Oct 27, 2016
Executives
Stephen C. Davidson - MSCI, Inc.
Henry A. Fernandez - MSCI, Inc.
Kathleen A. Winters - MSCI, Inc.
Analysts
Alex Kramm - UBS Securities LLC Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker) Andrew Owen Nicholas - William Blair & Co. LLC Toni M.
Kaplan - Morgan Stanley & Co. LLC Joseph Foresi - Cantor Fitzgerald Securities Warren Gardiner - Evercore Group LLC Keith Housum - Northcoast Research Partners LLC
Operator
Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to turn the call over to Mr. Stephen Davidson, Head of Investor Relations.
Sir, you may begin.
Stephen C. Davidson - MSCI, Inc.
Thank you, Ester. Good day and welcome to the MSCI third quarter 2016 earnings conference call.
Earlier this morning, we issued a press release announcing our results for the quarter. A copy of the release and the slide presentation that we have prepared for this call may be viewed at msci.com under the Investor Relations tab.
Let me remind you that 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 were made and are governed by the language on the second slide of today's presentation.
For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements in our most recent Form 10-K and our other SEC filings. During today's call, in addition to GAAP results, we also refer to non-GAAP measures, including adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS, and free cash flow.
We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide a baseline for the evolution of results. You'll find a reconciliation of the equivalent GAAP measure 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 20 to 24 of the earnings presentation.
On the call today are Henry Fernandez, Chief Executive Officer, and Kathleen Winters, Chief Financial Officer. With that, let me now turn the call over to Mr.
Henry Fernandez. Henry?
Henry A. Fernandez - MSCI, Inc.
Thanks, Steve, and good day to everyone. Please turn to slide 4 for a review of our financial results.
We continue to make significant progress in executing our strategy to be a leading provider of mission-critical tools to the investment community worldwide. And this translated into strong financial results again in the third quarter.
A 28% increase in adjusted EPS was driven by a 7% increase in operating revenue, a 3% increase in costs, an 11% increase in adjusted EBITDA and almost 200 basis point decline in our effective tax rate, and a 13% decline in share count. In terms of revenue growth, the 7.3% increase in revenue was driven principally by double-digit growth in recurring subscription revenue in Index.
In Index, I'm very pleased that MSCI was selected by the Wealth Management Association, or WMA, in the UK to replace a competitor as the provider of five multi-asset class indices used by the group's membership. The WMA in the UK represents wealth advisory firms and together manage $1.1 trillion in assets on behalf of more than 4 million clients.
This win marks a significant milestone in our strategy to market our products and services to advisory firms in the wealth management industry worldwide. Analytics revenue grew 4.1% on a foreign exchange adjusted basis.
And while this revenue growth was not yet where we wanted it to be, this was a strong quarter for us in terms of delivering new products and capabilities that will significantly enhance our capabilities in fixed income Analytics, one of our targeted growth areas in this product line. All Other revenue grew 12.4% on a foreign exchange adjusted basis and excluding the Real Estate occupiers sale which we closed in early August.
Within All Other, the ESG continues to register strong top-line growth of high-teens in revenue – accounting revenues and low-20%s in run rate and on the back of record sales in the quarter. Turning to operational efficiency, our second pillar, the strong top-line numbers were complemented by a 3.7% increase in adjusted EBITDA expenses or a 5.8% increase on a foreign exchange adjusted basis.
During the quarter, we continued our relentless expense management process and our strong productivity gains to fuel both continued strong organic investment and profit margin expansion. We are confident that we can continue to do both and they cannot be mutually exclusive.
As a result of the success of these processes, we're lowering our fiscal year cost guidance. Kathleen will go over the new cost guidance in her section.
Our tax reduction project is continuing. And we're now in the final stages of planning.
We expect to implement this new plan in early 2017 and see the benefit in about 200 basis point reduction in the effective tax rate by sometime in 2018. Our third pillar is our capital optimization.
Our board authorized management to explore financing options in late July. We executed in early August.
And we have opportunistically tapped the debt markets for $500 million of 10 year senior unsecured notes with a very attractive coupon of 4.75%, one of the records at that time for a high-yield issuer. The debt financing has temporarily moved us above our stated gross leverage range of 3 times to 3.5 times and we expect to move back into this range over time as our adjusted EBITDA grows.
In the third quarter and through October 21, we repurchased a total of 923,000 shares at an average price of $79.48 for a total of $73.4 million. Most of these repurchases were executed after the quarter closed where we took advantage of volatility in the market.
We continue to have the same capital allocation policies that we have had for the past couple of years. And we are committed to returning capital to our investors.
So the philosophy guiding our share repurchase programs and dividend policy continues to be the same. In any given quarter, however, we may be subject to blackout periods or other restrictions on repurchasing of our shares, which may slow the pace of repurchase activity in a quarter.
These are just tactical actions. And we remain committed to our strategic goal of returning capital through share repurchases.
Furthermore, we are strategic investors in our stock and we always look for opportunities to take advantage of volatility in the markets to buy more shares. We are willing to be patient and wait for those opportunities in those volatile markets, so this discipline may also impact the pace of repurchase activity in any given quarter.
So, in summary, continued strong revenue generation and a relentless focus on expense management drove an 11% increase in adjusted EBITDA, which combined with an almost 200 basis point decrease in our tax rate and a 13% decrease in our share count, drove a very impressive 20% increase in adjusted EPS. And year-to-date adjusted EPS is 34% above the prior-year level.
