ratings and screening offering.

In asset-based fees, revenue grew 18%. It was driven by strong ETF revenue, and average assets under management grew 21% year-over-year in equity ETFs linked to MSCI indexes. Sequentially, the average basis point fee actually increased slightly by 0.01 basis points. This was due to the mix of ETFs capturing flows, rather than a reversal of the broader decline trend. Non-ETF passive fund revenue was up 11%, driven by increased contributions from higher fee products. And finally, futures and options revenue, one of our high-growth areas, was up approximately $3 million as compared to last year.

As you heard from Henry, ending assets under management and equity ETFs linked to MSCI Indexes were $934 billion as of December 31, 2019, up 34% versus the prior year-end and up more than 14% versus the prior quarter end. On a sequential basis, MSCI saw $56 billion of inflows into funds linked to MSCI Indexes across geographic market exposures, notably those associated with developed markets outside the U.S. Additionally, factors and ESG funds accounted for nearly 1/3 of cash inflows into equity ETFs linked to our indexes. On a year-over-year basis, around 40% of $239 billion growth in assets under management at year-end was attributable to cash inflows, with the balance coming from market appreciation.

Now I'll shift the focus to adjusted earnings per share, which was $1.67 per share in the fourth quarter, up 27% year-over-year. More than 2/3 of the growth in adjusted EPS was from higher operating revenue, net of operating expenses, a strong proof point on the earnings power of our franchise. The remaining 1/3 of the growth in adjusted EPS was driven primarily by a lower tax rate and reduced share count, partially offset by higher interest expense.

Turning now to our balance sheet and capital allocation. We ended the year with $1.5 billion of cash and $31 billion of debt.

$3.1 billion.

Excuse me, $3.1 billion of debt. In November, we issued $1 billion of debt at a coupon of 4% and used $500 million of the proceeds to partially refinance our 5.25% coupon notes due in 2024, of which we currently have $300 million remaining. In the fourth quarter, MSCI paid approximately $58 million in dividends to its shareholders but did not repurchase any shares.

And before I turn the call back to Henry, I'd like to share select elements of the 2020 guidance we published in our press release this morning. MSCI's guidance for 2020 is based on assumptions on a number of macroeconomic and capital market factors, particularly related to equity markets. These assumptions are subject to uncertainty, and actual results for the year could differ materially from our current guidance.

For the full year 2020, we currently expect adjusted EBITDA expenses in the range of $750 million to $770 million and capital expenditures in the range of $60 million to $70 million. As you know, we cannot predict asset-based fee revenue. However, it is our intention that higher levels of operating revenue will coincide with higher levels of expenses and higher capital expenditures as we invest back in our growing businesses. Finally, we expect free cash flow to be in the range of $580 million to $640 million. Free cash flow in 2020 is projected to decline from 2019 primarily due to 2 factors: first, the absence of tax benefits we had related to stock-based compensation last year; and second, increased capital expenditures this year. A full list of our guidance is included in our earnings release published this morning as well as in our earnings presentation for this call. Both are available in the Investor Relations section of our website at msci.com.

And before we move to Q&A, I'd like to turn the call back over to Henry.

Thank you, Linda. I am pleased to announce that we've added 2 new directors to our Board. Paula Volent and Sandy Rattray have been appointed to serve as independent directors effective February 26 of this year, increasing our Board from 10 to 12 directors. Both Paula and Sandy have extensive experience in the investment industry. Paula is currently the Chief Investment Officer of Bowdoin College in the U.S., one of the best performance endowments in the U.S., and Sandy is currently the Chief Investment Officer of the Man Group in the U.K. I am confident they will provide diverse and valuable perspectives, drawing from their combined global experience and their expertise across asset classes and emerging industry trends, including technological innovation.

And with that, we'll move over now to Q&A.

(Operator Instructions) And our first question comes from the line of Toni Kaplan with Morgan Stanley.

Could you talk about the decision to make ESG ratings available for free on the website? My take was that the objective is to broaden the use of the ratings and have MSCI be -- continue to be the standard there. And I guess could you just talk about if that changes the ESG business model you have at all? And then finally, with a lot of new big name providers entering the ESG space, do you think there'll be more price competition in ESG?

