MSCI Inc.

Good day, ladies and gentlemen, and welcome to the MSCI Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session where we will limit participants to one question and one follow-up. We will have further instructions for you at that time. As a reminder, this conference call is being recorded. I would like to now turn the call over to Sally Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you, operator. Good day and welcome to the MSCI Fourth Quarter and Full Year 2019 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the Fourth Quarter and Full Year 2019. This press release, along with our earnings presentation, which will reference on our call, and a brief Fourth Quarter update, are available on our website, msci.com, under the Investor Relations Hub. Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to, Organic Operating Revenue and Growth Rates, Adjusted EVITA, Adjusted EVITA Expenses, Adjusted EPS, and Free Cash Flow. We believe our non-GAAP measures facilitate meaningful -to-period comparisons to provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful, as well as how management uses these measures on pages 25 to 33 of the earnings presentation. We will also discuss Organic Run Rate Growth Figures, which include the impact of changes in foreign currency and the impact of any acquisition or divestiture. On the call today are Henry Fernandez, our Chairman and CEO, Sarah Pettit, our President and COO, and Linda Huber, our Chief Financial Officer. I would also like to point out that members of the media may be on the call this morning in a listening only mode. With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Sally. Hello, everyone, and thank you for joining us today. Before I go through my prepared remarks, I would like to give you some reflections as we enter this new decade and what we should expect from MSCI. As many of you know, I've been at the helm of MSCI almost 25 years, and I can categorically tell you that today I am more excited and more optimistic about this franchise than I have ever And I'm sure that it's not only me, but my partners here, Bear and Linda, share on that optimism. Our franchise is getting stronger at an accelerated pace. And in terms of what we do for clients all over the world, we tackle problems and opportunities we help them solve, what industry bodies would like to know from us and learn from us, what government officials and regulators want to learn from us, everyone wants to talk to MSCI about how we are helping change the investment industry. Our strategic investment choices at MSCI are vastly wider and deeper than they were 10 years ago because of the more central role that would play in the global investment industry. Our financial model is not only very resilient and diversified, but is presenting us with significant new organic opportunities of investment with even higher rates of return and short to medium term paybacks. The reason for this is that what we do is normally built upon on top of an existing infrastructure and cost base at MSCI, and as that infrastructure is more and more developed, any incremental investment for new things yields a much higher incremental payoff and therefore an acceleration on internal rates of returns. This is clearly the case in index and ESG, for example. So we are therefore positioning ourselves to take full advantage of this dynamic and hopefully accelerate shareholder value creation throughout this new decade. Well, with those reflections, let me now go through my prepared remarks. In the fourth quarter, we deliver strong performance across our franchise with -over-year growth of 12% in operating revenues, 16% in adjusted EBITDA, and 27% in adjusted ETS. In the fourth quarter, assets under management in equity ETS linked to MSCI indices hit a record high of $934 billion. The increase of $119 billion from the third quarter was driven by both strengths in the global markets and very healthy cash inflows into ETF linked to MSCI indices. Since the start of the new year, we have continued to see growth in AUM levels in equity ETF linked to MSCI indices. At the end of last week, they exceeded $950 billion, setting a new record and come close to the $1 trillion mark, which would be great to achieve so. Notably, although inflows to global equity ETFs were lower throughout 2019 compared to 2018, MSCI actually saw a 48% increase in equity ETF inflows linked to our indices, demonstrating the power, the diversity of our ETF indexing franchise. About a year ago at this time, on our Investor Day, we shared with you three pillars of our strategy. Today, I'm excited to give you an update on our progress. At the time, we told you we would one, grow our core business, two, execute in-flight opportunities, and then three, capture new wave of opportunities in order to serve a wider and deeper variety of investments, problems, and opportunities, and therefore in turn, fuel the growth of the company and the creation of shareholder value. We have been delivering on our promise to execute in these areas of growth while serving as responsible stewards of your capital. In the core business, we have produced significant growth as we continue to innovate and add content in response to changing markets and client interests. You can see evidence of this continuous progress in our well-established solutions like our equity market cap indices, our equity risk and performance analytics, as well as our multi-asset class risk analytics. In fact, as of December 31st to 2019, we reached a combined run rate for our index analytics segment of almost $1.5 billion, up 13% year over year. In addition to accelerating our core business, we have executed on a number of in-flight growth opportunities to meet the needs of our customers and the investment community more broadly. Let me give you a few examples. First, within our futures and options business, we expanded our strategic partnerships with key derivative exchanges in the US and Europe. The run rate from futures and options grew over 56% compared to the prior year. Second, with respect to our ESG business, the October 2019 acquisition of Carbon Delta provided us with an essential climate value at risk capabilities for our ESG franchise. And of course, the climate change segment of the ESG franchise is an area that we're intensely focused on as the world is focusing on the impact of climate change in a variety of areas, in our case, on portfolios of our clients. To those who are, we are very pleased with the progress we have made with our integration efforts with Carbon Delta and the level of client interest that we are placing. Third, in fixed income, we recently launched 15 MSCI fixed income ESG and factor indices, leveraging our three plus years of extensive experience in fixed income risk and performance analytics, as well as our leadership in index construction and -the-art data capabilities, and of course, on our expertise in ESG. Finally, in real estate, we continue to grow and expand our offering of private core real estate data and analytics, and our optimistic that our growth in this segment will gradually accelerate. Finally, we have invested in new wave of opportunities that will drive our future growth. Most recently, we entered into a strategic relationship through a significant minority investment in the purchase group, a leading provider of investment decision tools for private asset classes. This was an area of significant focus in our investor day a year ago. Our positioning in private assets is critical to supporting our clients who are increasingly looking for solutions that expand both public and private assets. Our alliance with Burgess is intended to accelerate and expand the use of data, analytics, and other investment decision support tools for investors in private asset classes all over the world. More broadly, we remain committed to providing our clients with tools that would enable them to capitalize on their significant new investment opportunities and challenges. We believe this puts MSCI at the leading age of more investing. As we enter the new decade, we're proud of what we have built and the tremendous value that our employees have created for our clients and in turn our shareholders. Before I pass on the call to my partner, Bear, I would like to congratulate him because this month Bear has celebrated his 20th anniversary of being an MSCI and a partner of mine throughout that time. Mr. Pettit.

