Good day, ladies and gentlemen, and welcome to the MSCI Third Quarter 2015 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. If anyone should require operator assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Stephen Davidson, Head of Investor Relations. Sir, you may begin.
Thank you, Shanice. Good day, and welcome to the MSCI Third Quarter 2015 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for third quarter 2015. 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. These documents include our new segment reporting and activity costing disclosures. 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 are made. 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 filings with the SEC.
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 to the equivalent GAAP term 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 32 to 40 of the earnings presentation. We have provided you with a lot of new disclosures this quarter, so to allow for more time for the Q&A, we have tried to limit the prepared remarks to incremental information not already included in our earnings release. On the call today are Henry Fernandez, Chief Executive Officer, and Robert Qutub, Chief Financial Officer.
With that, let me now turn the call over to Mr. Henry Fernandez. Henry?
Thank you for joining us today. In my opening remarks, I plan to discuss some of the highlights from our strong third quarter, which builds upon the momentum that we have been developing over the last several quarters. I would like to share with you the bigger picture of MSCI. Our company's exciting strategy for the next several years is designed to lead to even greater revenue growth and profitability, as well as increased cash flows. This strong financial performance should allow MSCI to continue its policy of returning significant capital to our shareholders. I am very excited to provide you with this look ahead. First, our Q3 results, which start on slide three. As you saw from our press release, MSCI reported a strong third quarter.
Among other things, we delivered much higher levels of profitability, driven by solid revenue generation and a strong cost discipline, resulting in double-digit growth in adjusted EBITDA and continued margin expansion. The highlights of Q3 include revenue growth of 7%, which, combined with a 7% decline in adjusted EBITDA expenses, drove a 740-basis point increase in margin to 48%, which is the highest margin recorded by MSCI in almost three years. Total run rate growth was 6%, and the recurring subscription run rate was up 8%, excluding the negative impact of FX. Net income was $64 million, or $0.59 in diluted EPS. Adjusted net income was $66 million, or $0.60 in adjusted EPS. Our business model continued to deliver a strong cash flow.
Our well-timed $800 million issuance of senior notes in early August, just before the spike in market volatility, positioned us to repurchase 8 million shares for a total value of approximately $480 million in the quarter and through October 14th. Since December 2012, we have repurchased over 22 million shares, and with the completion of our $850 million share repurchase authorization, our board has approved a new $1 billion authorization. In summary, on the financial perspective, we are extremely pleased with MSCI's overall performance in the first three quarters of 2015. On the personnel front, and to better position MSCI to achieve its strategic goals, we recently announced that Baer Pettit will assume the role of Chief Operating Officer, and Diana Tidd has been appointed Head of Equity Index Products worldwide, reporting to Baer. We are very pleased to have leaders like Baer and Diana step into these important roles.
I will turn our attention to the long-term targets we have set for ourselves on slide four, taking you through each of our segments and the growth we aspire to for each of them over the longer term. This is the way we are running the company, and the segments will provide you with greater transparency and insight into our performance, as we have promised earlier in the year. We believe we are a growth company with a strong recurring revenue model, aspiring to achieve double-digit revenue growth over time. We have, in our view, multiple levers to drive that future growth. In our Index segment, where MSCI's global equity indices are considered the gold standard for global investing, it is our long-term goal to grow revenue annually in the low double digits with adjusted EBITDA margins ranging from 68%-72%.
This range is below the margin level that we're reporting today for Q3. This is our long-term target, which reflects the impact of important investments that we may need to make to enhance and expand our market position in indices, just as we have done in the past by differentiating ourselves in new areas such as factor indices. We're excited to report that we believe our Analytics segment is now on the path to both revenue growth and improved profitability as a result of the steps we have taken this year and the steps we will continue to take in 2016. It is our goal to move our revenue growth to the high single digits over time. It is also our long-term goal to move adjusted EBITDA margins to the 30%-35% range.
Our clients rely on analytics products to meet the demands of an increasingly complex and global multi-asset class investment world, therefore presenting us with significant opportunities to serve them and to grow our business. Lastly, in our All Other segment, which consists of our ESG and real estate products, we see high growth opportunities in our ESG products and the potential to achieve higher levels of growth and improved profitability for our real estate products. Our long-term goal is that the All Other segment will be an engine of future growth for the company, and we hope to grow revenues in the segment in the low double digits. Over the longer term, we also would like to move our adjusted EBITDA margins from negative levels today, given our significant investments in this area, to the range of about 15%-20%.
Having reviewed our financial targets for each of our segments, what does this all mean for MSCI as a whole? If we reach our long-term financial targets, we believe that we will be in an even more competitively advantaged position in the future, and we will be better positioned to deliver deeper insight and superior tools to the leading investors in the world. If we can grow at a faster pace, we believe we'll be in a position to solidify and enhance market leadership in all our products, including indices, equity and multi-asset class analytics, and ESG and private real estate products. From a financial perspective, it is our goal that the respective contribution from each of the segments will help us achieve our long-term goal of low double-digit revenue growth and EBITDA margins of over 50% for the whole company.