Toni, Baer here. So look, clearly, transparency is a critical element in sustainable investing. And we have shown our commitment to that, both to the broader market and also to companies by making this information available at this level. Equally, central to the notion of ESG investing and sustainable investing is being able to go deep into underlying information relating to companies' activities, supply chains and the enormous diversity of their activities. So we're confident that by putting this on our website, it both shows our commitment to transparency and to the -- to giving the market headline information, but that our subscription model and the need to access the more detailed research behind the ratings will continue to be a very important economic driver for us.

Great. And do you think pricing will be more competitive?

At this stage, we don't have a great deal of evidence of that. I mean it's an -- as you know, it's an area of investing that is growing dramatically quickly. We've seen enormous changes even within the last year or 2, let alone the last 5 years. And so I'm loath to make a forward-looking judgment about that. I think you can see our results are very robust and very -- continue to be very strong and attractive. So at present, we don't have any evidence of any sort of strong pricing pressure.

Got it. And for my follow-up, just wanted to get an update on Beon analytics, looked good this quarter. And so wanted to understand if the number of clients adopting the platform was above what you had expected originally. And if you could talk about any sort of future selling -- cross-selling opportunities with that, that would be great.

Sure. So for the time being, Beon is not having a material impact on the analytics numbers. And during the course of 2020, it will not be a major contributor to the analytics sales. We're confident about where the platform is. And I think as the year progresses, we can keep you updated on the functionality and client uptake. So I would say we're confident with the path for Beon. But from a pure sort of accounting revenue point of view for 2020, it should not have a material impact.

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

Henry, just the Burgiss deal sounds pretty interesting. And I was just wondering if you could help describe in the context of all the partnerships and so forth that you're looking at, like what does that pipeline look like? We weren't familiar with Burgiss. I'm sure there's plenty of these other ones out there. So just curious on your thoughts on what that looked like.

Yes. So Manav, let me start with Burgiss, and then we can broaden it to other forms of partnerships. So Burgiss is one of the leading, if not the leading, provider of private asset class data and analytics through a sort of integrated, unified technology platform. They've been at it, at this game, for about 30 years, 30-plus years. They serve about 1,000 clients in 36 countries. And importantly, on their product line is about 10,000 funds that represent about $7 trillion of committed capital. And a bit of their strength is in private equities, but it's not totally. So in that -- let me give you a little breakdown.

In that 10,000 funds, over 6,000 of those 10,000 are in private equity, representing about $4.25 trillion out of the $7 trillion. Another close to 2,000 funds, representing, say, about $1.5 trillion, are in private real assets, real estate, natural resources, infrastructure, and another 1,000 funds or so representing close to $1 trillion, a little less, is in private. So this is an incredibly rich database that we can not only help Burgiss commercialize much more rapidly. And that's one of the reasons you haven't heard a bunch about Burgiss because they've been a company that has spent a great deal of time building their products, and we are -- a lot of our efforts are to help them commercialize the product. But then secondly, that we can take a lot of these databases at MSCI and build all the things that we know how to build, build indices, build risk models, build performance attribution models, performance measurement models and all of that for these various private asset classes. So we are exceedingly excited about this partnership and investment that will -- so remember, everything I just said is about Burgiss.

What I haven't said is our own private core real estate product line, which we just closed the $50 million run rate, is made up of about $2 trillion worth of real estate properties in, I don't know, 30, 40 countries in the world and representing about 70,000 properties. So there's some overlap, so to speak, but between the tools, we have roughly $9 trillion of databases, which I would imagine is pretty close to 85%, maybe 90% or 95% of the entire universe of private asset classes in the world. So very exciting about that opportunity.

Now more broadly speaking, one of the key tenets of MSCI's strategy is to build partnerships, distribution partnerships, research, academic partnerships to build new models, data partnerships to get data, technology partnerships to help us accelerate our AI and machine learning processes, for example, and the like, and those partnerships to be the basis for creating ecosystems, in which hopefully MSCI is the heart of that ecosystem in order for all of us to be serving clients. So we started -- we've always been doing this, but we accelerated the partnership initiatives about 2, 3 years ago. Obviously, we have very extensive client partnerships as well. But we accelerated the other forms of partnerships. So you're going to see us doing a lot more of this, a lot more. Some partnerships may be just a strategic relationship, exchanging in data, exchanging mutual capabilities. Some of them may require some investments on our part, either minority investments of any type or maybe control investments.