Thank you, Henry. 20 very interesting years indeed and doubtless more excitement ahead of us. So clearly I share your enthusiasm about the many opportunities to drive growth and shareholder value at MSCI. Henry talked about the three pillar strategy that we discussed with you at Investor Day. At that event, we also highlighted the secular forces that are transforming the investment industry including the move from active to index enabled investing, increasing globalization and acceleration of capital flows, and the need to incorporate ESG and more specifically climate change considerations into investment processes. MSCI continues to be well positioned to help global investors build modern portfolios that will capitalize on this transformation. Our sales efforts have led to total organic run rate growth of more than 14 percent in the fourth quarter year over year. Growth sales grew above 20 percent in each of our segments in the fourth quarter and we reached record total growth sales of over 75 million dollars. The fourth quarter's retention rate was down from the third quarter but in line with last year's fourth quarter rate at 92.9 percent as a result of a seasonal decline given the concentration of contracts that generally come up for renewal in the fourth quarter. We're working hard to deliver must-have products and solutions to our clients with the aim that such tools become embedded in their processes, analysis, and thinking about investing. Our recurring subscription run rate where we recorded our ninth straight quarter of organic double-digit percentage growth saw strength across all geographies notably in Asia-Pacific and Europe. From a client perspective, asset managers and asset owners which collectively comprised two-thirds of our subscription run rate grew above 11 percent each. At a segment level, index and analytics subscription run rate grew more than 11 percent and 7 percent respectively. Within analytics, we recorded strong recurring sales growth in our equity and multi-asset solutions notably to asset owners. Within our all other segment, we crossed milestones of 100 million dollars for our ESG research subscription run rate and 50 million dollars for our real estate subscription run rate. Our ability to achieve these strong results and to deliver attractive returns on our investment dollars validate our disciplined capital allocation approach. Our daily focus is to help clients more effectively and efficiently build portfolios. I'd like to walk you through a few recent examples of this. First, innovation within our ESG and factor categories has been a key differentiator in the cash inflows to equity ETFs linked to MSCI indexes versus our competitors. In 2019, MSCI was the number one index provider based on cash inflows to equity ETFs. Second, as we have often communicated, there are significant client benefits to integrating MSCI research and content across various investment use cases. In the ESG space, this integration has driven our combined ESG research and index run rate to nearly 150 million dollars in 2019. Third, our continuous investments in modeling new risk categories has helped bolster our analytics growth. One such example is in the area of liquidity metrics where our innovative solutions were well received in 2019 and contributed meaningfully to our financial results. Next, our client interactions with major global asset owners and asset managers show us that our real estate offerings are an important input to their investment decisions. Further, our 2019 client surveys indicate significant improvements in customer satisfaction with regards to our real estate products and services. And finally, last week we published the MSCI principles of sustainable investing to further equip investors with a framework to integrate ESG into their investment processes amid the global shift towards sustainable investing. Overall, we have substantial momentum heading into 2020 and we are confident in our ability to continue delivering for our clients. This confidence underpins our guidance which Linda will review in addition to going over our financial performance. Over to you Linda.