The trajectory to our goal of 50% adjusted EBITDA margin will obviously not be a straight line. For example, even though we reached 48% margin in Q3, we expect Q4 to be lower by some 2-300 basis points. However, please keep your focus on the destination of 50%. On slide five, we provide you with more detail on how we intend to achieve the adjusted EBITDA targets in the Analytics segment. As you know all too well, this is an area of keen focus for us. The focus for analytics in the near term will continue to be on improving profitability. We have started by reducing the cost structure. We have achieved over $10 million of cost reductions so far in 2015, which annualize to about $20 million of the $25 million-$30 million that we hope to achieve.
We have therefore made significant headway already in 2015 in achieving our cost targets for analytics products. On slide seven, we provide you with a sense of how much the new analytics management team, led by Peter Zangari, has accomplished in the last six months. The team has put this segment on a path to improve profitability and subsequent revenue growth. Lastly, jumping to slide eight, we highlight for you the strong track record of capital return that we have established for MSCI. From our early days of capital return in 2012 until the present, we have returned over $1.2 billion in capital to our shareholders by repurchasing over 22 million shares at an average price of $51.34 and paying accumulated dividends of $85 million. We certainly hope to continue our strong record of returning capital to our shareholders over the long term.
Now I would like to turn it over to Bob, who will walk us through the third-quarter results in more detail.
Thanks, Henry, and good morning to all of you on the phone. Now please turn to slide 10, where we will begin my overview of our financial results. Our results this quarter were strong, with a 7% increase in revenue and a 7% decline in adjusted EBITDA expenses. This drove a 26% increase in adjusted EBITDA and a 740 basis point increase in our adjusted EBITDA margin to 47.9%, including the impact of foreign exchange fluctuations. Just a couple of quick comments on the results. Our results include higher interest costs from our bond offerings in the fourth quarter of last year and August of this year. In our GAAP numbers, we recorded a $6.3 million gain on the sale of an investment, which is excluded from our adjusted EPS. The 7% decline in weighted shares outstanding over the year added about $0.04 to our adjusted EPS.
We anniversaried GMI in August, and as of the third quarter, it is considered part of our organic revenue stream in ESG. Lastly, just a comment regarding our tax rate. We are now in the process of aligning our tax profile with our global operating footprint. We believe this project will reduce our effective tax rate by a number of percentage points over the coming years. As we move forward, we will update you on our progress. In the slides that follow, we adjust our reported results for foreign currency fluctuations on our subscription revenue and costs, but we do not provide the impact on foreign currency fluctuations on our asset-based fees tied to assets under management, of which approximately two-thirds are invested in securities denominated in currencies other than the U.S. dollar.
Before I get into the results, let me talk for a moment on the changes in our disclosures. The disclosures of our product segments and their related profitability are in line with the commitment we made at the beginning of the year to provide this information in the second half of 2015. In line with these enhanced disclosures, we spent considerable time focusing on the activities that drive our costs. Those activities are now reflected in our income statement and show what we incur to, 1, support our existing products and clients, expand and grow our client relationships, and finally, develop and build new products. We believe this increased transparency will provide you with more insight into MSCI. Now let's turn to slide 11, where we will provide you with a bridge for the year-over-year change in our revenues by segment and revenue type.
Total revenues increased $17 million, or 7%, to $269 million, declined slightly from the second quarter of 2015. The year-over-year increase was driven by an increase of $14 million, or 7%, in recurring subscription revenues and an increase of $4 million, or 9%, in asset-based fees, partially offset by lower non-recurring revenue. Adjusting for the negative impact of FX, our subscription revenues, which includes recurring subscription and non-recurring revenue, would have increased 8% overall, Index would have increased 10%, Analytics and all other would have each increased 7%. The $4 million, or 9%, increase in asset-based fee revenue to $51 million was driven by a $32 billion increase in average AUM in ETFs linked to MSCI indices to $418 billion, as well as growth in non-ETF institutional passive funds based on MSCI indices.
On a linked-quarter basis, asset-based fees declined slightly, driven by a 5% decline in average AUM in ETFs linked to MSCI indices. The linked-quarter decline was mitigated by higher revenue from non-ETF institutional passive funds linked to MSCI indices. Turning to slide 12, we provide you with the year-over-year adjusted EBITDA expense bridge. Third-quarter adjusted EBITDA expenses decreased $10 million, or 7%, to $140 million, declined $12 million, or 8%, compared to the second quarter of 2015. The impact of 2014 hires and same-store inflationary compensation, noted here on the chart as net carryover inflationary increase, as well as incremental severance was more than offset by a $7 million benefit from foreign currency exchange fluctuations and cost savings of $12 million, driven primarily by lower compensation and benefits as headcount was lower by 133 year-over-year. Lower non-compensation costs also contributed to this decline.
