MSCI Inc. (MSCI) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the MSCI Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Edings Thibault, Head of Investor Relations. Sir, you may begin.

Thank you, Mary. Good morning, everyone, and thank you for joining our second quarter 2012 earnings call. We are also joined today by Bob Qutub, who will become our Chief Financial Officer after we file our 10-Q. Please note that earlier this morning, we issued a press release describing our results for the second quarter 2012. A copy of that release may be viewed on our website at msci.com under the Investor Relations tab. You will also find on our website, a slide presentation that we have prepared for this call. This call may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management's current estimates, projections, expectations or beliefs, which are subject to risks and uncertainties that may cause actual effects to differ materially -- actual results to differ materially. For a discussion of additional risks and uncertainties that may affect MSCI's future results, please see the description of risk factors and forward-looking statements on our Form 10-K for our fiscal year ending December 31, 2011 and other SEC filings. Today's earnings may also include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. Adjusted EBITDA and adjusted EPS exclude the following: Restructuring costs and nonrecurring stock-based expense. Adjusted EPS also excludes the amortization of intangibles resulting from acquisitions and debt repayment and refinancing expense. Please refer to today's earnings release in Pages 16 to 18 of the investor presentation 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 rate frequently in our discussion this morning. So let me remind you again 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 licensed 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 second quarter operating results, and then David Obstler will provide some details on our financial results. I will now turn the call over to Mr. Henry Fernandez. Henry?