Thanks Bear and hello to everyone on the call. I'll start with operating revenue where we reported 407 million dollars per quarter, up 12 percent from the prior year. Looking at each of our business units, first in index, operating revenue grew approximately 16 percent. Growth in asset base fees were meaningful contributor. In addition, we saw strength in recurring subscription revenue driven by continued momentum in developed market modules and in factor custom and ESG indexes. Second, analytics operating revenue increased more than five percent with a continued strong growth in non-recurring revenue from implementation and other services as well as an uptick in recurring subscription revenue. Finally, for the all other segment, operating revenues grew 20 percent reflecting robust growth across our ESG rating and screening offer. In asset base fees, revenue grew 18 percent. It was driven by strong ETF revenue and average assets under management grew 21 percent year over year and equity ETFs linked to MSCI indexes. Dequentially, the average basis point fee actually increased slightly by 0.01 basis points. This was due to the mix of ETFs capturing flows rather than a reversal of the broader decline trend. Non-ETF passive fund revenue was up 11 percent driven by increased contributions from higher fee products. And finally, futures and options revenue, one of our high growth areas, is up approximately three million dollars as compared to last year. As you heard from Henry, ending assets under management and equity ETFs linked to MSCI indexes were 934 billion dollars as of December 31, 2019, up 34 percent versus the prior year end and up more than 14 percent versus the prior quarter end. On a sequential basis, MSCI saw 56 billion dollars of inflows into funds linked to MSCI indexes across geographic market exposures, notably those associated with developed markets outside the U.S. Additionally, factors in MSCI funds accounted for nearly a third of cash inflows into equity ETFs linked to our indexes. On a year over year basis, around 40 percent of the 239 billion dollar growth in assets under management at year end was attributable to cash inflows with a balance coming from market appreciation. Now, I'll show you the focus to adjusted earnings per share, which was one dollar and 67 cents per year in the fourth quarter of 27 percent year over year. More than two-thirds of the growth in adjusted ETFs was from higher operating revenue, net of operating expenses, a strong proof point on the earnings power of our franchise. The remaining third of the growth in adjusted ETFs was driven primarily by a lower tax rate and reduced share count, partially offset by higher interest expense.

Turning now to

our balance sheet and capital allocation, the end of the year was 1.5 billion dollars of cash and 31 billion dollars of debt. In November, we issued 1 billion dollars of debt at a coupon of 4 percent and used 500 million dollars of the proceeds to partially refinance our 5.25 coupon notes due in 2024, of which we currently have 300 million dollars remaining. In the fourth quarter, MSCI paid approximately 58 million dollars in dividends to its shareholders, but did not repurchase any shares. Before I turn the call back to Henry, I'd like to share some elements of the 2020 guidance we published in our press release this morning. MSCI's guidance for 2020 is based on assumptions about a number of macroeconomic and capital market factors, particularly related to equity markets. These assumptions are subject to uncertainty and actual results for the year that differ materially from our current guidance. For the full year 2020, we currently expect adjusted EBITDA expenses in the range of 750 million to 770 million dollars and capital expenditures in the range of 60 to 70 million dollars. As you know, we cannot predict asset-based revenue. However, it is our intention that higher levels of operating revenue will coincide with higher levels of expenses and higher capital expenditures as we invest back in our growing businesses. Finally, we expect free cash flow to be in the range of 580 to 640 million dollars. Free cash flow in 2020 is projected to decline from 2019, primarily due to two factors. First, the absence of tax benefits we had related to stock based compensation last year, and second, increased capital expenditures this year. A full list of our guidance is included in our earnings release published this morning, as well as in our earnings presentation for this call. Both are available in the investor relations section of our website at MSCI.com. And before we move to Q&A, I'd like to turn the call back over to Henry.

Thank you, Linda. I am pleased to announce that we invited two new directors to our board. Paula Volente and Sandy Rathrate have been appointed to serve as independent directors effective February 26th of this year, increasing our board from 10 to 12 directors. Both Paula and Sandy have extensive experience in the investment industry. Paula is currently the investment officer of both in college in the U.S., one of the best performance endowment in the U.S., and Sandy is currently the chief investment officer of the MAM group in the U.K. I am confident they will provide diverse and valuable perspectives drawing from their combined global experience and their expertise across asset classes and emerging industry trends, including technological innovation. And with that, we'll move over now to Q&A.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And as a reminder, we ask that you please limit yourself to one question in one time. One moment while we compile the Q&A roster. And our first question comes from the line of Toni Kaplan with Morgan Stanley.

Thank you. Could you talk about the decision to make ESG ratings available for free on the website? My take was that the objective is to broaden the use of the ratings and have MSCI be continue to be the standard there. And I guess, could you just talk about if that changes the ESG business model you have at all? And then finally, with a lot of new big name providers entering the ESG space, do you think there'll be more price competition in ESG?

Thanks. Hi Toni, Bear here. So look, clearly, transparency is a critical element in sustainable investing. And we have shown our commitment to that both to the broader market and also to companies by making this information available at this level. Equally, you know, central to the notion of ESG investing and sustainable investing is being able to go deep into underlying information relating to companies' activities, supply chains, and the enormous diversity of their activities. So we're confident that by putting this, you know, on our website, it both shows our commitment to transparency and to giving the market headline information, but that our subscription model and the need to access the more detailed research behind the ratings will continue to be a very important economic driver for us.

Great. And do you think pricing will be more competitive?

