MSCI's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: MSCI, Inc. (MSCI)

MSCI, Inc.(NYSE:MSCI)

Q3 2011 Earnings Call

November 2, 2011 11:00 a.m. ET

Executives

Edings Thibault – Investors Relations

Henry Fernandez – Chairman, Chief Executive Officer

David Obstler – Chief Financial Officer

Analysts

Suzanne Stein – Morgan Stanley

David Togut – Evercore Partners

Robert Riggs – William Blair & Company

Michael Weisberg – Crestwood Capital

David Scharf – JMP Securities

Operator

Good day, ladies and gentlemen. Welcome to the MSCI Third Quarter 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Edings Thibault, Head of Investors Relations. You may begin.

Edings Thibault

Thank you very much operator, and I’m delighted to be joined this morning by Mr. Henry Fernandez, the Chairman and Chief Executive Officer of MSCI and Mr. David Obstler, the Chief Financial Officer. Thank you all for joining us on our third quarter 2011 earnings call.

Please note that earlier this morning we issued a press release describing our results for the third quarter and nine months 2011. A copy of that release can be viewed on our website at MSCI.com under the Investor Relations tab.

This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date in which they are made which reflects management’s current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the company, please see the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ended November 30, 2010 and on our Form 10-Q for the third quarter of 2011 that will be filed.

Today’s earnings call may also include discussion of certain non-GAAP financial measures including adjusted EBITDA and adjusted EPS. Adjusted EBITDA and adjusted EPS exclude the following.

Third-party transaction expenses resulting from the acquisition of risk metrics, restructuring costs related to the acquisition of risk metrics and non-recurring stock-based expense. Adjusted EPS also excludes the amortization of intangibles resulting from acquisitions and debt repayment and refinancing expenses. Please refer to today’s earnings release for the required reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and other related disclosures.

We will be referring to run rates frequently in our discussion this morning, so let me remind you that our run rate is an approximation at a given point in time of the forward-looking fees for subscriptions and product licenses that we will record over the next 12 months assuming no cancellations, new sales, changes in the assets and ETFs license to our indices or changes in foreign currency rates. Please refer to table 10 in our press release for a detailed explanation.

Henry Fernandez will begin the discussion this morning with an overview of the third quarter, and then David Obstler will provide some details on our financial results. In the case of financial accounting metrics, the discussion of the year-to-date numbers will focus on pro forma results which assume the acquisition of risk metrics occurred at the beginning of MSCI’s 2010 fiscal year. Pro forma nine months 2010 includes MSCI’s results for the nine months ended August 31, 2010 and risk metrics fourth quarter ended December 31, 2009 and first quarter ended March 31, 2010.

As a reminder MSCI’s acquisition of risk metrics took place on June 1, 2010, the first day of MSCI’s 2010 fiscal third quarter. All operating metrics as distinct from financial accounting metrics have been restated to reflect MSCI’s results on a combined basis during the comparable period in 2010. That means all quarterly operating metrics reflect the calendar quarter or nine months indicated rather than the prior fiscal period.

I will now turn the call over to Mr. Henry Fernandez. Henry?

Henry Fernandez

Thank you, Edings. Good morning and thank you for joining us. This morning we reported third quarter revenues of $225 million, adjusted EBITDA of $104 million and adjusted EPS of $0.49. Year-to-date we reported revenues of $675 million, adjusted EBITDA of $315 million and adjusted EPS of $1.39.

Our third quarter revenues grew by 11% versus third quarter 2010, and our adjusted EBITDA rose 19% compared to the same period last year. Our adjusted EBITDA margin rose to 46% from 43%, and our adjusted EPS rose 48% versus the third quarter of 2010.

Our third quarter run rate rose by 8% year-over-year to $876 million. Total sales remain at a healthy level. Despite choppy markets our retention rates remain strong, driving continued growth in our subscription run rate. The decline in the equity markets worldwide during the quarter did impact the growth of our asset based fee run rate especially on a sequential basis.

Total sales were $38 million in the third quarter. New recurring subscription sales were $32 million, down 10% from a strong third quarter 2010 but up 4% from the second quarter of this year. Our sales in Asia, especially in Japan, remain strong. The U.S. market for us was stable and Europe was surprisingly steady despite the headlines.