Turning to slide 5, we highlight here one of our largest and key product areas, recurring subscription revenue in Index. Year-over-year, Index recurring subscription run rate has been growing at a compound annual growth rate of 10% for the past years ending Q3 2016 and is a key component of the overall growth of our company.
The investments we're making in Index have been the driver of this consistent high-quality revenue stream and our focus is to continue to innovate and invest to ensure that the compounding effect is maintained. As this slide highlights, compound annual growth of 8% in our largest contributor, developed market indices, and growth of 10% in our second largest contributor, emerging market indices, are complemented by double-digit growth in both factor, ESG, and thematic indices, and customized and specialized indices, giving us a combined run rate growth of 10%.
We believe this combined growth rate is sustainable. In order to support growth in all areas of our Equity Index product line, we are focused on capturing, what I call, the waves of growth in the market and I'd like to think of these waves in two dimensions.
The first dimension are the waves by actual investment objectives. The globalization wave, where investors are expanding the scope of their investments from a domestic-bias view to more of a global view incorporating all developed markets, emerging and frontier markets, and global small caps.
Investment institutions around the world are still very far from a steady-state in this area. The factor investing wave, which clients are incorporating factors into their active and passive investment approach, we are just at the beginning of this wave.
And lastly the ESG wave, as environmental, social, and government criteria are integrated more and more into the mainstream of the investment process. These are still very early days in this wave.
The other dimension of these waves of growth in the market is by application or by use case. So, first, we saw the wave of growth in active management.
That continues, but it's still – but it's a little more mature. This is now followed by the wave of growth in passive investing in all types of wrappers, whether it's ETFs or mutual funds or pooled vehicles or separately managed accounts, et cetera.
And lastly, the derivative wave, which supports growth in exchange traded futures and options and in structured derivative products in multi-country, multi-currency equity indices. This wave is in its infancy, since the market has been dominated by single currency Equity Index Derivative products, especially in the exchange traded sector.
We believe that MSCI by capturing these waves of growth through our strategy to capture new client segments up-sell to our existing clients or establish new use cases, we believe MSCI is extremely well-positioned to lead in all of these rapidly growing areas in the overall investment process. And we're terribly excited and all of this underpins our belief in the growth rates that we have in all of these three categories, which is subscription, passive fees, or asset-based fees, and derivative fees.
Let's turn to slide 6, which highlights the strength of our franchise as a leading provider of indices to the ETF marketplace, one of the many segments that we're addressing. The global ETF landscape is comprised of many ETF providers who even within their own product lineup have various pricing, client, product, and distribution strategies.
Similarly, MSCI's ETF licensing business consist of a diverse group of over 850 ETFs sponsored by a range of ETF providers and listed on various exchanges around the world. As a result of this diversity and the strength of our indices, we've been able to license to many different type of ETF providers and assets under management in ETF linked to our indices have grown 57% over the past three years from about $300 billion in Q3 2013 to about $475 billion in the current quarter.
We are focused on both sides. On one hand, AUM linked to our indices.
And on the other hand, the revenue we derived from them. Even though there are significant changes and some fee pressures in the ETF industry, we remain focused on revenue growth and do not see any let-up in our revenue growth rates in this area.
I should note that the recent pricing change announced by one of our largest clients in the ETF space affects only five ETF linked to MSCI indices. Those ETFs have about $33 billion of the total $475 billion linked to our indices.
And given the structure of our arrangement, there is no impact to our revenue related to this pricing announcement. These lower-cost ETFs linked to MSCI indices are designed for more price sensitive retail investors where they have seen more pricing pressure in the U.S.
as a result of competition between ETF providers to attract assets. In addition, the recent announcement of the Department of Labor with respect to the fiduciary rule is expected to drive more retail assets into passive investment products, like ETFs, and is expected to benefit ETF providers and index providers, like MSCI, even indices of these products are reduced.
So in line with the strategies being incremented by some of our largest clients, we believe that, over time, the trade-off in ETF between price and volume is favorable to us and to many ETF providers and we're well-positioned to benefit from this trade-off. Let's turn to slide 7, which shows our long-term adjusted EBITDA margin target for Analytics compared to where our margin is this year and where it was last year.
The long-term target for Analytics are upper-single-digits revenue growth and adjusted EBITDA margins of 30% to 35%. As we shared with you last year during our third quarter 2015 earnings call, the adjusted EBITDA for full year of 2014 for Analytics of $72 million is the baseline for evaluating the progress towards the long-term target.
The annualization of our Q3 2016 Analytics adjusted EBITDA resulted in an annualized adjusted EBITDA of about $126 million or about 28%. We will continue to look for additional opportunities to pull cost out of the product line or relocate cost to other higher yielding opportunities within Analytics.
So we remain confidence that, over time, we can achieve the longer term targets of EBITDA margins of 30% to 35%. The next step in our plan toward achieving our long-term targets will be driven by incremental revenue from several key initiatives that will continue to require incremental investment in the quarters and the years ahead.
The three key areas that we're focused on to generate this incremental revenue are as follows. First is fixed income analytics.
This is a very important initiative for us. We are building our key functionality to replace the leading incumbent with select clients that we already have relationships with.
The delivery of the new fixed income factor model, transaction-based performance attribution, and several upgrades to both RiskManager and BarraOne this quarter, support this initiative. Next growth area is services.
We are right now in the process of identifying client operational pain points that will help us refine our service offering toward these clients and lead to potential future managed service opportunities. As we evolve to a more services-focused approach from a more product-centric approach, the opportunity for MSCI to leverage our workflow tools are amplified significantly.
And, lastly, our third growth area is the new Analytics application platform. This single point of entry for all of our analytical data and content is in beta testing right now.
