明晟 (MSCI) 2009 Q1 法說會逐字稿

Good day and welcome to the MSCI first quarter 2009 earnings conference call. Today's conference is being recorded. The speakers for today's conference are Mr. Henry Fernandez, Chairman and Chief Executive Officer and Mr. Michael Neborak, Chief Financial Officer.

At this time I would like to turn the conference over to Mr. Neborak. Please go ahead, sir.

Thank you, Operator. Good morning and thank you for joining our first quarter 2009 earnings call. Please note that earlier this morning, we issued a press release describing our results for the first quarter 2009. 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 the additional risks and uncertainties that may affect the future results of the Company, please see the description of risk factors and forward-looking statements in our Form 10-K for our fiscal year ending November 30, 2008.

Today's earnings call may also include a discussion of certain non-GAAP financial measures. Please refer to today's Earnings Release for the required reconciliation of non-GAAP financial measures to 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 subscriptions and product licenses that we will record over the next 12 months assuming no cancellations, no new sales or changes in the assets and ETFs license to our indices. Please refer to Table two in our press release for a detailed explanation.

Henry will begin the discussion with an overview of the first quarter, and then I will follow with a review of our financial results. Following our formal remarks we will open the line up for questions. In order to leave plenty of time for Q & A, our prepared remarks this morning focus largely on information that is incremental to what was provided in the Earnings Release.

With that then let me turn the call over to Henry.

Thank you, Mike. Despite very difficult operating conditions worldwide, we continue to deliver strong financial results at everything by the growth in our subscription revenues and our ability to generate an adjusted EBITDA margin of 46%. Our pipeline of new subscriptions remains solid, reflecting favorable response to recent product enhancements and the increased demand for risk and performance analytics tools in a volatile environment.

In Q1, we generated new recurring sales of $11 million across all product categories, and we added 52 new clients on a gross basis with increases in all regions, including the Americas, EMEA, and Asia, and in each product category. Yet, our product demand is being offset by client hesitancy to make purchasing decisions in the face of unprecedented volatility in the financial market. This environment has lead to a slowdown in new sales and lower retention rates, as can be seen in the table of run rates in the Earnings Release.

We're using this period as an opportunity to work even more closely with our clients to understand how our products and services can better serve them in their investment decision processes. We're maintaining a very active and frequent dialogue with clients, and interest in our products remains fairly high. For example, attendance at our three research conferences in the Americas in the first quarter was up over last year. Given the broad range of products that we offer, we're also benefiting from our clients' desire to consolidate their number of vendors. In our asset based fee business, we are signing new license agreements for our indices with ETF providers and are seeing good demand from broker dealers to license our indices as the basis of derivative and structure products.

In the quarter, we made significant progress in the replacement of services provided by Morgan Stanley, and we continue to work towards our target of completing this work by Q3. The increase in employee headcount in the quarter demonstrates our committment to investments in our business. We will continue to hire selectively, but as discussed last quarter, we have slowed down our near term ambitious hiring plan in light of current market conditions. During the quarter, we also accelerated our migration of headcount to emerging market centers. 32% of our total employees are now located in these centers compared to 21% a year ago.

To preserve or enhance our profit margin in even more difficult operating conditions, we have the added flexibility to accelerate even further our migration to emerging market centers and to reduce expenses by managing staffing levels down and reducing incentive compensation. Our cash flow remains strong, reflecting the high level of profitability of our business, our focus on expense management, our diligent receivables collections, and the lower level of capital requirements of our business. Our balance sheet remains very strong with net debt of $119 million, down from $134 million at the end of 2008, and with lower receivables compared to Q1 '08.

I will now provide additional color on first quarter performance for our main product categories. I will be referring only to run rate figures while Mike will focus on accounting numbers. Run rates are only a snapshot of our business at a point in time, and only serve as an indicator for future revenue.

In terms of major product categories, the run rate in equity indices was flat compared to Q4 '08 with data subscriptions up 1.9% and asset based fees down 2%. Increases in data subscriptions were led by gains in our emerging markets and developed market index modules, our two largest product sets, as well as value and growth index modules which were each up between 0.5% to 1.5%. In addition, we saw good demand for our custom index products where the run rate was up 2%. We also saw growth in reporting fees which are paid by clients to use our data such as in their financial reporting to their own clients.

Offsetting these gains in equity index data subscriptions were declines in our small cap index module and in user fees. Sequential growth in the run rate was seen across all client segments with particular strength from small to mid size clients. The growth in new sales for equity index data subscriptions during the quarter was comprised of price increases, upselling to existing clients and new client additions. The aggregate retention rate for equity index data products remained relatively high at 95%, but down from Q1 '08, largely reflecting an increase in cancellations due to funds or firms shutting down, new fund launches being delayed, and reductions in the number of locations receiving data within an existing client.