At this stage, we don't have a, you know, a great deal of evidence of that. I mean, as you know, it's an area of investing that is growing dramatically quickly. You know, we've seen enormous changes even within the last year or two, let alone the last five years. And so I'm loathe to make a forward-looking judgment about that. I think you can see our results are very robust and continue to be very strong and attractive. So at present, we don't have any evidence of any sort of strong pricing pressure.

Got it. Thanks. And for my follow-up, just want to get an update on SBEON analytics look-by this quarter. And so wanted to understand if the number of clients adopting the platform was above what you had expected originally. And if you talk about any sort of future selling opportunities, cross-selling opportunities with that, that'd be great.

Sure. So for the time being, SBEON is not having a material impact on the analytics numbers. And during the course of 2020, it will not be a major contributor to the analytics sales. We're confident about where the platform is. And I think as the year progresses, we can keep you updated on the functionality and client uptake. So I would say we're confident with the path for SBEON, but from a pure sort of accounting revenue point of view for 2020, it should not have a material impact.

Thanks a lot.

Thank you. And our next question comes from the line of Manav Patni with Barclays.

Thank you. Henry, just the Burgess deal sounds pretty interesting. And I was just wondering if you could help describe in the context of all the partnerships and so forth that you're looking at, what does that pipeline look like? We weren't familiar with Burgess. I'm sure there's plenty of these other ones out there. So I was just curious on your thoughts on what that looks like.

Yes. So Manav, let me start with Burgess and then we can broaden it to other forms of partnerships. So Burgess is one of the leading, if not the leading provider of private asset class data and analytics through a sort of integrated, unified technology platform. They've been at it at this game for about 30 years, 30 plus years. They serve about a thousand clients in 36 countries. Importantly, on their product line is about 10,000 funds that represent about $7 trillion of committed capital. And a bit of their strength is in private equity, but it's not totally. So in that, let me give you a little breakdown. In that 10,000 funds, over 6,000 of those 10,000 are in private equity, representing about $4.25 trillion out of the 7. Another close to 2,000 funds representing say about $1.5 trillion are in private real assets, real estate, natural resources, infrastructure. And another 1,000 funds or so representing close to a trillion dollars, little less, is in private debt. So this is an incredibly rich database that we can not only help Burgess commercialize much more rapidly, and that's one of the reasons you haven't heard much about Burgess because they've been a company that has spent a great time building their products and we are, a lot of our efforts are to help them commercialize the product. But then secondly, that we can take a lot of these databases, the MSCI, and build all the things that we know how to build. Build indices, build risk models, build performance attribution models, performance measurement models, and all of that for these various private asset classes. So we are exceedingly excited about this partnership and investment that will, so remember everything that you'll say about Burgess, what I haven't said is our own private core real estate product line, which we just crossed the $50 million run rate, is made up of about $2 trillion worth of real estate properties in 30, 40 countries in the world and representing about 70,000 properties. So there's some overlap, so to speak, but between the two of us we have roughly $9 trillion of databases, which I would imagine is pretty close to 85, maybe 90, or 95 percent of the entire universe of private asset classes in the world. So very exciting about that opportunity. Now more broadly, speaking, one of the key tenets of MSCI strategy is to build partnerships, distribution partnerships, research, you know, academic partnerships to build new models, data partnerships to get data, technology partnerships to help us accelerate our AI and machine learning processes, for example, and the like, and those partnerships to be the basis for creating ecosystems, in which hopefully MSCI is the heart of that ecosystem in order for all of us to be serving clients. So we started, we've always been doing this, but we accelerated the partnership initiatives about two, three years ago. Obviously, you know, we have very extensive client partnerships as well, but you know, we accelerated the other forms of partnerships. So you're going to see us doing a lot more of this, a lot more. Some partnerships, you know, may be just a strategic relationship, changing data, changing commercial capabilities. Some of them may require some investments on our either minority investments of any type or maybe control investments.

Okay, got it. And I guess one of the reasons that I was asking that, and maybe, you know, Linda, you can help you, just in terms of the capital allocation, should we just see more of these? How should we see the balance of buybacks? Because I guess, you know, your stock is nearly doubled from the last time you guys made these average that you disclosed of 147. So just how would you think of that going forward?

Yeah, so we have an integrated capital allocation approach, right, which is the quote unquote external capital allocation, which is dividends, share buybacks. Obviously, we're always focused on the leverage ratios of the company. And the objective there is to run the company with the minimum amount of capital necessary and distribute any excess capital in the company. And then the internal capital allocation process is about how do we deploy capital internally for organic investments that, you know, and that's something that Linda can talk to at another point in time that we're very focused on. And then obviously the third element is sort of external M&A or partnerships and the like. These are all opportunistic, you know, they're going to come and go. I will not say that, you know, we're accelerating that for any reason. It just happens that we did a couple of delta and in addition to the organic investment. So whatever doesn't get utilized at a proper and high rate of return with good paybacks, then that capital gets returned to the shareholders in the form of dividends and in the form of opportunistic buybacks of our shares.