During the quarter our sales to asset owners were strong and banks and broker dealers were surprisingly resilient. Our sales to asset managers remain stable and our hedge fund sales remain weak.

Our retention rate overall remains strong. The third quarter aggregate retention rate rose to 91% from 88% a year ago, as total cancellations declined more than 20%. Our year-to-date retention rate is up 3% to 92%. The fact that our retention rate is holding in the low 90s validates the importance and mission critical nature of our products to our client investment processes.

As a result our net new recurring subscription sales rose 4% to $16 million during the quarter. The growth of net new subscription sales was offset by a $6 million decline in run rate resulting from the strengthening of the U.S. dollar during the quarter.

As a reminder we adjust our run rate at the end of each quarter to reflect the current spot foreign exchange rates again at the end of the quarter. Including this adjustment in foreign exchange rates our total subscription run rate was $758 million, up 8% year-over-year and 1% sequentially.

Finally, we have continued to invest in our business. The number of MSCI employees has risen by about 8% since the end of 2010 with all of that growth coming in our emerging market centers. After a slow start for the year we have been more successful in adding employees over the second and third quarters, and that should position us very well for continued growth.

Next let us take a closer look at the performance of our major product line. Our index and ESG business reported revenues of $101 million, up 20% from the third quarter 2010, and our run rate of $383 million up 13% year-over-year. Total index and ESG sales rose 6% year-over-year to $14 million. New recurring subscription sales were $10 million, down 5% from a strong third quarter of 2010. Higher sales of our benchmark index products were offset by a decline in sales of indexed financial products.

Cancellations of the index and ESG business continued to decline, falling 27% year-over-year and pushing our retention rate to 95% from 92% in the third quarter of 2010. As a result, the index and ESG subscription run rate, which excludes asset based fees, rose 3% sequentially and 15% year-over-year to $265 million.

Asset based revenues rose 39% year-over-year but fell sequentially as a result of the fall in global equity markets. The run rate at the end of the third quarter was up 9% year-over-year to $118 million but was down 16% from the end of June of this year. At the end of September there were $290 billion of assets in ETFs linked to our indices, down $70 billion or 20% compared to June 30, 2011.

Virtually all of the decrease versus the second quarter was due to a fall in market values as declines in non-U.S. indices were magnified by the strengthening of the U.S. dollar. Asset outflows were negligible. Our average basis point fee, excluding minimums, fell slightly to 3.1 basis points at the end of the third quarter, driven by the outperformance of ETFs linked to our U.S. indices.

We continue to see a lot of interest from asset managers in using our indices as the basis for new ETFs. 27 net new ETFs linked to our indices were launched in the third quarter brining our worldwide total on September 30th to 508 funds.

As a reminder, on the second U.S. business day of each month we publish on MSCI.com the assets under management of ETFs linked to our indices for the prior month. Those numbers will be updated after the close of today’s market and they will be as follows.

At the end of October there were $322 billion in assets under management linked to our indices, up 11% from the end of the third quarter.

We continue to build our families of MSCI strategy indices. These are index series that are intended to compliment our core market capitalization weighted indices and they include minimum volatility indices, fundamentally value-weighted indices and risk-weighted indices. We have already won several institutional passive mandates on these indices and nine shares recently launched for ETFs linked to our minimum volatility indices. These are encouraging signs of growing market acceptances of these products.

At the beginning of October we also launched the MSCI emerging market 50 index, which highlights the 50 largest constituents of the market leading MSCI emerging market index. The product is designed as a more easily tradable alternative to the broader index and we are seeing a strong early interest from broker dealers.

Revenues for our risk management analytics business were $62 million, up 13% versus the third quarter of 2010. The risk management analytics run rate of $252 million grew by 1% sequentially and by 10% year-over-year. Changes in foreign exchange rates, especially the strengthening of the dollar against the euro during the quarter, reduced the risk management analytics run rate by $4 million or 2%.

Total risk management analytic sales were $13 million in the quarter, down 27% year-over-year from a very strong third quarter of 2010 and up 24% sequentially. New recurring subscription sales were $12 million. The level of demand for risk systems remains healthy, although we did experience some slippage during the quarter of deals from the third quarter into the fourth quarter.