Excluding the impact of foreign currency exchange fluctuation, our adjusted EBITDA expenses would have decreased $3 million, or 2%. The decline on a linked-quarter basis was driven entirely by lower compensation and benefit expenses, reflecting lower incentive compensation accruals, lower wages, and lower severance related to our efficiency efforts, and higher capitalization of compensation related to various strategic projects underway. On Slide 13, we provide the run rate bridge for the quarter. Our reported run rate increased 6% to $1,062 million, consisting of a 6% increase in subscription run rate to $874 million and a 6% ABF run rate to $188 million. Compared to the second quarter 2015, however, run rate was flat, driven by a 7% decline in asset-based fee run rate and a 5% decline in average AUM in ETFs linked to MSCI indices. Adjusting for foreign currency fluctuations, subscription run rate grew 8% year-over-year.
In the quarter, a combined $3 million increase in index and record ESG sales was offset by a $4 million decline in analytics and real estate sales. Lower analytics cancellations, however, helped mitigate the decline in analytics gross sales, and aggregate retention rates increased to a record 95.3%. Overall, retention remains very strong at 95%. On slides 14 through 18, I'll walk you through our segment results. Let's begin with index on slide 14. Revenues for index increased 9% on a reported basis, and the recurring subscription portion of index revenues increased 11% on an FX-adjusted basis. The adjusted EBITDA margin for index increased to 73%. We saw continued strong growth in our core market cap index products, factor and thematics, and derivatives, as this growth continues to be supported by a growing pipeline of new products.
Our core market cap index products, factors and thematics, and derivatives recorded strong year-over-year results in run rate growth. Growth in factors and thematics is helping to diversify our revenue base and is driving growth in both subscription and ABF revenue types. Open interest in MSCI index-based futures and options increased to 1.6 million contracts, up 29% year-over-year. In terms of new products in the quarter, we launched three new index families and we expanded 20 index families, mostly factors. Year-to-date, we have launched 15 new index families and 44 index families have been expanded, compared to 22 in the prior period. In the third quarter, ETF providers launched 47 ETFs based on MSCI indices, compared to 19 in the prior year. Lastly, on the client side, we are continuing to focus on diversifying our client base and growing new client segments.
On slide 15, we provide you with some detail around our asset-based fees. In the upper left chart, despite the spike in market volatility in August, our asset-based fee revenue remained fairly stable on a linked-quarter basis due to higher revenue from non-institutional passive funds linked to MSCI indices. As shown in the upper right corner, third quarter inflows into ETFs remained positive in the quarter, despite depreciation of $48 million. As shown in the lower left corner, we have seen significant declines in emerging markets related AUM, both year-over-year and quarter-over-quarter. While developed market AUM is up year-over-year, it declined on a linked-quarter basis.
Turning to the lower right, the reported average basis point fee for ETF AUM linked to MSCI indices was 3.40 basis points at the end of the third quarter, down from the 3.51 reported at the end of the third quarter, down slightly from the second quarter of this year. The decline year-over-year and quarter-on-quarter was driven by fee structure as well as the negative mix shift I mentioned earlier, as assets have moved out of emerging markets and moved into developed market ETFs. On slide 16, we highlight our position as a leading index provider to the ETF market, where we are number one year-to-date globally in terms of new assets gathered. Net flows into ETFs to MSCI indices were $3 billion during the third quarter, down from $24 billion in the second quarter. Year-to-date, ETFs linked to MSCI indices captured $59 billion in net flows.
Number one, new assets in currency hedged indices. Assets in ETFs linked to MSCI currency hedged indices have more than doubled year-to-date, growing from $17 billion to $41 billion as of the end of the third quarter. Number one in new assets linked to factors. Despite lower assets and equity factor ETFs generated during the quarter, mainly due to negative market movement, there was positive demand for ETFs linked to MSCI factor indices. Assets and ETFs linked to MSCI factor indices were $21.8 billion at the end of the third quarter, up $1.6 billion from the end of the second quarter. Year-to-date, ETFs linked to MSCI factor indices have captured $9.1 billion of net flows. Lastly, we were number one in the total number of equity ETFs with 774. On slide 17, we highlight the financials for the Analytics segment.
Revenues for Analytics increased 5% on a reported basis and 7% on an FX-adjusted basis, and the adjusted EBITDA margin increased to 27%. To reiterate what Henry mentioned earlier, we expect that higher costs across all segments in the fourth quarter will lower the Analytics margin to a range of 24%-26% in the fourth quarter. The three primary use cases around which we are focusing our products and services in Analytics are, one, clients looking to differentiate themselves, two, operations and risk management infrastructure, and three, regulation. As we think about these use cases, what we are seeing from our clients is that they are spending to save money, they are spending to comply with the increasing complex regulatory environment.
