MSCI's CEO Discusses F4Q11 Results - Earnings Call Transcript

| About: MSCI, Inc. (MSCI)
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MSCI Inc. (NYSE:MSCI) F4Q11 Earnings Call February 2, 2012 11:00 AM ET


Edings Thibault – Head of Investor Relations

Henry A. Fernandez – Chairman, President and Chief Executive Officer

David M. Obstler – Chief Financial Officer


George Mihalos – Credit Suisse

Robert Riggs – William Blair & Company, LLC

David Togut – Evercore Partners

David Scharf – JMP Securities

William Warmington – Raymond James

Suzanne Stein – Morgan Stanley


Good day, ladies and gentlemen and welcome to the MSCI Fourth Quarter 2011 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host today, Edings Thibault, Head of Investor Relations. Please go ahead.

Edings Thibault

Thank you, Shawn. Good morning, and thank you for joining our fiscal year and fourth quarter 2011 earnings call. Please note that earlier this morning, we issued a press release describing our results for the fiscal year and fourth quarter 2011. A copy of that release can be viewed on our website at 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 ending November 30, 2010 and on our Form 10-Q for the third quarter of 2011.

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 fourth quarter and then David Obstler will provide some details on our financial results. In the case of financial accounting metrics, the discussion of the fiscal year 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, fiscal year 2010 includes MSCI’s results for the fiscal year ended November 30, 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 12 months indicated rather than the prior fiscal period. I’ll now turn the call over to Mr. Henry Fernandez. Henry?

Henry A. Fernandez

Good morning and thank you all for joining us. Earlier this morning we reported 2011 revenue of $901 million and adjusted EBITDA of $419 million, up 10% and 17% respectively from pro forma 2010. MSCI full year adjusted EBITDA margin rose to 46.5% from 43.7% in pro forma 2010. MSCI’s 2011 adjusted EPS rose 36% year-over-year to $1.85.

For the fourth quarter MSCI reported revenues of $226 million, up 6% versus fourth quarter 2010. Adjusted EBITDA of $104 million, up 5% year-over-year and adjusted EPS of $0.45 up 25%. Our adjusted EBITDA margin was 45.8%, down from 46.4% in the fourth quarter of 2010. Our fourth quarter run rate rose 7% year-over-year to $882 million. The increase in the run rate was primarily driven by continued growth in the subscription run rate, offsetting part by slower growth in asset-based fees including the fees from Exchange Traded Funds.

From an operating perspective, MSCI continue to perform well despite an uncertain and difficult operating environment globally. We saw healthy growth in subscription sales and our cancellations continue to decline on a year-over-year basis.

Total sales for the quarter were $43 million, down from $46 million in the fourth quarter of 2010. New recurring subscription sales rose 5% to $35 million. By client type, our recurring subscription sales to our asset owner client and to our corporate client were strong and we saw very good sales to alternative investment managers including hedge funds and funds of funds. Sales to asset management clients and to banks remained steady during the quarter.

Our retention rates rose again to 85% from 82% a year ago. Our total cancellations declined by 10% year-over-year. As a reminder it is important to look at our retention rates on a year-over-year basis because of the seasonality in our retention rates. As you know our retention rates declined typically on a sequential basis from the third quarter to the fourth quarter as a result of a greater percentage of our business that is up for renewal during that period in the fourth quarter.

For the full-year MSCI’s retention rate was 90%, up from 87% in 2010. It is encouraging to note that our cancellations continue to decline in both the third quarter and the fourth quarter of the year, even as financial market became more volatile, economic uncertainties increased and our overall operating environment got more challenging.

With the growth in recurring subscription sales are under declining cancellations therefore, our net new subscription sales more than doubled from the fourth quarter of 2010 to $8 million. That growth in subscription sales was partially offset by a $2 million decline in run rate resulting from the strengthening of the U.S. dollar during the quarter. Netting all those changes, our subscription run rate at the end of the fourth quarter was $762 million, up 8% year-over-year and 0.5% sequentially.