One of the key areas of growth in our risk management analytics business is our sales to asset owners especially pension funds. We signed contracts with two of the top 20 U.S. pension funds during the quarter. To support this demand we released an updated version of BarraOne that incorporates the latest version of the Barra integrated model. This innovative model now includes coverage of private real estate portfolios as well as publicly traded fixed income, global equities, currencies and hedge funds and allows asset owners to have a more granular view of the risks and correlations across their entire investment programs. The new model also enables us to provide our asset manager clients more in-depth analysis in certain asset classes like fixed income and currency.

Another key area of growth for us in the risk management analytics business is our hedge fund transparency product line. Hedge fund investors are eager to better understand the risk across their hedge fund holdings and our service provides aggregated position level risk analysis and reporting without disclosing the fund by fund position themselves. During the quarter we added 2 of the top 10 largest global fund of hedge funds to our client base.

Cancellations in the risk management analytics business declined 29% and the third quarter retention rate improved from 88% to 92%. For the first nine months of 2011, the retention rate has increased to 93% from 88%.

Our Portfolio Management Analytics business or PMA continue to recover. Revenues were $30 million. While run rate of this business declined 3% year-over-year, it rose 1% sequentially to $119 million. We had $4 million of new recurring subscription sales in our PMA business in the third quarter with the majority of that coming from sales of our risk models and our data. Our retention rate increased to 87% from 82% in the third quarter of 2010 as cancellations declined 29%. For the first nine months of 2011 our retention rate stands at 89%, up from 85% in 2010.

As promised in this business we are delivering new products into the equity portfolio management and trading market. During the quarter we launched our innovative new U.S. equity model, the first in a series of models designed to deliver much better forecast of risk and expected returns for optimized portfolios. We also plan to launch an updated version of our global equity risk model in the near future.

Additional single-country models using our newer framework will be launched and new functionality into the Barra portfolio management software platform is being worked on.

The governance business continues to lay a foundation for future growth. Revenues were $29 million in the third quarter. Governance run rate slipped slightly versus the second quarter of 2010 to $107 million as currency changes offset our third consecutive quarter of positive net new subscription sales. Total governance sales rose 13% year-over-year to $7 million. New recurring subscription sales driven by strong sales of our new executive compensation product rose 62% to $4 million, which more than offset a decline in non-recurring sales for the segment.

Cancellations rose 5% and the retention rate for the third quarter was 86%, down 1% from the third quarter of 2010. For the first nine months of the year the retention rate was 87%, up from 86% a year ago.

To sum up, MSCI reported a strong operating and financial results during the third quarter of 2011 despite the impact of weaker financial markets all over the world. The combination of solid overall sales and continued strength in retention rate helped drive continued growth in our subscription run rate.

Looking ahead, our pipeline is healthy and the ETF assets linked to our indices have rebounded from the lows of the third quarter. We believe we are well-positioned to take advantage of the strong long term secular trend that are in demand in our business worldwide.

I’ll now turn it over to David for some additional comments regarding our third quarter financial results. David?

David Obstler

Thank you, Henry. Before we get started, I want to remind everyone that we closed the acquisition of RiskMetrics on June 1, 2010, the first day of MSCI’s 2010 fiscal third quarter. That means that all of the quarterly comparisons we are making represent the actual results of the company on a combined basis.

MSCI reported revenues of $225 million in the third quarter of 2011 and $675 million for the first nine months of the year. MSCI’s third quarter revenue growth was driven by 20% growth in index and ESG product revenues and a 13% growth in risk management analytics revenues. These gains were offset by a 5% decline in governance revenues.

By type of revenue, subscription revenues grew 7%, asset-based fees grew 39% and non-recurring revenues were essentially flat. By segment, performance and risk revenues grew by 14% year-over-year to a $196 million in the third quarter of 2011.