Given this, the sales dialogue with most of our clients is focused on the operations and risk management use case, as well as the regulatory use case. The Federal Reserve's Comprehensive Capital Analysis and Review, known as CCAR, and the proposed liquidity rules for asset managers by the SEC are the primary drivers of the regulatory change in dialogue. As a result, we are seeing strong sales from our bank and large asset management segments, with some weaknesses in hedge funds. Lastly, for our segments, on slide 18, we have the All Other segment, which consists of ESG and real estate. Revenues for All Other increased 2% on a reported basis and 7% on an FX-adjusted basis, and the adjusted EBITDA margin continued to improve. First, in terms of ESG, we are continuing to see a growing demand for deeper ESG analytics on client portfolios across asset classes.
In terms of sales, it was a very strong quarter, especially for the Americas, where we secured global deals with several very large global asset managers. We also recorded our first sale in Japan to a large global asset manager. Carbon continues to be an area of strength as a result of the strong collaboration between Index and ESG. The Montréal pledge deadline and the approach of COP21 in Paris appear to be drivers of increasing demand. Lastly, growth in ESG continues to be fueled by the addition of new clients. Turning to real estate, we are continuing to focus on improving the profitability of this important product. We have reorganized the sales team and are reviewing the product portfolio to eliminate non-core products. We are also in the process of upgrading our platform to improve the value proposition for our clients and drive revenue growth.
Lastly, for real estate, we are continuing to automate client data workflow, which drives increased efficiency. Turning to slide 19, we provide our key balance sheet indicators. We ended the quarter with cash and cash equivalents of $993 million, which includes cash held outside of the United States of $102 million, and as a general policy, we maintain a U.S. cash cushion of approximately $125 million for operational purposes. We continued repurchasing shares in October for a total of approximately $135 million. That leaves us approximately $630 million in excess cash to be deployed. It's important to point out that through today, we have now completed 96% of our commitment to return $1 billion in capital to our shareholders by the end of 2016.
With the completion of our $850 million authorization, our board has just approved a new $1 billion authorization, under which we expect to continue to repurchase shares in the open market. The very high pace of repurchases in the quarter and in October was driven by the pullback in the stock price due to the spike in volatility. While we expect to continue to repurchase shares in the open market, we expect that if the stock moves higher from these levels, the pace of repurchases will decline, and if it moves lower, the pace will increase. Our goal is to deploy the remaining cash in a manner that generates the highest return for shareholders. We will continue to regularly evaluate the methods to achieve this objective with our board. As of October 22nd, shares outstanding were 102.7 million.
On slide 20, we provide you with the progression of our full year 2015 adjusted EBITDA expense guidance. Through third quarter of 2015, the annualized foreign exchange benefit that we have registered relative to our original full year 2015 guidance of $620 million-$640 million, based on year-end 2015 plan rates, is approximately $7 million. The primary driver, therefore, of this decline to the current range of $595 million-$600 million, is the cost savings that we have achieved based on the deliberate actions we have taken to reduce headcount and improve overall cost efficiency. On our second quarter call, we expected that we would see increased costs from new hires, higher technology infrastructure spend, higher professional fees and severance that would keep us at the low end of our previously stated range of $620 million-$640 million.
These costs came in lower than expected in the third quarter due to two factors. First, there was an element of timing where higher costs from new hire professional fees and technology costs were delayed, and we now expect these costs to come in in the fourth quarter. Second, the actions that we have taken in the first half of 2015 by reducing headcount and prioritizing projects have had a more significant impact on the quarterly run rate of expenses. In fact, of the $24 million-$29 million in cost savings that we expect this year, analytics represents a little more than $10 million of that savings. While we do expect to see incremental costs flow through in the fourth quarter based on our guidance, the fourth quarter adjusted EBITDA expenses are now expected to be between $148 million and $153 million in the fourth quarter of 2015.
As Henry mentioned earlier, we expect that we'll have a negative 200 to 300 basis point impact on our adjusted EBITDA margin in the fourth quarter. One final comment on cost. The long-term goals that Henry outlined earlier involve solid growth in revenue, as well as a sustained cost discipline. In the near term, we now aspire to annual cost growth at the low end of the 5%-7% range we provided you with in the second quarter on a constant currency and constant portfolio basis. We believe this level of annual expense growth will enable us to strike the right balance between investing to fuel future growth and maintaining strong cost discipline. On slide 21, I'll close out with prepared remarks on our updated guidance for full year 2015. As I just stated, we now expect adjusted EBITDA expenses to come in between $595 million and $600 million.
Interest expense for the year is now expected to be approximately $63 million. Free cash flow is now expected to come in between $255 million and $270 million for 2015. CapEx is now expected to be in the range of $45 million-$50 million, reflecting lower technology infrastructure spending. Finally, the effective tax rate is still expected to come in between 35% and 36%. With that, I'd like to open up the line for your questions.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Thank you. Thanks for providing the additional disclosures, especially on the margins of the segments. I'm going to skip over index just because it was a really strong number and in line with the targets anyway. Just on analytics, just the run rate in the quarter ticked down a little bit on a constant currency basis. I just wanted to know if you could remind us of some of the initiatives that'll drive you to the higher growth rate that you're looking for.