Thank you, Edings, and good morning. MSCI reported second quarter 2012 revenues of $239 million, up 5% from the second quarter of 2011 and adjusted EBITDA of $108 million, up 1% year-over-year. MSCI's 2012 adjusted EPS rose 6% year-over-year to $0.50. MSCI had a solid second quarter despite a global operating environment that remained challenging. Our total run rate grew 4% to $920 million. Our subscription businesses grew at a healthy 6% to a run rate of $791 million. That growth was fueled by double-digit expansion in our index and ESG subscription run rate, as well as growth in our risk management analytics and governance units. Our overall subscription sales were steady, as weaker sales to asset managers and U.S. banks were partially offset by sales to hedge funds and asset owners. Our retention rate remains strong. This strength in our retention rate is especially gratifying to us because we have invested heavily over the past few years in our client service function and we continue to invest in improving our technology platforms that connect us with our clients. I would like to also importantly note that our sales pipeline for Q3 and Q4 remain solid. We are continuing to invest in our businesses despite a challenging environment. The pace of that investment has slowed though, versus 2011, but we continue to make targeted additions to our research, product development, client service, and administrative functions. To reduce the impact of those investment costs on our profitability, we are keenly focused on tight expense management. Our continuing and key part of that strategy is our ability to leverage our emerging market centers, which has enabled us to manage our overall compensation levels by migrating certain operating and support functions on parts of our employee base away from more costly developed market centers. During the second quarter, we moved proactively to accelerate that shift, resulting in higher severance expense, which David will touch upon. The percentage of our employees in emerging market centers have gone from about 35% in Q2 '11 to 40% last quarter, to now 42% in this quarter. We're also working pretty hard to manage aggressively, all of our non-compensation expenses. In addition, we are focused on reducing our expenses below the EBITDA line. As we announced on our last call, we successfully refinanced our debt, enabling us to pay down $200 million of debt and lower our interest cost on the remaining $876 million. That should result in annualized interest savings of $16 million. We have also made significant progress in reducing our tax rate by taking advantage of our global footprint. Again, all of these expense management efforts are designed to free up resources in our company to continue to invest in our business without impairing our profitability levels. Let us now take a closer look at the performance of each of our major product lines starting with our index and ESG business. The run rate for our index and ESG subscription business continued to grow at a double-digit pace to $286 million in Q2. While sales weakened during the quarter, the retention rate improved to 95%. Demand for our core index modules, especially the emerging market and the small-cap modules, remained the biggest driver of our run rate growth. We're also seeing continued demand for our strategy indices, notably the minimum volatility and risk weighted indices that we have been introducing over the last couple years. Sales in ESG products rose also as well during the quarter. Our asset-based fees were impacted by the weakness in global equity markets during the second quarter. Assets under management in exchange traded funds linked to MSCI indices, declined to $327 billion at the end of Q2 from $355 billion at the end of Q1 2012. Funds growth were minimal during the quarter. Our bright spot was the performance of ETF linked to our Minimum Volatility Indices. These ETFs, which were launched by a major provider last October, have reached more than $1 billion of assets under management already. We also experienced a slowdown in equities we have launched activity during the second quarter with a total of 6 new launches of ETFs linked to our indices. Our overall ETF pricing remained unchanged and stable during the quarter at an average of 3 basis points. We continue to see positive acceptance of MSCI linked futures and options contracts. The revenue impact of this business remains small but volumes of these products are growing and we are seeing additional interest from exchanges around the world in licensing our indices. Eventually, the success of these futures and options also lead to more business for us in the structure derivative products. Our risk management analytics run rate rose 4% year-over-year to $259 million. It's important to remember that approximately 20% of the run rate of the risk management business is dealt in euros and the weakening of the euro depressed the underlying sequential run rate growth by more than $2 million in the second quarter and by more than $7 million compared to second quarter 2011. Over the first half of the year, RMA sales have benefited from increased demand from asset owners and also from hedge funds, driven in part by new reporting requirements in the latter client group. We continue to see strong demand for our hedge fund transparency products as well -- this is before Measurisk product line. Offsetting that strength, was the declining sales to asset managers and U.S. banks and broker-dealers. The business in RMA also continued to benefit from the strong retention rates. Portfolio Management Analytics run rate was $117 million, essentially flat versus the prior period, the prior year. Solid sales in the quarter, especially of our new models for hedge funds were offset by an uptick in cancels. We continue to see the results of our investment in new products, which accounted for an increasing percentage of our total sales in EMA. During the quarter, we enhanced our lineup of innovative new models by introducing new market models for Canada, Australia and China. We are encouraged to see that the enhancements released earlier in the year for Barra Portfolio Manager also appear to be gaining some traction in the marketplace. Our governance business continues to make progress and improve. Governance run rate was $114 million, up 6% versus 2011. Much of the growth in Governance run rate has been driven by the success of our new executive compensation data and analytics product, which was launched in June of last year. Since its launch, we have sold $9 million in new executive compensation subscriptions. The retention rates are positive and we continue to see a strong demand for this product. I'm especially pleased with the retention rate for the Governance business, which were 92% in the quarter and 90% in the first half of the year. Retention rates in Governance are at their highest rate since before the beginning of the financial crisis. These higher retention rates are due in part to investments we have made in client service and in our technology platform to see a change that connects us with our client. Given the ongoing financial pressures being faced by our clients and the presence of competitors in this business, our retention rate, our higher retention rate is an important vote of confidence from our clients in the value that we're delivering in this business. Let me now turn it over to David Obstler for a discussion of our financial results. David?