With that overview now, let us take a look at each one of our major product line. Our Index and ESG business reported revenues of $101 million, up 11% from the fourth quarter, and a run rate of $389 million, up 10% year-over-year. Total Index and ESG sales sell 11% year-over-year to $50 million.

New recurring subscription sales rose 6% to $12 million. Gains in sales of index products, especially benchmark and financial products were partially offset by a decline in sales of ESG products.

Cancellations rose by $1 million to $6 million. Our quarterly retention rate dipped slightly to 89% from 90%. Index and ESG subscription run rate was $270 million, up 14% year-over-year and up 2% from September 2011.

Asset-based fee run rate rose 2% year-over-year to $120 million, despite a decline in ETF assets under management linked to our indices. The increase in run rate was driven by an increase in fees collective on other types of financial products such as [pension] funds and listed features and options, which more than offset a decline in ETF run rate during that comparison period.

At the end of 2011, there were $302 billion of AUM in ETFs linked to our indices, down $32 billion or 10% compared to the end of 2010. Over the course of 2011, we have experienced significant volatility in the level of AUM of ETFs linked to indices.

We experienced a strong growth in the first half of the year with AUM climbing and peaking at $371 billion at the end of April before bottoming out at $290 billion at the end of September. AUM levels recovered modestly in the fourth quarter raising $12 billion. Most of the fourth quarter gains resulted from market moves rather than net inflows, which were about $1 billion.

For the full-year, the average AUM and ETF’s linked to our indices was $334 billion.

As most of you know, on the second business day of each month, we publish the AUM or ETFs linked to our indices for the prior month on Those numbers will be posted to our website after the close of today’s market, but let me share them with you now.

At the end of January, just a few days ago, there were $334 billion in AUM in ETFs linked to our indices, up 11% from the end of the fourth quarter. Approximately one third of the increase in AUM has been the result of positive net flows into these ETFs linked to our indices.

During the quarter, at the end of the quarter, the average basis points in the ETFs linked to our indices dropped slightly from 3.1 basis points at the end of September to 3.0 basis points. On a relative basis, the out performance of ETFs linked to our U.S. market indices, which accounted for 24% of the total AUM at the end of December contributed to that modest decline in the average basis point C.

Revenues for our risk management analytics business were $62 million, up 7% from the fourth quarter of 2010. The risk management analytics run rate of $251 million grew 8% year-over-year. Changes in foreign currency rates especially the strengthening of the dollar against the euro during the quarter reduced the risk management analytics run rate by $2 million.

Total risk management analytic sales were $14 million in the fourth quarter, down 11% year-over-year, but up 10% sequentially from the third quarter. New recurring subscription sales were $12 million. We experienced solid demand from asset managers, hedge funds, asset owners and funds of funds offset by weaker demand from banks and broker dealers where budget prices remain intense.

Risk management analytics cancellation rose to $11 million in the fourth quarter and our retention rate dropped to 81%. For the full year, cancellations declined 7% and the retention rate rose to 90% from 86% in 2010. As we have discussed in the past, risk management analytic sales tend to be bigger, [junkier] and more volatile than in any one of our other major product lines. The same is true of cancellations.

In the fourth quarter of 2011, our largest cancel was driven by a client consolidation, a merger that had taken place two years ago that eventually declined ended up consolidating, and the second largest cancel was the result of a bankruptcy that we all know about. Both were in the banks and broker dealer segment. Based on our current pipeline, we do not believe that the fourth quarter increasing cancellations represent the beginning of any significant acceleration in cancellations in our risk management analytics product line. We continue to work hard to cement our position as an innovation leader in multi-asset class risk analytics.

During the quarter, we launched an upgraded version of the analytics underlying our flagship risk manager product. The new version enhances our coverage of complex deliveries increases our coverage of new fixed income instruments and contains enhancements to our counterparty credit risk capabilities. We also upgraded the hardware underpinning Barra 1 product resulting in significant performance improvement.