We expect to have a commercially viable platform ready in the first half of 2017, and then we expect incremental sales to begin in the latter part of 2017 and build up on 2018. And accompanying all these key initiatives, we continue to implement a more systematic process of price increases in Analytics, commensurate with the enhancements that we make to our systems for the benefit of our clients, while continuing to maintain high retention rates.
With that, let me now pass it on to Kathleen.
Kathleen A. Winters - MSCI, Inc.
Thanks, Henry, and hello to everyone on the call. I'll start on slide 8 where I'll take you through an overview of our third quarter results.
We delivered a very strong Q3 across all of these measures and were very pleased with our overall execution as well as a strong rebound in AUMs and ETFs linked to our indexes. So let me walk you through each measure.
We delivered a 7.3% increase in revenue, driven primarily by a 6% increase in recurring subscription revenue, and a 10.6% increase in asset-based fee revenue. There was a negligible impact from foreign currency exchange rate fluctuations on our subscription revenues.
As a reminder, we do not provide the impact of foreign currency fluctuations on our asset-based fees tied to average AUM, of which approximately two-thirds are invested in securities denominated in currencies other than the U.S. dollar.
Operating expenses and adjusted EBITDA expenses were up 3% and 4%, respectively, on a reported basis. Expenses that are exposed to foreign currency exchange rate fluctuations represented approximately 40% of adjusted EBITDA expenses in Q3.
Excluding the impact of foreign currency exchange fluctuations, operating expenses and adjusted EBITDA expenses would have increased 5% and 6%, respectively, reflecting an approximate $3 million FX benefit. The primary currency move that drove this benefit was the British pound, which was substantially weaker quarter-over-quarter.
Additionally, there were smaller benefits from the Mexican peso, the Indian rupee, the Swiss franc, offset in part by yen strengthening. We delivered a 13% increase in operating income and an 11% increase in adjusted EBITDA, resulting in a 210 basis point increase in our operating margins, and a 180 basis point increase in our adjusted EBITDA margin to 49.7%.
Our effective tax rate was 33.1% down 190 basis points from 35% in the prior year as we continue to better align our tax structure with our global operating footprint. Diluted EPS and adjusted EPS increased 15% and 28%, respectively.
Diluted EPS in the third quarter of last year included the benefit of a $6.3 million gain on sale of an investment, which was excluded from our adjusted EPS. Free cash flow was up 9% year-over-year at $133 million, primarily driven by higher billings and collections from customers and lower cash payments for income taxes, including the impact of tax refunds, partially offset by higher interest payments.
In summary, this was a very strong quarter. On slide 9, you see a walk showing the different drivers of EPS growth in Q3.
Adjusted EPS increased $0.17 from $0.60 per share to $0.77 per share, or 28% in comparison to third quarter 2015. Strong revenue growth from both subscription and asset-based fees contributed $0.12 per share.
Investments in our product segments and operations reduced earnings by $0.05. We continue to spend in the highest growth, highest return areas with growth in costs across Index and ESG somewhat offset by continued efficiencies in Real Estate.
The lower effective tax rate contributed $0.02 per share. Next, in terms of capital optimization, share repurchases benefited EPS as well.
We've reduced our average weighted diluted share count by 13% with a partial offset from higher net interest expense, resulting in net accretion of $0.06 per share. And lastly, FX had a net $0.01 per share positive impact.
On slides 10 through 13, I'll walk you through our segment results. So let's begin with the Index segment on slides 10 and 11.
Revenues for Index increased 11.4% on a reported basis driven primarily by a 10.6% increase in recurring subscriptions with growth in core products, factor and thematic usage fees and custom products. As well as a 10.6% increase in asset-based fee revenue.
We also had higher non-recurring revenues which increased $1 million year-over-year, mainly due to one-time history data purchases by several clients as well as other non-recurring services. In terms of our operating metrics, recurring subscription sales in the quarter were basically flat compared to prior year and Aggregate Retention remained high at approximately 96% in line with the prior-year and the previous quarter.
Index run rate grew by $59 million or 11% compared to September 30, 2015. This was driven by an increase in subscription run rate of $34 million or 10%, and a $24 million or 13% increase in asset-based fee run rate.
The adjusted EBITDA margin for Index was 70.8% versus 72.7% in the prior year and up from 70% in second quarter 2016. Turning to slide 11, you have detail on our asset-based fees.
Starting with the upper left-hand chart, overall asset-based fee revenue increased $5 million or 11% over Q3 2015, driven by a $3 million or 24% increase in revenue from the non-ETF related passive product areas. The increase in revenue from the non-ETF related passive product was primarily due to initial fund fees recognized in the quarter.
Non-ETF passive assets linked to MSCI indexes were flat year-over-year and experienced a slight improvement in the average basis point fee, so core revenue growth was slightly above the prior year. The remaining $2 million increase was driven by two components.
First, $1 million or 4% increase in revenue from ETFs linked to MSCI indexes, resulting from a 12% increase in average AUMs partially offset by the impact of changes in product mix. And additionally, we had a $1 million or 60% increase in revenue from exchange traded futures and options contracts based on MSCI indexes.
Total trading volume in these contracts increased 37% year-over-year and are running up 45% year-to-date versus the prior year. In the upper right-hand chart, you can see that we ended the third quarter with a record $475 billion in period-end ETFs, AUM linked to MSCI indexes.
This resulted from market appreciation of $24 billion and cash inflows of $11 billion during the quarter. As shown in the lower left-hand chart, quarter-end AUM by market exposure of MSCI linked ETFs reflected strong growth in EM, which increased approximately 47% year-over-year and recorded $15 billion in inflows in Q3 alone.