Thanks, Henry. I would like to start my discussion with a review of the key drivers of our revenue growth in the second quarter, which are outlined on Page 11 of the slides, which we have posted to our website. Total revenues grew by $12 million year-over-year or 5% to $239 million. Our revenue growth was led by index and ESG subscription revenues, which were up $7 million or 14% and risk management analytics revenues, up $4 million or 6%. Our subscription revenues year-over-year grew by $16 million or 9%, offset by a $2 million or 6% decline in asset-based fees. As I'm sure all of you recall, global markets and the average AUM in our ETFs linked to the MSCI indices peaked in the second quarter of 2011, resulting in a tough year-over-year comparison. Nonrecurring revenues fell by $2 million to $6 million year-over-year. Much of this decline in nonrecurring revenues can be attributed to our decision to shift the focus of our sales efforts to subscription corporate compensation analytics products. My next topic is our expenses. Our adjusted EBITDA expense for the quarter was $131 million, an increase of 9% versus the second quarter of last year with virtually all of the growth coming from a compensation expense increase. Our compensation expenses, excluding nonrecurring stock-based comp, rose $11 million or 13% year-over-year. As Henry discussed earlier, our compensation costs were impacted in the quarter by $4 million of severance and other expenses related to recent headcount reductions. Backing out that expense, our compensation expense rose in the mid to high single-digit range, which is significantly below the 16% growth in our average headcount and more indicative of the kind of leverage we expect from the shift in our employee base to emerging market centers. As we have noted earlier, we have significantly slowed the pace of new hires versus 2011 so we expect to see decelerating year-over-year growth in headcount in the second half of this year. Our second quarter non-compensation expenses were essentially flat year-over-year. Occupancy expenses rose by $2.5 million versus the second quarter of last year, driven in part by duplicative rent expenses as we consolidate our operations in New York City and move our offices in Rockville, Maryland, as well as due to an increase investment in information technology. To offset these costs, we have worked very hard to reduce our other non-compensation expenses and we benefited from lower professional fees, market data expenses and travel and entertainment costs. With the office move now nearly complete, we expect our occupancy costs will decline in the second half of 2012 as the duplicative leases roll off. We will also likely record a $3 million to $5 million charge to exit one of our New York office locations in the third quarter. Our adjusted EBITDA for the quarter was $108 million, up slightly from last year. On a segment basis, performance and risk EBITDA was $103 million, up 3%. Our Governance segment EBITDA was $5 million, down $2 million or 29% from the second quarter of last year. Below the EBITDA line, as Henry mentioned, we are making progress in reducing our expenses. Our interest expense in the quarter was $29.6 million but that number includes a $20.6 million charge related to our second quarter debt repayment and refinancing, which is nonrecurring. As Henry mentioned, on May 4, we raised $880 million of term loan A indebtedness and used the proceeds plus $200 million of cash on hand to repay our previously-outstanding term loan B debt. The repayment of $200 million of debt lowered our annualized interest costs by roughly $7 million and the lower interest rate on the remaining portion lowered our ongoing interest costs on an annualized basis by an additional $9 million. The tax rate was 34.4% in the quarter and 35.1% for the first 6 months. While the nominal tax rate was flat compared to a year ago, we think that this understates the progress we've made. Last year's tax expense was impacted by discrete benefits and also included the benefit from the R&D tax credit. This year, we have fewer discrete benefits and are not receiving the benefit of the R&D tax credit. We are now projecting that our full year tax rate will be between 35% and 35.5%. So backing out the impact of discrete and tax credits, we are expecting our operating tax rate to decline by almost 100 basis points from the level of 2011 to an increase in income recognized in lower tax jurisdictions around the world. Finally, we had another very strong cash quarter. Our cash flow from operations was $120 million, up from $106 million in the second quarter of 2011. Year-to-date, we have generated $190 million of operating cash flow. Our strong cash flow has helped us to offset the impact of modestly-higher capital spending and paid down significant debt while retaining a very comfortable cash position. Capital spending was $16 million in the second quarter and $20 million year-to-date as we have built out our new locations in New York and invested in our IT infrastructure. We ended the quarter with $360 million of cash, cash equivalents and short-term investments. With that, let me now turn the call back over to Henry.

Thank you, David. Before we open up the call to your questions, I want to welcome Bob Qutub, our incoming Chief Financial Officer. Bob joined MSCI at the beginning of July and will officially take over the CFO role very shortly. Over the course of his long career in Bank of America, Bob was instrumental in developing and implementing a comprehensive set of financial and operating metrics for each of the business units for which he was CFO of. This experience will be invaluable as we build the financial infrastructure to support our growth. Welcome, Bob.

Thanks, Henry. I'm delighted to be here.

I also want to acknowledge and recognize the work that David Obstler has done over the past 2 years. This is David's last earnings call and he will be leaving MSCI at the end of the month. As CFO of RiskMetrics from 2005 to 2010, David was one of the architects of that company's growth, its successful IPO and eventual sale. Since joining MSCI at the time of the merger, David has made an important contribution to the successful integration of MSCI and RiskMetrics and has had a critical role in other financing and corporate activities, including the recent successful refinancing of our outstanding debt. He has also been a strong and effective voice of MSCI to many of you and others in this trade. David, thank you for your work in helping to build MSCI and we all wish you well in the next chapter of your professional life.