Okay. Got it. And I guess one of the reasons I was asking that, and maybe, Linda, you can help, just in terms of the capital allocation, should we just see more of these? How should we see the balance of buybacks? Because, I guess, your stock is nearly double from the last time you guys made this average that you disclosed of $147. So just curious how we should think of that going forward?

Yes. So we have an integrated capital allocation approach, right, which is the "external capital allocation," which is dividends and share buybacks. Obviously, we're always focused on the leverage ratios of the company. And the objective there is to run the company with the minimum amount of capital necessary and distribute any excess capital in the company. And then the internal capital allocation process is about how do we deploy capital internally for organic investments that -- and that's also in that -- Linda can talk to at another point in time that we're very focused on. And then obviously, the third element is sort of external M&A or partnerships and the like. These are all opportunistic. They're going to come and go. I will not say that we're accelerating that for any reason. It just happens that we did Carbon Delta and we've done this. But whatever -- and those are -- those have extremely attractive returns obviously in addition to the organic investments. So whatever doesn't get utilized at a proper and high rate of return with good paybacks, then that capital gets returned to the shareholders in the form of dividends and in the form of opportunistic buybacks of our shares.

So Manav, it's Linda. We continue to pay our dividends. It's about $58 million per quarter on our dividends. We'll take another look at our dividend rates we get later in the year as we usually do. Partnerships are very important, but they don't require a huge outlay of cash, which is very helpful. They do require a huge outlay of work and time and focus on the accounting treatment. The buybacks, we do have some modeled in, about 2.2 million shares, frankly at a price lower than where we're trading now. We'll continue to take a look at that, but that continues to focus on the opportunistic way of repurchasing shares that Henry just talked about. So that's how we're thinking about this for right now. And if we evolve that over the year, we will keep you posted.

Your next question comes from the line of Alex Kramm with UBS.

I just want to ask about the guidance very briefly here. I understand obviously that you don't make -- guide revenues because of the asset-based side. But clearly, you guide operating cash flow and free cash flow, and you just made this comment, Linda, that there is just clearly a level that if asset base is doing better, you would spend a little bit more. So can you just help us how you think about that side of the business in terms of what are you budgeting for market performance, flows, pricing perhaps? So we have a better sense of when you would accelerate your spending if markets actually work in your favor.

Okay. Alex, you're asking for about all the variables we haven't spoken to. So let me see if I can help you with this in a way that follows our guidance. So we started with adjusted EBITDA expense because we thought this would be more helpful for the shareholders. And we talked about a range of $750 million to $770 million. The matching number for 2019 was $707 million, just so you're aware of that. The piece of ETFs linked to MSCI fees within ABF has grown rapidly. We cited the most recent number at 950, which has been a significant jump up from where we were just a few months ago. So we're taking a look at that 950 number, Alex. And in terms of planning for our expense growth, we're taking a moderate or conservative view of further growth in that number because it jumped up pretty significantly just in the last couple of months. So I hope that helps you.

And then the $770 million, which is the top end of the range, we want to very much stress that we're going to have to see some additional increases in those ABF fees enable to spend more. So we're looking at modest increase in spending if we have earned it, if we have earned it on the top line, and that may take us toward the higher end of the range. But we'll keep you posted. We would note, very important to note, the first quarter is a higher expenditure quarter for us due to tax payments and bonuses. So if we do more of this, it will likely not come quite as much in the first quarter but a little bit more tilted towards the second and third and perhaps the back half of the year. So hope that helps you, Alex. But we would point you back to the longer-term guidance targets that we had given in Investor Day last year as what we're continuing to try to achieve.

So that basically means you're not looking for a lot of help from the market is the point, right? Did I hear that right?

We're being thoughtful and moderate in terms of what we're expecting from the market because we've seen very good growth already.