Governance revenues, as I noted earlier, declined 5% to $29 million. As a result of a shift in strategy within the ISS corporate business we now have a greater percentage of sales, as Henry mentioned earlier, coming from recurring subscriptions rather than non-recurring sales, which is having a modestly negative impact on recorded revenues during the quarter prior period comparisons. Overall, adjusted EBITDA expenses, which exclude depreciation and amortization, non-recurring stock-based compensation, restructuring costs and transaction expenses rose 5% year-over-year to a $121 million. Our compensation costs rose by 5% also to $85 million.

As Henry mentioned, we have been able to leverage our emerging market centers to mitigate the financial impact of our ongoing investments in our employee base. In the past 12 months we’ve grown our employee base by 10% including a 7% increase in the third quarter. The majority of this growth has come in emerging market centers like Budapest, Monterey, Mumbai and Manila where our headcount growth is over 40%. That has helped keep our overall compensation costs in check.

We generated $104 million of adjusted EBITDA in the third quarter, an increase of 19% from the third quarter of last year. Our adjusted EBITDA margin expanded to 46% from 43% in the third quarter last year. On a segment basis performance and risk adjusted EBITDA grew 21% to $96 million and the adjusted EBITDA margin expanded to 48.9% from 46.1% in the third quarter of last year. Governance adjusted EBITDA was essentially flat, but the margin expanded by 140 basis points to 26.5%.

For the first nine months of 2011 we reported adjusted EBITDA of $315 million, an increase of 23% from the pro forma nine months of last year. MSCI’s adjusted EBITDA margin rose to 46.7% from 42.6%. Performance in risk adjusted EBITDA margin rose 24% to $290 million and governance adjusted EBITDA increased 5% to $25 million.

We incurred $12 million of other expenses in the third quarter, most of which was interest expense related to our debt. Our interest expense declined versus the third quarter of last year as we realized the benefit of lower levels of outstanding debt and lower interest costs resulting from the re-pricing of our debt during the first quarter of 2011.

Our effective tax rate in the third quarter was 29.2%. For the nine months of 2011, the tax rate was 33.3%. The third quarter 2011 tax rate benefited from the recognition of two non-recurring tax benefits totaling $4.2 million. Excluding those benefits, the third quarter tax rate would have been 35.1% and our year-to-date tax rate would have been 35.4%.

We are currently projecting our full year tax rate to be approximately 34% to 34.5% including those two non-recurring items I just discussed, and that would imply a fourth quarter effective tax rate of approximately 37%. Third quarter GAAP diluted earnings per share was $0.40 per share, up from $0.08 per share in the third quarter of last year. Our adjusted earnings per share, which is a non-GAAP measure that excludes the after tax per share impact of restructuring costs, non-recurring stock-based compensation, the amortization of intangibles, transaction expenses and debt repayment and financing costs, was $0.49 a share, up 48% from $0.33 per share in the third quarter of last year.

For the first nine months of the year, MSCI’s GAAP-diluted EPS was $1.05 a share, up $0.55 from last year, and our year-to-date adjusted EPS was $1.39, up 36% from the nine months of last year.

During the third quarter, MSCI generated $95 million of operating cash flow, up from $66 million from the third quarter of 2010. Our operating cash flow for the first nine months was $175 million, up from a $121 million last year. Capital expenditures were $10 million in the third quarter and $17 million over the first nine months of 2011.

We ended the third quarter with $1.1 billion of total debt outstanding of which roughly 38% is swapped into fixed rate instruments. We also had $364 million of cash, cash equivalents and short term investments on our balance sheet.

Finally, our quarterly weighted average fully diluted share cap was a 122 million shares, essentially flat from the second quarter of this year. With that we would be happy to take any questions you might have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Suzie Stein of Morgan Stanley. Your line is open.

Suzanne Stein – Morgan Stanley

Hi, good morning. I am just wondering if you could update us on any conversations you’ve had with ETF providers, particularly BlackRock in regard to your fee structure just given the tone of the market and given the recent filing by BlackRock to be an index provider.

Henry Fernandez

Yeah, Suzie, there is absolutely no change whatsoever on our fee structure with any index, EPS provider anywhere in the world. There are no discussions or conversations about changes to our fee structure of any nature with anybody. With respect to BlackRock we have a great relationship getting stronger and we’re trying to do more things together around the world. So, no change whatsoever there.

