明晟 (MSCI) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the MSCI Inc. first quarter 2008 earnings conference call. Today's call is being recorded. All lines are currently in a listen-only mode. With us today from the Company is Chairman and Chief Executive Officer, Mr. Henry Fernandez; and Chief Financial Officer, Mr. Michael Neborak. At this time I would like to turn the call over to Mr. Neborak. Please go ahead, sir.

Thank you, operator. Good morning and thank you for joining us for our first-quarter 2008 earnings call. Please note that earlier this morning the Company issued a press release describing its results for the first quarter 2008. A copy of that release can be viewed on the Company's website at MSCIBarra.com under investor relations.

This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of the date on which they are made which reflect management's current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see forward-looking statements in our 10-K dated February 28, 2008 and filed with the Securities and Exchange Commission.

Today's earnings call may also include discussion of certain non-GAAP financial measures. Please refer to today's earnings release for the required reconciliation of the non-GAAP financial measures for the most directly comparable GAAP financial measures and other related disclosures.

Since we will be referring to run rate frequently in our discussion this morning, let me remind you that our run rate at a given point in time represents the forward-looking fees for all subscriptions and product licenses that we will record over the next 12 months assuming no cancellations and no new sales. The run rate is a good indicator of future accounting revenue. Please refer to Tables 2A and 2b in our press release for detailed explanation.

The agenda for today's call is as follows. First, Henry will summarize the first quarter and provide an update on our major initiatives. Second, I will review the first-quarter financial results. Following our formal remarks we will open the call up for questions. With that, let me turn the call over to Henry.

Thank you, Mike. Before I review our first quarter results, let me refer you to our press release we issued this morning as well. We announced that we intend to file shortly a registration statement on Form S-1 with the US Securities and Exchange Commission for the sale by Morgan Stanley of up to 28 million shares of MSCI's Class A common stock par value $0.01 per share for up to 28% of its economic interest in MSCI. Morgan Stanley currently has an 81% economic interest in MSCI.

The proposed offering is consistent with Morgan Stanley's previous indication that it might sell a portion of its ownership interest in MSCI and that it may ultimately divest its entire interest in MSCI. This announcement is neither an offer to sell nor a solicitation of an offer to buy shares of Class A common stock. Any offering of these securities will be made only by means of a prospectus and a related prospectus supplement.

Due to securities regulations, we will not be able to make further comments about this announcement. Now onto our first-quarter financial performance.

In my remarks, when I discuss topline numbers, I will be referring only to run rate figures while, Mike, in his presentation will focus on accounting figures or revenues. I should also point out that while some of the numbers I will refer to can be found in Table 2A of the earnings release, I will also make references to run rates not included in the release particularly those related to our client segments.

We started fiscal 2008 with a very strong first quarter. Operating revenues increased 20.5% in the first quarter compared to the year-ago period. Adjusted EBITDA increased 29.4% and our adjusted EBITDA margin reached almost 45%. The strength was again broad-based across [total] categories, geographic regions and client types.

Even more impressive and pleasing to us is the fact that we were able to produce record revenues and very strong adjusted EBITDA growth in the context of lower growth in our [EPFC] as a result of declines in equity values worldwide and increased volatility. Our first-quarter performance also highlights continued strong demand for our performance measurements and portfolio risk management tools among new and existing clients worldwide.

This demand is evidenced in the year-over-year growth of 22% in the run rate for our subscription based fees. We also experienced close to 30% growth from the run rate in our asset based [fees]. And while the latter run rate declined compared to the end of the fiscal 2007 year, we remain very excited about the secular growth prospects for revenues from [exchanged credit fund fees].

In terms of the outlook, we remain very comfortable that our revenue and EBITDA over time will be in line with our financial targets namely, revenue growth in the mid-teens and adjusted EBITDA margin in the low 40s. That said, in any given quarter, we estimate that our level of profitability will fall within a range of 40 to 50% depending on the rate of revenue growth particularly by our high margin [exchange] credit fund fee and depending on the pace of investment in important initiatives for continued growth and the nearer-term duplicate costs we are incurring as we replace services currently provided to us by Morgan Stanley.

Now let me provide you a bit more color on our first-quarter results. Please note that the run rate growth figures that I will refer to represent a percentage change from the run rate as of February 29, 2008 compared to the run rate as of February 29, 2007 unless otherwise specified. Overall, our total run rates increased 23.4% to $413.3 million with an increase of 22% in our index and analytics subscription based fees and almost 30% in our asset-based fees.

