MSCI Inc (MSCI) — Q4 2017 Earnings Call Transcript

Thank you, Daniel. Good day, and welcome to the MSCI fourth quarter and full-year 2017 earnings conference call. Earlier this morning, we issued a press release announcing our results for the fourth quarter and full-year 2017. A copy of the release and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab. Let me remind you that this call may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, and are governed by the language on the second slide of today’s presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements in our most recent Form 10-K and other SEC filings. During today’s call, in addition to GAAP results, we also refer to non-GAAP measures, including but not limited to, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide a baseline for the evolution of results. You’ll find reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on pages 26 to 30 of the earnings presentation. On the call today are Henry Fernandez, our Chief Executive Officer; Baer Pettit, our new President; and Kathleen Winters, our Chief Financial Officer. With that, let me now turn the call over to Mr. Henry Fernandez. Henry?

Thanks, Andy. I apologize for a little bit of scratchy voice and cough. Like many Americans now, I’m battling a cold. As Andy indicated, Baer Pettit, our President will be joining us on this call and will be joining us going forward. As some of you know, Baer has worked side by side with me for over 18 years in building this great company. I will provide a brief intro and then pass it on to Baer to go through a few slides, and then Kathleen will provide the financial review. As you can see by the full-year results on Slide 4, we are seeing the enormous potential and power of the MSCI franchise and the progress that we have made perfecting our go-to-market strategy, our continued company innovation, and the enhanced capabilities that we’ve been building across our software applications and services, all of which have been delivered as one integrated company. These record results and strong performance have not happened by accident. They reflect very strong progress that we’ve made over the last few years that we’ve been reporting to you on our organization, and how we’re executing against both our strategic and financial roadmap. We also saw an acceleration in some of our key leading indicators with subscription run rate growth of 11% versus 7% in 2016. We saw recurring net new sales for the quarter and the year with growth of 60% in Q4 and 37% for the full-year, reflecting again the strong progress we have made as an organization and as a team, in this particular case, in product development and client engagement. We remain absolutely committed to continue to generate positive operating leverage for our shareholders through our relentless focus on enhancing productivity throughout the company. Kathleen will discuss in more detail, but it’s also worth noting that we will significantly benefit from the newly passed U.S. tax reform law in 2018, both in terms of a lower effective tax rate going forward and very importantly, the ability to repatriate a meaningful amount of our international excess cash. As in prior calls, we want to tell you we remain absolutely committed to optimizing and having the most efficient capital structure in our company and returning any excess capital back to shareholders along the lines of the same principles that we have outlined in the past. So in sum, we expect all of this will further enhance what we call our financial algorithm. We’ll continue to drive very attractive long-term shareholder returns. Let me turn it over to Baer now.