Our portfolio management analytics business continued on its road to recovery. revenues were $30 million, down 3% from the fourth quarter of 2010. Run rate, on the other hand, grew by 3% to $118 million. Recurring subscription sales were $4 million, up slightly from the fourth quarter of 2010.

Retention rates continued to recover rising to 87% in the fourth quarter from 63% a year ago, as a result of a 67% declining cancellations. For all of 2011, the retention rate in this business rose to 88% from 80%. The reinvigoration of the Barra product line continues.

Over the course of 2011, we benefited from the launch of several new generation risk models as well as from the launch in the end of 2010 of our new Barra portfolio manager software platform.

These products help our overall sales for years and play a very important role in the increase in retention rates. We have several more product launches scheduled for the first quarter including upgraded functionality for Barra Portfolio Manager, a new global Equity Model and two single-country models. There will be more to come over the balance of 2012 including more models and further additions to the software Barra Portfolio Manager.

We are also pleased that the progress we are making in restoring our government business to grow. Revenues were $29 million in the fourth quarter, up 1% from the prior year. Run rate increased 3% year-over-year and 1% sequentially to $108 million. Total government sales rose 13% year-over-year to $9 million led by sales of Proxy Research and Voting products.

New recurring subscription sales rose 60% to $7 million as we saw growth in both of our major product lines there ISS Institutional and ISS Corporate. In the latter category, we had strong sales of our new corporate compensation products. One of the first decisions we made up on acquiring the ISS business was to invest in the sales force and in account management. And we see that decision is starting to pay off in the form of an 11% increase in 2011 total sales.

Cancellations in the business declined by 5% to $5 million and our retention rates rose slightly to 81%. For the full year our retention rates rose to 86% from 84% as total cancel fell by 10%.

At the beginning of 2011, we noted that we expected to make certain investments in our business over the course of 2011, mostly in the form of increased headcount. We added a total of 330 new positions over the course of 2011, mostly in emerging market centers. The primary focus of our investments were in the front office where we expanded our distribution capabilities and bolster our client service and consultant services to clients. And we also made investments in our both management and development areas and our technology functions.

By business, the biggest beneficiary of our newest spending in 2011 were in Index and ESG, in portfolio management analytics and in risk management analytics. We expect the pace of headcount additions to moderate in 2012.

To sum up, MSCI reported positive operating and financial results for the fourth quarter and full year of 2011 despite the impact of increased economic uncertainty, weaker financial markets and a challenging operating environment for most of our businesses. We believe that the investments we have made over the course of 2011 and we will continue to make some in the course of 2012 will position us very well to benefit from the strong secular growth drivers underpinning our business and will enable us overtime to drive top line revenue growth.

I will now turn over to David Obstler for some additional comment.

David M. Obstler

Thank you Henry. MSCI reported revenues of $226 million in the fourth quarter of 2011 and $901 million for the fiscal year.

MSCI’s fourth quarter revenue growth was driven by a 10% growth in Index and ESG product revenues, and a 7% growth in risk management analytics revenues. These gains were offset by a 3% decline in portfolio management analytics revenues.

By type of revenue, subscription revenues grew by 7%, asset-based fees grew by 9% year-over-year and non-recurring revenues fell by 35% or $3 million. By segment, performance and risk revenues grew by 7% year-over-year to $198 million in the fourth quarter and governance revenues increased by 1% to $29 million.

Overall, adjusted EBITDA expenses, which exclude depreciation and amortization, non-recurring stock-based compensation and restructuring costs rose 7% year-over-year to $122 million. Our compensation costs rose by 8% to $85 million.

During the fourth quarter, we reduced our annual bonus accrual to reflect the slowdown in our growth in the second half of the year resulting in a roughly $3 million reduction in compensation expense in the fourth quarter. Our non-compensation expense rose 4.5% year-over-year to $38 million.

We generated a $104 million of adjusted EBITDA in the fourth quarter of 2011, an increase of 5% from the fourth quarter of last year. Our adjusted EBITDA margin declined to 45.8% from 46.4%.

