MSCI Inc (MSCI) — Q4 2016 Earnings Call Transcript

Thank you, Sonia. Good day and welcome to the MSCI fourth quarter and full year 2016 earnings conference call. Earlier this morning, we issued a press release announcing our results for the fourth quarter and fiscal year 2016. A copy of the release and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they were made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements in our most recent Form 10-K and our other SEC filings. During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS, and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide a baseline for the evolution of results. You'll find a reconciliation of the equivalent GAAP measure in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on pages 24 to 28 of the earnings presentation. On the call today are Henry Fernandez, our Chief Executive Officer; and Kathleen Winters, our Chief Financial Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry?

Thanks, Steve, and good day to everyone. As you have seen from the newswire this morning, we’ve been very busy, and there is a lot to be excited about at MSCI. We are pleased to share with you our fourth quarter and full year financial results. We executed very well against our strategy, and we continue to create new growth and services designed to help our clients solve their most challenging investment problems and capitalize on their significant investment opportunities. As a result, MSCI is even more embedded in the fabric of the global investment process, therefore creating a valuable network effect with our clients. Please turn to Slide 4 for a review of our financial results for full year 2016. A 31% increase in adjusted EPS was driven by a 7% increase in operating revenue, a 2% decrease in adjusted EBITDA costs, an 18% increase in adjusted EBITDA, a lower effective tax rate, and a 12% decrease in our share count. We have been able to achieve these strong results because the management team has been keenly focused on three areas, as we have been reporting to you each quarter. We’re focused on investing in new products and services to drive our top-line growth, driving from greater efficiency and productivity gains to create an even more efficient organization, and ensuring the capital at MSCI is right-sized and optimally deployed in the highest return opportunities to enhance shareholder returns. First, in terms of revenue growth, we recorded a 7% increase in revenue driven principally by a 10% growth in Index revenue. Excluding the foreign exchange impact on subscription revenues, operating revenues would have been 8% higher. As we say, it would have been an increase of 8%. This was the 12th consecutive quarter of year-over-year double-digit growth in our Index subscription run rate, which is a testament to the strength of our Index franchise as well as the strong contribution from innovative new products. Analytics revenue grew 3% on a reported basis or 5% on an FX adjusted basis. While 5% constant current revenue growth in Analytics in a challenging market environment is a solid performance, we are not satisfied with this growth rate and continue to take measures to improve it. We have successfully restructured the Analytics product line under Peter's and Gary's leadership and now it is well positioned for the next phase, which we hope will lead to increasing levels of revenue growth in line with our long term targets for this product line. As announced earlier this morning, we’re very excited that Peter will be replacing Remy Briand as the Global Head of Research and Product Development. This role is one of the most important at MSCI and it’s even more important now given our drive to accelerate the pace of innovation and growth. Peter will be succeeded in his role as Head of Analytics by Jorge Mina, who has led Analytics in the Americas and has also led the business side of the development of our new Analytics platform. This move is just another example of our ability to tap a very deep bench of talent and deploy it to critical areas of focus at MSCI. Revenue from our Other Product segment grew 7% on a reported basis or 13% excluding the impact of FX. ESG continues to register strong top line growth of approximately 20% on record sales in the quarter and record sales for the full year. The success in this product line has been driven by the increase in the integration of ESG factors into the mainstream of the investment process, resulting in a strong sales leveraging MSCI’s existing client base as well as some new clients. This strong ESG sales mainly to existing MSCI clients demonstrate the power of the MSCI franchise with our clients, as we are leveraging our brand and our existing relationships to sell ESG Reserves and Ratings at an accelerated pace. In Real Estate, we realize our commitment to achieve profitability driven largely by disciplined expense management. Real Estate is one of the largest and fastest growing asset classes in the world. So we believe that the restructuring of this product line that is underway will begin to pay dividends in the near future for us. In summary, in the overall area of revenue growth, we are very focused on innovation and new products and services to accelerate the top line. Turning to operational efficiency, the strong top line numbers were complemented by a 2% decrease in adjusted EBITDA expenses that was flat versus the prior year on an FX adjusted basis. We were able to achieve this strong performance because of our continued focus on efficiency and our emphasis on redirecting capital to high-return initial investments. We expect to see more improvements over time in our operating tax rate, primarily driven by ongoing efforts to better align our tax profile with our overall global operating footprint. We believe there are more opportunities to achieve operating efficiencies at MSCI and we are only just getting started. Some of the areas that we are focused on include increased automation within our technology infrastructure, improved distribution of our products and services through our applications that will allow our clients to better access our products which will result in operational efficiencies but would also lead to higher revenue growth. Finally, in terms of capital optimization, we continue to be strategic investors in our stock, repurchasing 11.1 million shares for a total of approximately $844 million at