Thank you, Henry. As you've mentioned, I've been CFO of first, RiskMetrics and then MSCI for the past 7-plus years. It has been a real pleasure to have been part of such an amazing growth story. Over the years, I have seen our companies and our markets change significantly but one thing that hasn't changed is the sheer size of the opportunity in front of this company. I firmly believe that MSCI has significant room to expand and I am looking forward to watching the company grow for many years to come. And with that, let's open the call to your questions. Operator?

[Operator Instructions] Our first question comes from George Mihalos from Crédit Suisse. Georgios Mihalos - Crédit Suisse AG, Research Division: Firstly, David, thanks for your help over the years and best of luck and Bob, welcome aboard. So Henry, I just wanted to start off, you mentioned the ETF pipeline slowing in 2Q certainly after a very strong first quarter. What's the outlook like for ETF launches going forward?

I think it's definitely less than it has been in the last 12 months. I think that a lot of the ETF sponsors are assessing and reassessing a lot of their plans even though this product category has done fairly well relative to many of the other ones, and especially relative to our equity mutual funds in America. There is obviously a significant investment required and some risk in continuing the high pace of launches that took place in the last 12 months. So I think we'll see potentially, a little bit of a slowdown but I think everyone believes that the category continues to be very strong and in our case, we're very focused on not only continuing to work with the existing client base here in the U.S. and in Europe, but we, in the last few months, have started focusing quite a lot of energy of our ETF business in Asia, especially in China. Georgios Mihalos - Crédit Suisse AG, Research Division: Okay, great. And then maybe, can you talk a little bit about the sales cycle and the outlook for the RiskManager business now as we enter the back half of the year? I think typically, that business has strengthened a bit as we tend to go to the second half.

Yes, the RMA, you're speaking George, to the RMA business, right? Georgios Mihalos - Crédit Suisse AG, Research Division: Yes.

The RMA business, the pipeline continues to be solid and pretty much in many parts of the world. The issue has always been, with these kinds of sales, is that the pipeline is solid, not a lot gets dropped at all from it and the issue is the pace at which we can close out those items in the pipeline and book the sales. In the last 3 or 4 quarters, as we have reported in these calls, given the environment, a lot of our clients are cautious, more approvals are needed, the sales cycle has gotten a little longer and therefore, I would -- therefore, the particular sales that are happening in any single quarter are probably going to be a little more chunky, little more in one quarter, maybe a little less in the following quarter and so on and so forth because of just the nature of the environment. But we continue to feel very good about the pipeline and especially in Europe, actually. And therefore, more to come on this. Georgios Mihalos - Crédit Suisse AG, Research Division: Okay, great. And just last question for me. Can you talk a little bit about the decline in the retention rate for the portfolio management business, maybe some of the challenges that you're seeing there, if it's competitive or more sort of structural?

Well, I think this is -- I would view this 84% retention rate in the second quarter, 88% for the first half of the year as business as usual. I mean, some quarters, it will go up to the low 90s, some quarters it will stay in the 80s. The business remains competitive and I think it will stay competitive. We have adapted to that level of competition by doing a lot of different things, obviously including a lot of new product introduction and increasing dramatically our client service efforts and retention efforts and the like. So I would not read too much into it. I think it is going to be bearable, depending on what the sales activity in that particular quarter and this second quarter, there was a little bit of an uptick in cancels but we remain very comfortable of where we are with this business given of course, the challenges in the global environment and also in the quan [ph] managers, which haven't seen that much of a huge influence into their funds. So we feel pretty good and especially because we continue to launch a lot of new products and as an increasing percentage of new sales of the PMA business are in those new products.

Yes, if you look at the Core Retention Rate, which excludes product switches amongst star [ph], the retention rate for the first half of the year was just under 90%, which is a pretty good retention rate, a little under last year, and it reflects what we've been talking about, which is strong concentration on our core clients, and new products and innovation to retain those clients.