On a segment basis, performance and risk adjusted EBITDA grew 7% to $97 million in the fourth quarter, and the adjusted EBITDA margin was flat at 49%.

Governance adjusted EBITDA fell to $6.7 million from $8.4 million and the margin declined to 23.4% in the quarter from 29.6% last year. For the fiscal year 2011, we reported adjusted EBITDA of $418 million, an increase of 17% from pro forma 2010.

MSCI’s adjusted EBITDA margin rose to 46.5% from 43.7% last year. Performance and risk adjusted EBITDA rose 19% to $387 million and governance adjusted EBITDA declined 3% to $31 million.

We incurred $11.5 million of other expense in the fourth quarter, most of which was interest expense related to our debt. Our interest expense declined the fourth quarter of last year as we realized the benefits of lower levels of outstanding debt and lower interest costs resulting from the repricing of our debt during the first quarter of 2011.

During the fourth quarter, we repaid $38 million of our term loan facility. The repayment is expected to trigger a decline in MSCI’s applicable margin above LIBOR to 2.5% from 2.75% when MSCI files its Annual Report for fiscal 2011. That should result in a decline in our interest expenses by 25 basis points.

Our effective tax rate in the fourth quarter was 36.6%. For fiscal 2011 the tax rate was 34.2%. The fiscal year 2011 tax rate benefited amongst other things from the recognition in the third quarter of two non-recurring tax benefits discussed in our last call totaling $4.2 million. Excluding those benefits, the fiscal tax rate for 2011 would have been 35.7%. At the close of 2011, our operating tax rate excluding discrete items is approximately 36% to 36.5%.

Fourth quarter GAAP diluted earnings per share was $0.36 per share up from $0.25 per share in the fourth quarter of last year. Our adjusted earnings per share, which is a non-GAAP measure that excludes the after-tax per share impacts of restructuring costs, non-recurring stock-based compensation, the amortization of intangibles, transaction expenses, and debt repayment and refinancing costs was $0.45 per share, up 25% from $0.36 in the fourth quarter of last year.

MSCI’s fiscal GAAP [EPS] diluted EPS for the year was $1.41, up from $0.81 per share in the fiscal year of last year. Our fiscal 2011 adjusted EPS was $1.85, up 37% from last year.

During the fourth quarter, MSCI generated $80 million of operating cash flow, up from $62 million in the fourth quarter of last year. Our operating cash flow for the fiscal year was $255 million, up from $183 million last year. Capital expenditures were $6 million in the fourth quarter and $23 million for the full fiscal year. We will be making investments in our physical infrastructure in 2011.

One of the key drivers of this is the shift in our New York offices. Because our lease is expiring at our present location we will consolidate our two New York operations into a single facility in the third quarter of 2012. as a result, we will be spending approximately $25 million to $30 million on facility build outs in 2012, the largest of which is New York, with approximately $10 million to $12 million of that pay for buyer landlord. As a result, we expect our growth capital expenditures to be around $15 million in 2012 and the net spend to be in the range of $33 million to $40 million.

It is of important to note that this level of capital expenditures does not represent a new norm, and we would anticipate a drop in CapEx in 2013. We ended the fourth quarter with $1.1 billion of total debt outstanding of which roughly 40% is swapped in fixed rate instruments. We also had $393 million of cash, cash equivalents, and short-term investments on our balance sheet.

Finally, our quarterly weighted average fully diluted share count was $122.5 million up from $122.3 million in the third quarter and from a $121.2 million in the fourth quarter of last year.

With that, we will be happy to take any of the questions that you might have. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from George Mihalos from Credit Suisse. Please go ahead with your question.

George Mihalos – Credit Suisse

A couple of questions, starting off on the retention side. Henry, I think you called out two sort of one-time or non-recurring events on the risk side. Do you happen to have the retention rate X those two losses? And then, also can you comment a little bit about the retention rate in the Index business. I know, we got to look at a year-over-year and it’s seasonal, but it seemed a little bit weaker, given the strength that you’ve seen over the first three quarters. Can you comment a little bit what you saw there?