Thank you, Henry. Slide 5 illustrates the increasingly important role that we play within the investment industry. The content, applications, and services that we provide to our clients are mission-critical to their core investment activities, such as allocating assets, constructing and optimizing portfolios, and understanding and managing investment risk and performance. Because we are central to our clients’ core activities, we’ve gained unique insights into their investment needs and key objectives. Furthermore, because of our success, our products have become established within the industry as a common framework for defining and measuring investment risk and return. The frameworks that we deliver to our clients provide, for example, a framework for defining the universe of investable equity securities provided by our All Country World Index, or ACWI; a common language for defining and measuring the performance of a specific market or strategy, such as that provided by our equity and real estate benchmark indexes; a common language for understanding the absolute and relative environmental, social, and governance attributes of issuer securities, such as that provided by our ESG content and indexes; and a common language for defining and understanding the systematic drivers of risk and return in a security or a portfolio through our widely-accepted multi-asset class risk platform, our world-renowned factor models, and our recently introduced factor box and factor classification system for commonly used factors. Because our offerings provide frameworks for analyzing aspects of the investment process, a broad range of participants within the investment industry provide us with their thoughts and insights. They provide viewpoints on how to more effectively measure our market or calculate risk and return, as well as their thinking around the latest investment trends and additional tools that may be required to capitalize on those trends. Our ability to synthesize this feedback from all parts of the investment industry increasingly positions us as a thought leader around emerging investment trends. This feedback allows us to create new content, applications, and services, and modify our existing ones to make them more effective. This virtuous circle has allowed us to stay at the forefront of key industry trends like global investing, ESG, factor investing, and multi-asset class risk and performance management. Because of this feedback loop, clients increasingly want access to tools and knowledge across the firm, not just from a single product line, with the large majority of our clients using products and services from more than one of our product lines. During 2017, we achieved several key milestones and witnessed several notable events that reinforce the growing relevance and importance of MSCI. As previously reported in September 2017, there were approximately $12.4 trillion of assets benchmarked to our indexes globally. As of January 30, there were over $807 billion of ETF assets, or one-fifth of the equity ETF market, moving to our indexes. The ETF assets linked to our indexes are up more than 57% from one year ago. Additionally, we’ve received an unprecedented level of industry attention in media coverage around index inclusion events, such as the announcement of the coming inclusion of China A-shares, the consultation on the potential inclusion of the Saudi Arabian market into our emerging market index, as well as around the growing significance of ESG investing and the value of MSCI ESG content and indexes. Please turn to Slide 7, where we highlight some of the recent initiatives that we have been pursuing to fuel our integrated franchise. We are increasingly taking an integrated approach to engaging with our clients and are spending more time with C-level executives, where we are becoming an even more important partner by helping them to understand emerging trends and how MSCI can help them to take advantage of those trends. We have also introduced regional operating committees, which help to optimize our go-to-market strategy for each region to address the specific needs and business models of our clients. In addition to increasing levels of engagement in the sales process by MSCI’s senior executives, notably by Henry; our Chief Operating Officer, Laurent Seyer; and myself, we are continuing to hone a consistent approach to delivering the full suite of MSCI products and capabilities. As a result of the senior-level approach to selling, together with the introduction of our coverage incentive plan compensation program and our senior account manager program, we have achieved increased levels of growth from our largest clients, with 19% year-over-year run rate growth from those clients who have greater than $2 million in run rate, and a 14% improvement in sales productivity since 2015. We have also been heavily focused on providing anonymous content and enhanced applications and services across the organization to better serve our clients. By having integrated client coverage, research, data, and technology groups supporting all product lines, we’re better suited to share our unique intellectual property and leverage our differentiated know-how to deliver innovative and high-quality content. Answering executive-level feedback from our integrated approach to clients, we’re leveraging our integrated research and data teams to deliver differentiated new index models, as well as differentiated multi-asset, risk and stress-testing models. Additionally, we’re leveraging our integrated research, data, and technology teams to release new applications and services that empower our clients to use our content more efficiently and more effectively. For example, services like index metrics and our custom index development offerings help our clients understand the factor and ESG attributes of an index and to build new indexes. Additional analytics capabilities released in recent years like benchmark aggregation, performance attribution, data management and reconciliation, and enhancements to our regulatory services, including our liquidity analytics and services that help clients meet their end or regulatory requirements help our clients to address key operating challenges. These additional capabilities together with enhanced content in areas like fixed income analytics have helped drive an 11% year-on-year run rate growth in the fourth quarter within our multi-asset class analytics offerings. We saw $46 million of total growth sales in 2017 from multi-asset class analytics, where fixed income capabilities were a key driver of our success, with $12 million of total new sales associated with fixed income analytics. Our integrated franchise continues to be a significant competitive advantage for us and an important driver of our attractive growth trajectory. On Slide 8, we wanted to highlight two of the more notable areas of content innovation, where having an integrated franchise has allowed us to benefit across products and client use cases. By having well-established position, reputation, and research team in factor analytics, we have been able to create a cohesive and systematic multi-factor set of index families that is being rapidly adopted as benchmarks and for content mandates and ETFs. We’re uniquely positioned to preserve the right tools for analyzing, communicating, and implementing factor strategies. As of December 31, 2017, we had over $208 million of run rate related to factors across all of our products, and we have seen a two-year compound annual growth rate of the factor-related run rate from 2015 to 2017 of 16%. Our factor analytics tools help investors to understand the factor attributes of a portfolio and to construct portfolios to achieve specific objectives, while our factor indexes provide the mechanism to implement those portfolios. Similarly, as ESG considerations are increasingly central to the investment process, MSCI has established a position in ESG content; our broad and deep security coverage and our consistent systematic ratings framework provides a natural foundation for ESG indexes. Furthermore, our established research and deep relationships with asset owners have accelerated the adoption of ESG indexes within the investment process. As of December 31, 2017, we have over $83 million of run rate in ESG content and ESG indexes, and we have seen a two-year compound annual growth rate of the ESG-related run rate from 2015 to 2017 of 31%. Of note, the iShares MSCI KLD 400 Social ETF became the first and only ESG ETF to cross the $1 billion mark in assets under management. We believe we’re well-positioned to continue to identify and benefit from emerging trends in the investment industry in the future. With that, I’ll turn it over to Kathleen to discuss our financial results, segment results and guidance for the year ahead.