an average price of about $74.18 throughout 2016 and through January 2017. We have delivered on our commitment to optimize our balance sheet by increasing our gross leverage to levels that allow us to enhance shareholder returns but also maintain flexibility to pursue all our capital deployment options as our management board determines. In summary, 2016 was a very strong year for MSCI, and we are very excited by the opportunities for growth and further efficiencies that lie ahead. In 2017, we will continue to be extremely focused on innovation and how we can accelerate the growth of the company. We will continue to position ourselves to achieve superior operational efficiencies and again we will be focused on optimizing the deployment of capital, not just through dividends and share repurchases, but also across all capital deployment opportunities that will enhance our shareholder returns. Please turn to Slide 5, which illustrates what we call the integrated franchise at MSCI that we bring to clients to help them capitalize on significant investment opportunities and solve their most challenging investment problems. This franchise is the basis and foundation for a partnership-like relationship with our clients as opposed to a vendor-like relationship. We are very pleased that the investment community has embraced our segment reporting that we released in 2015. This has provided our investors and the analysts that follow us with the transparency they needed to give them the ability to track profitability and better value our assets. But it is absolutely critical to understand that MSCI is increasingly one integrated company. This integration is evident across several areas, including our approach to client relationships, our go-to-market strategy, our product development efforts between various areas of the product line, and the content application combination that powers the tools that we provide our clients. Let me talk through each of those areas briefly. First, in terms of client relationships, we are taking an integrated approach by having a dedicated account manager for each of our top 100 clients. Each manager is responsible for coordinating all client interactions within MSCI. These account managers are focused on understanding our clients’ strategy, the various initiatives our clients have to drive those strategies, and the key individuals in the senior management team of our clients responsible for these strategies, so that we can help them address the opportunities and challenges in their investment processes. So in addition to the relationship that we have with those clients at the expert, user, or product level, this overlay of the relationship allows us to apply a solutions-oriented approach that drives the interaction with us at a senior level between MSCI and our clients' organizations, so that we become partners in what the clients do and not just vendors. Next, MSCI is increasingly integrated at the product development level, where we use all of our different IP across the company to deliver complex solutions to our clients. Let me give you a few examples: equity factor models and equity factors indexes are critical collaborations between two product lines. We’ve talked about this extensively in the past. ESG Research and Rating alongside ESG Indexes provide our clients with an integrated perspective on the equity market opportunity with a view that cuts across market cap, factor weight, and ESG factors. So you receive all three combined: the market cap approach to indexes, the factor approach to the opportunity set, and then an ESG factor approach to give our clients one view of the equity markets in which they can build their portfolios. This becomes very powerful in their search for alpha and differentiation. Lastly, in our Analytics product line, we have integrated our equity risk management products and services with our multi-asset class risk products and services and we are now further developing our fixed income risk products into one holistic view of risk across the total portfolio: equity, fixed income, and other asset classes from both a portfolio management and risk management perspective. The third area of integration with MSCI is what we call the content and applications, further illustrated in this slide. The most successful firms in our space will be those that master the integration of both the content, i.e., the models and methodologies and the right data, the algorithms or calculators, and the applications that are so critical in enabling that content for maximum use and utility in our clients' investment processes. The combination of content and applications creates more value than the sum of the parts, because of the ability to use content and applications together to address more use cases, solve more problems, and create more opportunities for our clients. Our goal is to be the best provider of content through either our clients’ applications, third-party applications, or our own applications, as long as we get paid for their content. So we are working on this integration as shown by our new Analytics platform, which integrates data, analytical content, models, and algorithms all in one platform. The integrated franchise that we're building at MSCI is very powerful. It has some ways to go; there are long areas that we can continue to further integrate, but we believe that we're just getting started, and the opportunities are massive. As I travel around the world and meet our clients, especially at the C-level, I hear more and more that they want us to do much more for them, that they want us to become partners in their investment process and not just vendors. Therefore, we can solve more and more use cases with our tools. We believe that this integrated solutions-based approach, in addition to what we have built at the user level, will serve our clients very well and will drive substantial value creation for our clients and our shareholders for a long time to come. Before I turn the call over to Kathleen to go through the quarterly numbers, I would like to welcome Jacques Perold, our new Independent Member of the Board, who will officially start with us on March 6, as per the press release and 8-K earlier this morning. We are absolutely thrilled to have someone with Jack’s deep experience in the asset management industry join MSCI at this exciting time in the evolution of our firm. Kathleen?