Henry A. Fernandez

Yeah. Those two losses accounted for approximately $2.5 million, which would have increased the retention rate by a couple of percentage points on an annual basis. On a quarterly basis, I believe that would be about 4% to 5%.

George Mihalos – Credit Suisse

And sorry, on the index side...

Henry A. Fernandez

On the index side, David correct me, but I think the retention rate that we’re showing is combined Index and ESG.

David M. Obstler


Henry A. Fernandez

And what it is slowly the slight decrease on the combined retention rate George, is mostly attributed, if not all of it attributed to the ESG retention rate rather than the Index business, the index subscription business, which remains pretty healthy. what happened was just to put something in context was when we acquire those metrics, those metrics have recently made a variety of acquisitions in the ESG space was spend to better part of the last part of 2010 and the first part of 2011 consolidating products and rationalizing the operation and that resulted in certain clients that cancel their subscription, some of it was things that we wanted to endorse, given the new product line and some of it obviously was always voluntary. So that’s, I would not read too much into that drop in the retention rate on the Index business and we believe that the drop and the retention rate in ESG were temporarily and is now back to more normal levels.

David M. Obstler

The benchmark itself had relatively flat cancellations from – in the fourth quarter of this year versus last year with net, which means on a growing business actually the retention rate would have increased in the date and benchmark side of the business.

George Mihalos – Credit Suisse

Okay. That’s very helpful. And then just last question, can you talk a little bit about the selling environment and maybe talk a little bit about you’re seeing in the U.S. versus Europe?

Henry A. Fernandez

Yeah. I think we are putting it into context; we started the last – the first two quarters of 2011 up until April or May. I’m feeling pretty good that the environment and the budget of clients were beginning to relax and things were gradually were going to begin to be better for us. And then sometime in May, I think it was, the sovereign debt crisis in Europe began to raise its head. And then from then on, from May through September, the selling environment became pretty challenging and difficult and, but we kept selling on a healthy basis during that period. Importantly, a lot of what we had in the pipeline during that period, all the way to December alarming was delay, so the challenging environment caused delays in the selling of products rather than outright deletions from our pipeline during that period, that trend continuous in January, so there is no fundamental change.

As to geographic areas, we actually have done okay in Europe relative to the environment, our levels of sales have been satisfactory I would call them. They are not bad in any sense and that has been positive surprise for us.

And sales into the U.S. has been healthy and a little stronger than the expectations because clearly the recovery of the U.S. market. But they are not in any kind of strong pace at all social client segment clearly the banks and the broker dealers are challenging for us and for anybody else who are selling into land both in sales and cancels, and we saw a recovery at the end of December in sales into hedge funds, risk management analytics, which was good because of what we pointed out in the third quarter, and our sales of hedge fund transparency products, this is as a result of the Measurisk acquisition that we made in December of 2010. Those will began to gather pace, they are largely to funds of funds and other investors in hedge fund and we feel pretty good about that product and build sales.


Our next question comes from Robert Riggs with William Blair. Please go ahead with your question.

Robert Riggs – William Blair & Company, LLC

All right, thanks for taking my question. Maybe just an extension of about last question on the sales force, Henry, you have made some investments in headcount there you said that the headcount overall hiring were moderate and a little bit in 2012, can you just kind of comment in general about your plans for hiring as far as the sales force goes and then as an extension of that recent successes that you had with the sales force, can you bucket or maybe point out some trends. Are you having success because in general you think you have more effective coverage, have a recent hires, ramps up fuller rate of productivity or are you really starting to benefit from the new product introductions, thanks.