Lastly, on the lower right-hand chart, you can see the year-over-year decline in the average basis point fee from 3.4 to 3.11. This decline was driven primarily by increased asset flows to and market appreciation in lower-cost ETFs linked to MSCI indexes.
Compared to second quarter, the average basis point fee was essentially flat and benefited from the strong flows into EM market cap funds in late Q3. On slide 12, we highlight the financials for the Analytics segment.
Revenues for Analytics increased 2.7% to $111 million on a reported basis, which includes a $1.5 million negative impact from FX. Excluding the impact of FX, Analytics revenue increased 4.1%.
The increase in revenue was primarily driven by higher revenues from equity models driven by the increasing focus of hedge funds on factors to explain investment performance. Additionally, we had higher RiskManager and InvestorForce revenue in the quarter.
We had a very nice increase in recurring sales, which were 26% higher compared to the prior-year third quarter, due to higher RiskManager, equity model, and BarraOne sales partially offset by slightly lower InvestorForce sales. And gross sales, which include non-recurring sales, were up $3.7 million or 31%.
So a very strong new sales quarter. However, we did see higher cancels for Analytics in the quarter.
We're continuing to see cost pressures and budgetary constraints among some clients, particularly banks and wealth management subsidiaries of banks. Also, we continue to see a challenging environment for hedge funds primarily in the U.S., which resulted in higher levels of RiskManager cancels in the quarter in the U.S.
and in Europe. The cancels were $10.5 million for Q3 and are a function of a challenging market for our clients and the continuation of the market conditions we saw in Q2 and have discussed on last quarter's call.
We are continuing with our systematic price increases in Analytics. This process is going well and cancels are market-driven and not a result of our price increases.
As a result of the higher cancels in the quarter, which get annualized to determine the quarterly retention rate, Analytics retention declined to 90% down from 95% a year ago. But year-to-date retention remains high at 92% compared to 94% in the same period last year.
Analytics run rate at September 30 grew by $22 million or 5% to $452 million compared to prior year and the impact of FX was not significant. Adjusted EBITDA margin was 28.3% up from 27% in the prior year.
While we are seeing some elongation of the sales cycle, the overall Analytics pipeline remains strong. And the importance of our risk tools in helping our clients gain deeper insight into portfolio performance and respond to increasingly complex regulatory reporting requirements is only increasing.
Turning to slide 13, we show results for the All Other segment. Revenues for All Other increased 3% to $19 million on a reported basis and grew 12% after adjusting for the disposal of the Occupiers business and the impact of FX.
First, in terms of ESG, a $2 million or 18% increase in ESG revenue to $11 million was due to strong ESG Ratings revenue on record ESG sales. Growth continues to be driven by the increasing integration of ESG into the mainstream of the investment process and new client acquisition.
Real Estate revenues, however, decreased $1 million or 14% to $8 million on a reported basis. However, excluding the impact of foreign currency and the sale of the Occupiers business, which closed in early August, Real Estate revenues increased 6%.
The All Other adjusted EBITDA margin was 0.4%, up from a negative17.4% in the prior year. The substantial increase in the adjusted EBITDA margin was driven by continued strong growth in ESG revenue as well as lower Real Estate costs, primarily due to a reduction in head count and strong cost management as we make progress toward improving profitability in our Real Estate product area.
On a sequential quarter basis, All Other revenue declined $7 million primarily due to normal seasonality. Q2 of each year is seasonally strong for Real Estate when the majority of annual Portfolio Analysis Service reports are delivered to clients.
This seasonality also drove the sequential quarter decline in the adjusted EBITDA margin for this segment. Turning to slide 14, you have an update on our capital return activity.
As you know, we've returned substantial amounts of capital to investors in recent years. Specifically, since 2012, we've returned almost $2 billion through share repurchases and dividends.
In Q3, and through October 21, we repurchased and settled 923,000 shares at an average price of $79.48 for a total value of $73.4 million. Yesterday, our board approved a $750 million increase in our outstanding authorization, bringing the total repurchase authorization outstanding to $1.1 billion.
There's been no change to our capital allocation policy; we will always be looking at the full array of options before us to deploy capital. Given this, there may be times when we are subject to blackout periods or restrictions on repurchasing our shares because of any number of factors.
We view ourselves as a strategic buyer in our own shares and we will be flexible as we look to take advantage of market volatility to repurchase more shares. On slide 15, we provide our key balance sheet indicators.
We ended the quarter with cash and cash equivalents of $974 million. This includes $188 million of cash held outside the United States and a domestic cash cushion of approximately $125 million to $150 million, which is the general policy we maintain for operational purposes.
In August, we issued $500 million of senior unsecured notes due 2026 at a very attractive coupon of 4.75%. As a result, our gross leverage was 3.8 times at the end of the quarter.
Over time, we expect that we will return to our stated range of 3 times to 3.5 times as our adjusted EBITDA grows. Lastly, before we open the line for Q&A, on slide 16 we're updating our full-year guidance.
Based on the progression of our investments and the efficiencies that we have achieved year-to-date, we are lowering our full-year adjusted EBITDA expense guidance to $580 million to $590 million, down from our previous guidance of $600 million to $615 million. We're very happy with our progress on our productivity initiatives and this is reflected in the guidance.
Next, we are increasing our full-year 2016 interest expense guidance to $102 million, reflecting the impact of the recently issued senior notes due in 2026. One of the key strengths of our financial model is that it's highly cash generative.