Thanks Henry, and hello to everyone on the call. I'll start on Slide 6 and take you through our fourth quarter results. We closed out the year with a very strong Q4. We delivered a 7% increase in revenue driven primarily by a 6% increase in recurring subscription revenue and an 11% increase in asset-based fee revenue. Adjusting for the impact of foreign currency exchange rate fluctuations on subscription revenues, total operating revenue would have increased 8%. As a reminder, we do not provide the impact of foreign currency fluctuations on our asset-based fees tied to average AUM, two-thirds of which are invested in securities denominated in currencies other than the U.S. dollar. On a reported basis, operating expenses increased by 1%, while adjusted EBITDA expenses were basically flat. Expenses excluding foreign currency exchange rate fluctuations represented about 40% of adjusted EBITDA expenses in Q4 and the full year of 2016. Excluding the impact of foreign currency exchange rate fluctuations, fourth quarter operating expenses and adjusted EBITDA expenses would have increased 3.5% and 2.7% respectively. The primary currency move that drove this benefit was the British pound, which was substantially weaker year-over-year. We delivered a 17% increase in operating income and a 16% increase in adjusted EBITDA, with an adjusted EBITDA margin of 50.2%. Our effective tax rate was 29.7%, in line with the effective tax rate of 29.8% in the prior year Q4. The 2015 fourth quarter tax rate benefited primarily from higher net tax benefits mainly associated with various research and production-related credits and deductions. These benefits impacted Q4 2015 adjusted EPS by $0.04. The current quarter's tax rate benefited from higher 2016 profits recorded in lower tax jurisdictions than previously estimated, as well as several favorable discrete items including the settlement of a tax audit and a recent taxable change. These benefits increased fourth quarter 2016 adjusted EPS by $0.04 per share. Diluted EPS and adjusted EPS increased by 28% and 23% respectively. Free cash flow increased over 100% to $127 million in fourth quarter 2016. In summary, Q4 was a great performance capping off a strong year, as we continue to execute very well against our strategy. On Slide 7, you can see the different drivers of EPS growth in Q4. Adjusted EPS increased 23% from $0.66 per share to $0.81 per share. Strong revenue growth from both subscription and asset-based fees contributed $0.15 per share. Investments net of efficiencies in our product segments and operations reduced earnings by $0.04. In terms of capital optimization, share repurchases also benefited EPS. We reduced our average weighted diluted share count by 9%, which benefited adjusted EPS by $0.08, with a partial offset from higher net interest expense that netted a $0.03 per share benefit. Lastly, FX had a net $0.01 per share positive impact due to the impact of currency moves primarily from the pound on adjusted EBITDA expenses. On Slide 8, we highlight our record fourth quarter sales. We delivered record sales this quarter despite the continuing challenging market headwinds that select client segments have been experiencing, as reflected in the higher level of cancels in Analytics over the past three quarters, which I will address in an upcoming slide. The record sales growth of $50 million represents an increase of 21% and was driven by strong growth across all regions and product segments, particularly in Asia, where growth sales were up 45%. This growth in Asia was driven by a broad mix of new client acquisitions and module sales in Index, as well as strong growth in Analytics, especially in Greater China and Japan. We believe that this strong sales performance in a challenging market is a reflection of our ability to identify new and innovative use cases that leverage our product and service offerings for our clients. Strong recurring index sales up 26% were complemented by strong Analytics recurring sales, which were up 13%, driven by strength in the banking client segment and higher sales of RiskManager and Equity Model. We also had record ESG sales with recurring sales up 54%, driven primarily by ESG Ratings sales leveraging both MSCI’s existing client base as well as new client growth. These record sales help to offset higher levels of cancels, resulting in a 37% increase in net new recurring subscriptions. We’re maintaining a high level of retention at approximately 93% on a much larger book of business. Our pipeline remains strong, and we remain optimistic, but cautious as we move into 2017. On Slide 9 through Slide 14, I’ll walk you through our segment results. Let’s begin with the Index segment on Slide 9 through Slide 11. Revenues for Index increased 11% on a reported basis, driven primarily by a 9% increase in recurring subscriptions. We saw growth in benchmark and data products broadly, with growth in core products, factor and thematic products, usage fees, and custom products. Additionally, we saw a 1% increase in asset-based fee revenue. In terms of our operating metrics, record quarterly sales were driven by record recurring subscription sales of $17 million. The aggregate retention rate remained high at approximately 93% in the quarter and 95% for the full year, in line with the prior year period. The Index run rate grew by $54 million or 9% compared to December 31st, 2015. This was driven by an increase in subscription run rate of $38 million or 10% and a $16 million or 8% increase in asset-based fee run rate. The adjusted EBITDA margin for Index was 71.1% versus 68.9% in Q4 2015. Turning to Slide 10, we provide detail on our asset-based fee. Starting with the upper left-hand chart, overall asset-based fee revenue increased $6 million or 11%, driven by a $3 million or 26% increase in revenue from non-ETF passive funds, and a $2 million or 5% increase in revenue from ETFs linked to MSCI indexes, reflecting an 11% increase in average AUM. The strong revenue generation from non-ETF passive funds was primarily driven by higher revenue from new product launches including increases in higher fee products. In the upper right-hand chart, we ended the fourth quarter with $481 billion in ETF AUM linked to MSCI indexes, driven by cash inflows of $15 billion, partially offset by market depreciation of $9 billion. For the full year, ETF AUM linked to MSCI indexes increased by $48 