Henry A. Fernandez

Good question, and I think the one of the biggest benefits in 2011 in the growth of our, in our headcount investment in the client organization was in retention. We purposely invested significantly in headcount in our client service centers that are mostly if not largely located in emerging market centers and that client service investment has helped us establish a strong dialog with clients that have progress up for renewal been able to service them at a higher level of performance that we had in the past, and on the like and that has helped us maintain a fairly healthy rate of renewals, if anything in certain product lines the retention rates that we have especially in certain Index products are historically high levels, which is not what you would have expected in an environment like this, and therefore we are very pleased with that.

Another part of the investments we made are in what we call consultant, which are people that are located in financial centers London, New York, Hong Kong and [light], there are people that help us train clients, it will take clients in the use of analytics products, not so much index products, analytics products and that has helped those to retain clients and increase the retention rate.

With respect to up to sales, we benefited, we opened up sales presence in Toronto and Canada. We step up efforts with Korean clients. We actually opened up an office in Korea, a couple of weeks ago and we made announcement, press release at the time. So then what we are trying to do is marginally going to clearly new areas where we believe customers have budget to spend and those are the markets whose economies are doing better than that and the countries that are doing better than that such as Canada. So that has been – we benefited from that as well. So those were some of the efforts on the sales side.

On the products side, a lot of the investments in products that we made in the last six months are not yet on the sales, they’re not on the sales numbers and on the sales pipeline, because obviously there is a lag effect on that. So for example, we’re making some investments, not large, but we’re making some investments in performance attribution for their risk management analytics business, in alternative, and be modeling of alternative investment for risk management, for patient funds and fixed income instrument for a lot of our asset managers and in high volume processing for our wealth manager clients. That’s a new area, wealth management has been a good area for us to expand sales we’ve been pretty happy with the performance on that. And lastly, I’d like to emphasize again that in the last two quarters, there have been two products that are compared to the first two quarters of the year that we outperform in our expectations. One is the hedge fund transparency risk product, again otherwise called measured risk, that’s the acquisition we made and that is risk management, a capability for investors in hedge funds. And the second product was back I think in the early summer, we'll launch a new executive compensation data, service and analytics in light of ISS and that has been a phenomenal, successful in the – on a relative basis right in the last two quarters and we expect both of those products to continue well in 2012.

Robert Riggs – William Blair & Company, LLC

Great, thank you, Henry.

Henry A. Fernandez

Anything else Dave? Anything else to add to that David?

David M. Obstler

Yeah. I think in the – with workers’ compensation line, we got about sort of about $2.5 million; it’s the second quarter out. So we’re experiencing some pretty strong momentum in that area?

Robert Riggs – William Blair & Company, LLC

Thanks guys.


Our next question comes from David Tog with Evercore Partners. Please go ahead with your question.

David Togut – Evercore Partners

Thank you. Good morning, David and Henry.

Henry A. Fernandez

Good morning.

David M. Obstler

Good morning.

David Togut – Evercore Partners

Can you bracket David, your 2012 headcount growth target and also give us a breakdown of what parts of the business the new employees will go into?

David M. Obstler

We don't put headcount targets out. But as Henry mentioned, we've been investing in a combination of our front-office, sales and distribution, our product creation and IP, and another infrastructure support with a concentration in investing in the emerging markets except for the clients facing in sales organization that focuses more on the financial markets and we see more of that in 2012, as Henry mentioned though lesser rate of growth than we had in 2011. And that the other things is at the in order to plans for 2012 in terms of headcount growth and obviously a moderation from the levels of 2011. we are going and take them a quarter at a time depending on the performance of the business in this quarter, given the environment, if the environment gets better, we’ll look to expand a spend a little more, if the environment states about the same, we’d be more restrained on that effort. and as we said, we always have a – we have a balancing out in terms of putting a meaningful part of our investment in sales and client service for new sales on those new products pretension purposes, because those investments stay back right away. It’s a very quick return on that. And an investment in people that are building new products that typically is a lag by a year or two or three in terms of building up the sales on those new products. So we tend to be cautious about those in environments like this clearly, but we are committed that on a year-over-year basis, we continue to put up – put new products and new services to clients even if obviously the environment is difficult.