Suzanne Stein – Morgan Stanley

Okay. And then what’s been the response for the new equity models released this quarter? Are clients paying for the upgrade or is this part of the subscription? And then, is there a higher price point for new clients?

Henry Fernandez

The response has been overwhelmingly positive. There are a lot of people who have been part of the beta-test of this model who have seen how robust the new model is with respect to forecasting expected returns on risk and portfolios in any market. Let me pass it on to David with respect to the fee structure.

David Obstler

Yeah. We are in upselling, selling through the model to clients and achieving success. It’s early days. We’re just out with it. But as Henry mentioned, the response from the clients is it’s been positive.

Henry Fernandez

The other thing that I would highlight is that this model was built with a lot of new modeling methodologies, and it’s the first of a long series of models that we will be launching that have this improvement. A few of those models, for example, will be launched before the end of the year, another one will be in the first quarter and in the balance of 2012.

Operator

Thank you. Our next question is from David Togut of Evercore Partners. Your line is open.

David Togut – Evercore Partners

Thank you, and good morning.

Henry Fernandez

Good morning.

David Togut – Evercore Partners

Could you give us an update, David, on the current rate of RiskMetrics related cost savings in the September quarter and whether you see an opportunity to achieve additional cost savings in the next 12 months?

David Obstler

Yeah, thanks. We reported in the last quarter that we achieved our target, $50 million, and that that had run through the financial statements and closed the book on that chapter. As far as going forward we are making investments in the business, in the risk business, in a number of different areas, as well as continuing to work as we do every quarter on our cost structure in areas of non-compensation such as market data, IP, etcetera. Those numbers are flowing through the growth rates in our cost structure, which as we said is 5% in comp and non-comp in the quarter.

David Togut – Evercore Partners

I see. And then, Henry, you highlighted 27 net new ETFs that were linked to your indices in the quarter. Do you have a good sense of the pipeline of new ETFs that might link to your indices in the next 6 to 12 months?

Henry Fernandez

There’s not a great deal of change on the pipeline. Clearly this is a product line that has remained resilient worldwide regarding the flows of assets, net new so to speak or net flows of assets, compared to – like for example mutual funds. I think many ETF providers, even though cautious, continue to work hard at launching new products.

Operator

Thank you. Our next question is from Robert Riggs of William Blair. Your line is now open.

Robert Riggs – William Blair & Company

Good morning. Thanks for taking my question. Could you just give us an update on your plans for hiring in the coming quarters? It sounded like Q2, Q3 were big hiring quarters. And then a follow up on that would be, will there be more of a focus on kind of content development or sales or both?

Henry Fernandez

I think we will continue to hire new staff at a steady pace, especially staff in our emerging market centers. We believe very strongly that the secular wins for pretty much everything we do get even more reinforced and even more positive for us during periods of crisis like this, obviously from passive management to bridge management to quantitative tools to help in optimizing portfolios, to governance and so on and so forth.

So therefore we are very keen on continuing to invest in our distribution channels. So, a lot of our people – a lot of the people that we’re hiring are in sales and client service and consultant and the like to work directly with clients. And we’re also very keen on continuing to invest and launch new products pretty much across the board. We’re launching new indices, we’re clearly launching a lot of new models and software in the Barra business.

We’re investing also in the risk management business, in performance contribution and (inaudible) risk and liquidity risk, and as you saw non-private – as I said non-liquid assets for asset owners, and so on and so forth. And all of that is already baked into the cost structure of the company. So the additional headcount I think is not going to put an inordinate amount of pressure at all on our financials.

David Obstler

As we mentioned in the remarks, the net hiring is in the emerging markets and that has enabled us to add these heads but control the costs, the compensation costs related to that.

Robert Riggs – William Blair & Company

Great, thank you.

Operator

(Operator Instructions) Our next question is from Michael Weisberg of Crestwood Capital. Your line is open.

Michael Weisberg – Crestwood Capital

Hi, everyone. How are you?

Henry Fernandez

How are you doing Michael?

Michael Weisberg – Crestwood Capital

Good. Couple of things, could you – the index business, could you give us a sense of the run rate on a sequential basis constant currency? Is there a way of doing that?