Yes, good. And just secondly, quickly, I think you gave a little bit of color on analytics growth. I mean the sales was very impressive. But maybe you can expand a little bit more in terms of where that is coming from. Is it a lot of upsells? Can you maybe talk about the regions you're seeing or customer types who see a lot of demand? I think -- yes, I think that would be great.

Sure. So I'll make a few comments there, Alex. So first of all, I think we've had generally strong growth across analytics, as I said in my comments. So it's not, I would say, unevenly distributed. Having said that, the particularly positive areas have been recently in a combination of -- in BarraOne, for a lot -- in asset owners, so for total portfolio analysis of risk and return and with this sort of, if you like, an overweight in the numbers to Asia. So those are some of the, I would say, the most recent above-average performances. I would say -- and in those, we would assume that the strength in total portfolio analytics will continue. The numbers in Asia were very strong. We want to keep pushing them. But they may not persist at quite that level because there were some exceptional deals there. But -- and as I mentioned with my comments about liquidity, that's one example of various kinds of us serving increasingly specialized use cases where we have a unique offering. So I would say, good core strength, some specific outperformance and continued innovation, and we want to keep that on that path.

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

So first question for you on the index business. You talked to the retention rate and how that was flat year-over-year, and that we saw the downtick on a sequential basis, and that was driven mostly by seasonal components. Now it's a high-class problem. I'm not trying to pick on the 93% retention rate because that's very strong. But I just wanted to know if there was anything behind that downtick. And also a question of where are the investors going if -- when they do leave?

So the good news, Bill, is the headline is nothing to see here. Honestly, there really isn't -- I mean the Q4 number was pretty much -- so that's the total company number. The index number is higher. I don't have it right in front of me. But -- so the total company number was pretty much flat. The index numbers continue to be very strong. And so really, there's -- the good news is there's really -- there's no story that we see there. We see conditions being fundamentally what they have been.

Got it. And then a question on -- my follow-up on the analytics business. There was a slug of nonrecurring revenue there that you've mentioned came from implementation. I just wanted to know if that was a forerunner of some acceleration in the analytics business. Or how to interpret that?

Sure. So in fact, let me talk about nonrecurring sales a little more broadly. So last year, there was roughly a 50-50 split in nonrecurring sales between equity index and analytics. So in equity index, the main drivers of that are the continued strengthening of what Henry has called the third pillar of derivatives in equity index, which is -- which are made up of structured products and OTC, over-the-counter licenses. So that is the main thing there. And those revenues are nonrecurring, but we think that category will continue to grow.

In analytics, to come back to your point, the key drivers there are implementation and managed services on a roughly 2/3-1/3 basis. So structurally in analytics, as our larger, more complex deals grow and also as we service this efficiency theme that we've discussed with you in the past at asset managers where we're getting increasingly involved in helping them manage data, et cetera, then the managed services linked to that in setting all of that infrastructure up will continue to go up. The final point about those, again, it's a category which should grow. But just to reemphasize what we've said in the past, it will be lumpy. It is -- there are certain types of deals which will have this attached to it. There are certain types which won't. And so it's a category which directionally should grow but will be fairly lumpy Q-on-Q type of thing.

Sounds like Linda has to create a new category of recurring and nonrecurring.

We'll just try to keep the money coming in.

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

I wanted to go back to ISG for a second -- I'm sorry, ESG, where's my head. But it's been a lot of wording, I guess. But yes, if you know anything about ISG, I'll take that, too. But on the ESG side, maybe you could just take a step back and frame for us what -- how you see that evolving? It's obviously a red-hot space. What products do you think are going to move in the short term? How you're going to price them? And then how you think about competition in that space right now? And where you see it going?

So look, the ESG investing or sustainable investing is a major, permanent secular trend in the world driven by -- think of it as the shrinking of the basement, the shrinking of the world in terms of dissemination of information, connectivity, communication, transparency of what's happening and the like. And that this -- in a world like that, in which societies around the world are -- have access to a lot more information, a lot more transparency on a real-time basis about what's happening in all institutions of society, those societies are going to hold those institutions accountable for their actions. And this is not just about investors and companies. It's about political institutions, media, religious, educational and so on and so forth.