billion or 11% on inflows of $37 billion and market appreciation of $11 billion. From January 1st, 2017 through January 31st, ETF AUM linked to MSCI indexes has increased to $509 billion, driven by $13 billion in inflows and $15 billion in market depreciation. We hit an all-time high of $511 billion on January 27th. More equity ETFs track MSCI indexes than any other provider. As shown in the lower left-hand chart, quarter-end AUM by market exposure for ETFs linked to MSCI indexes reflected the decline in emerging markets after the U.S. Presidential Election, which was accompanied by increases in developed markets. Emerging markets, however, remain well above prior year levels. Lastly, on the lower right-hand chart, you can see the year-over-year decline in the average run rate basis point fee from 3.32 to 3.1. The decline in the average basis point fee is primarily due to cash flow dynamics of lower fee segments of the ETF market. However, we’ve experienced stabilization in the average basis point fee over the last three quarters, which has continued through January 2017. On Slide 11, we provide you with the AUM of ETFs linked through our indexes, classified into three discrete components, illustrating our differentiated index licensing strategy. This strategy is linked to further expanding our index licensing franchise for the ETF market beyond our flagship indexes, increasing the adoption of new index families and U.S. segment index families. The first component of the strategy primarily reflects the licensing to ETF providers of our flagship indexes, meaning market cap indexes focused mainly on exposures outside the U.S. with exposure to large and midcap stocks only. This component represents the majority of ETF AUM linked to MSCI indexes, as well as most of the approximately $10 trillion benchmarked to MSCI indexes overall. This category of licensing includes EAFE, EM, and our single-country market cap indexes. The ETF AUM linked to these indexes has been growing at a three-year CAGR of approximately 6%, and pricing has been steady. The next component of our strategy is the licensing of indexes that primarily include non-U.S. exposure to large, mid, and small-cap stocks, which include indexes that are used as a basis for U.S.-listed iShares or core series in the USA factor indexes such as the MSCI USA Minimum Volatility Index. The assets in this component represent roughly 10% of total AUM and have been growing at a CAGR of over 90% over the last three years. Generally, the pricing for these products is lower than ETFs that licensed our flagship indexes. The third component of our strategy is the licensing of more segmented U.S. indexes, including sector and REIT indexes. AUM in this category has been growing at a CAGR of approximately 30% over the past three years and represents about 15% of overall AUM. Pricing in this component is generally lower than ETFs licensed for flagship new index families. So you can see our strategy is to diversify our licensed ETF franchise and maximize revenue. This differentiated strategy has been successful, as evidenced by the strong growth in AUM and revenue. Even with the faster growth in lower-fee product areas contributing to a lower overall average basis point fee based on run rate, we expect our period product mix will impact the average fee we earn through a differentiated licensing strategy, while we look to maximize the price-volume trade-off over the long term. Resilient pricing in our flagship bonds with strong AUM growth more than offsets pricing declines in fast-growing lower-fee ETFs. On Slide 12, we highlight the financials for the Analytics segment. Revenues for Analytics increased 3.4% to $114 million on a reported basis, which includes a $2.4 million negative impact from FX. Excluding the impact of FX, Analytics revenue increased 5.6%. The increase in revenue was primarily driven by higher revenues from RiskManager, Equity Models, and BarraOne. We have a strong increase in recurring sales, which were 13% higher compared to the prior year’s fourth quarter, due to higher equity model and RiskManager sales. Gross sales, which include non-recurring sales, were up $2.9 million or 15.1%. We did, however, see elevated cancels in Q4, due to seasonality driven by a higher number of contracts up for renewal in the fourth quarter, as well as continued challenging market conditions in some client segments. Analytics run rate at December 31st, 2016, grew by $15 million or 3% to $452 million and would have increased 4% excluding the impact of FX. The adjusted EBITDA margin was 29.1%, up from 27.9% in the prior year, notably approaching our long-term margin target range for this segment. Turning to Slide 13, this provides you with sales and cancels history for the Analytics segment. The chart shows gross sales and cancels for Analytics over the last three years. The higher level of sales in 2016 broke us out of the $60 million range of the previous two years, driven by strong RiskManager and Equity Model sales. Over the past several quarters, we’ve seen increasing cost pressures and budgetary constraints among our banking and bank-owned asset and wealth management clients, which resulted in a $10 million or 34% increase in cancels for Analytics in 2016. Roughly $5 million of the $10 million increase came from two clients in the second half of the year. These cancels have been primarily in the U.S. but we’ve also experienced higher levels in Europe, principally in the RiskManager product area. Approximately 70% of the cancels for 2016 are mainly related to closures, changes in strategy, and cost pressures—market factors beyond our control. So while we’re disappointed with the increase in cancels in select client segments, we’re very pleased with our strong sales numbers in the quarter, specifically in the bank segment where RiskManager growth has been up 138%, and the pipeline remains strong. Turning to Slide 14, we show results for the All Other segment. Revenues for the segment increased 4% to $19 million on a reported basis and grew 15% after adjusting for the disposal of Occupiers and the impact of foreign exchange. First, in terms of ESG, there was a $2 million or 20% increase in ESG revenue to $12 million due to strong ESG rating revenue with record ESG recurring sales in the quarter, which increased 54%. Growth in ESG continues to be driven by the increasing integration of ESG into