In terms of product category, the run rate in equity indices increased 28.4% to $227.5 million. The breakdown within equity indices are equity index subscription fees had one of the best quarters ever. Our run rate grew 24.1% to $154.1 million reflecting strong growth in data subscriptions worldwide. We continue to benefit from the enhancements made for international equity indices with the launch of GIMI, our Global Investable Market Indices.

Growth in subscriptions for our small cap series was also particularly strong. New indices launched in Q1 include [frontier markets and Asia 8650] which will add to revenues over time. For our equity index asset-based fees, the run rates increased 38.5% to $73.4 million with the vast majority of the increase due to asset inflows into ETF linked to MSCI indices. This performance, while strong, represents a decline in the run rate compared to the end of the fourth quarter of 2007.

Mike will go through ETF numbers in detail. As [inflows] remain positive and new ETF linked to MSCI indices continues to be introduced into the market. However, the benefit from these strands has not been able to offset the impact from declines in a number of equity markets.

Importantly though, we maintained our global market shares in EPS linked to our indices in the mid-20s. In addition, unlike most of our competitors, we have over 30 ETF with over $1 billion in assets which underscores the breadth and the depth of the EPS link to MSCI equity indices.

We remain very positive about the outlook for ETF given the very attractive attributes of this investment vehicle worldwide. In terms of new ETF, 13 of them were launched -- 13 of them linked to MSCI (inaudible) indices were launched in the first quarter of 2008 compared to 29 for all of fiscal 2007 and our pipeline remains very strong. Please note it will take the time for this new products to contribute meaningfully to revenue growth.

In equity portfolio analytics, we also had one of our best quarters ever with run rate growth of 17.7% to $131.3 million. This performance was led by a 48% increase in the subscription base of our equity risk covenant which includes sales of our equity risk data to clients who incorporate it into their our internal systems and risk data sales through third-party vendors such as FactSet.

Demand was strong for equity risk content from clients in most regions of the world. The strength was evident in a strong gross new sales as well as higher retention rates for equity risk content.

The growth in Barra Aegis slowed modestly to 8% from the 9% reported for the fourth quarter. Sales for Barra Aegis were a bit softer largely reflecting the deferral of sales as clients await the launch of GEM2 or our new and enhanced global equity risk model. We expect GEM2 to be launched in the second half of this fiscal year.

The run rate for our multi-asset class analytics increased 35.4% to $31.7 million. The run rate for BarraOne was in the multi-asset class category increased 57.6% to $19.2 million reflecting our efforts to increase new sales through product enhancement.

The growth in BarraOne is mitigated by the impact of our decision of the end of 2006 to stop licensing TotalRisk, our other multi-asset class analytic system. Please also note that sales in BarraOne tend to be uneven throughout the year resulting in variability in our quarterly performance.

The run rate of BarraOne compared to the end of fiscal fourth quarter 2007 increased only 3.4% as an example of that variability. That said, we continue to see strong demand from both asset owners and investment managers worldwide and we expect this trend to continue as we expand BarraOne's analytical functionality and asset class coverage. In first-quarter 2008, we launched historical value-at-risk and performance attributions tools within BarraOne which should contribute to revenues in the coming quarters.

The run rate for other products increased 15.8% to $18.4 million with strong growth in our energy and commodity valuation analytics which was mitigated by declines in fees from our hedge fund indices. Let me now give you more color on our client segment.

On run-rate basis we experienced good growth across all client types reflecting growth from both new and existing clients worldwide. Approximately 18% of our gross sales excluding asset-based fee clients during the quarter came from new clients. This was on par with what we experienced for all of fiscal 2007.

In first-quarter 2008 compared to fourth-quarter 2007 we added 54 net new clients for a total of 2,980 clients worldwide. These count excluding again our asset-based fee clients. We added new clients in virtually all product categories, geographic regions and client types.

Our run rate for asset managers increased 21.2% to $283.3 million. We experienced strong double-digit growth across all regions with asset managers. As you know, asset managers is our largest client category by a significant margin accounting for 68% of our total run rate.

We continue to make inroads with hedge fund clients as evidenced by the 47.9% increase in the run rates to $20.7 million for this category particularly with our equity risk content products. We also see hedge funds increasing subscriptions to our equity indices for back testing purposes. We expect to bolster our focus on hedge funds with the opening of our new Stanford, Connecticut office in the third quarter of this year.

Growth in our run rate for asset owners primarily pension funds accelerated to 26% to $19 million reflecting good growth for our equity indices, equity portfolio analytics and multi-asset class analytics pretty much across the board of all our major product categories. The run rate growth for broker-dealers also accelerated in the first quarter of this year increasing 27.6% to $40 million and compared to 11.4% in the fourth quarter of 2007.