Thanks, Baer, and good day to everyone on the call. I’ll start on Slide 9 and take you through our financial performance for the quarter. We delivered another quarter with double-digit revenue growth, 14%, driven by growth in asset-based fees of 41% and recurring subscription revenue growth of 9%. During 2017, we saw AUM and ETF linked to our indexes grow to $744 billion, a 55% increase, more than half of that increase came from cash inflows into ETFs linked to MSCI indexes. Operating expenses and adjusted EBITDA expenses, which included elevated non-recurring severance expenses in the quarter, increased year-over-year by 8.4% and 10.5%, respectively. Full-year expenses of $615 million were in line with our most recent guidance provided during our last earnings call. Severance expense was $7.7 million for the quarter, an increase of $6.9 million from the prior year, of which $4.8 million was within Analytics. These efficiency actions have an associated cost save of approximately $13 million, with $9 million related to Analytics, and will enable us to allocate resources to our key growth areas. We delivered attractive operating leverage with adjusted EBITDA margin expanding 170 basis points and adjusted EPS growing 42%. On Slide 10, you can see the drivers of adjusted EPS growth in Q4. The biggest drivers of the increase in adjusted EPS were strong top line growth and continued alignment of our tax profile with our global operating footprint. This growth was partially offset by an increase in expenses related to ongoing investments in severance to achieve efficiencies. The alignment of our tax profile with our operating footprint, the impact of various discrete items, and the positive impacts of share-based compensation excess tax windfall benefits contributed $0.11 to the adjusted EPS growth. This was partially offset by foreign exchange. We recorded a net estimated charge of $34.5 million associated with tax reform, which included a tax charge related to the repatriation of foreign earnings, partially offset by the revaluation of our net deferred tax liabilities. This charge is excluded from adjusted net income and adjusted EPS. Similarly, we expect that any future charges resulting from refinements to and further guidance on tax reform will also be excluded from adjusted net income and adjusted EPS. Exclusive of these non-recurring tax reform-related charges, our adjusted tax rates for the fourth quarter and for the full-year were 22% and 27.5%, respectively. Slide 11 provides the full-year summary of financial performance. As you can see, we delivered very strong results for the full-year with revenue growth of 10.7% and adjusted EPS growth of 31.4%. Free cash flow came in at $355 million for the year, consistent with our guidance. As a reminder, 2016 free cash flow experienced several favorable non-recurring and timing-related items related to tax reforms, prior period tax overpayments, as well as early payments from clients that drove an elevated free cash flow level in 2016. Adjusting for these items, the normalized 2016 free cash flow was $340 million. The growth relative to the prior year normalized free cash flow reflects the strong financial performance for the year, partially offset by higher interest payments. Although collections were higher, they were somewhat slower than anticipated, attributable mostly to our tax realignment work as we adjusted billing entities for some of our international clients. Overall, we’re very happy with our execution and results in 2017, and we’re excited about our momentum heading into 2018. On Slide 12, we’d like to share the exceptional sales and net new sales performance we saw as we closed 2017. We delivered record gross sales, recurring sales and recurring net new sales in the fourth quarter and for the full year 2017. We executed well in the quarter and converted a significant amount of pipeline into signed deals, particularly within Analytics. Index run rate grew 23% with Q4 being another quarter of double-digit subscription run rate growth. Analytics demonstrated a nice acceleration in subscription run rate growth of 8%, or 7% excluding foreign exchange. The 7% ex-FX run rate is up from 3.8% in 2016, a clear acceleration of growth rate. We experienced particular strength in EMEA and Asia with subscription run rate growth in Q4 of 14% and 13%, respectively. While the subscription growth in the Americas remained in line with the growth in past years at 8%. We’re seeing the benefits of our enhanced go-to-market strategy, our continued innovation and product enhancement, and the increasing power of our integrated franchise. One point to mention is that we’ve seen a higher percentage of our annual sales occurring in the fourth quarter and a lower percentage in the first half of the year. Specifically, we’ve seen about one-third of our annual recurring sales booked in the fourth quarter in each of the last two years, compared to 27% to 28% in each of the prior three years. It’s difficult to say whether this will be a continuing trend, but this change in linearity has possibly been driven by the budgetary processes of our clients as well as our coverage incentive plan that was implemented in 2016. We’re keeping a close eye on it as we build the pipeline for 2018. We’re very pleased with the strong performance in 2017 sales and the team is now focused on continuing to build and execute on the 2018 pipeline. Now let’s turn to our segment results on Slide 14. Index revenue grew by a significant 22% this quarter, the highest rate of growth since 2011. This included strong growth in ETF-related revenue due to cash inflows and market appreciation, growth in non-ETF passive product revenue, and exchange-traded futures and options products. Index subscription revenue grew at 12%, reflecting our continued sales momentum and high retention rates with growth in new products and traction in our client segments. In the Analytic segment, we delivered revenue growth of 3%. The growth in revenues typically lags the growth in run rate. Contributing to this lag, we’ve seen the onboarding and implementation periods for some large clients lengthened, reflecting the growing complexity of client needs. We’re beginning to see the benefits of our fixed income investments with $12 million of total gross sales in 2017. Also, we continue to invest in our new Analytics platform, additional service capabilities, and our go-to-market efforts to drive revenue growth to higher levels. Finally, our all other segments delivered revenue growth of 21.5%. ESG revenue was up 24%, driven by continued strong recurring sales, which were up 47% for the quarter and 32.5% for the year. We believe ESG is in the early stages of its evolution. ESG has the potential to become a key component of investment mandates throughout the world and we’re well positioned to provide a framework for analyzing ESG issues that will be widely adopted. As we have discussed in the past, we’re investing to leverage new technologies in natural language processing and machine learning to enhance efficiency and drive productivity in this product. Next, in terms of real estate, revenue was up 17% on a reported basis and up approximately 12% on a foreign exchange adjusted basis. The increase in revenue was primarily driven by growth in our market information product and strong momentum in North America. We continue to focus on further improving the performance of this segment with initiatives to enhance sales, product capabilities, and productivity. We believe there is an attractive long-term market opportunity for this offering. Slide 