Given our strong operating results and the benefit of lower cash taxes and Q3 tax refunds, we are increasing our full-year net cash provided by operating activities to $350 million to $375 million and our free cash flow range to $305 million to $335 million. Lastly, we are narrowing our full-year CapEx guidance to $40 million to $45 million based on the $32 million that we had recorded year-to-date in our outlook for Q4 spend.
In summary, we are very pleased with our results for Q3. We executed well throughout the quarter.
We delivered solid financial results. We continue to execute a consistent capital allocation strategy.
And we're continuing to invest in and innovate the new products that will position MSCI to continue to grow in the quarters and years ahead. With that, we're happy to open the line and take your questions.
Operator
Our first question comes from the line of Alex Kramm with UBS. Your line is now open.
Alex Kramm - UBS Securities LLC
Yeah. Hey, good morning, everyone.
Henry A. Fernandez - MSCI, Inc.
Good morning.
Alex Kramm - UBS Securities LLC
So just, Henry, you already proactively addressed the whole ETF fee pressure debate that's been going on. But maybe you can flesh it out a little bit more.
I mean, surprising to hear that no revenue impact. So maybe if you can talk about the pricing structures a little bit more why is there no revenue impact, and then also, looking forward a little bit, how do you feel about incremental pressure that could be coming beyond those five that you highlighted?
Do you think it's consistent with – revenue should be limited? Do you feel like there could be more pricing pressure on the institutional side at some point and maybe levered there a little bit different?
So just a little bit more color so we can put the debate a little bit more to rest. Thank you.
Henry A. Fernandez - MSCI, Inc.
Yeah. So, thanks for the question, Alex.
The – look, I think we've got to start from obviously the bigger perspective and that is, the ETF industry is growing by leaps and bounds all over the world, but especially in the U.S. and Europe.
And we're trying to make it grow fast in Asia, but it's been a bit more challenging. That ETF industry is going to gather large amounts of assets in market beta, if you want to think about them, and in factor beta and eventually in ESG betas and, hopefully, also in actively managed funds.
Although, so far, that segment of the market is not that large. We believe that that continues to be a fairly large growth part of the investment process.
And as I said, we'll gather quite a lot of assets. So that part of the volume, so to speak, will benefit us and many ETF managers significantly.
Then inside that global ETF industry, there are a lot of different participants with a lot of different pricing strategies, market segments and product offerings and all of that. And there is increasing levels of competition particularly in the U.S., and especially for retail investors.
So we are likely to see PTR erosion of this ETF product line particular in the more competitive areas of the market since we are in the U.S., particularly the retail competition and leading up to this fiduciary rule by the Department of Labor, it's going to drive some early adopters of lower fees and all of that in order to capture more assets, particularly assets away from mutual funds and actively managed mutual funds. So, clearly, all of that is happening and we, at MSCI, are partners with a lot of these ETF managers and we want to remain partners with them and help them achieve those strategies.
And as we have talked about in the past, with particularly one entity, iShares, we've had differentiated pricing between the large- and mid-cap standard MSCI indices globally and the ETF on those, which are more targeted to institutional investors with higher liquidity, higher bid-ask spreads and all of that, and in more the core funds, which are the All Cap indices around the world and have lower management fees and have had lower – already have lower licensing fees from MSCI. So I think that our focus is on two or three things.
One is the size of the industry and how we capture a lot more assets; i.e., the volume. And that would lead to a lot of revenue and large growth of revenues.
Secondly, working with our partners to adjust and be flexible with our pricing strategies, which we have already done. We have already effective.
There is zero new news on that in any of these announcements that have been going on. And then, three, innovate with a lot of new products so that those new products not only can be priced attractively for us but also capture a lot of market share.
So I think, in a nutshell, the announcement and the sort of reports that have come out in the last few weeks have not really changed the strategy of MSCI and have not really changed the pricing strategy of MSCI.
Alex Kramm - UBS Securities LLC
All right. Thanks for that.
And then just, secondly, maybe, on the retention rate that came down, again, you addressed it already a little bit, too. But on the Analytics side, in particularly, do you feel like most of what led to that low retention, you kind of through that in terms of any sort of hedge fund pressure that is maybe leading some incremental cancels or do you think the environment is still very uncertain on the retention rate?
Henry A. Fernandez - MSCI, Inc.
Yeah. So, look, it's a – I think that's a good question as well.
And let me try to abstract from it again. We, at MSCI, continue to produce very strong financial results.
But we do so – and we do so with a lot of strong wins in our back in terms of passive investing and in terms of ESG investing and risk management and all the things – globalization, all the things that we always talked about. But we are really selling into an investment industry around the world in which significant segments of that industry are being challenged.
Active managers are being challenged. Banks, hedge funds, funds of funds, wealth managers, subsidiaries of banks, not because the wealth managers are not doing well, it's because when the banks – when the senior management of banks decide to have cost measures, cost management measures, they do so across the board in order to have the wealth management subsidiaries which are doing well contribute larger amounts of profitability to compensate for the pressure that they see on the investment bank or the commercial bank.
So that leads to some pressures in segments of our marketplace. There are other segments that are doing well for us, like, non-bank subsidiaries – non-bank on wealth managers, patient funds, sovereign wealth funds and all of that and we can talk a lot about that.
Right? So the pressure continue.
In this particular quarter, we saw a meaningful pressure on funds of funds or our HedgePlatform product line, we saw meaningful pressure from the wealth management subsidiaries of U.S. banks, we saw some pressure from the investment banks in Europe as well and alike.
