Georgios Mihalos - Crédit Suisse AG, Research Division
Okay. So we're ready to begin. Our next presenting company is MSCI. We have with us here CFO, Bob Qutub; and also up here on the stage is Edings Thibault, who heads the IR efforts at MSCI.
With that, Bob, I will turn it over to you.
Georgios Mihalos - Crédit Suisse AG, Research Division
I appreciate the opportunity to talk to you today. So before I begin to describe our business, let me start by giving you just a few key principles of how we manage our company. One, we're focused on providing mission-critical investment decision support tools for major asset classes to institutional investors worldwide. And two, we're focused on growth. And our goal is to deliver attractive top and bottom line growth through the cycle.
Here you see our strategy. To deliver that growth is it's predicated on building a network of investment decision support tools that provide incremental insight about risk and return for all single-asset and multi-asset class investors. To build tools for multi-asset class investors, we need the best-of-breed in each asset class. We are tying these tools together, not only across asset classes, but linking the front office performance tools with the traditional middle office view of risk, giving our clients a single system that does both.
Our -- also integral to our growth strategy is our goal to build tools that can provide transparency about risk and return, not only across portfolios with any single asset manager, but also across the institutional client network. A great example of this is index. One of the primary use case of an index is to serve as a benchmark of return so that pension fund can measure the performance of an asset manager. That kind of transparency and linkage within our network of client serves to entrench us in their investment processes. We think this strategy is supported of what we see are long-term trends. Financial markets are becoming more integrated, both globally and across asset classes, increasing the complexity our clients face.
Clients and regulators are demanding more transparency, both internally across portfolios and externally between managers. At the same time, the cost of processing data is falling fast, which will drive innovation and increase the value of unique data sets.
All of these factors are driving underlying demand for tools, which can provide insight and linkage around performance and risk with single-asset class and multi-asset class investors and managers. These same factors are also driving our need to invest, both organically and via acquisitions. And when I say acquisitions, I'm talking about accelerating technology or bolt-ons, not transformational.
The last key element of our strategy is to leverage our common platform, when possible, to maximize the value we deliver to our clients and to our shareholders. Simply put, we seek to build our tools using common data and analytic sets, common technology platforms and by leveraging the breadth and depth of our coverage to bring incremental insights to our clients at the lowest possible cost.
Our leadership position in the marketplace is as a result of more than 40 years of innovation. Each of our major product lines and brands, whether it's MSCI, Barra, RiskMetrics, ISS, IPD, were all early pioneers in their fields, and you can see here from the timeline, starting with the Capital group, all the way to the rise of ISS. This is MSCI Inc.
Our strategy is to build a broad network of tools that spans our client's single-asset class and multi-asset class portfolios, providing a deep understanding of risk and return. These tools provide insights about portfolio performance, performance attribution and construction. They provide important information for measuring and reporting risk in those same portfolios. And they help our clients better understand some of the nonfinancial risks surrounding governance or other social issues.
As you can see, we have built or acquired a wide range of performance and risk tools, ranging from equity indices, portfolio construction tools, performance attribution tools for a full range of asset classes, including equities and real estate, and we also have proxy voting tools and others.
On the risk side, our tools enable investors to better understand equity risk, multi-asset class risk, position level risk within their portfolio of hedge funds and much more.
Over time, we are linking these tools together, bringing together the front office view of performance with the middle office view of risk to enable our clients look at risk and return through a common set of data and analytics.
Another key part of our strategy is to build tools that create transparency between asset owners, asset managers, hedge funds, banks and exchanges. By building these links between our clients, we create a network effect that leads our tools more deeply embedded in their investment processes. The most obvious example of this is in our index product line, with more than 95% of all U.S. pension fund assets invested in international equities are benchmarked to MSCI indices. We have become a critical tool for asset managers to explain their performance to asset owners.
To a lesser extent, our risk management and equity performance attribution tools enjoy a similar kind of support within the network. Our deep tools -- our deep links to our broad customer base is one of our key assets. Our clients are the premier investment organizations: asset managers, hedge funds, banks, pension funds, sovereign wealth funds, and corporate clients from around the world. We believe we are unique among our peers in terms of the breadth of our relationships with this full range of institutional investor ecosystem. We have built an understanding about the needs of our clients.
These relationships are based on real dollars. 8% of our subscription run rate comes from asset owners. Asset managers, or our client base, accounting for 54% of our run rate. Almost 20% comes from financial intermediaries and corporations, and more than 10% from alternative asset managers.
The final element of our strategy is to utilize a common platform to enhance the insights we provide to clients and the returns we provide to shareholders. We have broken this common platform down into 3 distinct elements: a common data, analytics and technology platform here seen at the base; in the middle, a cross product development; and finally, with client relationships. Each of which I'll touch on in detail.