Yeah, Toni, it's Henry. We had a slightly soft quarter in Analytics sales, it is just a quarter. There was clearly a lot of volatility in the market. When that happens, clients focus intensely on the volatility and sometimes some decisions about budgets and closure of contracts, and the likes slow down a little bit. Our pipeline Analytics is actually pretty extensive. Therefore, that gives us cautiously optimistic that our sales pace will pick up.
In terms of what are we doing to drive that even higher structurally, not just with the existing product line, there is a slew of new product development that is taking place in Analytics from the launch of a lot of new models in the equity risk model area to particularly the revamping of our applications with a new interface and a new layer of application on top of some of our other applications. We're hoping that we can launch that in a selective basis in the first quarter of 2016. Over time, we hope that that's going to drive Analytics higher. One other key area that we have been focusing on in the last six months with the management team in Analytics is how do we really look at use cases in our clients and drive strong sales efforts in each one of these use cases.
I think as Bob mentioned, we're very much focused on investment differentiation. You go to a client and say, "Our tools are going to help you build better performance." The second one is operational efficiencies. The complexity and global nature and multi-asset class nature of portfolios is creating significant complexity on our clients operationally, we want to drive our products to help them reduce that complexity and create efficiencies. The third one is surely regulatory compliance.
All of those efforts. I gave you a little bit of an answer in the short term in terms of the sales in the pipeline, longer term, why we're very optimistic about the sales in this product line.
Okay, great. In all other, it looks like the non-recurring revenue's been sort of a drag there on the growth rate. Can you just remind us what's included in that non-recurring part? Because it looks like the run rate trend has been sort of low double digits on a constant currency basis. Thanks.
In the other segment, we have ESG and real estate, and the real estate tends to dominate the one-times. We've spent a lot of time trying to move those more into recurring. With the platform, we're expecting us to be able to generate more product capabilities across the regions that are out there. Most of those are coming out of the real estate segment, and they tend to be one-time sales, one-time subscriptions that are out there.
Okay, great. Just lastly, just wanted to see if you have any updated thoughts on capital deployment now that you have almost $1 billion of cash on hand. Just any areas of M&A that you're more focused on. Thanks.
No, we tried to bring you down to where our cash is now. Obviously, we continued to deploy cash all the way past through the quarter end. We used up the rest of our $800 million authorization. We've got about $600 million of cash on our balance sheet that's available. Acquisitions are obviously a good deployment of capital that can be done either synergistically or they can be done to fill in gaps, or they can be done to excel capabilities like most recently we've had a few. We're looking for the highest return, and we've been deploying capital through buybacks, with the $1 billion authorization, as I indicated earlier. We intend to continue to buy that back until opportunities come up our way that are different. Highest and best use is what we're focused on.
Thanks a lot, guys.
Our next question comes from the line of Chris Shutler with William Blair. Your line is now open.
Hey, guys. Good morning. On the new $1 billion buyback plan, what are your thoughts on timeline there? Is there a date that you have to complete it by or just how fast do you think that'll get deployed?
We kept it open. We're committed to returning it. We're going to basically pace ourselves over the course of the next few periods. As I said, Chris, we are way ahead of our original commitment of returning the billion. We're 96% on that initial billion, and we remain committed to returning that and using our recently issued debt to the highest and best use.
Okay. I'm just thinking through this, Bob. If it was going to be longer term in terms of the timeline for usage, why would you raise $800 million of debt given that you could buy back that $1 billion over a period of a year, a little bit over a year with free cash and a revolver, which would probably be a lot cheaper?
Well, it goes back to when you look at our balance sheet and what we talked about at the second quarter, working with the board, we felt the more appropriate level of leverage was three to three and a half, which better matched our cash flows. We had a great opportunity to raise $800 million, as Henry mentioned, extremely efficiently in the first part of August before the volatility struck. We've always remained committed, Chris, that we are not here to store cash. We are here to deploy it as efficiently and effectively as we can. I think our record in the third quarter here shows that we did deploy a lot of capital. As the market moved and the volatility enhanced, we were able to efficiently buy back a lot of shares, 8 million shares, to be specific, since the beginning of the third quarter.
Also, look, as Bob indicated, our plan is to try to be in the market with lower levels of share price, and be in the market a bit less with higher levels of share price. I think the pace at which we affect our program will depend quite a lot on where things turn out.
Okay, thanks. Then just a couple more quick ones. Bob, did you give the ETF yield and the asset- based fees?
Yeah, 3.4 basis points, which is down from 3.43 and 3.51 year before on a linked and year-over-year basis.
Okay.
It's on one of the slides, too, Chris.
Okay, perfect. Thank you. On Index, just what kind of investments do you guys need to make there to enhance and expand, as you said? The margin targets there, just given where you're at, seem relatively conservative, so just want to understand the incremental investments.