And therefore, the majority of these $10 million in cancels, were attributed to those cost pressures and resulted in partial cancels, resulted in shutdowns of hedge funds, shutdowns of funds of funds, as an example, the reduction of services from wealth managers and all of that. We believe that that trend will continue.
Now it will be bumpy. There will be some quarters in which the retention will zoom up because the cancels were lower.
In other quarters in which the retention is lower, like it did in this third quarter, the cancels will be elevated. There's nothing new there in the way we're looking at the product line and our strategy and all of that.
We believe that the health of the business is also demonstrated by the strong recurring sales in Analytics and strong one-time sales, non-recurring sales in Analytics. But I think we will continue to have those pressures and every quarter when there is pressure maybe a different set of client segments, there be more in one area and more in another area, you may be compensated by lower retentions in other areas or much higher sales in other areas like pension funds or sovereign wealth funds, but it will continue like this.
But net – net-net, we think that the product line continues in this progression of growth. We wanted to be more rapid in the top line, but we're sure of growth and profitability.
Kathleen A. Winters - MSCI, Inc.
And, Alex, maybe I can just add to that a little bit. We did talk about; in Q2 we saw these conditions as well.
And Q3 here is really a continuation of that, and as Henry said, probably will continue in the near-term. Right?
And if you look at historically, Q4 is usually a higher quarter for us in terms of cancels. So, we'll see how that goes in Q4, but let's just put it in the overall context for Analytics.
For the quarter, organically Analytics revenue up 4% and in fact new sales, recurring sales of 26%, and then if you include even one-time sales, up 31% for the quarter. In addition, continuing to make progress in Analytics on margin expansion.
So, we continue to execute there. Certainly concerned about the cancels being high, don't like to see that, but we're working hard to minimize that.
Henry A. Fernandez - MSCI, Inc.
Actually one other thought that I forgot, because there's been some speculation that the – some reports that some of these cancels came from are across the board price increases, in Analytics. There's very, very little effect of our price increase in these cancels.
They had very little to do with our price increases. Our price increases are going relatively well, obviously, nobody likes to see price increases in our client base but they're going well.
And we will continue to execute on them.
Alex Kramm - UBS Securities LLC
Excellent. Thanks for the color.
Operator
Our next question comes from the line of Ashley Serrao with Credit Suisse. Your line is now open.
Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)
Good morning. Henry, I just wanted to clarify your comment on Alex's question about the BlackRock fee cuts not impacting revenues.
Is that because it's just too small as a percentage of AUM or is it because contractually the pricing change doesn't flow through to you guys?
Henry A. Fernandez - MSCI, Inc.
We already have a formula with them on the core shares – the core iShares. That has a formula that is relative to the management fee – percentage of the management fee and it has a floor, it has a ceiling.
And a lot of that was already in the lower end of that range. So, the management fee gets cut or the fee are gets cut, we're already at those low levels.
And there hasn't been any change on the pricing of the product at all with them. Now, over time, for sure, right, as we tried to capture assets, they tried to capture assets and what I mean more aggressive we may have other discussions about how to create pricing strategies that get us much more volume and even if it's lower fees.
But none of those discussions are taking place right now.
Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)
Okay. Appreciate the clarification.
And then just on the Analytics revenue projection over the next few years, does that include any contributions from potential wins from replacing the Barclays, Bloomberg POINT system, which I think was announced after you gave your initial guidance. And then how should we be thinking about the timing of the incremental investment for growth to flow through the business?
Henry A. Fernandez - MSCI, Inc.
Yeah. So all of these projections that we show have in them both the investments, the organic investments that we referred to, so I don't want anybody thinking that these incremental investments that I referred to will be added to this and, therefore, lower our targets of EBITDA margin in the future.
And secondly, they also do reflect the contributions to revenues from all these initiatives, the fixed income analytics initiative, the services offering Analytics and the new platform – the new sort of a technology platform Analytics product line. So, all of that is there.
Now, they are back-ended because as you developed a fixed income capabilities for both, not only for fixed income analytics – for fixed income portfolio management but also fixed income analytics in the context of the multi-asset class analytics offering, right. So the investments we're making there give you incremental revenue that are part of that progression of revenue growth, constant currency revenue growth to the high-single-digit, and the same thing with the offering, the service offering on the new platform.
But they are back ended. So I don't anticipate or I would anticipate us getting closer to the 30% to 35% EBITDA margin first before we get closer to the high-single-digit revenue growth, because revenue, it gets back-ended in terms of the investment and the progression of getting clients and all of that.
I mean, as you know, it just takes time to accumulate those run rates. So within fixed income analytics, per se, yeah, this is a strategic area for us for many, many years as we talked about for many years we also wanted to solve this inorganically through some acquisition and we're praying and hoping that that will happen, and properties have come to the market, but we haven't liked the prices.
We've been very – very disciplined buyers and have passed therefore. And now the time has come in which we got to do it organically because we've been waiting too long.
And we really need to start filling out this whole area and that's what we're doing gradually now.
Ashley Neil Serrao - Credit Suisse Securities (USA) LLC (Broker)
Okay. Thank you for taking my questions.
Operator
Our next question comes from the line of Chris Shutler with William Blair. Your line is now open.
Andrew Owen Nicholas - William Blair & Co. LLC
Hi. This is actually Andrew Nicholas filling in for Chris.
Just one question. I believe most of my other ones have been answered.
On EBITDA expense, I believe your guidance implies fourth quarter expense around $150 million at its midpoint. If I take that run rate into 2017, it looks like year-over-year growth on a constant currency basis would be around 3%.