A key element of our common platform is shared data, analytics and technology. The first element of this platform is data. As a provider of tools, data is our raw material, so we work hard to try and leverage common data sources across all of our product lines. Equity data is a prime example. We have built a common database for global equity data that feeds price and other information, not only to our index products, but our portfolio management analytics and our Risk Management Analytics products as well. And we utilize common libraries across our analytic product lines.
A second element of our common technology platform is to try and utilize a common software infrastructure as well. We have kicked off, in fact, a multi-year effort to integrate our analytic software platforms, which will generate meaningful efficiencies over time.
Another way that we can deliver more insight to our clients is to continuously enhance the value of our products and services by incorporating and integrating data sets and analytics from across our product suite. A great example of this integration is the Barra-based analytics into our RiskManager platform. Another success has been the use of Barra tools to help build our strategy indices, like our minimum volatility indices, for which we are seeing strong demand. There are other examples on the slide here including: The integration of IPD data into our risk platforms; adding an ESG component to our risk systems; the integrated approach taken by our research teams and others.
The final element of our common platform that I want to share with you today is how we adopt a client-centric approach to MSCI Inc., the full value of our product suite to our clients. We took the first step of this approach immediately after the RiskMetrics merger by organizing our sales force around client types. So a global team focused on asset owners and another team focused on banks and hedge funds, et cetera. We also used our client service teams located around the world as a means of coordinating cross-product approach to solving a client issue as they use our products.
Finally, we recently instituted a senior client relationship manager program in which we are assigning some of our senior managing directors to our top accounts to manage MSCI across the entire client spectrum.
The next slide here demonstrates how widely used our products are by our top clients. We are showing our top 10 clients by run rate. And looking at each -- looking at the use by each of these clients of some of our major products. What it shows is that we have a significant relationship with all of our top clients virtually across all of our products. So our major client -- major index client is more likely to be a major buyer of our risk systems than our government products. We think the opportunity for us to increase our penetration of clients is high. By managing this critical relationships more closely, we think we can continue to tighten the links between our products and make sure that our clients are getting the full value of our products can deliver. As we go down to the next 10 and the next 20, the opportunity gets even larger.
So that is the essence of our strategy: Focus on providing a full suite of performance and risk tools with best-of-breed products in every asset class; gradually link these products together and allow our global clients have more comprehensive view of risk and opportunities inside their portfolios and more transparency in the investment framework, and at the same time, we want to leverage our common platform to deliver these tools as effectively and efficiently as possible.
We believe our business benefits from several critical and long-term secular investment trends. The first and foremost trend is the globalization of investments. When you step back and think about it, the globalization trend is really the product of 2 drivers. The first driver is to search for returns and the willingness to cast an ever-wider net in order to find those returns. And the second driver is technology. It this simply easier and less expensive to track and trade global securities today than at any time before.
The second trend driving our business is the popularity of passive investments. The most tangible evidence of this has been the increased popularity of ETFs, the broad shift to passive investing puts in index or a series of indices at dead center of the investment process.
The third trend driving our business is the critical need to understand, measure, manage and report risk. This is really about understanding and trying to quantify the amount of risk an investor is taking in his portfolio relative to the expected return.
And the last big trend driving our business is the increasing focus on issues of sustainability and corporate governance. So how we organize to monetize all of our unique ties to our client and provide critical tools to institutional investors? We operate primarily in 4 product lines, the largest of which is our index and ESG product line, with more than $300 million in subscription revenues and another $140 million in asset-based fees in 2012 or, 46% of our total.
The second largest product line is Risk Management Analytics, with $260 million in revenues or 27% of the total. Those are our 2 biggest product lines. They are the product groups that have demonstrated the highest growth rates in recent years, and together, make up over 70% of our overall business.
With respect to our other 2 product lines, each of which are about 13% of revenues or approximately $120 million each. The first is portfolio management analytics where we sell models and software to asset managers to help them with portfolio construction and performance attribution.
The second is governance. The biggest part of our governance business is proxy research and voting, which is just over half that segment, and ISS is clearly leading brand in that space. So let's take a look at each one of these product lines.
As I noted earlier, the index business is roughly a $440 million product line. Its revenues have grown by an average of 17% from 2009 to 2012. This has been fueled by an average growth rate of 14% by our subscription revenues and better than 25% for asset-based fees. The MSCI indices are differentiated by the quality of our data, the high level of service, our broad consultation with clients and the trillions of dollars of assets benchmarked to them. The foundation of our index product line is the data subscription portion, and the strength lies in our relationship with asset owners and asset managers.