That's actually a good point because -- that David just made, because we are -- we obviously are agnostic with respect to clients on whether they use our Barra Portfolio Manager or Aegis or BarraOne or they actually get the Models Direct, which is the direct data with our software, and all we want is to make sure we satisfy the needs of the client and they're shopping at MSCI. So I think you will continue to see a little bit of volatility as well in this switch of products from one kind of business to the other and that increasingly -- it'd probably be better to focus on that retention rate rather than the other one.

Our next question comes from Jennifer Huang from UBS.

You had mentioned that the pace of the investments, while you guys are very focused on it, has slowed slightly from last year. Can you just talk about which areas you're investing in now versus last year?

I think last year, especially in the second half, our investment was very much across-the-board from sales to client service, consultants, the business -- the product management and business units, the research and development organizations, for sure, a lot of the support functions in HR and finance and stocks [ph] and the like, and we have benefited from that expansion especially in the client retention because we hire a significant number of people in client service in emerging markets to have a higher approach of service to our clients and be proactive at the times of renewals. So we benefited significantly with that. This year, we're trying to be much more targeted in what we do. I think we have a relatively good footprint of salespeople in all the various locations, we probably could add some more in emerging markets for the emerging market clients, we are looking at that. But we have a fairly good footprint. I think we have hired a number of people in client service and in the process of training them in the last 12 months and getting them fully productive. So I think we're fine with that. A lot of our efforts right now have been more on the product development organization, we're rounding up certain key hires in our research organization. We recently hired a managing director in our multi-asset class risk modeling team, has joined us a few weeks ago. We're in the process of hiring somebody else as well in our equity modeling, fino [ph] process. So we're making those investments there. And lastly, we want to continue to strengthen the administrative function. We recently hired our global head of HR, which started yesterday and we're going to make some selective hires in the financial organization to build out that team, especially financial analysis and planning and especially an infrastructure to look at investment very thoroughly on a return on investment basis and tracking them and the like. So those are some of the targeted investments we're making as opposed to, pretty much, as opposed to across the board.

Okay. And then just in terms of the headcount, can you discuss in which areas that you had seen a reduction? I know it's in a developed market but, which business units or which functions, employee functions?

Yes, what we did in the second quarter was, we took a very hard look once again at all the functions that we perform in developed market centers in New York, London, Geneva, in Berkeley and Tokyo and places like that and we said, what kind of functions of those that we do there can be moved to emerging market centers where we already have built an infrastructure, where we already have talent and we can add more talent to that place? And we have benefited from having already built a lot of it, enabling technology to glue all those teams globally. So a lot of what we did in the second quarter was not in the sales organization or client service or in consulting. It was not in the distribution part of the organization. A lot of it was not also in the product management organization, those functions continue to be needed in financial centers as close to the clients as possible. A lot of the effort of continuing to migrate positions have been in software engineering, in IT infrastructure, in data, some functions in finance that we can do better and with great talent in emerging market centers, so those are some examples of that, Jennifer.

Our next question comes from Suzi Stein from Morgan Stanley.

Can you talk about the new sales number? I guess it looks like recurring subscription sales were down 6% year-over-year and cancellations were up, which I guess, drove down the net new recurring sales 27%. Is there noise in that or is that just simply a function of the environment? And I guess, if the environment doesn't improve over the next couple of quarters, are you expecting this level of net in sales for the rest of the year?