I'm just curious if that's a fair way to be thinking about next year, and if so, in either case, what are the key spending areas that we should be thinking about that would drive EBITDA expense higher than that Q4 run rate?
Kathleen A. Winters - MSCI, Inc.
So as we think about our planning, Andrew, and as we've talked about, we think about our model being strong top-line growth coupled with really controlling our expenses. Right?
And we talk about high-single-digit revenue growth rate but capping expenses at a 5%-ish growth rate. Now we are in the midst of our planning process right now, so I really can't say specifically what 2017 is going to look at, but when you just think about conceptually the nature of our expenses and our expense base and our expense base being primarily compensation-related because we're a people business, right, and you think about the inflation associated with that year-over-year.
Add onto that, right, the investments that we want to continue to make in our fast-growing spaces, particularly in Index and ESG, in fixed income analytics, that's kind of how we think about our expenses. We want to be able to fund the fast-growing parts of our business, but at the same time, we want to be able to find productivity to fund that really for all of the projects that we see across the board that have high returns.
Andrew Owen Nicholas - William Blair & Co. LLC
All right, that's helpful. That's all I had.
Thank you.
Operator
Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Toni M. Kaplan - Morgan Stanley & Co. LLC
Hey, good morning.
Henry A. Fernandez - MSCI, Inc.
Good morning.
Toni M. Kaplan - Morgan Stanley & Co. LLC
So, as you mentioned, new sales in Analytics were actually strong and – but clearly the retention rate in Analytics was a little bit light, as we've been discussing. Could you just give some color on whether there's a difference between the products that are being demanded on the new sales front versus the products that clients are canceling.
Henry A. Fernandez - MSCI, Inc.
Yeah. So, on the cancel side, Toni, the epicenter, so to speak, of the cancels this past quarter were in multi-asset class RiskManager product – the product line there to hedge funds, some smaller hedge funds that shut down, for example.
Also to wealth in the U.S., let's say, to wealth management subsidiaries of banks in the U.S. which also offer that multi-asset class RiskManager product line.
So that was one area. Another area is HedgePlatform or funds of funds, a much smaller negative impact with that.
We have had relatively little cancels on BarraOne which is more of the factor-based multi-asset class risk management product line. A lot of that is to asset managers and pensions funds, so very little cancels there, if anything good sales there.
Very strong sales in equity analytics models and applications, particularly to equity long/short hedge funds that are being asked by various institutional clients to report the performance and risk of their portfolios on a factor basis. That is definitely an increasing trend and we hope to capture that.
Those have been the areas where some of these issues have been focused on.
Toni M. Kaplan - Morgan Stanley & Co. LLC
Okay. Great.
And then you've mentioned success in fixed income analytics. Are you targeting sort of existing customers that already have some of the equity analytics or multi-asset class analytics or are you going after sort of new fixed income only shops?
Henry A. Fernandez - MSCI, Inc.
Yeah. Well, first of all, the success has been in just launching the product and putting cost in the company.
We are hoping to have success in generating revenues, but not yet, right, because we just started this effort. Our main focus on – clearly, there are two focus.
Right. The fixed income analytics as it relates to the multi-asset class offering.
And then there is the fixed income analytics for the fixed income portfolio managers alone. Right?
So in that area, our main focus is to go to those clients that we already have a large relationship with in multi-asset class analytics and in equity analytics for their equity portfolio management team and round-up the efforts in fixed income and the fixed income portfolio management side, that's been one big effort. And the second big effort has been targeted in the high-end of that as opposed to the low-end, the small and medium-size clients, but the bigger clients that we've had very extensive relationship with and that is – there is a lot of changes that are going on in fixed income analytics because the providers of fixed income analytics have been changing hands and all of that.
So this has been driven by both. A lot of our clients have come to us and say, how can you help us manage these transitions?
And obviously we've been eager to help them as well.
Toni M. Kaplan - Morgan Stanley & Co. LLC
Thanks a lot.
Operator
Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open.
Joseph Foresi - Cantor Fitzgerald Securities
Hi. Has the focus of your clients shifted towards cost versus quality particularly in the Index business?
And could that shift get worse if the economy continues to do poorly? I'm wondering if you have any worries around pricing.
Henry A. Fernandez - MSCI, Inc.
With respect to indices and our clients, well, let me go back – with respect to our clients, particularly our active management clients are for sure, there is a lot of emphasis on cost – not dramatically different than it has been in the last two years, three years. There's a lot of emphasis on cost.
Now, with respect to the Index product line, with those clients, we've been successful at selling them more things, particularly, factor indices, for example, or emerging market indices, because the emerging markets asset class has began to come back or custom indices, ESG indices and the like. And therefore, our share of their wallet has increased.
Because at a time in which they need us the most. So, obviously that is coming at the expense of reductions in budgets of those clients from other providers.
Joseph Foresi - Cantor Fitzgerald Securities
Got it. And so – and then my second question is how would you characterize the cancellations in the Analytics business?
Were most of those due to hedge funds going out of business versus just kind of not needing the product anymore? And if you could – I know this is very difficult – can you quantify the percentage of spending in that business as typically discretionary?
Thanks.
Henry A. Fernandez - MSCI, Inc.
Yeah. So the expense of this is typically mission-critical for sure.
So some of these cancels have been hedge funds, medium and small hedge funds shutting down, because these are largely multi-strategy hedge funds by the way, not equity long/short hedge funds. These are largely multi-strategy hedge funds that have done that, or that they have partial reduction of service because their assets under management have declined significantly.
And therefore, they're less processing or they've got out modules or whatever. Right?