We continue to see good demand for equity risk content and equity index link products from broker-dealers. However, as we have noted previously, this client segment can be volatile. And it is relatively small for us accounting for approximately 10% of our run rate.

Now let me turn my attention to the balance of 2008. In fiscal 2008, we remain focused on our three major client initiatives. This includes first growing our revenue base from asset managers through (inaudible) selling and cross selling all of our products and bringing in new clients; secondly, increasing our penetration among hedge funds, particularly equity long shore hedge funds by focusing on sales of equity portfolio analytics; and third, increasing our revenues from asset owners primarily pension funds by selling subscriptions to our multi-asset class portfolio analytics as we expand our asset class coverage.

In terms of new product development in the balance of 2008 for equity index asset-based fee, we expect to see new license agreements for our indices as new ETFs are launched. So far, in fiscal 2008, there were 18 new ETFs linked to our equity indices. While these will contribute modestly to revenues in the near-term, they highlight investor demand for these investment vehicles linked to MSCI indices and reaffirm our excitement about the secular growth prospects for ETFs and the revenue opportunity for us from licensing our indices as the basis of need for these new ETFs.

In addition, asset inflows to existing ETFs should help drive revenue growth for us in 2008. However, it is difficult to predict the impact of financial market conditions on the asset levels in existing ETFs.

In terms of product development on equity index subscription side, we remain very focused on sales of our global investable market indices as well as the recent index launches including the MSCI Frontier Markets Indices and the Asia APEX 50 Index. In particular, our new Frontier Market Indices have shown good signs in the marketplace since their launch early in the first quarter. The launch of Short and Leveraged Indices is also on track for the second quarter.

And equity portfolio analytics, we plan to release GEM2, our enhanced global equity risk model in the third fiscal quarter which should contribute to sales of Barra Aegis. As I mentioned earlier, we have seen some deferrals of sales of Barra Aegis as clients await the introduction of GEM2. GEM2 will be a significant release of a new version of our global risk models which is one of our most broadly used equity models. We will be releasing long horizon and short horizon version of this model and in addition we plan to release Barra Aegis 4.2 to be able to accommodate the new GEM2.

In multi-asset class portfolio analytics we delivered BarraOne 3.0 and the performance attribution model in the first quarter. We have seen very strong interest in this performance attribution module particularly from our EMEA clients. We also continue to expect to launch additional functionality this year including (inaudible), Monte Carlo [VAR] and new derivatives coverage. In addition, we're continuing to transition clients to BarraOne from TotalRisk.

With respect to expansion in 2008, let me make a few comments. We expect to incur initial setup costs as well as duplicate costs related to the ongoing separation of certain administrative functions from Morgan Stanley. Throughout the separation process, we will remain very disciplined in our approach to investment spending and overall expense management and therefore are confident we will maintain an adjusted EBITDA margin in line with our target of [lower 40's].

One of the ways in which we plan to manage our expenses is by taking advantage of lower cost centers around the world. We are a global company with many offices around the world and we have years of experience operating in various regions of the world. We should be able to capitalize on this skill set and knowledge base by expanding our operations into locations outside of major financial centers and therefore where costs are lower.

After this period of transition, we will expand our investment program given the many opportunities we see for profitable growth of our business. In sum, we're very pleased with our first quarter results as a public company and we're off to a very strong start in fiscal 2008. I will now turn the call over to Mike for a more detailed review of our first-quarter financial performance.

Thank you, Henry. I'm going to describe in more detail our financial performance. Please note that unless otherwise specified numbers and percent change figures represent the comparison between first quarter 2008 and first quarter 2007.

First, our operating revenues. For the first quarter, 2008, operating revenues increased 20.5% to $105 million. We saw good growth in both our subscription and asset-based fee revenues which were up 15.3% and 50%, respectively. The first quarter was among the best quarters ever for revenue growth in our subscription based fee business.

Subscription based fees represent approximately 80% of our run rate. On a sequential basis, revenue growth was 3.2% and negatively impacted by lower growth in revenues from ETF fees. Now, let me talk a little bit about revenue performance by product.

Our largest product category is equity indices representing 56% of first quarter revenues. Revenues related to this category increased 26.4% to $58.4 million compared to first quarter 2007. Within equity indices, we have two categories -- equity index subscriptions and equity index asset-based fees.

For equity index subscriptions, we were up 17.1% to $38.8 million. As you may recall, this product category includes fees from MSCI equity index data subscriptions, fees from onetime licenses of our equity index historical data, and fees from custom MSCI indices. We continue to see strong client adoption of GIMI with notable success of our enhanced small cap series. In addition, sales from custom indices continue to be strong.