So, my name is Linda. We continue to pay our dividends. It's about $58 million per quarter on our dividends. We'll take another look at our dividend rates to get later in the years. We usually do. Partnerships are very important, but they don't require a huge outlay of cash, which is very helpful. They do require a huge outlay of work and time and focus on the accounting treatment. The buybacks, we do have some modeled in, about 2.2 million shares, frankly at a price lower than where we're trading now. We'll continue to take a look at that, but that continues to focus on the opportunistic way of repurchasing shares that Henry just talked about. So that's how we're thinking about this for right now. And if we evolve that over the year, we will keep you All right.

Thank you guys.

Thank you. Another next question comes from the line of Alec Graham with UBS.

Yes. Hey, good morning, everyone. Just want to ask about the guidance very, very briefly here. I understand, obviously, that you don't make a guide revenues because of the asset-based side, but clearly you guide operating cash flow and free cash flow. And you just made this comment, Linda, that there is just clearly a level that, you know, if asset-based is doing better, you would spend a little bit more. So can you just help us how you think about that side of the business in terms of what are you budgeting for market performance, flows, pricing perhaps, so we have a better sense of when you would accelerate the spending if markets actually work in your favor? Thanks.

Okay, Alex, you're asking for about all the variables we haven't spoken to, so let me see if I can help you with this in a way that follows our guidance. So we started with the adjusted EBITDA set because we thought this would be more helpful for the shareholders. And we talked about a range of $750 million to $770 million. The matching number for 2019 was $707 million, just so you're aware of that. The piece of ETF linked to MSCI fees within ADF has grown rapidly. We cited the most recent number at $950, which has been a significant jump up from where we were just a few months ago. So we're taking a look at that $950 number, Alex, and in terms of planning for our expense growth, we're taking a moderate or conservative view of further growth, and that number jumped up pretty significantly just in the last couple of months. So hope that helps you. And then $770 million, which is the top end of the range, we want to very much stress that we're going to have to see some additional increases in those ADF fees, and able to spend more. So we're looking at modest increase in spending if we have earned it, if we have earned it on the top line, and that may take us toward the higher end of the range, but we'll keep you posted. We would note, very important to note, the first quarter is a higher expenditure quarter for us due to tax payments and bonuses. So if we do more of this, it will likely not come quite as much in the first quarter, but a little bit more tilted toward the second and third, perhaps, the back half of the year. So hope that helps you, Alex, but we would point you back to the longer-term guidance targets that we have seen in the last year as what we're continuing to try to achieve.

So that basically means you're not looking for a lot of help from the market is the point, right? Did I hear that right?

We're being thoughtful and moderate in terms of what we're expecting from the market because we've seen very good growth already.

Yeah, good. And just secondly, quickly, I think you gave a little bit of color on analytics growth. I mean, the sales was very impressive, but maybe you can expand a little bit more in terms of where that is coming from. Is it upsells? Can you maybe talk about the regions you're seeing or customer types receive a lot of demand? I think that would be great. Thank you.

Sure. So I'll make a few comments there, Alex. So first of all, I think we've had a generally strong growth across analytics, as I said in my comments. So it's not, I would say, unevenly distributed. Having said that, the particular positive areas have been recently in a combination of in bar one for a lot in asset owners, so for total portfolio analysis of risk and return and with a sort of, if you like, an overweight in the numbers to Asia. So those are some of the, I would say, the most recent above average performances. I would say, and in those, we would assume that the strength in total portfolio analytics will continue. The numbers in Asia were very strong. We want to keep pushing them, but they may not persist at quite that level because there were some exceptional deals there. And as I mentioned, with my comments about liquidity, that's one example of various kinds of us serving increasingly specialized use cases where we have a unique offering. So I would say, good core strength, some specific app performance and continued innovation, and we want to keep that on that path.

Sounds good. Thank you very much.

Thank you. And our next question comes from the line of Bill Warmington, from Wells Fargo.

Good morning, everyone. So first question for you on the index business. You talked to the retention rate and how that was flat year over year and that we saw the downpick on a sequential basis and that was driven mostly by seasonal components. Now, it's a high class problem. I'm trying to pick on a 93% retention rate because that's very strong. But I just wanted to know if there was anything behind that downpick and also a question of where are the investors going when they do leave?

So the good news, Bill, is the headline is nothing to see here.

Honestly,

there really isn't. I mean, you know, the Q4 number was pretty much, so that's the total company number. The index number is higher. I don't have it right in front of me, but you know, so the total company number was pretty much flat. The index numbers continue to be very strong. And so really, there is, you know, the good news is there's really, there's no story that we see there. We see conditions being, you know, fundamentally what they have been.

Got it. And then on a question on my follow-up on the analytics business, there was a slug of non-recurring revenue there that you mentioned came from implementation. I just wanted to know if that was a forerunner of some acceleration in the analytics business or how to interpret that?