I don't know. 70+% EBITDA margins don't seem conservative to me, right? Look, I think that we have a phenomenal franchise in Index. Phenomenal. Honestly, as management, as shareholders, you got two choices. You either milk the franchise, and over time you reduce your market leadership, or you invest in your franchise, and you continue to feed this revenue growth and this level of profitability. We are in the latter camp. Obviously, it's a balance between how much you want and can invest on an annual basis. If you think about it, there are three areas where equity indices can be very profitable for us, active management, passive management, and derivatives. In active management, you have to reach out to more and more customers deeper into the market cap area. For example, small cap indices.
You want to reach into new territories like China and Saudi Arabia and other places like that as they open up to global investing. On passive management, in addition to the market cap indices, you want to invest in factor indices and thematic, which is a big revolution. We're at the forefront of that. You got to put some investments in there. Thirdly, an area that has been small for us is derivatives, listed futures and options around the world. We feel extremely excited about that area over time from a small base because we have demonstrated in the last few years that the market for multi-currency index underlying futures contracts can be very successful.
We did that obviously with our partners at ICE with the emerging market index futures and the EAFE futures, in Europe with our partners at Eurex with the world futures and the like. We'd like to make some investments in there to see if we can build a fairly large third leg of revenue and profitability for our business.
All right. Thank you.
Our next question comes from the line of Alex Kramm with UBS. Your line is now open.
Yeah. Hey, good morning, everyone. Again, thanks for all the disclosures. I actually want to go back to page five and the Analytics long-term target. I think some of this was mentioned already, but maybe you can flesh it out a little bit more. First of all, when you talk about long-term target, what are the timelines of some of these buckets here, in particular when it comes to the cost savings? Are those very near term? What's a little bit more backward loaded? Coming back to, I think, something that was asked earlier, how confident do you feel about the ability to drive that incremental growth at the same time as you're cutting costs? Thank you.
Yeah. Well, look, we purposely left the timeline a bit flexible because clearly, nobody has a crystal ball right as to what the future can predict and the pace by which we can achieve things. The second important component of this slide is that it starts with the restructuring of the cost, the efficiencies of the product line. Therefore, you notice that the first column on this slide on the left is long-term cost savings, which we are very much on our way to achieve. We already are on an annualized $20 million cost savings. We got five million to $10 million to go. Those are the things we have identified for now and clearly. The management team in Analytics is also not going to stop there. It's going to keep tightening and tightening in a way that creates further efficiencies.
On the right-hand side, as you see, we put the incremental revenue target there, which we think are going to take a little longer than the cost savings. We're confident that, at least from today's vantage point, as I mentioned earlier, that the significant amount of new product development and repositioning of the product and utilization of the use cases and the like can help us achieve these kinds of revenue profiles to get to a steady state from today's vantage point, EBITDA margins in the 30s. Once we achieve those, that doesn't mean that's where we end. We then will have to reassess. Is that an appropriate margin? Can we do better? Can we not? I don't know. It's clearly too early to tell.
Right now, what we can give you is what we see in the horizon and then reassess when we get there as to what else can be done.
Great. Maybe just to follow up quickly on this one as well. You mentioned earlier the use cases and more focus on that, but I think what's been noted a couple of times is that the sales growth is still lacking in that segment. Maybe just getting beyond some of those use cases, what would you say is the biggest thing that's missing? If it's macro, that's fine too, but what do you think is really the one component that you need to accelerate that sales growth?
I think, first of all, I honestly want to ensure that I point out again that the softness in any particular quarter should not be a cause for alarm. The same thing that if we have a blowout quarter, unless we tell you otherwise, should not be a cause for euphoria. We will be guiding you through that given the segment reporting on a quarter-to-quarter basis. If I were you, I would not read that much into the softness of this quarter. Remember, we had a huge amount of volatility in the U.S. Labor Day was a week later, and then September was really three weeks to close a lot of deals. The distraction by our clients and the late return of people from vacation and all of that may have caused some of those things to slip.
Overall, for example, going into the final week of the quarter there was like $4 million. This is not just analytics, but overall there was like $4 million that could have closed in the quarter that slipped into the following quarter, and that was about 100% higher than in prior quarters. That tells you a little bit of some of these artificial sort of lines that we put into quarters. What is very important is that the pipeline is pretty good. We feel very good about the pipeline. Now, the timing of closing all of that, again, is a question of working with our clients and getting approval for their purchases and so on and so forth. We feel pretty good.
Now, my keen focus and the team's keen focus on these various use cases is so that we rally the resources of the firm to achieve the objectives of the client. Said differently, instead of selling products and features and applications and models and the like, we're trying to flip a lot of that completely and say, solve use cases. Okay, a client wants 10% better cost efficiencies in the way they're managing their risk as a risk management effort. How do we achieve that with our tools? Let's work backwards from that. Our client is looking for 50 basis point better improvement in their portfolios. What can the tools do to achieve that, and so on and so forth? Worse yet, the clients are with a huge deadline by regulators to provide certain reports and the like. How can we rally our resources to achieve that?