MSCI indices have become a critical tool for asset owners, which we call pension funds, endowments and sovereign wealth funds, to help them think about equity performance, understand the potential in terms of size and liquidity and evaluate the performance of the asset managers they select to manage their money. As you know, pension plans typically adopt the highest standard in index selection. So again, we view it as a tremendous honor that 95% of U.S. pension fund assets invested in international equities are benchmarked to MSCI indices according to intersect.
We have also become embedded in the process of asset managers. Many of our asset manager clients have explicit contracts with asset owners that call for them to measure their performance against one or more MSCI indices. The value of our indices provide, as illustrated by the breadth of our business, our index and ESG subscription run rate was $338 million at the end of 2012, spread out across more than 3,000 clients globally.
Now let's talk about our strategy for indices. First, our growth strategy for index products is about reinforcing our existing product suites so we can continue to sell more modules to more users in more locations and to more clients in more countries. The modest price increases are also a part of the strategy. Second, is our ACWI strategy, or all country world index. We have taken the view that our clients -- we have taken the view with our clients that equity should be seen in a single-asset class in a single global benchmark and also serves as an asset allocation tool. We have been successful in convincing more than 100 institutions, in the U.S. alone, to adopt this approach.
That approach yields several benefits to MSCI. It's likely -- it likely increases our exposure to future global equities, creating more demand for our products. It likely deepens the demand for other global strategies, such as small caps and frontier markets. And MSCI frequently becomes a domestic benchmark of choice in that U.S. pension fund.
The third focus for us in this strategy is what we call strategy indices. These are indices that enable investors to invest on the basis of a reduction in volatility, dividend income or other factors. Importantly, embedded in many of these indices are Barra analytics, another great example of how we are leveraging our cutting-edge products in one product to add value to another.
And finally, we're trying to grow our share of listed product market. We recently announced a new relationship with Eurex and an expansion of our relationship with Liffe, so we're starting to see some good growth there.
The second part of our index in the -- the second part of our index and ESG product revenues is our asset-based fees, which accounted for more than 1/4 of our index and ESG run rate. This is in an area that has received a lot of attention lately, so let me be really succinct. ETFs are not going away, MSCI intends to remain a major provider of the indices to this market and we will be a relevant player.
Even excluding ETFs impacted by Vanguard transition, MSCI remains the second largest provider of indices to the equity ETF market -- marketplace as measured by AUM well ahead of the #3 player. And while there has been a great deal of focus in the U.S. market, we remain the leading index supplier to European ETF providers, as measured by AUM, and we're also seeing good traction in Asia with the recent launch of an ETF-based on our China A Series Index.
Our second largest product line is Risk Management Analytics. This is a $260 million product line with 10% CAGR over the period 2009 through 2012. Our flagship risk systems, RiskManager and BarraOne, offer our clients multiple views of risk across multiple-asset classes. It's not just about Barra, it's also about stress testing, it's about scenario analysis, it's also using our tools to give investors a more complete view of the risk in their portfolios.
We sell our risk management products and services to a broad array of clients with just over 1/3 of our run rate coming from asset managers, more than 1/4 from banking and trading clients, and 20% from hedge funds. Notice the 14% coming from pension funds and sovereign wealth funds. We become very effective at selling a complete multi-asset class risk system into the asset-owner community.
We have just over 900 clients in this business and we believe the penetration of third-party risk management systems into various asset types of clients around the world is very low. There is a significant opportunity for us to continue to grow in this market.
To drive growth, we're expanding our market franchise to enable us to offer more views of risk to more clients by expanding our asset class coverage, adding new views of risk like liquidity risk and by investing in the technology platform.
The second dimension of our growth is to broaden the range of analysis we can perform on our client's portfolios by adding performance attribution tools. Pension funds, for example, are demanding improved coverage of private securities, like private equity, venture capital, real estate, so that's another dimension where we're going. The acquisition of IPD clearly plays into that trend. IPD's data should enable us to broaden and deepen our modeling of commercial real estate.
We're also working to incorporate our hedge platform, holding-based hedge fund risk analysis into our broader risk system.
Portfolio Management Analytics accounted for $116 million of our revenues in 2012. Barra equity analytics products enable investors to gain a deeper understanding of risk and return in their equity portfolios using quantitative factor-based framework. This business is facing a combination of higher levels of competition in challenged end markets, and we are working hard to reposition the PMA unit by accelerating our new product development. To that end, we have launched new market models, upgraded the underlying software system and increased our levels of client average and support. In fact, we've just announced the release of Barra Portfolio Management 3.7 that now contains back testing capabilities, which is viewed as a critical operator.
When we take this measure to stabilize our overall market share, this remains a competitive market in quantitative portfolio managers, a core-end market struggling to attract assets.