Sure. So in fact, let me talk about non-recurring sales a little more broadly. So last year, there was roughly a 50-50 split in non-recurring sales between Equity Index and Analytics. So in Equity Index, the main drivers of that are the continued strengthening of what Henry has called the third pillar of derivatives in Equity Index, which are made up of structured products and OTC -the-counter licenses. So that is the main thing there. And those revenues are non-recurring, but we think that category will continue to grow. In analytics, to come back to your point, the key drivers there are implementation and managed services on a roughly two-thirds, one-third basis. So structurally in analytics, as our larger, more complex deals grow, and also as we service this efficiency theme that we've discussed with you in the past at asset managers where we're getting increasingly involved in helping them manage data, etc., then the managed services linked to that in setting all of that infrastructure up will continue to go up. The final point about those, again, it's a category which should grow, but just to re-emphasize what we said in the past, it will be lumpy. There are certain types of deals which will have this attached to it. There are certain types which won't. And so it's a category which directionally should grow, but will be fairly lumpy, -on-queue type of thing.

Sounds like Linda has to create a new category of recurring, non-recurring.

We'll just drop you some money coming in. All right, well thank you very much. Thanks,

Bill.

Thank you. And our next question comes from the line of Joseph Forezzi with Cantor Fitzgerald.

Hi. I wanted to go back to ISG for a second. I'm sorry, ESG. Where's my head? But it's been a lot more than I guess. But yeah, if you know anything about ISG, I'll take that too. But on the ESG side, maybe you could just take a step back and frame for us how you see that evolving. It's obviously a red-hot space. What products do you think are going to move in the short term? How are you going to price them? And then how you think about competition in that space right now and where you see it going?

So look, the ESG investing or sustainable investing is a major permanent secular trend in the world driven by, think of it as the shrinking of the planet, the shrinking of the world in terms of dissemination of information, connectivity, communication, transparency of what's happening and the like. And in a world like that in which societies around the world have access to a lot more information, a lot more transparency on a real-time basis about what's happening in all institutions of society, those societies are going to hold those institutions accountable for their actions. And this is not just about investors and companies. It's about political institutions, media, religious, educational, and so on and so forth. So ten years from now in the investing industry, I don't think that there will be a category called sustainable investing because everything that people will do will have to have an element of sustainable investing in them, in their investment processes. So MSCI wants to be the leading provider by far in the world of all the tools necessary to make that transition and to get to that point. And that is from ESG research to understand what the ESG components of companies are. So somebody wants to come with a list and say exclude this, exclude that. We know what we're talking about. ESG ratings, ESG indices of all types in equities, in fixed income and the like. And by the way, ESG ratings in equities, in fixed income, in real estate, in private companies, in private debt and the like. And ESG risk models or risk models that take into account also ESG and all the other factors that they do and all of that. So we are extremely well positioned at MSCI to be the leader in this because we already are crossing the whole product range that I just described. We are already a multi-asset class firm and we already play a central role in the investment industry. So there will be competition because it's a very vast and large field for sure. But I think our position in the marketplace, the quality of what we do, the combination of all the things that we do for people as opposed to only one thing to one area or another that another supplier can do. And that will create enormous moat around our franchise. And that's what we're going for here and that's what we're putting enormous investments into that. Now that's the ESG category as a whole. Within ESG you have climate change, which is eventually, maybe in the next few years, climate change and the impact on portfolios around the world may even become bigger than ESG itself. Right now we put it into a subset of ESG investing, but it may become even bigger than ESG investing itself and a category of its own. So we're taking steps to be the leading provider of climate change tools in the world as they affect portfolios, as they affect repricing of assets and as they affect the allocation of investors.

Got it. And then on the fixed income indexing, over the last couple of years we've heard different data points of how under-penetrated it is and what the opportunity is out there. Can you talk about what the barriers to entry are from a penetration standpoint? Is this now a real viable product that you think is going to equal that of equities over a long period of time? And how do you go about converting people on the indexing side from a

fixed income perspective?

So

let me just take this opportunity to say something that we say a lot inside MSCI. We're not in the index business. We're not in the analytics business. We're not in the risk business. We're not in the data business. We are in the business of helping investors build better portfolios, which right now happens to be a combination of all of that and will continue to be a combination of all of that. But there will be some other elements over time, like private asset classes, that will be integral part of helping investors build better portfolios. So we have no interest in sort of launching a fixed income index for the sake of throwing another widget in the marketplace. What we're looking here to do is to see, we see a need for fixed income investors in the world to look at an index or a model portfolio, if you think that way, that incorporates the securities in it, reweighted along ESG lines or reweighted along factor lines. And if ESG right now is less of an alpha generating tool, a lot of it is a risk management tool. And if we think that ESG is big in equity, it should be much bigger in fixed income. Because as you know, when you invest in a fixed income instrument, the best you can hope for is to pay back your principal. And therefore, risk management becomes much more central to the investment process of fixed income, and therefore ESG should become more central. So that's what we're solving for in the launch of these things. And we did it in consultation with clients all over the world, and use cases that we want to use and all of that. And just

one slightly tactical observation, following up from Henry's kind of slightly more strategic view. We've been talking to clients in the last number of weeks since these indexes have been launched and leading up to their launch. We've had very positive feedback across a range of different client types. And so I would say that from our client interactions very recently, literally last week, the last few weeks, we've had a very positive reception. These numbers will not be material to MSCI in the short run. But I hope that over the course of the year we'll be able to give you more color related to benchmark wins, product launches, related to these indexes.