So that's being one area. Clearly, another area is funds of funds.
We know that this is an area that has been challenged, the funds of funds industry in hedge funds. And we've had some cancels there.
We have wanted to make up those cancels by higher sales of our HedgePlatform product line to endowment, foundations and pension funds meaning all other forms of asset owners. But that has – we haven't spent as much time in increasing those sales.
We will, in the future, but we haven't, to make up for those funds of funds decline and the like. So that has been the nature of the cancels.
Joseph Foresi - Cantor Fitzgerald Securities
Thank you.
Operator
Our next question comes from the line of Warren Gardiner with Evercore. Your line is now open.
Warren Gardiner - Evercore Group LLC
Hey. Good morning.
So I was wondering if you guys could – I know you sort of mentioned that there was no impact – cancels had no impact on gross – on the pricing from the pricing you exerted in the quarter. But I was wondering if you guys can just quantify the impact on gross sales from maybe some of the pricing increases you've been passing through.
Kathleen A. Winters - MSCI, Inc.
So, on the Analytics side, going back, I guess, a year or so, we really started to more systematically look at our pricing. And we continue to do that now in Analytics, really had not had an impact with regard to the cancellations.
And we're going to continue to, kind of, focus on that as one of our key areas usually around 15%-ish of our revenues.
Warren Gardiner - Evercore Group LLC
For Analytics and Index or just Analytics?
Kathleen A. Winters - MSCI, Inc.
Yeah. For Analytics.
Warren Gardiner - Evercore Group LLC
Okay, great. And then I think you guys mentioned some asset-based fees or mutual funds in the quarter, I think you talked – I think you term them initial funds fees.
I mean, should we be thinking about that as a one-off like event or is that maybe – or is that the right run rate to use going forward for that line item?
Kathleen A. Winters - MSCI, Inc.
So, can you just clarify what you're asking?
Warren Gardiner - Evercore Group LLC
All right. So, in the asset-based fees, the funds from passive mutual funds, I think there's a nice tick up, and I think you guys noted initial fund fees as one of the reasons.
I was wondering if that's more a one-off or is this now kind of the right run rate to think about going forward?
Kathleen A. Winters - MSCI, Inc.
Yeah, I mean, that can be kind of lumpy. I wouldn't assume that that's an ongoing run rate.
That can, kind of, bounce around a little bit.
Warren Gardiner - Evercore Group LLC
Okay, great. Thank you.
Operator
Our next question comes from the line of Keith Housum with Northcoast. Your line is now open.
Keith Housum - Northcoast Research Partners LLC
Good morning. Henry, the adjusted expense guidance for the year has come down, obviously, significantly.
If you look at over the past year, what's been the drivers of that decrease, has it been driven a combination of like FX and delayed spending and just better performance, or if you had to weigh – like, where are the savings is, how would you weigh that?
Henry A. Fernandez - MSCI, Inc.
So, look, I think in general, it's been driven by a very, very tight management of the head count, right. For example, in years past, we were growing our head count aggressively.
So, we came to a situation where we felt that we had enough head count all over the world and we needed to just focus on productivity of that head count in the company. So, when you see it's almost flattish head count growth that has helped dramatically to decrease the rate of growth of EBITDA expenses.
Clearly, foreign exchange has benefited us immensely there. But that's why we give you the numbers on FX adjusted basis versus non-FX adjusted basis.
And you like anything else, Kathleen?
Kathleen A. Winters - MSCI, Inc.
No. I mean, we're – as you said, really strong rigorous keeping an eye on expenses, on head count, particularly driving for more efficiency in Real Estate and Analytics.
And you can see that in the margin rate. I mean we've had pretty steady margin expansion.
We're going to continue to keep an eye on that.
Keith Housum - Northcoast Research Partners LLC
Okay. As a follow-up, as I look at the guidance you guys gave a few quarters back in terms of your long-term adjusted EBITDA margins, the Index business is already at the top end of that range and the range was 68% to 72% now.
Should we think of that range to be bumped up or are you guys be increasing your investment area commensurate with your revenue growth?
Henry A. Fernandez - MSCI, Inc.
No, no, I think that rate – that range to stay like it is. There will be times in which we would be at the lower end of the range like we have been in prior quarters this year on the basis of lower ETF fees or at the same time couple with investment.
There'll be times in which we would be a little bit over on the upper side of the range. But given – clearly, it's a built-in margin expansion in the Index product line, but if we really would like to see this Index product line expand for years and years and years to come, we need to continue to invest in a lot of new areas there and that's what we're doing and that's what we are capping, so to speak, the margin range to those levels.
And the investments, clearly factors, it's a huge part. We need to do that and everything that goes with factor, distribution, client service, the production environment for factor indices and all of that, right, ESG indices, another part, et cetera.
Kathleen A. Winters - MSCI, Inc.
Yeah. So, as Henry said, we really are making it a priority to make sure we are funding our growth initiatives and innovation.
Right? So – but we're very happy to be in that target range of 68% to 72%.
And it's clearly a priority for us. Look, we've got lots of great projects that we want to fund high return projects and we want to continue to be able to do that, and it makes sense to do that for the long-term growth of the business.
Keith Housum - Northcoast Research Partners LLC
Okay. Thank you.
Operator
At this time, I'm showing no further questions. I would like to turn the call back over to Don (sic) [Steve] for any closing remarks.
Stephen C. Davidson - MSCI, Inc.
Thank you, everyone. We went over a little bit to get everyone in – on the queue.
So, thank you and we'll speak again next quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.
You may all disconnect. Everyone have a wonderful day.