Henry Fernandez

Well, there are customary numbers. Michael, the Index business is largely prized in dollars. The index subscription business, not the ETF, right, not the asset based fees, it's largely priced in dollars pretty much all over the world. There are very, very few exceptions to that. The businesses that are part of the run rate is in foreign currencies, for example, the risk management analyst business and the PMA, the Portfolio Management Analytics business, but the Index business is largely devoid of any sort of foreign exchange issues. Now, clearly, on the ETF part, the majority of the Indices that we have and the ETF linked to those Indices are non-dollar denominated Indices that get translated into dollars as listed in the U.S. for example.

David Obstler

Yeah. Just to follow up, Michael. The impact in the quarter on the run rate in the benchmark business was less than $400,000. As Henry mentioned, most of the contracts are denominated in dollars. Most of the run rate difference, which is a little under $6 million, was in the Risk Management Analytics business, where more of the contracts are in Euros et cetera. So, as far as the benchmark business is concerned, negligible effect on the run rate in the benchmark business from currencies.

Michael Weisberg – Crestwood Capital

Well, because I guess the follow-up would be, you were flat sequentially. Now you were flat sequentially last year as well in the second and third, is that because of a decline in non-subscription business? Because you would think based on the ACV that your revenues would be up sequentially? In the Index business, I’m sorry.

David Obstler

Yeah. The Index business was up 2.8% sequentially in the quarter on a run rate basis.

Michael Weisberg – Crestwood Capital

I’m talking about revenues. The revenues were flat.

David Obstler

The revenues would mainly be related to two things. One is the AUM, as we mentioned, where the average assets under management were lower, and there are small and recurring non-recurring sales, one-time sales in periods-to-periods that have that effect down into the single percentages or so.

Michael Weisberg – Crestwood Capital

Okay. Again, I was talking about flatness in the index business, not the ETF business. ETF I understand. I was talking about flatness in the Index business.

David Obstler

And that would most likely be related to the one-time sales and the timing of those sales with a one-time sale in one period versus the other.

Michael Weisberg – Crestwood Capital

I see. Okay.

David Obstler

The subscription business, the benchmark was up 2.8% sequentially in run rate. That is – to remind everybody that doesn’t include the non-recurring sale. So, this effect down into these percentages is related to whether you have a one-time sale in one quarter versus another.

Michael Weisberg – Crestwood Capital

I see. That’s affected that.

David Obstler

Yeah.

Michael Weisberg – Crestwood Capital

What kind of challenge do you see in the fourth quarter in the risk business? Just because I think traditionally a lot of the subscriptions come up for renewal fourth quarter. Should we expect a material jump in cancel rates in the fourth quarter?

Henry Fernandez

It’s hard to say, to forecast, Michael, right now. But, what we can say is that the secular demand for risk management analytics gets even stronger in environments like this. Our pipeline remains pretty healthy, but the RMA business is lumpy. For example, in this quarter, this third quarter of 2011 compared to the third quarter of 2010, it may look unfavorable because there were very strong sales, particularly to U.S. asset managers in the third quarter of 2010. Some of that would delay purchases that people delay because of the closing of the RiskMetrics acquisition. There was a little bit of uncertainty there from the second quarter and therefore they slipped into the third quarter.

Overall we’re not worried per se about the level of fundamental demand for risk management analytics among our client base worldwide. As I said, this quarter, this third quarter, it was particularly strong with asset owners, pension funds in risk management. It remains weak on hedge funds. Part of that has been the way we’ve approach the market, and we’re making changes to that and re-pricing certain products to the lower end of the market so we can also participate there. Part of it is that many hedge funds have been very negative about the market outlook during the third quarter.

David Obstler

Yes, Michael. As you’ve been following, there is a weighting in the fourth quarter. It’s not our most weighted. The governance business is more weighted in terms of renewals, but there is a weighting. That would mean on the same retention rate you would have more cancels than you’ve seen in previous periods. But, the weighting is not very significant in the RMA business.

Operator

Thank you. Our next question is from David Scharf of JMP Securities. Your line is now open.