Thank you.

Thank you. Our next question comes from the line of Craig Huber with Huber Research.

Thank you. A couple questions. The 6 to 9% guidance, I guess, for cost for this new year of EBITDA expenses, can you just quickly highlight for me where the incremental spend is going toward in terms of what growth initiatives internally? You touched a bunch of stuff. Just for me to rank order, the top three or four with those incremental dollars are going towards. That's my first question. Thank you.

Sure, Craig. The first thing is that the technology underpins all of our investments. And we pair those technology investments with the product investments to ensure that we can deliver for our clients. Some of the product investment areas are ESG, as Henry has described at length, fixed income where things are going very well, index innovation is also a very good area for us. And futures and options is growing very rapidly. Also, our analytics business is doing really well. Margin close to 35%, which is an incredible accomplishment. So plenty of areas for investment, and those would be some of the major ones. But again, only toward the high end of the expense growth range if we earn our way into it with good portions in the ABF run.

Look, I think importantly that flexing between 6% and 9%, we obviously account wise call it EBITDA expenses. But these are not. I mean, they are expenses, of course, but they are investments, more importantly. And we are also extremely focused and obsessed with a methodology or investment which we call the Triple Crown methodology. Which is also that we want to bias a lot of our investments and our internal capital allocation on investments of three grounds. One is high, very high risk adjusted internal rate of return. Secondly, the shorter the payback, the better. And number three, in areas that the multiple of EBITDA that is yielded by those investments is the highest. So there will be a bias overseas that you got to do in all of this, but the huge emphasis is in that Triple Crown territory.

Okay Mike, next question guys. Can you give us the annual run rate, if you would, for each of ESG at the end of the year, the future and options segment and then fixed income? Give us three numbers, Andy.

I do

not have that handy. I'm sure you probably can look at the slides and get a view on that, Craig. As we're looking for it, anything else?

The billion and a half percent of cash that you have on the balance sheet, I know you touched on this earlier, but the appetite for a sizable acquisition given all your internal growth initiatives you just enunciated here last hour, I assume it's fairly low for a large acquisition. Is that a fair statement?

Yeah, I think that's probably fair. Craig, we like where we are. We do have an amount of dry powder, but as you see we're moving in the partnership way of investing. FED has served us very well, and I think you're in the right ZIP Code. One housekeeping matter while we continue to look for some things here. On the Burgess Partnership, I want to reiterate that that is a minority stake, and we will not consolidate the financials of Burgess. Our share of its income is going to flow to other income, other expenses, and will be expressed in a net line on that. So I just wanted to make sure that as you're looking at where we are with Burgess, you know where to look.

So it's probably best, Craig, if you follow us up with your line on your question.

Okay, thank you guys.

Thank you. And our next question comes from the line of Henry Chin with BMO.

Hey, good morning everyone. I wanted to ask about the core index business. I guess beyond, or not beyond, but separate from the more dynamic ESG and factors. Just on the index, you know, pretty simple question. What's driving that stable kind of 10, 11% growth? And I think that just kind of given the flows in the active side are pretty much zero, I guess. And so I'm just kind of curious if you could frame, you know, whether that's like just continual, like the ham available in like asset owners or wealth managers or replacing providers or just adding new products. Just kind of just, you know, pretty simple question of what's driving that. Yeah, so

therefore, I mean, when you look at index, we haven't completely sort of broken all out like this way, and maybe we will in the future, but if you look at the index product line, you can then categorize that index product line into three or four buckets, right? You can say the market cap indices, that's what we call the ACWIMI family. Then, you know, the ESG indices, obviously, which are have an ESG overlay, the factor indices that have an overlay. And then you split the products into the use cases, which is, is it being used for active management purposes, i.e. benchmarking, is it being used for passive management purposes, or is it being used for derivatives or structured products, you know, as a third pillar, third leg. So it's a little bit of a matrix, you know, in all of that. So, but if you focus on the market cap indices, and then obviously there is a further breakdown on market cap, and the emerging market cap, because those modules and the subscriptions have, you know, different sales cycles. And the market cap indices, what's driving the growth is, you know, continued globalization of the equity markets of the world, continued expansion of the use cases inside an organization. So, you know, we have traditionally charged by number of people that use the indices, by vendors, and all of that. We're now moving to a little bit more of a bundle, you know, products, but, you know, when you have a, if an organization has, let's say, 100 professionals that were using the indices, and they want to go to 300, 200 or 300 professionals that want to use the indices, there has to be a commensurate amount of, you know, of new fees. What is also driving the growth of the market cap indices is cost of indices. These are market cap indices in which somebody says, can you exclude this? Can you exclude that? Can you put another thing like this? Can you do this? So that is a high level of growth that is happening, that is happening there. Now, in the ETF category, of course, market cap indices continue to grow as well. You know, obviously, we've seen higher growth in ESG indices, in ETF, and obviously in factor ETF. So there is a whole category of things that, you know, maybe in future discussions, we can try to put a sort of a landscape of one of these, but that's, you know, that's a little... Another area that obviously is happening is new client segments, right, that are new, wealth management is a new client segment that are using now indices. Hedge funds, equity long-short hedge funds are being measured, given the performance of equity long-short hedge funds, or lack of performance, I should say, relative to, you know, to non-leverage, non-short strategies, these people are now being increasingly measured against the market cap indices, so they need to subscribe to the information, and so on and so forth.