The final product I'd like to discuss today is our governance business. Most of the revenues in this business come from ISF, which is the leading provider of proxy, research and voting products and services. We see great upside in transforming this business into a focus on proxies and voting, a mature market into a much larger provider of governance services to asset owners, to front office of asset managers and corporates. We're already doing this by leveraging the data we capture and packaging that into different set of products that we sell to corporations. We have had a lot of success recently with the sale of compensation data and analytics to this customer set.
We see the success of the corporate business as a roadmap for how we can continue to grow the governance business. We are doing this by leveraging data and it already collects and developing new products and services. This will enable a broader set of users to gain insights about the governance practices of the companies in which they invest and the governance characteristics in their overall portfolio. In fact, we just launched last week a new product called QuickScore, which is a quantitatively-driven scoring and screening solution designed to identify governance and risk in public companies.
Let's take a look at the financials here. If you move on here, our business model at MSCI, it is based on the 3 key components: A focus on subscription revenues; emphasis on strict cost management; and disciplined and balanced use of capital. First and foremost, we are focused on recurring revenues, more specifically the subscription revenues, based on annual evergreen contracts. The non-asset-based fees have grown at an average rate of 8% over the past 4 years, and have been positive in every year of this current financial cycle.
Our asset-based fees have also been an important overall contributor, growing at an average rate of 17% since 2007. That growth, however, has been significantly more variable as it slowed to less than 1% in 2012. Here you can see on the year-over-year growth of our revenues in the 2 periods, showing the quarter and for the year, driven by -- and both of them were driven by the recurring subscription revenues, significantly outpacing asset-based fees, I mentioned earlier. The decline in the nonrecurring over the full year of 2011 was driven in part by the conversion in our governance business of nonrecurring revenues into recurring subscription revenues.
On the next slide here you'll see driving our revenues is a very efficient cost structure, compensation despite one-off events in each of -- in this year, increased only 10%. We also had IPD coming in there and the other events were severance that came in for the first full year. But the point I want to make on this one here is the non-compensation cost are flat to down in each of the comparative measures, either by the quarter or for the full year.
If you look at the next slide here, solid revenues and a tight rein on expenses drove, what I see here is, double-digit growth and overall profitability in both adjusted EBITDA, growth of 12%, and net income, 22% growth. Adjusted EPS also increased by double digits. And note the timing -- note that the timing of the accelerated share repurchase in December that we had, $400 million, only had a very minor impact in the EPS for 2012.
For the full year 2012 versus 2011, we had solid results that were offset by some nonrecurring items that muted the core profitability, which were higher severance cost of $8 million, refinancing fees of $15 million, and lease exit charges of $4 million, both of which dampened the results for this year.
On the next slide here, you'll see some summary. Just the key highlights that I want to point out. Revenues grew by 9%. Our run rate grew by 10% in part by the IPD acquisition, which added $39.5 million. While our sales remain down, our pipeline remains very strong, still reflecting an elongated sales timeline in some of our product lines, as clients continue the delay in spending. It is important to note, however, the retention rate remains seasonally very strong for the quarter and for the full year.
And finally, I think it's important to focus here a moment on our balance sheet and give some upticks here in terms of generating $347 million of operating cash flows. Some of that was benefiting from our increase in working capital efficiencies of about $52 million. But we used that money to fund organic growth -- fund organic investments in our analytics platform and index brand. We spent $45 million on CapEx, invested $125 million in IPD. We also returned a total of $324 million of invested capital in the form of a $224 million reduction in debt. And in December, as I mentioned earlier, to a $100 million accelerated share repurchase agreement which is part of an authorized $300 million share buyback in December.
We ended 2012 with $254 million of cash and cash equivalents and short-term investments, with approximately $84 million with that held offshore. This year, we've already invested $23.5 million to acquire InvestorForce. And under the terms of our current loan, we're scheduled to pay another $44 million in 2013 of our outstanding debt. But after -- and after a quick uptick in 2012, we expect our capital expenditures to be around $30 million to $35 million. And of course, we had a $200 million buyback.
So briefly, I'd like to close with -- yes, I'd like to close with a brief review of our available cash and our scheduled uses of that cash is '13. Over the course of 2012, we did a great deal of talking to our board of investors about how we would deploy our capital and to support our medium and long-term growth, while balancing the needs of our shareholders. The result of that process was a balanced approach that funded internal investments, enabled us to take advantage of limited strategic opportunities and return capital. We continue to -- we intend to continue with that balanced approach in 2013. Thank you.
Georgios Mihalos - Crédit Suisse AG, Research Division
Thank you, Bob. Thanks, Edings.
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