the mainstream of the investment landscape and leveraging the existing MSCI client base as well as new client acquisitions. Real Estate revenues decreased by $1 million or 13% to $8 million on a reported basis. Excluding any impact of foreign currency and the sale of the Occupiers business, Real Estate revenues increased by 10%. The All Other adjusted EBITDA margin was 2.3%, up from a negative 16.1% in the prior year. The increase in the adjusted EBITDA margin was driven by continued strong growth in ESG revenue as well as lower Real Estate costs, primarily due to a reduction in headcount and strong cost management as we make progress toward improved profitability in our Real Estate product area. Turning to Slide 15, you have an update on our capital return activity. We continue to return a substantial amount of capital to investors. In Q4 and through January 27th, we repurchased and settled a total of 4.2 million shares at an average price of $80.27 for a total value of $339.7 million. Since 2012, we’ve returned almost $2.3 billion through share repurchases and dividends, and we’ve repurchased 35 million shares for the company. There was $806 million remaining on our outstanding repurchase authorization as of January 27th, 2017. On Slide 16, we provide our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $792 million. This includes $208 million of cash held outside the United States, and a domestic cash cushion of approximately $125 million to $150 million, which is a general policy we maintain for operational purposes. We continue to repurchase shares in January, totaling over $60 million. Furthermore, we pay our annual cash incentive compensation in the first quarter. As a result of this, coupled with interest, dividends, and tax payments, CapEx disbursement and the aforementioned buyback, our deployable cash balance in Q1 2017 will be lower than what was available at 12-31-16. Our gross leverage was 3.7 times at the end of the quarter, down from 3.8 times at the end of the third quarter 2016. Over time, we expect that we will return to our stated range of three to three and a half times as our adjusted EBITDA grows. On Slide 17, we highlight the key drivers of the outperformance for the full year of 2016 free cash flow generation. Free cash flow increased 53% to $392 million for the full year versus 2015. The outperformance was driven primarily by two factors. First, we saw strong customer collections in Q4 with some clients even paying early, therefore experiencing a pull forward of about $20 million in collections into 2016. Next, we benefited from a combination of tax refunds and discrete cash tax benefits of about $40 million. Normalized free cash flow would have been approximately $330 million for the full year of 2016. For 2017, we are guiding to free cash flow of $310 million to $370 million, reflecting ongoing strong cash generation in 2016, partially offset by incremental interest payments, cash taxes, and lower collections due to the pull forward. Lastly, before we open the line for Q&A, on Slide 18 we’re providing you with our full year 2017 guidance. Operating expenses are expected to be in the range of $690 million to $705 million, and adjusted EBITDA expenses are expected to come in between $605 million and $620 million. FX rates at the end of 2016 are the bases for this expense guidance. In 2017, we're expecting approximately half of the $32 million year-over-year increase in adjusted EBITDA expenses to come from carryover and inflationary increases. The other half of the increase will be investments in sales, marketing, and products and services. We expect the full year 2017 adjusted EBITDA margin in analytics to be flat or slightly better than the 4Q exit margin for the product area. Interest expense is expected to be approximately $116 million. Net cash provided by operating activities is expected in the range of $360 million to $410 million. CapEx is expected to be in the range of $40 million to $50 million in line with 2016. Free cash flow is expected to come in between $310 million and $370 million below the free cash flow generated this year because of the items I discussed earlier. The effective tax rate is expected to come in between 31.5% and 32.5%. In Q1 2017, we will be adopting the new accounting guidance related to employee share-based compensation under the new standard. All share compensation excess tax benefits and tax shortfalls will be recognized in income taxes in the statement of income as discrete items in the reporting period in which they occur. Previously, these were recognized as a component of stockholders' equity. We expect the impact, assuming current stock price levels and based on stock vesting and option expiration timetables, to result in a tax benefit of approximately $3.5 million for the full year of 2017. Given that the majority of our stock vests in the first quarter of each year, we expect about two-thirds of this estimate to occur in Q1. Please note the impact of this change is just an estimate, which could change significantly based on changes in MSCI’s stock price, employee behavior, and when employees elect to exercise options. We're reaffirming our dividend payout ratio of 30% to 40% of adjusted EPS and our objective to maintain gross leverage in the range of three to three and a half times. Also, beginning with Q1 2017, adjusted EPS will include amortization expense associated with internally developed capitalized software on a prospective basis. The impact of prior periods was not material. We're making this change because internally developed capitalized software will become a more meaningful component over time as we continue to invest. We believe that only intangible amortization related to acquisitions should be excluded from the adjusted EPS calculation. For modeling purposes, amortization of internally developed capitalized software that will be included in adjusted EPS is expected to be between $5 million and $6 million in 2017. Lastly, as a follow-up to the issuance of our long-term targets in 2015, we are reaffirming those targets as of this call. In summary, we executed well throughout the quarter and the year, and we're very pleased with our strong results. We are continuing to invest in and innovate with new products that will position MSCI to continue to grow in the quarters and years ahead. With that, we’ll open the lines to take your questions.