David Togut – Evercore Partners

Can you give us some insights into a non-comp expense for 2012 particularly SG&A?

David M. Obstler

Again, we don't give guidance, but we have as a matter of course worked on controlling our non-comp expenses in our largest areas, market data, IT infrastructure et cetera. We’ll continue to do that in 2012.

Henry A. Fernandez

We’ll not see much of this in any kind of meaningful significant growth in non-comp expenses in 2012, with the exception of the occupancy line, especially because in our New York office, we’re currently in two locations. We are loosing the lease in the health quarter location by all those.

We made an announcement that we’re moving to a 7 World Trade Center hopefully sometime in July in a faced approach. And therefore for most of the year, we’re going to have double rent, and that is going to obviously show up on the financial statements is all factoring into our budget and our analysis, but that will obviously increase a non-compensation expense lines by a bit.

David M. Obstler

Yeah, we locate our as Henry has mentioned, our occupancy up into our cost items. So that will be spread and have working on a number of other cost initiatives and the other non-comp areas to help – pay for that increase in occupancy.


Our next question comes from David Scharf with JMP. Please go ahead with your questions.

David Scharf – JMP Securities

Great, thank you for taking my question. Henry, maybe circling back another sort of high level question about the market out there. If we set aside just directionally where the markets have been going in the last few months and set aside even the dislocations in Europe right now, how should we be thinking about the secular growth outlooks for the core index business current market volumes that we’re seeing now? Actually end up being a new normal, I mean I know we all want to believe that once some of the overhangs out there are removed that market volumes will pick up. But as we think about that kind of demand out there particularly on the Index side, should we be focused as much on kind of the current volume outlook and whether or not this is a new secular benchmark or should we just be looking at kind of near-term fund formations?

Henry A. Fernandez

Yeah, I think it’s a good question and we actually spend a good amount of time within the company trying to differentiate strongly what is secular and what is cyclical? And I think starting with the overall business when you look at the totality of our business, the secular demand for what we do is theoretically is strong and getting a lot stronger.

And the two crisis that we have had the financial crisis of ’08, ‘09 and the sovereign-debt crisis have enhanced that secular demand for what we do and that is the valuation of investments, asset management, risk management, governance, ESG and so on and so forth.

So we’re pretty comfortable that’s kind of fundamental demand even in a new norm of a lower growth world is pretty good for us. If anything a low growth environment is going to put intense amount of pressure on asset owners and asset managers on fees to asset managers of all types and the transparency of those fees and the transparency of the return and the risk that investors are taking with the asset owners’ money.

And a lot of clients have come to us and say that they need more tools from us to be able to understand what the actual performance of people are, and the attribution of that performance, and the risk that those people are taking on that performance in order to pay for alpha and not to pay for beta, that’s kind of a way to look at it.

So that puts in a more added benefit to the secular demand of what we do. So when we look at our various businesses clearly that theoretical demand is heavily pitched right now or pinch I should say right, now by the budgets of clients in which they will like to get a lot of our tools, and get them in significant numbers.

But they got to face the reality of the financial constraints that they have in their business and therefore they make room for us. Many of our clients’ budgets are flat to down and our share of their budget is increasing and they make room for our tools and they got us [squish] somebody else to do that.

So what we believe is that as the world recovers even in a lower growth environment those budgets are going to get relaxed, maybe not totally to pre-oil once they get relaxed and as they get relaxed a lot of this bottled up demand for our products and services are going to start increasing the pace of activity for us, clearly at a higher level of what we have today.

With respect to index itself, I think there is a little bit of a trade-off that may happen over time between sort of benchmark data sales. We see that continuing, but clearly the rate of fund, the rate of fund launches and new product launches and alike may slowdown, given the environment. And that may or may not have an impact on sales or benchmark. But we also see the money we’re making on passive management, which continues at an institutional level at the ETF level and therefore it creates two inches of growth for that.

The third component is that it’s not big. And I don’t think it’s going to be big in the near future. But we continue to make inroads on generating revenues on derivative products, futures, options, structure products and the like that obviously is not a large number for us, but it adds up overtime. And that’s the third leg of the Index business that we’re trying to develop over the years.