I think, Suzi, there are 2 or 3 things that are going on here, to explain these numbers. First, my sense of the quarterly total sales and recurring sales numbers is that they're going to vary a bit up-and-down based on the comment that I made before, which is we have a solid pipeline and in some quarters, we'll close out a higher percentage of the pipeline and in other quarters will be a lower percentage of the pipeline. So from that point of view, there will be more noise than it used to be in a more reasonable environment, operating environment. That's one overall comment. The second one is that we have seen some weakness in asset managers across-the-board in Asia, in Europe and the U.S. and especially in the U.S. and asset managers are clearly a larger percentage, 55% or so of our sales are to asset managers and it's not because they don't want to make the purchases, it's not because they don't need the product, they are just being cautious in what they're doing and if anything, those are the ones that are delaying or taking more time to make decisions about items in the pipeline. So that has had that effect in the second quarter. So I think that clearly, if the environment continues to deteriorate, I don't think we will see too many items being withdrawn from the pipeline because that has been our experience in the last 5, 6 quarters. What we may see is again, elongated sales cycles that will take longer to close out the pipeline. So we've entered Q3 with a very solid pipeline, actually even more solid than it was in Q2. But in Q2, the turning of the pipeline into sales was lower and it's hard to say what will happen in Q3. It could be that we end up doing better than we did in Q2 or we could have been equal or worse than in Q2. But what we feel cautiously optimistic is that the pipeline remains healthy and solid and now it's just a question of grinding through it and trust me, it's a lot of grinding through it, given the difficult environment our clients are facing. And as you know well, there is a lot of uncertainty all over the place there in the U.S. There is every single excuse that people can give you from the elections, the fiscal cliff, the Dodd-Frank and all of that. In Europe, it's obviously the sovereign debt crisis but in Europe, relative to targets, we have done, relative to targets that we set for ourselves last year, we've done actually relatively well and a lot of it is because our products do well in these kinds of environment and secondly, a lot of our business in Europe is concentrated in the U.K. and in Northern Europe, much less in Southern Europe and we benefited from that. Asia is weak. Actually, a lot of people talk about the difficulties of hiring and selling into Europe, if anything, in Asia, it's actually weaker for us. But fortunately, it's a smaller percentage of our overall business.

And Suzi, to amplify a little bit what Henry's saying and give you an example. The pipeline as we've been saying, hasn't really changed that much in the last few quarters. But we have some chunky business. So what determines that last few million dollars of sales is do we sign a contract at the end of the quarter or the beginning of the next quarter or later. And for instance, there were a couple contracts in the quarter that didn't get signed and got signed at the beginning of the next quarter. We can't predict that but given the lumpiness of this in some of the product lines, that determines the last few million dollars of sales and therefore, your comparison.

Our next question comes from Bill Warmington from Raymond James. William A. Warmington - Raymond James & Associates, Inc., Research Division: I wanted to ask about the Subscriptions business within index and your thoughts about whether that can continue to grow in the mid teens in the second half of 2012? And if you can give us some color on how you think -- what will be the drivers for that? And then on the expense side, I wanted to ask for some thoughts on year-over-year expense growth there given the roll off of the duplicate occupancy costs and also the lower investment levels, and what that would mean for margins in the second half?

I'd like to stay away from guidance on a specific segment especially, obviously, in index subscription. What I can tell you, Bill, is that there clearly has been a slowdown, a gradual slowdown in index subscription sales compared to this time last year and I don't see that accelerating meaning -- I don't see that slowdown turning around fast to a recovery given where we are between now and the second half -- the end of the year because China's still in a little bit of a funk and clearly creating issues in Asia. Obviously, I don't see a resolution on the sovereign debt crisis in Europe and a change of environment there. And if anything, in the U.S., we probably will face a little more of an uncertain environment in the September through December period given the election and the fiscal cliff. But I continue to -- we continue to see solid and healthy pipeline in index subscription and now it's just a question of how much we can turn into actual signed contracts and how much of it doesn't happen, but I don't see any significant problems at all in this business. It's just a reflection of the environment, a reflection of cautiousness on the part of asset managers and obviously, there's been weakness with respect to the sales of this product to banks and the like.