Hey, good morning everyone. Maybe just starting with the environment and the outlook a little bit. Clearly, the cancels are still elevated, but the sales were really, really strong. So what are you seeing out there, particularly on the index side in terms of confidence level that the sales can remain elevated or even increase? Are you seeing anything that makes you feel that a lot of the cancels were one-time or is there still a concern about certain areas that could continue to see elevated levels? Thank you.

Yes, so the pipeline remains pretty solid as we head into 2017. In January, we remain cautiously optimistic about the prospects for gross sales and renewal sales this year. Our end client environment is complex; we sell a lot to active managers around the world, and a lot of our subscription business is based on that. Clearly, the asset-based fee business is tied to passive managers, and that client base is facing cyclical pressures alongside secular issues brought about by passive management, which is dominating much of what they do. Throughout the year, these trends have continued through December, and the new environment we’re seeing with higher growth around the world might be beneficial for our end client base. It's too early to tell how that might play out, as we recognize a recent run-up in banks and asset managers from November to December, but some of it has been reversed in January. We try not to focus too much on that. Instead, we're focused on understanding our clients' challenges and opportunities. Regarding cancels, I think elevated levels may continue given the structural changes in the market, but we are optimistic about sales driven by our efforts and innovative approaches.

Very helpful, thank you. And just to address the asset-based fees tied to ETFs and index fees, I appreciate the color on the mix. When you think about your biggest customer, BlackRock, you saw some of the moves that they just made on the custody side, moving $1 trillion over to J.P. Morgan from State Street. They're also getting more conscious with some of their vendors. So with those developments and others like Schwab lowering fees aggressively for their index products, do you believe that fee pressure is still a significant concern?