15 and 16 provide some additional detail on the Index segment. On Slide 15, we show four main categories of index modules and the four-year run rate compound annual growth rate for each category. Despite seeing pressure and headwinds on traditional active asset managers, we continue to deliver consistent revenue growth driven by the strength of our offerings, new products, and some high-growth client segments. Newer modules, such as our Factor and ESG Modules have been increasingly in demand. We’re seeing more and more investment mandates which include Factor and ESG considerations, such as minimum volatility, value, momentum, low carbon, as well as socially responsible and governance-related considerations. Similarly, we’re witnessing very strong demand for our custom and specialized index offerings, which help clients achieve a differentiated or unique mandate. We’re also continuing to gain traction further penetrating client segments, such as broker-dealers, wealth management, and hedge funds. More broadly, as passive and index-based investing represents an increasingly larger portion of global assets, there is an increasing need from all market participants to understand the underlying indexes. We continue to be excited by the ongoing prospects of our subscription revenue business. Turning to Slide 6, we show additional detail on our asset-based fees. Starting with the upper left chart, we recorded strong growth in asset-based fee revenue across all index-linked investment products. As of December 31, there were a total of 992 ETFs benchmarked to MSCI indexes, an increase of 9% from the prior year, or roughly 22% of the equity ETF market. Revenue from non-ETF passive products was up 28.3%, reflecting strong growth in institutional passive and index-based mutual fund AUM, including higher fee-type products like factor and ESG. Revenue from exchange-traded futures and options continued its exceptional growth, increasing 41% and reflecting the developing liquidity pool and broadening trading community around multi-markets, multi-currency index futures and options. On the bottom left, you see that in addition to the very strong cash flows into and market appreciation in the developed markets outside the U.S., we experienced strong AUM growth in both emerging markets and the U.S. In the lower right chart, you can see that average run rate basis point fee for the period at 3.04. While the decline in fee rate has slowed, our primary focus is not on driving higher fee rates or moderating the decline in fee rates. We are very focused on increasing volume and market share and driving long-term growth in run rate. Turning to Analytics, Slide 17 provides you with a summary of the margin and growth trajectory over the last several years. On the upper half of this slide, we show the Analytics margin progression starting with 2014. During 2013 and 2014, we invested heavily to bolster the technology infrastructure and the client service organization. We then undertook a series of restructuring initiatives during 2015 and 2016, which combined several products and sales organizations, rationalized and streamlined several functions, as well as prioritized investments into the key product and client growth areas that were most strategic for the firm. We continued the restructuring in 2017 with our Q4 realignment and reprioritization initiative, which resulted in a slight decline in the margin in 2017 to 27.4%. Excluding the increase in year-over-year severance expense, the Analytics margin would have been above 28%. We’ve largely right-sized the expense base and focused our investments in key growth areas. We’re now working on achieving acceleration in revenue growth to drive further adjusted EBITDA margin expansion into our long-term targeted range of 30% to 35%. Over the last few quarters, we’ve seen a gradual improvement in the run rate growth to the current level of 8%. In the fourth quarter, we saw recurring sales up 35.5% and recurring net new sales up 178%, as a result of both strong sales and a reduced level of cancellations. It’s important to remember, however, that quarters can be lumpy, but we continue to remain cautiously optimistic about this momentum. We saw strength in Equity Analytics, as clients increasingly need our content sets and applications to differentiate themselves by more effectively constructing portfolios to achieve their desired investment objectives. Similarly, our multi-asset class content applications and services help clients manage, understand, and support risk and performance across single or enterprise-wide multi-asset class portfolios. We’re helping clients manage and reconcile data, as well as meet regulatory requirements, such as end reports. Our applications and services also assist our clients in operating more efficiently, often delivering services and capabilities at a fraction of the cost of internal operations or multiple vendor solutions. Turning to the next section, Slides 19 and 20, provide an update on our capital, liquidity, and our 2018 guidance. On Slide 19, we provide our key balance sheet indicators. As a result of tax reform, we can now more efficiently access a significant portion of our cash held outside of the United States. In terms of leverage this quarter, we are at 3.2 times well within our stated range of 3 to 3.5, as a result of growth in our adjusted EBITDA. Although there are significant benefits from tax reform, we are not making any changes to our capital allocation strategy. Even with the access to additional cash overseas, we will continue to approach share repurchases in line with past practice by repurchasing more shares when there’s softness in the market and when we have more excess cash, and fewer shares when volatility is low and we have less excess cash. We continue to review repurchases as an important part of our return on capital strategy and will continue to repurchase shares opportunistically. On Slide 20, we share our 2018 guidance. As you can see by our expense guidance, we will continue to be diligent at balancing investment activity with controlling costs. In addition, I’ll point out that our long-term targets remain the same. As we reflect on 2017 and the company’s ongoing evolution, I want to highlight one element of the company’s transformation of which we are particularly proud. We’ve been intensely focused on creating an organization with world-class financial management that will enable us to effectively make and implement decisions based on appropriate information and ultimately allocate capital to its highest return uses. I’m excited to say that we’ve made enormous progress enhancing our financial and process discipline. We’ve improved our systems, processes and culture, which has enabled us to quantitatively track and manage our investments and expense base to drive continued innovation, effective capital allocation, and enhanced return on investment and shareholder returns. Of course, there are always additional improvements to make, and we very much have a culture of continuous improvement, but we are very proud of the progress the team has made in this area. In summary, 2017 was an exceptional year for MSCI and reflects our commitment to executing against our strategy. We’re uniquely positioned to continue to innovate and assist our clients by providing mission-critical tools and services to meet their evolving investment needs. We remain excited about our growth opportunities for 2018 and beyond and we very much look forward to keeping you updated on our progress. With that, we’ll open the lines to take your questions.