So 10 years from now, in the investing industry, I don't think that there will be a category called sustainable investing because everything that people will do will have to have an element of sustainable investing in that -- in their investment processes. So MSCI wants to be the leading provider by far in the world of all the tools necessary to make that transition and to get to that point, and that is from ESG research, to understand what the ESG components of companies are. So somebody wants to come with a list and say, exclude this, exclude that, we know what we're talking about, ESG ratings, ESG indices of all types, in equities, in fixed income and the like, by the way, ESG ratings in equities, in fixed income, in real estate, in private companies, in private debt and the like, and ESG risk models or less risk models that take into account also ESG in all the other factors that they do and all of that.

So we are extremely well positioned at MSCI to be the leader in this because we already are crossing the whole product range that I just described. We are already a multi-asset class firm, and we already play a central role in the investment industry. So there will be competition because it's a very vast and large field for sure. But I think our position in the marketplace, our -- the quality of what we do, the combination of all the things that we do for people, as opposed to only one thing to one area or another that another supplier can do, will create enormous moat around our franchise. And that's what we're gunning for here, and that's where we're putting enormous investments into that. Now that's the ESG category as a whole.

Within ESG, you have climate change, which is eventually, maybe in next few years, climate change and the impact on portfolios around the world may even become bigger than ESG itself. Right now, we put it into a subset of ESG investing, but they may become even bigger than ESG investing itself and a category of its own. So we're taking steps to be the leading provider of climate change tools in the world as they affect portfolios, as they affect repricing of assets and as they affect asset allocation of investors.

Got it. And then on the fixed income indexing. Over the last couple of years, we've heard different data points of how under-penetrated it is and what the opportunity is out there. Can you talk about what the barriers to entry are from a penetration standpoint? Is this now a real viable product that you think is going to equal that of equities over a long period of time? And how do you go about converting people on the indexing side from a fixed income perspective?

Yes. So let me just take this opportunity to say something that we say a lot inside MSCI. We're not in the index business. We're not in the analytics business. We're not in the risk business. We're not in the data business. We are in the business of helping portfolio -- helping investors build better portfolios, which right now happens to be a combination of all of that and will continue to be a combination of all of that, but there will be some other elements over time like private asset classes, that will be integral part of helping investors build better portfolios. So we have no interest in sort of launching a fixed income index for the sake of throwing another widget in the marketplace. What we are looking here to do is to -- we see a need for fixed income investors in the world to look at an index or a model portfolio, if you think that way, that incorporates the securities in it, reweighted along ESG lines or reweighted along factor lines. And if ESG right now is less of an alpha-generating tool, a lot of it is a risk management tool. And if we think that ESG is big in equities, it should be much bigger in fixed income. Because as you know, when you invest in a fixed income management, the best you can hope for is get paid back your principal. And therefore, risk management becomes much more central to the investment process of fixed income, and therefore, ESG should become more central to that process. So that's what we're solving for in the launch of these things. And we did it in consultation with clients all over the world and use cases that we want to use and all of that.

And just one -- just more slightly tactical observation, following up from Henry's kind of slightly more strategic view. We've been talking to clients in the last number of weeks since these indexes have been launched and leading up to their launch. We've had very positive feedback across a range of different client types. And so I would say that from our client interactions, very recently, literally last week, the last few weeks, we've had a very positive reception. These numbers will not be material to MSCI in the short run. But I hope that over the course of the year, we'll be able to give you more color related to benchmark wins, product launches related to these indexes.

Our next question comes from the line of Craig Huber with Huber Research.

A couple of questions. The 6% to 9% guidance, I guess for cost for this new year of EBITDA expenses, can you just quickly highlight for me where the incremental spend is going toward in terms of what growth initiatives internally? You've touched a lot of -- a bunch of it. But for me just rank in order the top 3 or 4 where those incremental dollars are going towards? That's my first question.