David Scharf – JMP Securities

Great. Thank you. Good morning. I had a question on risk as well. The new sales were I think stronger than certainly I was looking for. You mentioned in the press release strong growth particularly from BarraOne. I’m wondering, Henry, can you kind of bring us up-to-date on a year post the RiskMetrics acquisition? Just how BarraOne and RiskManager are sort of positioned side-by-side in the market. I mean I can recall when RiskMetrics was standalone and we would ask about BarraOne, and the response usually was they really didn’t cross paths in the sales cycle. Just trying to get a sense for how they’re positioned, what different types of customers perhaps they’re going after and whether there’s some integration down the road or cannibalization.

Henry Fernandez

Yes. Good question. We don’t see pretty much any cannibalization between these two product lines. They are positioned differently in the sense that BarraOne is ideally suited for what we call asset owners, pension funds, sovereign wealth funds, endowments, foundations and the like. RiskManager on the other hand, is ideally suited for hedge funds, multi-strategy, large multi-strategy hedge funds. So, the overlap in between is asset managers, and within asset managers RiskManager is more well-suited for wealth managers, and that’s been a very strong market for us, although from clearly low levels. Then asset managers, not only asset managers per se, there’s some that BarraOne would be better for them and there’s some that RiskManager would be better for them, and we end up looking at what is the best approach for them.

RiskManager is also fairly well-suited for banks and broker dealers on the sales side, especially in the prime brokers operations. That’s an area that this quarter, when I mentioned in the beginning that banks and broker dealers were surprisingly resilient it’s on the heels of good sales of risk management analytics or officially RiskManager per se for that segment of the market.

So, I think between these two product lines covering pretty much the wide spectrum of different client segments and various use cases worldwide, we feel that we are extremely well positioned, and with a strong secular demand for risk management analytics. The issue for us clearly is to deal with the lumpiness of these sales. One quarter will be great, the next one will be less great and the like, and to continue to make sure we invest in the product line to deliver the functionality and the services that clients are demanding.

David Scharf – JMP Securities

Okay. That’s a helpful distinction. Following that route of geography, I know RiskManager historically has gotten anywhere from 40% upwards of 50% of new sales from Europe. On the BarraOne side, this is a few quarters in a row where you’ve highlighted pension funds in particular, so I assume that, that’s BarraOne. Are those all U.S. based, from the asset owner standpoint and BarraOne in particular, is there a European pipeline of substance or is it primarily focused on domestic sales for the time being?

Henry Fernandez

Well, the pipeline is across the world, from BarraOne sales in Japan to Europe and the U.S. Obviously the U.S., especially the U.S. public pension fund market has been a pretty sweet spot for us. In the old days, corporate pension funds – you know, if you go back 20 years or so, corporate pension funds were the ones at the leading age of best practices and risk management and other areas. Today the public pension funds are the ones that are leading the charge.

So, we have been very successful with public pension plans in the U.S. and around the world, and we’re now beginning to develop quite a good pipeline of corporate pension plans. In Europe we have a few new clients that are in the 401(k), the equivalent of the design contribution space, especially in the U.K. We’ve got some good clients in Scandinavia. As I said, some of the public and private – public and corporate pension plans in Japan, the one area that we are still struggling to penetrate is asset owners in Mainland China for example. We have two or three of the salient, big clients there.

China Investment Corp for example is a client of BarraOne. We made a public announcement about that a few months ago. We have just returned from China last week. One of the things we’re trying to figure out is how to sell some of these systems in a market that is a little bit cautious about using on-line ASP solutions.

David Obstler

Also to add another aspect of the asset owner client base has been in our hedge fund transparency business where the fund-to-fund and other asset owners have been strong. That’s been in Europe as well as in United States. So that’s been a strength for us also in the asset owner area.

Henry Fernandez

That was as a result of the acquisition in July of 2010 of the Measurisk, a small company that we bought from JPMorgan. We merged it into a product called Hedge Platform that was part of RiskMetrics. It took us almost a year to re-engineer that combination and find alternative sources of data and the like. But now it’s beginning to go into high gear. That’s an area of meaningful growth for us in the next years to come.

David Scharf – JMP Securities

Great. Thank you very much.

Operator

Thank you. There are no further questions at this time. I’ll turn the call back over for closing remarks.

Edings Thibault

Thank you, Latoya and thank you everyone for joining us. Have a good day.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.

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