And Bill, with regard to your expense question, let me talk -- review some of the expense discussion that is onetime or special in the quarter and without getting to margin guidance. I think we mentioned that there was a $4 million severance in the court [ph] relating...then in terms of duplicate rents, that number is in the low millions per quarter. In terms of the duplicate facilities, we do have an increase of rent that we mentioned, $2.5 million year-over-year and about half of that, roughly, is in the increase in the rent and half of that is in the duplicate rent. We also mentioned that in the fourth quarter, related to our consolidated third quarter, sorry, it relates to our consolidation of facilities in New York, that we would have a write off and we mentioned $3 million to $5 million, which would be related to the exit from one of our facilities. So those are some of the things that I wanted to call out on the expense structure. William A. Warmington - Raymond James & Associates, Inc., Research Division: Got you. Now does the $3 million to $5 million flow in above the line?

We haven't reported yet. It would be something that wouldn't be recurring but it would be part of our operating expenses. William A. Warmington - Raymond James & Associates, Inc., Research Division: Got you. And I missed that, was it third quarter or fourth?

We expect it to be third quarter and we expect, as we have been, in both our Qs and our earnings to report on that as we reach that number. William A. Warmington - Raymond James & Associates, Inc., Research Division: Okay, excellent. And just -- I wanted to also ask about how the client budgets are doing specifically, for middle office products? That seems like an area that, even with the turmoil, has been able to maintain some good funding and the implications of that for RiskManager?

I think the environment that we're facing is an environment in which we are not seeing deep or significant cost cutting by clients in too many of their functions. And therefore, it's not affecting -- people are not calling and say, I've been told that we got to cut 20% and you got to tell me what part of your business with us we're going to cut. There are isolated events like that for sure, but it's not across-the-board, which is good because in an environment like this, you probably would've expected more of that. Secondly, the budgets are still there, that were designed at the end of last year by clients. But people are more cautious in spending it, there are more accruals needed and there are more hurdles that people have to go through and that obviously affects the sales cycle. I think with respect to risk management, many organizations have created budgets or made room to make purchases in this area. Hedge funds, because of the new regulatory requirement, especially Form PF that they have to file with the SEC in the new registration process. As an example, asset owners are on a secular trend to put our risk management systems in a lot of what they do and asset managers are also looking to, especially wealth managers, to put service management systems in that. So if anything, the middle office expenditures compared to a year or 2 years ago, have increased rather than decreased.

And if you look also at the retention rate in terms of what clients are doing with their existing products, the retention rates of, in the risk area, of around 92% and across the company, indicate that clients are sticking with their products and this is relatively the same level that they've ordered in the past.

Our next question comes from David Togut from Evercore Partners.

Henry, just picking up on George's question earlier and your comments about cautious buying patterns from customers, could you kind of flesh out what you're seeing a bit in the competitive environment, particularly in risk management analytics and portfolio management analytics where you don't have the near monopoly position that you have in index and ESG? And then maybe frame that in the context of price. Do you feel that you can hold price in this environment when your customers clearly have indicated such a cautious tone to you?

So I think in the Portfolio Management Analytics, no real change from the last 2 years. I think there was a little bit of a step-down function, right, in terms of pricing and competitive nature of that business at that time and it has remained the same. We won a number of mandates, RFPs from a -- in a competitive bake off and we lost 1 or 2 here and there. So I think that has -- that remains the same and our pricing has pretty much remained the same on that business. On the RMA, on the Risk Management Analytics business, there's been a bit more competition in that business, slightly more, I would not want to scare anybody, slightly more. It has not been -- it has been more around functionality, bundling services, ability to have certain types of models and certain types of software, much more than an issue of price. I think there will be selective cases in which price becomes the issue. But right now, it's more of an issue of, are you covering the whole waterfront and what the client needs, do you have the expertise in all the various asset classes and the like.

On a related question, Henry, can you give us an update on BlackRock? Where they stand with respect to their regulatory filing before the SEC to launch their own proprietary indices? And I know you put out the amended 10-K with respect to BlackRock, so any significant updates there we should be aware of?

Nothing. There's absolutely no change whatsoever on that front with BlackRock. As we said before, they're a very valuable client of ours and we hope that, that remains for many years to come. On the ETF front, we continue to build -- to have and strengthen and build a very strong relationship. There are very frequent meetings among our teams all over the world. They have launched 25 ETFs linked to our indices so far this year and then they just launched 4 in Canada in the last week or 2. They have more to come so the "business as usual relationship" is strong, it's very collaborative and the like. So no change to what we said at the time.