Revenues attributable to the equity index asset-based fee products increased 50.1% to $19.6 million in the first quarter of 2008 compared to the same period in 2007. On a sequential basis, the revenue growth for equity index asset-based fee products was 4.9% because of declines in equity markets worldwide and increased volatility.

While we continue to introduce new ETFs into the market the asset values linked to existing ETFs have been negatively impacted by these declines in equity markets around the world. Equity index asset-based fee growth in Q1 2008 versus Q1 2007 was primarily driven by higher AUMs in ETFs linked to MSCI indices. Approximately 97% of the increase in AUM compared with a year ago is attributable to asset inflows and 3% attributable to asset appreciation.

More specifically, assets in ETFs linked to MSCI equity indices increased $43.8 billion or 32.4% to $179.2 billion as of February 29, 2008 compared to February 28, 2007. However, on a sequential basis, assets and ETFs linked to MSCI equity indices decreased $12.5 billion or 6.5% from $191.7 billion as of November 30, 2007.

As you can see in Table 2B in our press release, the run rate for equity index asset-based fees declined from year-end. Importantly, however, we continued to see positive asset inflows during the first quarter. So of the $12.5 billion decrease from November 30, 2007 $16.2 billion was attributable to asset depreciation which was partially offset by an increase of approximately $2.7 billion in value of such assets from asset inflows.

The majority of the $2.7 billion increase came from the new ETFs launched during the last 12 months. It is also worth noting that the outflows were largely contained to domestic US ETFs. With the exception of Japan we saw positive inflows for our international ETFs. Said, another way, our flagship ETFs remained well positioned to benefit from a financial market upswing.

Our second-largest major product category is equity portfolio analytics 31% of first quarter revenues. Revenues for this category increased 10.1% to $32.3 million in the first quarter of 2008. I want to remind people again this product category includes Barra Aegis, our proprietary equity risk data and software; Models Direct, which is our risk data that clients can access through their own software; and Barra on Vendors, our risk data which clients access through third-party vendors.

First quarter revenue growth was particularly strong in our proprietary equity risk data access through our Equity Models Direct and Barra on Vendor products. This growth reflects an increase in the demand for our tools that aid clients in managing risk, developing quantitative portfolio management expertise and enhancing their equity trading strategies. Barra Aegis also contributed to revenue growth although to a lesser extent than our Equity Models Direct and Barra on Vendor products.

Revenues from multi-asset class portfolio analytics which represented just under 8% of first quarter revenues increased 84.3% to $7.9 million. This product category includes our BarraOne and Barra TotalRisk products which provide risk data and performance attribution for multiple asset classes. The increase is largely attributable to strong new subscriptions to BarraOne. Although on a sequential basis, multi-asset class analytics revenues increased only 2.5%, we continued to see strong demand from asset owners and asset managers and we expect this trend to continue as we expand our asset class coverage.

As Henry mentioned, we launched historical value-at-risk and performance attribution tools within BarraOne during the first quarter. These enhancements should continue to contribute to revenue growth in the coming quarters.

Revenues from other product categories 6% of first quarter revenues decreased 12.5% to $6.3 million. This category includes FEA energy and commodity asset valuation analytics and MSCI Hedge Fund Indices. Revenue growth from FEA was strong, however, FEA growth was offset by -- one, the large cancellation of a fixed income subscription at the end of the first quarter 2007 and decreased revenues from MSCI Hedge Fund Indices due to declining asset levels. So that's an overview of the revenue picture. I'm going to now cannot talk about expenses.

Operating expenses increased 22.2% to $70.3 million in the first quarter of 2008. The large increase is primarily due to three factors -- founders grant expenses, set-up and duplicate costs related to ongoing separation of certain administrative functions from Morgan Stanley and public company costs. If we exclude founders grant expense of $4.8 million, operating expenses increased by 13.9% to $65.5 million.

If we take this one step further, and strip out transition costs related to our eventual separation from Morgan Stanley services, public company costs and in the first quarter 2007 there were a number of unusual items. There was a bad debt provision reversal and there was some unusual severance.

If you look at it after stripping that out, our core operating expenses were up approximately 5% first quarter 2008 versus first quarter 2007. And I provide this figure to give you a better sense really of what the underlying trend in expense growth is.

And the reason for the relatively modest increase in expenses is largely from the following. Our headcount was a little bit lower at the end of February 2008 versus February 2007, headcount was down 5. But more importantly we had a movement of personnel to low-cost centers and I will review that in a minute. Finally just in general our disciplined approach to cost management which is particularly heightened as we incur duplicate expenses during this transition from Morgan Stanley services really resulted in this expense growth figure.