The first thing to consider is that we are trying to provide insight into how we view our licensing strategy, especially in light of what Kathleen will discuss. Our flagship product line and the new index families we're launching naturally have less pressure due to their longstanding market presence and unique characteristics compared to newer entrants. Our aim is not simply to rely on flagship products but to expand dramatically into all areas of the ETF marketplace. We understand the dynamics with large clients like BlackRock, where we aggressively optimize revenue together. Despite market pressures, we believe segments like flagship indexes will face less fee pressure because they provide unique value. For other segments, we acknowledge more fee pressure, but we will only participate if we see good returns on our capital and efforts. We are determined to be present in all relevant market areas.

When we look at the space, we expect continued growth and substantial asset gathering over time. We’re focused on how we can capture that market share through new product innovation and our differentiated licensing strategy. Over the long term, we’re confident that the volume-price trade-off will make sense for us.

Good morning, everyone.

Good morning.

Good morning.

So a question for you on the Analytics side. That's an area where you guys have been putting through some price increases, and even though you had elevated attrition, margins were still up 120 basis points on a year-over-year basis, and even 30 basis points on a sequential basis. So was it just that some low-margin clients left, or are you taking more of an up-and-out approach for some of the more marginal clients?

No, the approach has been focused on how we can aggressively manage the product line. We started by assessing the value our products offer clients relative to the prices charged. Upon realizing that some clients find immense value in our offerings, we've aimed to equate that value with higher prices gradually. The price increases have not driven cancellations by any meaningful extent at all. Furthermore, we evaluate all our activities; Analytics comprises various efforts and products. We are reallocating capital and expenses into higher-yield opportunities, impacting margins positively. We continue to make progress toward our restructuring and reengineering transformation of analytics, and while we've achieved margin expansion, our focus now is on revenue growth.

One more if I might on leverage. You pointed out on Slide 16 the gross leverage at 3.7 times, which is above target, but what stands out is the net leverage at 2.3 times. Given this, are you considering making any acquisitions, or will you be more aggressive on the buyback?

I think the way to think about it is that we have excess capital or excess cash. We're getting close to a steady state where we can utilize that capital effectively as we continue our trend of organic growth, return of capital via dividends and buybacks, all while leaving room for occasional acquisitions. As a result, with a robust balance sheet, will look for opportunities that align with our strategic objectives.

Hi, good morning.

Good morning.

Good morning.

You mentioned some cash collections that were expected in fiscal 2017 but were received in the fourth quarter, and I was wondering if that dynamic impacted your new sales level during the quarter as well?

Looking at those two data points, we had strong sales in the quarter, and we're happy with that. The second half of the year saw healthy sales, and we also had really positive cash collections. Sometimes clients pay ahead of the due date, which might suggest a healthy environment. However, we're still cautious, given that some client segments have faced challenges over the past several quarters.