Sure, Craig. The first thing is that technology underpins all of our investments. And we pair those technology investments with the product investments to ensure that we can deliver for our clients. Some of the product investment areas are ESG, as Henry has described at length, fixed income, where things are going very well. Index innovation is also a very good area for us, and futures and options is growing very rapidly. Also our Analytics business is doing really well, margin close to 35%, which is an incredible accomplishment. So plenty of areas for investment, and those would be some of the major ones. But again, only toward the high end of the expense growth range if we earn our way into it with good fortunes in the ABF lot.

Yes. Look, I think, importantly, that flexing between 6% and 9%, we obviously, accounting-wise, call it EBITDA expenses. But these are not -- I mean there are expenses, of course, but they are investments, more importantly. And we are also extremely focused and obsessed with a methodology or investment, which we call the triple crown methodology, which is something that we want to buy us, a lot of our investments and our internal capital allocation, on investments that have 3 crowns. One is high, very high risk-adjusted internal rates of return. Secondly, the shorter the payback, the better. And number three, in areas that the multiple of EBITDA that is yielded by those investment is the highest. So there will be a balance. Obviously, that you've got to do in all of this, but the huge emphasis is in that triple crown territory.

And my next question, guys, can you give us the annual run rate, if you would, for each of ESG at the end of the year, the future and options segment and then fixed income? Do you have those 3 numbers handy?

I don't know if we do.

I do not have that handy. I'm sure you probably can look at the slides and get a view on that, Craig. As we're looking for it, anything else?

The $1.5 billion or so of cash that you have on the balance sheet, I know you touched on this earlier. But the appetite for a sizable acquisition, given all your internal growth initiatives you've enunciated here last hour, I assume it's fairly low for a large acquisition. Is that a fair statement?

Yes, I think that's probably fair, Craig. We like where we are. We do have an amount of dry powder. But as you see, we're moving in the partnership way of investing that has served us very well. And I think you're in the right ZIP code. One housekeeping matter while we continue to look for some things here. On the Burgiss partnership, want to reiterate that, that is a minority stake, and we will not consolidate the financials of Burgiss. Our share of its income is going to flow to other income, other expense and will be expressed in a net line on that. So just wanted to make sure that as you're looking at where we are with Burgiss, you know where to look.

So it'll probably be best, Craig, if Salli follows up with you off-line on your question.

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

I wanted to ask about the core index business, I guess beyond -- or not beyond but separate from the more dynamic ESG and in factors just on the index. Pretty simple question. What's driving that stable kind of 10%, 11% growth? And I say that just kind of given that the flows in the active side are pretty much 0, I guess. And so I'm just kind of curious if you could frame whether that's like just continual, like TAM available in like asset owners or wealth managers or replacing providers or just adding new products? Just kind of just a pretty simple question of what's driving that growth.

Yes. So therefore, I mean when you look at index, we haven't completely sort of broken all out like this way, and maybe we will in the future. But the -- if you look at the index product line, you can then categorize that index product line into 3 or 4 buckets, right? You can say the market cap indices, that's what we call the ACWI IMI family. Then the ESG indices obviously, which are -- have an ESG overlay. The factor indices, they have an overlay. And then you split the products into the use cases, which is, is it being used for active management purposes, i.e., benchmarking? Is it being used for passive management purposes? Or is it being used for derivatives or structured products as a third pillar, third leg? So it's a little bit of a matrix in all of that.

So -- but if you focus on the market cap indices, and then obviously, there is a further breakdown of market cap, the developed market cap and the emerging market cap because those modules and the subscriptions have different sales cycles. In the market cap indices, what's driving the growth is continued globalization of the equity markets of the world, continued expansion of the use cases inside an organization. So we have traditionally charged by number of people that use the indices, by vendors and all of that. We're now moving to a little bit more of a bundled products. But when you have -- if an organization has, let's say, 100 professionals that were using the indices and they want to go to 300 -- 200 or 300 professionals that want to use the indices, there has to be a commensurate amount of new fees.