So let me provide a little context around our expansion into low cost centers. At the end of the quarter, the number of full-time employees was 652 which is as I said represents a decline of 5 from the 657 we had at February 28, 2007. The decline in full-time employees of 5 from February 28, 2007 was composed of a decline of 55 people in Berkeley, London and New York in aggregate and an increase of 39 people in Budapest and Mumbai in aggregate and an increase of 11 across other locations.

Please note that we will continue incurring initial set-up costs and duplicate expenses until we take over those services now provided by Morgan Stanley. And also please refer to the text in Table 6 in our press release for further detail on expense trends within cost of services and SG&A.

We had interest expense of $6 million in the first quarter of 2008 compared to interest income of $5 million in first quarter 2007. The $10.9 million decrease was a result of an increase in interest expense and a reduction of interest income. Interest income decreased from holding substantially lower cash balances and we experienced higher interest expense because of interest due on term loan borrowings of $425 million under our credit facility. Our effective tax rate increased modestly to 37.6% from 37.4% reflecting higher state and local income taxes.

Before I discuss net income and EPS, I would like to summarize a couple of things that one, the founders grant express, changes in our capital structure, and our initial public offering in terms of additional shares being outstanding impact the comparability of first quarter 2008 with first quarter 2007.

We incurred founders grant expense of $4.8 million pretax in the first quarter 2008 versus 0 in the first quarter 2007. As of February 29, 2008 we had borrowings of $419.4 million outstanding under our credit facility. As of February 28, 2007 there was no debt outstanding and we held cash of $366 million.

Consequently, we reported interest expense of $6 million in the first quarter 2008 compared to interest income of $5 million in the first quarter 2007. Weighted average common shares outstanding for the first quarter 2008 includes 16.1 million shares issued in our IPO while the first quarter 2007 does not. So let me go into net income now.

In the first quarter 2008, our net income declined 17.1% to $17.9 million from the first quarter 2007. As I mentioned decline primarily reflects founders grant expense, higher interest expense and lower interest income offset in part by improvement in operating income.

Our diluted EPS for the first quarter 2008 was $0.18 per share, a decline of 31% from the first quarter of 2007. So in addition to the items I just mentioned we had a higher number of diluted shares outstanding in the first quarter 2008 compared to the first quarter 2007 due to the additional common shares issued in conjunction with our November 2007 IPO.

Because of these changes in our capital structure and founders grant expense, we focus on adjusted EBITDA in order to really understand and monitor the progress of our business. The year-over-year comparison for adjusted EBITDA is not skewed by changes in our capital structure and the founders grant.

So when you look at adjusted EBITDA, adjusted EBITDA increased 29.4% to $47.1 million for the first quarter 2008 compared to the first quarter 2007. I want to refer everybody to Table 8 in our press release for the reconciliation of adjusted EBITDA and net income.

The adjusted EBITDA margin expanded to 44.9% in the first quarter 2008 from 41.8% in the first quarter 2007. This increase reflects the operating leverage in the business which really results from strong revenue growth across most of our product categories including the high margin ETF products and disciplined cost management.

On a sequential basis, adjusted EBITDA declined $1.6 million or 3.3% due to public company costs, and set-up costs related from the eventual transition of services now provided by Morgan Stanley. Fully diluted cash EPS decreased 17.3% to $0.25 in the first quarter of 2008 from $0.30 in the first quarter 2007.

We calculate cash earnings by taking net income and adding back the after-tax impact from amortization of intangibles and founders grant expenses. The decline in diluted cash EPS is due to interest expense and the additional shares outstanding in the first quarter 2008 versus first quarter 2007.

Now let me discuss some of the metrics we use to evaluate our business. These metrics are disclosed in Tables 2A and 2B of the release. Table 2A shows the year-over-year comparison and Table B shows the sequential comparison. My discussion will focus on the year-over-year comparison. The sequential analysis is also important because it highlights more recent trends in the business but bear in mind however there is some seasonality in our business which may impact sequential trends.

Henry spoke about our runrate so let me focus on the other key metrics. In terms of client count we added 54 net new clients during the first quarter 2008 bringing the total net new clients for the twelve-month period ended February 29, 2008 to 211 net new clients. We added clients across all major product categories. We added asset managers and owners, broker-dealers in hedge funds. So at the end of the first quarter 2008 we ended with 2,980 clients excluding asset-based fee clients.

Our retention rate increased to 97% for the first quarter of 2008 from 95% for the first quarter 2007 with retention rate increases in most product categories. Retention rate in the first quarter 2007 I want to point out was negatively impacted by the cancellation of a large fixed income index subscription. Excluding this cancellation the retention rate in Q1 2007 was 96%.