Okay. And you've mentioned a couple of times the tax initiatives this year that will impact next year's tax rate by about 200 basis points by aligning your business globally from a tax perspective. Would potential tax reform in the United States — if there were a reduction to a federal level of around 20% — impact your strategy for achieving your tax initiatives?

There are a lot of unknowns with tax reforms regarding what it may look like, when it might take place, and how it could affect our operations. We are waiting to see how this plays out. A reduced corporate tax rate would be beneficial, but other factors, like interest deductibility, will also need to be considered. Generally, the work we've done on the tax side aligns our tax structure with our operating structure, where we employ people and where our clients are located.

Hi guys, this is Mike Read on for Joe, thanks for taking my question. Just could you elaborate a bit on the expected impact of the new administration outside of potential tax reform?

I think the bigger implication for us would be the possibility of higher growth in the U.S., which may translate to higher growth in Europe as well. More emphasis on fiscal policy over monetary policy could lead to higher inflation. This would likely benefit our client base of asset managers, which could lead to increased demand for our products and ultimately result in fewer cancellations. However, we have to be cautious as this might be tempered by political risks and trade uncertainties.

Okay, thanks. And then just switching over to margins, after a strong performance in past years, how do you see the margin runway for the overall company in the medium to long term?

We remain committed to the same strategies that we've outlined previously. We will continue working on our operating efficiencies, particularly as we focus on revenue growth alongside our margin expansion goals.

Good morning, guys, thanks for taking my call. Just want to clarify on the tax rate guidance of 31.5% to 32.5%—that includes the stock-based compensation changes in the first quarter?

Yes, Keith, it does include that.

Okay, and also just a follow-up question regarding the cash collections. I guess I want to understand why customers would choose to pay early, as people generally prefer to hold onto their cash. So there's an interest in understanding that dynamic.

That's a valid question. We asked ourselves that as well, but we were happy to accept the $20 million.

Yes, thanks. I actually just have one last question. Given the dynamic you’re seeing, did those earlier cash collections impact growth in sales during the fourth quarter?

No, the cash collections were normal and did not notably impact our growth sales in Q4.

Okay, thank you. And another question: On the index subscription basis, it was a strong quarter for growth again, but we’ve noticed growth in non-U.S. mutual funds has slowed. How do you view that trend impacting gross sales outlook for index subscriptions? We also see some positives in custom and factor products.

The value of our benchmarking product has notably increased for mutual funds in recent years—clients are now more focused on understanding benchmark structures given the competition from passive investments. The average mutual fund manager has to devote more time to this, representing a competitive challenge. The benchmarking product has added value for our clients, leading to increased subscriptions. Additionally, the subscription to factor indices is growing, with clients using them for benchmarking rather than just replication. Therefore, while there are headwinds for traditional mutual funds, our offerings are also evolving and diversifying.

Hey, good afternoon, I guess. First question: Just a little bit of housekeeping—the incremental $5 million to $6 million expenses you capitalized or you amortized in 2017, is that incremental versus 2016? Because I recall it was nominal last year?

No, it’s not incremental; it’s $5 million to $6 million for 2017. However, this was a small figure, a couple of million in 2016.

All right, thank you. That's helpful. And then for my follow-up, I'm curious if you can share any thoughts on Morningstar's open index initiative discussed last December or November? It seems noteworthy since several buy-side firms have expressed displeasure with indexing licensing fees and this initiative appears to address that market.

First, there has always been competition and new entrants in the index space. Running the company for 21 years, I've known numerous firms attempting to create their own indices. This is not new. Our core value proposition is to provide a standard for comparisons between asset owners and asset managers. Competing standards make it harder to maintain that integrity. Furthermore, our high-value offerings are continuously innovating and evolving, making it difficult for new entrants to catch up.

Hi, this is Andrew Nicholas filling in for Chris. Just regarding the net sales in the Analytics segment: While they were solid numbers in the quarter, it appears that constant currency run rate growth continues to decelerate. Can you help me to understand what drives this dynamic?

There was a slight FX impact on the run rate; I can follow up with you on that number specifically. That said, even with the cancels, which have been isolated to specific client segments, we are pleased with our overall performance in analytics.

Thank you.

Thanks everyone for your time, and have a great afternoon. Thank you.