All of that gives us a good amount of optimism. Again, the sales process and the revenue process initially will be slow, and we hope that after a few quarters, it accelerates, and over time, it begins to move fairly more rapidly. Again, we have to see how it all goes in all of this. I want to make sure our expectations are right, that we're really focusing on profitability first and launching the products and utilizing the benefit of all the products that we have launched and the ones that were coming out, and then focusing on the increase in sales.
All right, great. I think people have been asking more than two questions, so I'm going to squeeze one more in, if that's cool. Bob, real quick, on the tax rates, you gave us a little bit of a teaser on looking to reduce that. Can you also talk a little bit about, A, the timeline, and B, the kind of things that you are thinking about? I think there's been some things thrown around, like moving the IP of indices and some things that sound a little bit more complex than other things I've seen in the past. Maybe give us a little bit more color about timeline and what you're actually trying to do here.
The timeline's immediate. We have already started to take advantage of our global footprint and realigning where our leadership is, all in line with what the tax and where we think the value is. In terms of selling IP and moving IP, that's a different conversation. Obviously, you'd want to explore that. Really right now, it's really aligning where the value is on our footprint. That'll happen, probably you'll see it, our operating rate is actually pretty strong. We had some discrete items this quarter that were reflective of state items, but the benefit on the sale of our investment offset that. We did, inside of the tax rate, have some benefit in the third quarter that will be continuing ongoing. As it becomes more meaningful, when we talk about guidance next year, we'll talk more about where we think those rates should be.
Our next question comes from the line of Vincent Hung with Autonomous. Your line is now open.
Hi, it's Vincent Hung from Autonomous. A few questions. Just the first one, maybe I've missed this. Can you talk through the path to the higher margins in the all other segments, please?
In terms of the margins in the other segment, the direction of them, Vincent? I'm sorry. Just wanted to make sure.
We couldn't hear you well, Vincent.
How you expect to get to the 15%-20% from where you are now.
It's two factors. I'll start off, Henry, you can finish it. You can see that we're directionally moving in that direction. You can see, the best way to look at the other segment, Vincent, in my view, would look at it on a year-to-date basis. You can see that the revenue on an absolute basis grew about 2.6%, or about $1.6 million. What we saw was efficiencies that I referred to on the real estate. Expenses actually on a year-to-date basis have declined, driving the margin to coming more towards a break even. As I talked about, ESG is growing significantly. Obviously, the reported run rates in ESG are obviously down, because now we've annualized GMIs. You're starting to see them in the high teens, closer to 20%. That's one factor.
The other factor that'll help drive the growth is the platform I referred to on real estate, that not only will provide a better client experience, it'll provide more efficiency as well as a platform to grow on. That's where we see it going forward.
Okay, thanks. Second question. I'm just curious on the segment reporting methodology you put out today. You've chosen to allocate the shared costs as opposed to splitting them out. How much did you have in terms of these indirect or shared costs?
When we went through all of the cost base, we had several dedicated costs. More than half of our costs tend to be dedicated and aligned around the products. We tend to become more corporate and share a lot of the infrastructure costs. We see it through either time tracking or allocations Costs that you see here from a contribution margin defined as what I would say is our cost of revenues, inclusive of our selling and our R&D. Those are really aligned around the products. The overhead or general administrative tends to be Henry and Bob and some of the other infrastructure that's out there. Our goal in that is to keep it low. Right now, 7.4% was the general administrative cost over revenues. We continue to drive that out to be as efficient as we can and continue to maximize the gross profit line.
That comes to a combination of specialists within the product, as well as being able to allocate the full corporate benefit and footprint that we have out there.
Our next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.
Good morning, gentlemen. Thanks for taking my question. As we look at the long-term guidance and long-term targets out there, I know you're loathe to put a year on that. Should we be thinking about that as a two or three-year target, or is this more of a 10-year target that you guys are thinking of in your heads?
Well, Keith, 10 years is an eternity for us. We're for sure not focused on that. We're probably closer to the first range. Again, we left it totally flexible at this point because we can't tell you how all of this will evolve. We can't tell you how market conditions and how product development efforts and so on and so forth. Again, it's not clear even to us that we have a specific set of targets, a timing of the target. What we have is targets that we want to achieve, and if they take a while, they take a while. If they come sooner, they come sooner. We don't have a specific timeframe, except we're always in a hurry, but we don't want a specific timeframe, so we can't provide that to you.
You can see that we demonstrated some immediate actions on the cost that Henry referred to about what we've done in analytics.