And also I'd like to point out that retention rates are generally higher during the first three fiscal quarters and lower in the fourth quarter. In recent years we have observed on average that approximately 40% of our full year subscription cancellations have occurred in the fourth quarter.

And I just want to remind everybody again what retention rate is. Our retention rate for any period represents the percentage of subscription run rate as of the beginning of the period that is not canceled during the period. If a client switches between our products we treat it as a cancellation. Retention rates for non-annual periods are annualized. Please refer again to Tables 2A and 2B in the press release for a more detailed explanation.

While we don't provide quarterly guidance, there are a couple of items I want to point out to assist you in your analysis, the first being if the level of assets in ETFs licensed to our indices remains at current levels the year-over-year growth for equity asset-based fees will be increasingly compressed as the year progresses.

Table 3 shows the quarterly progression of assets in ETFs licensed to our indices and highlights this dynamic. We expect to incur public company expenses of $5 million to $6 million in fiscal 2008. We expect expense increases from initial set-up costs and overlaps with Morgan Stanley services to continue until we can perform those services on our own.

As in the first quarter of 2008 we will have net interest expense in the second quarter 2008 versus net interest income in the second quarter of 2007. At the end of February 2008, we swapped 60% of our floating rate debt into fixed-rate debt with an effective interest rate of 5.65%. So approximately $250 million of our debt is now fixed at 5.65% for the next three years and a remaining 40% or about $165 million is floating at LIBOR plus 275 basis points. At the end of the second -- we think as a result of this we believe our blended interest rate for the second quarter will be approximately 5.75%.

As in Q1 2008 we will have a full quarter of founders grant amortization expense versus none in Q2 2007. And then finally capital expenditures this year should total approximately 15 to $20 million which is a large increase over the historical amount that we have experienced and the reason for this increase during 2008 is associated with purchasing and implementing new financial information technology in human resources systems related to our eventual separation from Morgan Stanley. I will now turn the call over to Henry for some closing remarks. We will then take questions.

Thanks, Mike. In closing, let me emphasize that the strong financial performance that we are reporting for the first quarter as well as that for the fourth quarter of last year is attributable to the very attractive financial characteristics of our business model, secondly the breadth and the depth of our products and then thirdly the diversity of our revenue stream across [12] categories, regions of the world and client types. We remain committed to profitably growing our business and building shareholder value in the quarters and years to come. Let's now open it up for questions.

(OPERATOR INSTRUCTIONS) Karl Choi, Merrill Lynch.

I have a few questions, first one is on cost. Is it possible to split out the $2.5 million of cost between public company costs and duplicative costs in the quarter, which one -- how much of that came from the two buckets? And how long do you think the initial set-up costs will continue?

The initial set-up costs will continue throughout 2008 as we take those services over. And once we take those services over we will have reduced allocations from Morgan Stanley. In terms of breaking out the costs between transition costs and public company expenses I think that was your first question?

Correct, yes.

During the quarter, we incurred $3.7 million in total between transition cost and public company expenses. The public company expense part of that was $1.2 million and so there was $2.5 million of transition expenses. Those transition expenses are -- some of them are compensation related and some of them are non-compensation related.

And Henry, you obviously -- the run rate revenues for subscription revenue fees were very, very good in the quarter. But given the long lead time sort of can you comment a little bit on what the selling environment is like out there and how do you think the current market downturn will eventually impact your subscription revenues if at all? Thanks.

So far we haven't seen any meaningful impact in the financial markets climate you know on our new sales. There has been quite a lot of inquiry on the part of clients into our client service line and our sales desk on both in equity indices and risk products in this volatile environment.

Bear in mind that in situations like this a lot of clients around the world were managing assets on a relative basis to [benchmark] -- want to really understand more fully and by a lot more people what's happening to those benchmarks and the same obviously with risk. But that hasn't -- typically in the past that has never translated into an uptick in sales in the near-term. A lot of our clients have long cycles to budget their processes and it takes awhile for that to translate into the bottom line. And the same would apply for any potential cancellations that would occur given the market environment.

Last question, the founders grant amortization cost it seems to be lower than what was indicated during the IPO process. Could you update us on how much it should be for the full year or for the next quarter?

Well the reason -- what you're referring to is that in the S-1 we gave the total figure that over the course of four years would add up to $68 million. When we booked the actual accounting entry we had to take into account that there is attrition of employees in the business and therefore at the end of two years a good number of employees that received the founders grant will not be here so therefore amounts related to that would not go through our P&L. The $4.8 million that you see is representative of an estimate for employee attrition that will take place in the business.

And bear in mind that founders grants were given to every single employee of the Company at the time of the IPO.