Yes. Hey, good morning, everyone. I want to start where you actually closed, which is the capital side. I think, Kathleen, you mentioned there’s no change to capital allocation. However, you’re building up a lot of cash. And I hear you that markets could get more volatile and you want to have some dry powder for buybacks. But we’ve been saying this for a year, markets keep on going up. So at some point, I wonder how much it is in the best interest of shareholders to keep piling up cash? I mean, if you’re really excited about growth, maybe you should be buying back your stock, or maybe you should raise a dividend. So maybe you can address that a little bit. And maybe also, Henry, how does M&A factor into this? Because again, you’re building up some cash here, and it might be some things out that I could fit nicely into your offering? Thank you.

Thanks, Alex, that’s a good question. Look, we’re very, very keenly focused on organic growth in the company. We believe that we have a lot of the footprint necessary to capitalize on all the opportunities that we see in the market. And if there’s any M&A, it’s kind of fillers here and there. But there’s also a lot of bullishness in the M&A market. So we look at certain assets, and the evaluations have been stretched. So we have felt that we can do that organically and fixed income Analytics is an example of that for ESG, the potential is our examples of that, et cetera. So we’re not really conversant in playing for any kind of bigger acquisitions, if anything, it’s just smaller icons alike. And one area we’re very focused on is technology, natural language processing, artificial intelligence, and things like that, right? So therefore, that brings the question of the capital back to what do we believe if it’s not there, right, if it’s not for any kind of acquisitive growth. Look, we believe that we earn a bull market, and sooner or later, there’s going to be a correction and we want to capitalize on that. And obviously, if a long time goes by and it doesn’t happen, then we’ll have to reassess and move forward. But for now, we believe the tax law just passed, and the excess cash currently on the balance sheet to date in New York or in the U.S. is $250 million. We have not been yet able to bring it back. It will take a few months to bring it back, because there are a lot of procedures associated with it. We think it could be up to $350 million or so that we can bring back. We’re still analyzing all of that, because we don’t want to pay large withholding taxes in various places. And that now creates a little bit of a larger amount of excess cash we can deploy, now we’ll be patient. I think, at the end of the day, look, I realized what you’re saying. But I also don’t want to wake up and say we deployed all this cash back to shares and then a month later, there was a correction and we didn’t capitalize on it.

Kathleen?

Yes. Just to echo what Henry said, look, we think there’s about 350 and possibly more than that that we’ll bring back. But it doesn’t come back immediately; it does come back most likely in the first half. But a lot has to happen to get that back in terms of auditing of legal entities, their withholding tax in local jurisdiction. So we want to make sure we are smart and diligent and we’re bringing it all back in the most cost-efficient manner we can, and we’ll continue to be disciplined from a capital allocation standpoint and wait for those moments of volatility.

Fair enough. Thank you. And then just secondly, I guess, to shift on to the cost guide, I think, you didn’t give a lot of detail there. So two things really that I’m curious about. One, how about FX, like what kind of – I mean, I think FX historically when the dollar weakens, that’s not a good thing for your cost base and your margin. So just wondering, what you’re going to build in, in terms of rate there? And then secondly, we’ve been in this good deduction environment as we just talked about, and obviously, your asset-based fees are going up, et cetera. If that actually turns around like Henry is waiting for, it sounds like, I mean, what kind of flex do you have on the cost base? Thank you.