Got it. That makes sense. And so just a follow-up on, I guess, specifically the ES and G data, you know, there's a lot of good color on framing MSCI's role in this, I guess, you know, just to help understand, so in the market cap or traditional investment products, it's very much performance-driven, I guess, or measurement of return attribution. How do you think about, with ESG, given the, I guess, very question of measurement of impact, or ESG risk is sort of unclear?

Well, over time, you know, over time, if you have an ESG portfolio, you're going to do all the things that you do in a normal portfolio. You're going to say, how do I measure performance? What is the attribution of the performance? Let me give you an example on ESG, you know, climate change driven, which is, as we all know very well, and the energy sector, particularly oil and gas, has been underperformer, so when you do your performance measurement attribution, you have to say what parts of the oil and gas industry are driving your performance, and what parts are not. And the glitz out of that is, what kind of performance are you getting on alternative energies, you know, from solar to wind, and the light to clear, et cetera. So, again, you know, this is all being done right now, with certain, obviously, degrees, but that's, it's not going to be any different, same thing on factors. We know that momentum has been a big driver of returns and quality and growth, relative to value, as an example. So, you know, so you want to analyze your portfolio on the basis of what is my performance attribution, how much of that is coming from a performance of momentum versus lack of performance in value. We provide all those tools, and that's why this franchise is getting stronger and stronger.

Got

it. Okay.

Thanks so much. Thank you. And our next question comes from the line of Chris Schultler with William Blair.

Hey, guys. Just two quick ones. First on Burgess, is there anything else you can say at this point around the actual impact to EPS? It sounds like it's going to be immaterial, but anything else you can give us there?

Not really. I mean, it's clearly a smaller company compared to us, right? So, the hope is that it's going to grow a lot, but it's still early days.

Yeah, in fact, we're picking up some expenses from Burgess and the integration at Slinda, but we don't expect to see significant results on this particularly immediately.

Okay. Fair enough. And then just, the other one's just on the index of description business, going back to the couple of questions ago. To put a finer point on that, how much of the growth, I guess, can from what you would characterize as pricing in 2019 and how much you expect to come from pricing in 2020?

Sure. Chris, one of the things we'd like to say, the entirety of the description of growth as part of the business, it's about one-third price increases and two-thirds volume for existing and new clients, so less than a third really on price increases.

Okay. So, consistent.

Yep.

Great. Thank you.

Sure.

Thank you. And our next question comes from the line of Keith Howell with North Coast Research.

Good morning, guys. A question for you, I just have a question about Burgess. You guys have a minority interest in it, but you guys want to have access to all their data. I guess, is this through an operating agreement and then agreements or your infrastructure with Burgess? Is that going to be exclusive so no one else can partake in their data?

Yeah, so as you notice, we always talk about two things. We always talk about the investment and the strategic partnership with them. Their goal is to say hand in hand. The investment is we're just a shareholder with the owner and the founder of the company, Jim Coaches. And on the sort of data usage and partnerships and the like, those are subject to separate negotiated agreements one by one as to how do we divide up cost if we're working on a joint product, how we divide up revenues and all of that. And those are being worked on right now.

Those will be exclusive so no one else, no competitor can come in there and try to obtain their data, so to speak.

Largely, but not totally, no. Okay, gotcha.

And then just a follow-up question, this is just more a reminder for me. When it comes to your institutional passive fees, that's a one-core delay, correct?

Yes, that is correct.

Okay, great. Thank you.

Thank you. And I'm sure no further questions at this time. So with that, I'll turn the call back over to CEO Henry Fernandez for closing remarks.

Well, I'd like to thank you again for the opportunity to present given the last 10 years of great performance and obviously the anticipation of what we can do in the next 10 years. I would like to make sure you all recognize how much we value the belief that you and our shareholders are putting us, the trust and confidence in running this great franchise and being good stewards of capital. And we hope we never disappoint in all of that. So thank you very much. Ladies and gentlemen, thank you for participating.