Great, that's helpful. Thank you.

(OPERATOR INSTRUCTIONS) Michael Weissberg, ING.

A couple of things. I presume Morgan Stanley is going to run the books on the secondary?

I would assume so.

As a suggestion from a shareholder, I think it's really important to use the secondary as a means of getting other firms involved in your offering -- in the offering and therefore in coverage of your company. I think we badly need more analysts following the stock. And I think the way the IPO was done caused that to not happen. I think it's important you have some ammunition to use to expand coverage. So I just want to make that comment.

We agree with you wholeheartedly and in fact the way the IPO was done or at least intended to be done was highly inclusive of a lot of different firms to participate in the process at the time and obviously those firms have to make a voluntary choice as to whether they pick up coverage or not.

Great. Can I presume founders grant of 4.8 -- that's what we should use every quarter this year?

More or less. Although at the end of every quarter we take a look at what we think employee attrition is. So to the extent employee attrition doesn't change much that's a number you can use for the most part for the remainder of each quarter during 2008.

You were very clear about what you did on interest expense. What about interest income which actually was a little higher than I thought? What is going to happen -- what were the drivers to interest income and what will they be?

Well, I think the biggest driver to interest income was the level of our cash balances during the quarter. We haven't disclosed it here but basically when we file our 10-Q you'll see we have somewhere around approximately $180 million of cash on our balance sheet and I would attribute that interest income difference you're citing to that level of cash balance.

I mean, the obvious thought would be can't you use that to pay down the revolver?

We have the freedom to prepay our debt without penalty. At this point time we haven't chosen to do so.

I see. Great. If I can ask, it looked like the subscriptions on the sequential basis on the multi-asset side didn't grow that dramatically. Maybe you could talk a little bit about that and whether you think the product has to be enhanced to really be able to accelerate the business. Could you talk about that a little bit?

The subscriptions to multi-asset class which in this case are particularly focused on BarraOne system as I indicated in my remarks are uneven throughout the year. Quite a lot of our sales happen to us at owners or pension funds around the world or the risk functions of asset managers. These are known across long sales cycles that tend to happen and therefore the sales are lumpy.

I would like to add though that we remain very, very positive about long-term trend of the subscription for this product line and particularly as we expand sales into all geographic areas for this product and we add functionality and add the coverage.

(OPERATOR INSTRUCTIONS) Ivy De Dianous, Fox-Pitt Kelton.

I have a couple of questions. On Table 6 you outlined the compensation changes between cost of services and selling and general admin. The compensation decreased 10% year-over-year for cost of service but increased 22%. Can we assume most of the difference between the two is that the employee attrition occurred in the cost service category and in sales and admin. you actually have duplicate costs?

To answer your question in sales administrative, the compensation in that category is where we are keeping track of those costs associated with transitioning off of Morgan Stanley services. So there'll be those costs in there which are as I mentioned we will incur but at some point we will stop incurring.

And then in terms of a simple way to look at the compensation decline in cost of services is that we redirected some of the people in that category to work on the transition. So there's little bit of a movement geography-wise between the compensation and cost of services and the compensation and SG&A related to those people that otherwise would have been in the cost of services category but from an IT standpoint are now focused on the transition away from Morgan Stanley.

What is the tax rate we should model going forward because apparently it decreased sequentially?

If you recall, the reason for the decrease sequentially is the fourth quarter 2007 we had booked a tax provision related to a settlement that Morgan Stanley had come to an agreement with the State of New York and the City of New York and so we recorded additional taxes in the fourth quarter. So the fourth quarter tax rate is artificially high because that's what when we reported that adjustment. So going forward I think (inaudible) 37% is a good effective tax rate to focus your modeling on.

[Shane Calhoun], (inaudible) Advisers.

I was wondering if you could give a little bit more color and kind of talk going forward as it relates to cost saving moving to lower cost locales. Are you looking at that in terms of how do you expand the business and hire or more people you'll be looking to go to Budapest and I think Mumbai or is that transitioning existing workforce into those locales -- kind of add a little bit more color there.

It is (inaudible) we started five or so years ago as we established our center in Mumbai for gathering of data, analyzing of data and providing also certain IT and finance functions. We had a very positive experience with doing that so in the Asia time zone we were looking for another center of similar impact in the European time zone so we opened up an office in Budapest where we're up to close to 30 people there.

At the moment we're mostly doing IT infrastructure work out of there. We're looking to expand that into other functions. So the answer is yes, we feel we are still at the early stages of that migration and expansion into those places and we will continue not only as we do work to replace the services currently provided by Morgan Stanley but also to expand many of our other functions in our global company.