Yes, a couple of questions you have there. So from an FX standpoint, I mean, you’re right, in terms of the impact to us, but it’s typically very minimal. We typically have some good natural hedges in place. And so we see really small impacts from an FX perspective. In terms of the asset-based fee environment and AUM levels, that does turn around and we see a correction downward movement. Obviously, yes, we get impacted by that. And as the percentage of our asset-based fees grow as a percentage of the total company, there is more of an impact there. So we are really, really diligent at doing scenario planning, and saying, okay, we’re going to build a base plan, but less scenario plan for both an upside and a downside. And if a downside happens, what do we do and what are our levers? So we’ve been pretty detailed about looking at what levers we do have in terms of variable expenses. And in particular, we would look at things like the variable component of compensation and we watch it very closely. Furthermore, we track as we go. We plan the year and we say, yes, we wanted to do a certain level of investment spending. But we are tracking it very closely as we go before we kind of pull the trigger on each level of spending.

That’s very helpful. Thanks, again.

Hi. I was wondering if you could talk about the improvement in the Analytics. How sustainable is that? I know we’ve been building up to this for a couple of quarters, and what’s really paying off you there?

Yes, good question, Joe. Obviously, this has been hard work for the last three years or so. I just want to reiterate what Kathleen said, which is a quarter doesn’t make a year. We feel very pleased and very proud of what we did in Q4. But this is kind of a product line that gets lumpy on us. So it don’t normalize the fourth quarter yet. I mean, we’ve got to wait for four or five quarters of similar performance before we feel like that, right? And that’s how we look at it internally. And so what has worked for us is an extreme focus on repositioning the product line, right? And focusing on the areas of the product line that are core and we want to grow, and harvesting parts of the product line that we want to invest in or spend. Obviously, the core of the product line is equity analytics, fixed income analytics, and multi-asset class risk and performance. We do have, I don’t know, $20 million of run rate that is not the core that is being harvested and that’s growing at a lower growth rate, and that’s always that obviously, we’re managing. So that’s one thing that has helped us put the resources in the right places. Then the positioning of the product line with the client base, let’s say, equity analytics. Everyone is trying to invest along factor lines or understand what their factor portfolios are. So we are more proactively talking and consulting with clients as to how they can use this set of risk models and this set of analytics to be able to help them, particularly the active manager clients and the hedge fund clients, they’re sort of long equity long-short hedge fund clients. That has created a meaningful amount of growth for us on equity analytics. On multi-asset class analytics and risk, the initial position of this product line was, okay, we’re going to put up a tool in your shop, it’s going to grow performance, attribution and risk analysis and you’re going to use it for that. That’s obviously is a primary use case. But a lot of our active manager clients are saying, it has to be more than that. I got to be able to use this framework to help me scale the business and cut a lot of costs inside the organization to cut a lot of costs. So we go in there and help them integrate the thing, and that’s why somewhat it delays the recognition of revenue, right, integrated thing in a way that fulfills those two objectives that it is a platform for them to scale their business, communicate internally, and report to their clients and understand risk and performance. But at the same time, it’s got to be a way for them to create efficiencies and lower the cost structure and eliminate a lot of resources. So that has helped us a lot. Lastly has been fixed income analytics. We started initially investing in a lot of fixed income analytics portfolio- fixed income portfolio analytics in the context of the changes that are going on in that space with the acquisition of Point by Bloomberg, and that was the initial focus and we continue to do that. But what we found out was that we had a lot more payback. If we took a lot of that fixed income analytics and played it hard on the multi-asset class risk and performance, and went to get large mandates for banks, for example, or big fixed income players. In this last quarter, we are extremely proud that two of the most significant fixed income managers and banks subscribed to our multi-asset class risk and portfolio analytics, largely on the basis of our fixed income offering. One large bank in Asia and one of the largest fixed income asset managers dedicated to fixed income asset management, particularly with a lot of our loan offerings and things like that. That has driven the revenue growth and all the efforts in integration, where the client has driven the local cancellations.

Yes. Let me just reiterate a little of what Henry touched on. Look, Q4 was obviously a great quarter for analytics, and frankly, we’ve seen some really nice momentum during the course of the year. If you look at the recurring subscription sales for Analytics, remember, we started Q1 being down from a year-over-year perspective and then trended upward each and every quarter this year. So really nice improvement. And what we’re seeing is some improvement in the operating environment, we also are seeing that the covered organization is executing really well, and remember, we have our sales incentive program in place now since 2016. So great quarter. We’re beginning to see what we’ve been talking about for a couple of years now in terms of returning to higher growth. But I really want to stress as we know, the quarters can be lumpy in terms of sales and cancellations. Q4 had a great combination, where we saw both high sales and low cancellations. So we certainly shouldn’t take the Q4 performance and try to extrapolate that or assume every quarter would be that good. We will get some variability on this from quarter-to-quarter.

Got it. And then my second question just, can you talk a little bit about the demand for passive investing heading into 2018? What kind of this trend and how prepared are you for a downtick in AUM or slowdown in momentum? And now you are going to have more cash available. So I’m wondering how diversified do you think you are if I do think you are if this is the year that things finally slow? Thanks.