Yes, the 10-K is not related to any change in the agreement or any change. As Henry mentioned, it's related to the request of the SEC for information in a certain form.

A final question for me. Henry, just given the $200 million debt paydown, just your updated thoughts on capital allocation priorities going forward.

Yes. I think at this point, we are -- we're beginning to see more and more acquisition opportunities. That doesn't mean we're going to do anything but I think what was happening in the last couple of years was there wasn't a single bid; those companies who wanted to sell, were waiting for a full recovery and with the double-dip, they probably got scared and said "might as well take the money now rather than keep waiting". So we've seen more dialogue, we've seen more flow and the like at reasonable prices. Nothing big, just smaller kind of deals. And therefore, it behooves us to keep our powder very dry in that environment to, in the event that something comes along that we like that is strategic, that is in our backyard and all the things that -- our criteria has not changed, whatsoever, in terms of acquisitions. So I think that, that is what is informing, basically, our view on cash versus using the cash to pay down debt or for our own purposes. But look, 1 year goes by, 2 years goes by and nothing really happens there, we'll have to reassess and decide what we want to do.

Our next question comes from Ed Ditmire for Macquarie.

I have a question related to Knight Capital Group who said today that it's exploring its strategic options. And I wanted to go through -- in the past, we've had issues with some sizable customers have consolidated or joined other customers and then we could get an impact in terms of not just the revenue impact but on renewal rates at some -- several quarters down the line when contracts come up. Is there any way you can help us kind of size the -- whether or not this is a material customer and whether that's a possibility with a customer like this, that down the line, we could get a material impact to the renewal rates, et cetera, from something like this?

I'm thinking ultimately, as I've disclosed in our financial statements, the only customer that sticks out, given the strong relationship we have, is BlackRock, right? And that's mostly on the nature of the ETF business, which is our -- some of these are MSCI brand and ETF that clients love to have, right? Or investors, I should say, love to have. So there is no real meaningful exposure to any other single client anywhere in the world. And therefore, the merger of 2 large client of ours, first of all, it typically takes time for that to work through the system in terms of rationalizing expenses. Secondly, sometimes, they end up needing more tools from us and therefore, they convert the spend that they have on loss on other products. So sometimes, the run rate doesn't go down. And then thirdly, as I said, there is no meaningful exposure to any other single client, as I said, with the exception of BlackRock given the ETF revenues.

Just a follow up. You don't think it's possible that even a small customer could have an outsized impact on the renewal rate in a given quarter?

No way, no.

In a product line, as we talked about over the years, in a product line in a quarter, because the computation is magnified, but over the year, no.

I think, David, just to add, I mean, do not underestimate how widely diversified our business is from names of institutions. If anything, sometimes we'll report our run rate, or sometimes we talk about our run rate with any particular institution, but often -- more often than not, that is broken down into 3 areas. So if it's a big financial institution, it's the broker-dealer it's the wealth management, it's the investment management part. So they're very different organizations. Secondly, we are very diversified across regions of the world, across client types -- from pension funds and other forms of asset owners and asset managers and hedge funds, the wealth managers and the like, from top down managers to passive managers and we're very diversified across product lines from indices and PMA, RMA, executive compensation analytics and governance products and services and the like. So no one single lever of any of these creates a meaningful or significant shock to the system.

And I think as Henry mentioned, we sell a department level off [ph] and so it's a combination of those operations as departments. We obviously have a lot of history now since the financial crisis and have seen this happen and I think as Henry mentioned, it goes a number of ways. It goes toward the consolidation where they buy more. But generally, the organization that resolves, isn't turning off the services altogether and it's a renegotiation and consolidation over a longer period of time.

Thank you. I show no further questions at this time and would like to turn the conference back to Mr. Edings Thibault for closing remarks.

Thank you. I think that concludes our call today. I want to thank you, Mary, for your help and thank, obviously, all of you, for your interest in MSCI. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.