Yep. Okay. Then as I think about the All Other Segment, I guess, is that the area where you have the most opportunity for improvement? It sounds like in your Index and analytical segments, it's operating as expected or perhaps even better than you were planning on perhaps even a year ago. In the All Other, especially in the real estate area, it sounds like you're perhaps lagging there where you're hoping to be. I guess is there any acquisition you need to make in the area, or is that an area you just need to spend more time and effort, and you'll be able to get there?
Yeah. The way to think about the enterprise is that we are already at a steady state of EBITDA margin and Index. It will go up and down, obviously within the range and beyond, depending on certain conditions. We are ramping up the margin on Analytics, and the milestone is in the 30s at some point and see what happens after that. Then thirdly, this other area, other product category, that's where we're putting a lot of our new investments that we think will have a high revenue growth. We need to have meaningful investments in them. At the beginning, obviously, we'll run them at a deficit. Over time, we want to make sure they break even, and then they contribute to the overall profitability of the firm.
Therefore, where we focused on in efficiencies and profitability are analytics in order to get to where we want to be. Within the other category is on real estate because that's an area that we've been investing in restructuring and re-engineering the whole product line after the acquisition, so we can bring it back to a positive contribution to profitability of the firm. Acquisitions, they can happen in any one of our businesses. We look at them all the time, for sure, especially smaller acquisitions. I think I want to emphasize that the footprint that we have at MSCI is enough for now to make us focus on organic growth. The vast majority of our efforts at MSCI are organic growth with selected bolt-on extension acquisitions. That's where we are right now. Obviously, if anything changed, we will be reporting that.
Okay. Thank you.
Our next question comes from the line of Joel Jeffrey with KBW. Your line is now open.
Hey, good afternoon, guys. Just looking at the P&L and the R&D expense line. It's up about 10% year-to-date, but certainly down meaningfully quarter-to-quarter and year-on-year in the third quarter. Just wondering how to think about that going forward. Was there just an acceleration of development costs in the first half of the year, or should we be thinking about sort of the remainder of the year being similar to what we saw in the third quarter?
A couple of things. One is R&D is what we're spending on for the future. Okay? As opposed to cost of revenues to support the existing book of business and selling and marketing to grow existing clients and new clients for acquisition. Here, two things are happening. In the first half of the year, recall we talked about the technology project associated with RMA that we decided to step away from because the benefits that we had initially identified had diminished, and we had a write-off of about $3.5 million-$4 million in the first quarter, which would have inflated the first quarter, and you can see that in the historical results, and also that inflates it on a year-to-date basis. I did talk about the linked quarter decline coming down significantly, and one of the components was deferred software, which is on a catch-up basis in the third quarter.
That would actually have sort of depressed the expense or reduced the expense for the in quarter. You would see that come back up slightly in the fourth quarter. One of the contributing factors that we referred to is slightly increasing costs in the fourth quarter.
The 5 points, when you think about that, it's just under 6% of revenues. I would say on a more normalized basis, that probably would be slightly higher, closer to the 6.5%, 7% that you've seen historically once we get full up and running.
Great. That's helpful. Just thinking back a couple of years ago, I know you guys talked about the investment that you needed to make in the business to ensure that you saw sustainable revenue growth going forward, and that was one of the reasons that margins had come down to the levels that they had. That in prior years before that, you were less focused on that, and that's the reason you saw the margins are actually at current levels about now. Just wondering, how we think about this going forward in terms of the need for increased spend and the ability to drive those margins up to that 50% level that you talk about longer term?
If you think about the investment plan that we went through in 2013 and 2014, which was very important to us, we needed some investment, a catch-up or step-up investments in Index, which we achieved, and you'll notice in the segment that therefore the EBITDA margins in Index went down to about 64%, 69%, because we needed that. We definitely needed a meaningful amount of investments, particularly on our data centers and our running of the infrastructure of the applications that we provide in analytics. There were investments there in significantly upgrading the leadership of the technology team in all aspects of that, and obviously a lot of investments in capital expenditure with the data centers and software and things like that, and new applications that we were building. So that, we're benefiting from that investment in this phase right now.
There was significant investment in servicing our entire client base around the world. There was a step-up of that. As we look at that period, that's a period that has benefited us in getting the retention rate so high, in stabilizing and now growing the Analytics product line, and in maintaining our leadership in the Index franchise. Where we are now is at a point in which that step-up of investment has served us well, and we're now on a normal step-up basis as opposed to a big step-up, a normal cadence every quarter, every year, which tells us that this is pretty sustainable for a period of time. If there were to be a different perspective of that and we need another round of investment in the future, which we don't see in the immediate future or medium-term future, we'll come back to you.
We feel pretty good about what we did. It was painful, obviously, in describing it all to you, and the share price did not benefit from that and the like. There are times in which you got to do that in order to make sure that the long-term value proposition of this business to our client is great and to our shareholders continue to drive shareholder value.
At this time, I'm showing no further questions. I would now like to turn the call back over to Stephen Davidson for closing remarks.
Thank you very much for your time today and your interest in MSCI. We look forward to speaking with you soon. Have a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.