Sure. Hi, it’s Baer here. So clearly, we have to distinguish the market movements, which we’re not going to take a specific position on, and you can make a judgment yourself as to how you feel that might end up. But in terms of passive and index investing, we don’t see that there is a change in the outlook. We continue to see increasing allocations from investors, both from institutional and advised investors. So I would say, the trend is continuous. The market level correction could have a slight impact on that. But in terms of the overall direction, we’re not seeing anything that’s different from what we’ve seen over the last quarters or years. And it’s also migrating. Obviously, the big part of all of this was market cap. So think of it as transitional exposures and markets and sectors around the world. We’re doing very well there with the DM part, OEM and all of that the country and everything. But that’s the one chart that we show you there. And now we’re seeing that going into attributes, so these are more or less – almost like less supply-driven, meaning not supply securities, but you know how our objectives in investing in momentum and investing in low–in high-quality stocks or whatever. So that is just in the early stages of a huge evolution. And behind that now is the ESG component, which is kind of taking the market caps and we weight them on the basis of ESG and manage the portfolio passively or actively. And that’s the early stages; we are by far the best position to capitalize on that. We’re already beginning to get a little bit of, still very early stages. So this institutionally our clients are saying, oh, you’ve got to help me combine the factors and the ESG into one holistic portfolio. So we’ve got a long, long way to go here that will significantly expand the market and our presence in it.

Great. Thank you.

Hey, good afternoon. Baer, I think you mentioned 19% growth from large clients, right? Would you attribute that to more like competitive wins, or pricing or budget expansion, or is there something else driving that, because I thought that that was a very strong statistic?

Sure. I think it’s all of the above, because there’s such a significant portion of our revenues that is hard to attribute to one particular factor. I think it really is – the most significant element is the deepening of the relationship and their consciousness of what we can offer across the various product lines and critically the connectivity between those. So clearly, we’ve had some price component in it, but less for them than for some of the medium-sized clients actually. But it’s chiefly the deepening of relationships, where they are using more of our tools more broadly within the organization.

And big component of that has been – the – again, the approach we’re taking, as Baer indicated, we’re deepening the relationship, which is traditionally MSCI has been built by subject matter experts in MSCI, talking to the individual user in the organization of the client. And therefore, obviously, that made it into a product sale very specific to their equities, or fixed income, or risk, or whatever. So the approach that we’re taking and is led by Baer, Laurent, and me on the road constantly is to go see the C-level people, the CIOs, the CEOs of our largest clients. And basically, we go there with a value proposition. And the value proposition is, look, we are a – we have an incredible franchise that can help you achieve your strategic goals and objectives, or create new products and direct revenue, cut costs, meet regulatory requirements. Do you want us to be a strategic partner to you or not? And if you do, let’s do a one day brainstorming session and let’s come up with all the various areas that we can help you achieve your goals and objectives. And so we’ve done a few of those and they’re incredibly powerful. And loan released things come out of that. So we’re now trying to obviously – we’ve done, I think, quite a lot of cases, but we’re now scaling it to, I think we have like 125 clients or so in this category over the – not over them yet, for sure, at a strategic partners level, there is a big commitment of time resources from them and us. But considering those with all of that, yes, they want to embrace us to be a partnership.

That’s great. And could you also give us an update on pricing? I think, in index, last year, you were raising prices about 5% to 7%, and also in Analytics, you were raising prices. So could you give us the sort of price increases this year for both segments? Thanks.

Yes. Toni, hi. It was pretty consistent this year with the prior year in terms of both the price increases and price as a percentage of sales for both index and analytics. I mean, we typically try to plan pretty conservatively in terms of how much we’ll get from price. But in fact, in analytics, we did quite well this year versus how we planned the year. So we’re pretty happy about that.

Hey guys, good morning. On the new factor style box, which we saw the press releases over the last couple of weeks on that. Just talk about what the go-to-market plan is? And then also just stepping back on a factor ETF, how should – what’s your good kind of average fee rates you use for the factor ETFs relative to the plain vanilla flagship?

Okay. So let me take the first one there. So the go-to-market strategy on the factor box. First of all, the launch that we had was extremely positive and there’s clearly a big demand in the market from clients to have a common language. I think that is true to – definitely through the institutional market, but even much more so in the advisor market. So the plan is to both work on communicating first of all, because we just launched this framework across all of our client types and then work with them to adopt this chiefly as a method of communicating to their clients about the nature of their portfolios. So we’re early days on this, but the initial response has been extremely positive and we had quite a number of meetings set up even in the last week or so since we launched. And obviously, these things don’t happen. I mean, everything at MSCI, as Baer went through in his slide, is a looping system, right? So we have been consulting with a large, large number of clients on this certification for the year-and-a-half or so. So we got an enormous amount of feedback and excitement from them, so that’s already baked into even before the kind of official launch of it. Look, on fees on – for example, the fees on factors, we take a fairly similar pricing approach to market cap on ETF and retail funds and things like that. So that’s not that different. Obviously, in some domestic markets, if we’re saying we’re launching a factor ETF on MSCI U.S., or in Japan or whatever, it has to be congruent with the pricing of domestic portfolios in ETF as opposed to government pricing, right? The area where we have gone exceedingly well is in the institutional market for factors and ESG, which is given the market cap indices, we make good money, but it’s relatively lower compared to ETF and others in the ETF. What we’ve been able to do is significantly ramp up the fees that we get paid in those index portfolios that are institutionally managed, mostly separate accounts or own vehicles by passive managers on factors and ESG. And the principal reason for that is, when we engage with institutional clients on this topic, typically, these decisions have a very material impact on their investment outcomes or process, and the alternatives that they would have to do that are higher fee. So we can both have an attractive fee for ourselves, add value to the clients and provide them with an economic incentive to work with us.