What is also driving the growth of the market cap businesses is custom indices. These are market cap businesses in which somebody say, can you exclude this? Can you exclude that? Can you put another thing like this? Can you do this? So that is a high level of growth that is happening there. Now in the ETF category, of course, market cap indices continue to grow as well. Obviously, the -- we've seen higher growth in ESG indices and ETF and obviously in factor ETF. So there is a whole category of things that maybe in future discussions, we can try to put a sort of a landscape of all of this, but that's a little -- another area that obviously is happening is new client segments, right, that are new -- wealth management is a new client segment that are using now indices, hedge funds, equity long-short hedge funds are being measured given the performance of equity long-short hedge funds or lack of performance, I should say, relative to nonleverage -- I'm sorry, nonshort strategies. These people are now being increasingly measured against the market cap indices. So they need to subscribe to the information and so on and so forth.

Got it. That makes sense. And so just a follow-up on, I guess, specifically the ES&G data. So it's a lot of good color on framing MSCI's role in this. I guess just to help us understand. So in the market cap or traditional investment products, it's very much performance-driven, I guess, or measurement of return attribution. How do you think about, with ESG, given the, I guess, very question of measurement of impact or ESG risk is sort of unclear?

Well, no, over time, I mean over time, if you have an ESG portfolio, you're going to do all the things that you do in a normal portfolio. You're going to say, how do I measure performance? What is the attribution of the -- let me give you an example on ESG, climate change driven, which is as we all know very well, in the energy sector, particularly oil and gas has been underperformer. So when you do your performance measure and attribution, you have to say, what parts of the oil and gas industry are driving your performance and what part are not?

On the flip side of that is what kind of outperformance are you getting on alternative energies, from solar to wind and the like, nuclear, et cetera? So again, this is all being done right now with certain, obviously, degrees, but that's -- it's not going to be any different, same thing on factors as we know that momentum has been a big driver of returns and quality and growth relative to value, as an example. So you want to analyze your portfolio on the basis of what is my performance attribution? How much of that is coming from outperformance or momentum versus lack of performance and value? We provide all those tools, and that's why this franchise is getting stronger and stronger.

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

Just 2 quick ones. First, on Burgiss. Is there anything else you can say at this point around the actual impact to EPS? It sounds like it's going to be immaterial. But anything else that you can give us there?

Not really. I mean it's clearly a smaller company compared to us, right? So the hope is that it's going to grow a lot, but it's still early days.

Yes. In fact, we're picking up some expenses from Burgiss and the integration. It's Linda. But we don't expect to see significant results on this, particularly immediately.

Okay. Fair enough. And then just the other one is just on the index subscription business, going back to the -- a couple of questions ago. To put a finer point on that, how much of the growth, I guess, came from what you would characterize as pricing in 2019? And how much do you expect to come from pricing in 2020?

Sure. Chris, one of the things we like to say of the entirety of the subscription growth part of the business, it's about 1/3 price increases and 2/3 volume for existing and new clients, so less than 1/3 really on price increases.

Okay. Still consistent?

Yes.

Your next question comes from the line of Keith Housum with Northcoast Research.

A question for you, just elaborating on Burgiss. You guys have a minority interest in it, but you guys will have access to all their data. I guess is this through operating agreements? And then the agreements or your structure with Burgiss, is that going to be exclusive so they -- no one else can partake in their data?

Yes. So the -- if you noticed, we always talk about 2 things. We always talk about the investment and the strategic partnership with them. They go obviously hand in hand. The investment is -- we're just a shareholder with the owner and the founder of the company, Jim Kocis. And on the sort of data usage and partnerships and the like, those are subject to separate negotiated agreements one by one as to how do we divide up cost if we're working on a joint product, how we divide up revenues and all of that, and those are being worked on right now.

But those will be exclusives. So no one else -- no competitor can come in there and try to do -- obtain their data, so to speak.

Largely, but not totally, yes.

Okay. Got you. And then just as a follow-up question, this is just more a reminder for me. When it comes to your institutional passive fees, that's a 1 quarter delay, correct?

Yes, that is correct.

And I'm showing no further questions at this time. So with that, I'll turn the call back over to CEO, Henry Fernandez, for closing remarks.

Well, I'd like to thank you again for the opportunity to present given the last 10 years of great performance and obviously the anticipation of what we can do in the next 10 years. I would like to make sure you all recognize how much we value the belief that you and our shareholders have put in us, the trust and confidence in running this great franchise and being good stewards of capital. And we hope we never disappoint in all of that. So thank you very much.

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