Could you talk a little bit going forward what you see in terms of driving new product creation as it relates to the ETF business? If I kind of look so far this year I think last year you had 29 and you're at 18 if I heard the call correctly. What you see going forward and more intermediate if you want to talk about this year but maybe kind of what is driving that and how big of a market you see there for new products?

There are a lot of research estimates that have been made as to the secular growth and the size of the ETF market globally. I will refer you to that rather than me becoming the analyst on that area. We ourselves continue to be very optimistic that market will continue to grow rapidly.

I think what you will see happening with us in the market is a number of things. One is we continue to fill out the box so to speak of existing products that we have, existing indices we have to launch ETFs on in various regions. Secondly we are gaining rapidly market share in Europe in addition to maintaining and enhancing (inaudible) market share in the US meaning in products traded in the US. And naturally we've now started to focus on quite aggressively on how to develop that market in Asia.

We have been cross listing -- our licensed source have been cross listing -- licensees have been cross listing ETFs in Spain and other places and we're looking to license additional indices for other locations in Asia. So those are some of the trends that are driving that. I think the overall headline is that this is a market that continues to experience high secular growth. We are a large player in that market and we intend to remain that way.

John Kohler, Oppenheimer.

A quick question. The debt outstanding was $418 million at the end of the quarter, is that correct? Total?

Yes.

418? (multiple speakers) you said that you had cash of $180 million. Did I get that figure right?

Well the cash -- it will leave approximately $185 million.

That's a significant increase from the end of the fiscal year?

It's about a $15 million plus increase. We paid down some debt in the quarter and we had some capital expenditures so, yes, that is correct.

Were there options exercised? What were the sources of the cash? Was it just operations or was there other?

All from operations. There was no exercise of options or anything similar to that.

Okay and you expect similar cash from operations in the coming quarters? Is that fair?

We expect to generate cash in our coming quarters and hopefully we generate more cash than we generated in the first quarter as we grow our business.

I think it's important to note that our business is a very strong generator of cash flow given our business model month over month. You will continue to see accumulation of free cash flow because of that unless there are other uses for that cash is just paying down of debt or something like that.

And then the other point I'd just make in terms of there's a little bit of an anomaly or seasonality in our first quarter because in the first quarter we pay cash bonuses in the first quarter related to the prior fiscal year. So first quarter of 2008 reflected cash payments that were accrued in terms of the compensation expense for 2007. That same phenomenon would not exist in quarters two, three and four. As we grow the business the cash number should be higher in those quarters.

Might you include a balance sheet in the next release or cash flow statement and/or?

The answer is our goal is to get to that point. We're going to be filing our 10-Q very shortly so you'll see a balance sheet and cash flow statement. But to answer your question in general in the future that is the goal, yes.

Michael Weisberg, ING.

Just a couple of things relating to SG&A. Can we presume now that you've gotten sort of a full hit in founders grant and SG&A should there be sequential growth in the SG&A spending or should it stay pretty much around where it is first quarter grow very slowly?

You'll see sequential growth in SG&A spending because a lot of what we're recording in terms of the transition costs associated with separating from Morgan Stanley services is being recorded in SG&A. You'll continue to see growth rates in SG&A that reflect those transition expenses coming online.

So in other words, all of those transition expenses haven't been fully put into effect so we're going to get some continual increases?

That's correct.

And then is there a way of quantifying how much that's going to go away? I guess you mentioned 2.5 million in the first quarter. So I sense that's going to buildup as we go through the year and then at some point if I'm understanding this that we go back to zero?

The way to look at it is we're building up these expenses as we try to put in place the ability to take over the services now provided by Morgan Stanley and once we're able to take over that service ourselves the allocation that we receive from Morgan Stanley will go away. So net effect gets you to what you just described.

So you can actually see SG&A could be lower in dollars '09 versus '08?

It could be, yes.

That's great. What kind of interest rate are you getting on your cash?

We basically get Fed funds plus 35 basis points on the cash that is held at Morgan Stanley which is the lion's share of the cash balance during the quarter (inaudible) quarter at least right now while we're still part of Morgan Stanley.

Are there any constraints -- you can use that cash to pay down debt if you choose to you're just not choosing to right now?

That's correct.

It appears we have no further questions at this time. I'd like to turn the call back to our speakers for any additional or closing remarks.

Again just want to continue to emphasize how pleased we are with our strong performance this quarter as I said particularly in light of some slowdown in growth in our (inaudible) fees. We remain fairly cautiously optimistic about the balance of the '08 and we thank you again for your participation on this call.

Once again this does conclude today's conference. (multiple speakers) You may disconnect at this time.