Okay, thanks. And then going back to analytics just maybe another way of looking at it. I mean, as you look at your – the pipeline stats, I mean, how does the pipeline look today versus in the last couple of quarters? And maybe refresh us on the incentive plan change that you made a couple of years ago and how that could play into seasonality in that business?

Yes. So the pipeline is looking pretty strong right now. As we look at kind of how the pipeline looked going into Q1 last year versus how it looks going in this year, we’re in about the same position. Remember, as I said and given to your seasonality question and your question on the incentive plan, we’re seeing a greater percentage of sales – new sales coming in the fourth quarter and less coming in the first half. So the sales incentive plan now has the entire sales or coverage organizations aligned to sales and cancellations metrics. We think that’s being very effective. Like I said, you’re seeing that come through in the strength of the Q4 results.

But it’s also – it’s clearly this increase in the fourth quarter versus the rest of the year. Obviously, it’s not just us, right? It is – the clients have increasingly designed budgets for the year and way towards the latter part of the year to see where things are headed in their organization and if there is an extra budget, they want to spend it. So that is gone, right, and going to the following year. So that has played a bit of a role there as well. So maybe in a not more normalized environment and budgetary process of our clients that gets reduced, but that’s becoming a little bit of a new norm, right?

All right. And then just a couple of quick cleanup questions. You touched on the cash, the $890 million of cash, assuming that you do repatriate 350-plus of that. How much of the total cash pay should we ultimately view as excess cash?

We – the amount out of, what I’ll call, the minimum cash balances, the operating cash hasn’t changed from what we’ve historically said. So $100 million, $125 million in the past we said in the U.S. and about $75 million outside of the U.S., but now it’s tangible, right? So you don’t have to think about it in terms of the regions anymore, but just in terms of total excess cash balances. So continue to think about it consistent with what we’ve said previously.

Good afternoon, everyone. So a question for you on the Analytics strength that you’ve been talking about, very impressive. I wanted to ask a little bit about where it was coming from specifically as a few big deals versus lots of small deals, and then new clients versus up-selling existing ones? And then also in terms of the timing, if there was anything there other than the seasonality that you’ve highlighted in terms of a secular cyclical change in client demand?

So the – first of all, the hero of the quarter within Analytics was obviously fixed income Analytics in the context of both a multi-asset class offering being subscribed or purchased because of the strength of our fixed income, or the example that I gave of a pure play fixed income manager. So we have more of the pipeline. But again, there would be lumpy. But we’re very excited about that because of all of the investments that we’ve made so far, and new investments that we’ve made that are not yet into the product line. So a year ago we are correct team of mortgage repayment models experts in the U.S. and they developed very good classic models and all that. We’re going to put that into the product line and that may help us penetrate the U.S. fixed income market more. So that’s the hero. Yes, increasingly, our analytics sales and that’s also why they get lumpy are larger deals. So the average or medium ticker is moving up. And now, every quarter, we have a number of million-plus sales that, in the past, was maybe one, and therefore, that’s operating. But in addition to that, we’re also selling a lot of other smaller-ticket items for medium case uses and the like. So it’s a combination of all of that. And the other piece to this thing, as I said, is that we’re positioning this – we used to position it as a tool. We’ll give you a tool, you figure out what to do with it and call us when you have issues. We’re positioning this thing as a solution and the services that need to go with that solution to help the client use the tools, right? We have some early successes of that, but we’re definitely excited about the potential of that coming.

Yes. So just to add a little to that, because we’ve got this mix of both some bigger ticket items, as well as still having a pretty high volume of lower dollar sales, we’ve got this high-volume asset, where our systems and processes become so important in terms of being able to have the wide system that gives us good timely accurate data and the process to use the systems. The organization has gotten much tighter and we’re much more rigorous about how we use our sales force to enable us to look at pipeline to take that pipeline and put it into the different stages of pipeline and then effectively manage and push those things through pipeline to execution. So the systems and the processes are really, really important. From a – just to give a little more color in terms of regionally, we saw strength for Analytics in each and every region. The total net new for the year was very strong across all three regions, and things strengthen in the Asset Manager segment and the Banking segment in particular.