Our next question comes from Bill Warmington from Raymond James. Please go ahead.

William Warmington – Raymond James

A question for you, if you could update us with respect to the volume of cross-border institutional mandates in the U.S. you’re seeing and how your success rate is trending there?

Henry A. Fernandez

We don’t specifically track on a quantitative basis or frequent basis. The amount of cross-border investments per se in institutional landscape when we do look at the data there are two, three things that are very clear. And that is despite the volatility in emerging markets the allocation of pension fund money to emerging markets continues unabated.

Even at times when people thought that the emerging markets were inflated because people make strategic asset allocations to asset classes and it’s very hard for them to time it, so they do whenever they feel that they need to make the strategic reallocation of assets, right. So we see that continues unabated.

Secondly, they continues to be a trend for looking at the equity investment processes of this asset owners on a global basis, not on a U.S. versus developed markets versus emerging markets versus global small cap basis. And therefore in the past, we’ve talked a lot about the increasing number of institutional clients for us in the United States that are adopting our ACWI, an ACWI IMI benchmarks without any biases of emerging or developed or domestic or international and like that continues on a healthy clip.

The benefit of that is that eventually the asset manager that is managing those assets for the asset owner is going to come back to us for more data regarding all of that including more domestic U.S. indices on the part of MSCI, which is in the past hasn’t been our (inaudible) in the U.S. market. For more emerging market data, for more and clearly more global small cap data, so that’s another trend.

So I think the way I would place it to you in the institutional part of our business, not the retail, but institutional part of our business that I just don’t see any slowdown or aggression on the pace of globalization of people’s portfolios especially the allocation to emerging markets.


Our next question comes from Suzi Stein with Morgan Stanley. Please go ahead with your question.

Suzanne Stein – Morgan Stanley

Hi, can you talk in general about the adoption of portfolio analytics over the past few years and your expectation on how that continues to play out? Have you converted customers that were more inclined to buy the products to begin with? So future sales could be more challenging or do you think the opportunity is still abundant?

David M. Obstler

I think Suzi, in the last 12 months, the story of the Barra business has been one relatively high levels of retention compared to 2010. A lot of that was fairly active dialog with our clients as to the roadmap of our analytics product, our software and our new models and description of what we’re trying to achieve.

There’s been a lot of thought in leadership in the form of research seminars and a lot of sort of advise so to speak, not advise, but a lot of description of what we’re doing in our models and the like and the impacts of our models in the way they’re managing their portfolios and so on and so forth. So that has helped on the retention.

The sales have remained at a good level, so that’s been good news in 2011, compared to 2010. But they haven’t accelerated quite dramatically either. So the net new has been very high, because of the drop of the significant decline in cancels.

So we have, I think as I mentioned 3% growth in run rate. We expect that continue to remain steady or accelerate with a launch of a lot of new products. So a lot of the money we’re making currently at the incremental sales, we’re making our own models.

And the benefits of BPM have not been fully flushed out on our sales, because obviously the first release of BPM was a good release, but it was for risk analysis. We’re now – I think this month in February, we are doing a major release of BPM that is going to include quite a lot of new functionality. And then we’re going to do another release towards the end of the year. So therefore, on the software side that’s going to help us increase the base of sales in that market.

So the opportunity continues to be good. We believe that the overall market opportunity for Index and risk management analytics is much larger than for equity portfolio analytics. But we’re hoping that this business can go back to more pre-‘07 growth rates that we’ve enjoyed in the past.


I’m not showing any other questions in the queue. I’d like to turn it back over to Mr. Fernandez for closing comments.

Henry A. Fernandez

Well, thank you very much everyone for joining us. And I will be more than happy to take individual questions from anybody if you so this hour. Thank you.


Thank you ladies and gentlemen. Thank you for your participation in today’s conference. This does conclude the conference. You may now disconnect. Good day.

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