The run rate for equity portfolio analytics declined 1.8% sequentially. This is an improvement over the 4.5% decline recorded in Q4, largely reflecting positive seasonal benefit in Q1 versus Q4 and a lower level of product swaps in Q1. We saw demand for our quantitative tools from clients, particularly small to mid size clients that are looking to better understand their portfolio risk and performance and clearly communicate it to their own investors in a transparent way. We're also seeing growth from hedge fund clients as the need for additional use on risk and the ability to explore opportunistic trading strategies is driving demand for our short horizon and trading risk models.

However, reduction in spending by several of our larger clients around the world is weighing on our results for equity portfolio analytics. Consequently, our aggregate retention rate was down versus Q1 '08. Nearly 90% of the cancellations reported during the quarter are a function of the cost pressures faced by our clients, particularly the larger clients, which have led to office closures, employee departures, firm closures, or fee changes. The run rate for Aegis declined 2.8% from Q4 to $81.8 million, while the run rate for equity rich data sold directly and through vendors increased 0.6% to $42.4 million from Q4 '08.

By region, EMEA was flat when excluding the negative impact of the strong dollar. And the Americas and Asia were down. By client segment, the run rate for hedge funds increased. The increase was offset by declines in asset managers, broker dealers, and asset owners. Our new GEM2 model generated new sales in the quarter and in the early summer we expect to release our GEM2 history data set and a new European equity risk model.

Multi-asset class analytics run rate increased 0.6% sequentially. If you'll recall from our last call, Q4 was very strong in multi-asset class analytics as several large deals that were in the pipeline closed during the quarter thereby making sequential comparisons difficult. As you also remember, sales for this product category tends to be lumpy and can vary significantly quarter to quarter. The run rate for BarraOne increased 1.3% sequentially to $26.9 million, led by growth in Europe. Good demand was seen for our four BarraOne product as well as our optimizer and Barra simulation products. We believe that there is still significant benefits in upselling the broader suite of analytics including the new performance attribution and new Barra capabilities. The aggregate retention rate for multi-asset class analytics declined from a year ago reflecting an increase in cancels from asset managers and hedge funds due to significant cost cutting measures as a result of AUM loss or fund strategy changes.

That said, new sales of BarraOne were up nearly 65% compared to Q1 08. And client interest in BarraOne remains very high as measured by the number of client meetings conducted, inquiries received, and product webinars attended. Asset managers and asset owners continue to be the largest contributor to new sales. We added several new clients in the quarter and announced that China Investment Corp., a key sovereign wealth fund in Asia, has adopted BarraOne for multi-asset class risk management.

In terms of the outlook, as previously stated, we remain comfortable with our longer term financial target of revenue growth in the mid teens and adjusted EBITDA margin in the low 40s. In the near term, we do not believe that the revenue growth will reach the mid teens but we expect to continue to be fairly profitable.

I will now turn it over to Mike for a detailed review of our financial quarter of our first quarter financial performance, mostly focused on the accounting numbers.

Thank you, Henry. I want to focus on a number of specific areas to help you understand the quarterly results and the strength of our business. Although revenues from asset based fees were down 33% to $13.2 million compared to Q1 2008, our ETF business remains very strong. 200 ETFs are linked to MSCI indices which is an increase of 33 from 167 at fiscal year end. 24 ETFs have AUM balances greater than $1 billion. Our global market share remains steady at 23% at the end of February. The ETF pipeline is vibrant. In flows remain strong. AUMs and ETFs linked to MSCI indices grew $16 billion during March to $124 billion. We estimate that the growth reflects $6 billion of in flows and $10 billion of market appreciation.

And finally, the business is more diversified now with Barclays accounting for 61% of AUMs link to our indices at the end of February versus 72% a year ago. Second point, we continue to manage our expenses very tightly. Operating expenses were up just shy of 5% to $73.1 million in Q1 2009 compared to Q1 2008. If we exclude founders grant expense and depreciation/amortization expenses, expenses were essentially flat at $57.5 million. Included in the $57.5 million is $9.8 million of allocation and replacement expenses. These expenses are down $4.4 million from the $14.2 million incurred in the fourth quarter 2008 reflecting ower allocation expense of $1.2 million, and lower replacement expense of $3.2 million.

For the full year, we now expect the allocation and replacement expenses in total to be approximately $35 million including $2 million to $3 million of allocation expense from Morgan Stanley.

As you can see from the Earnings Release we now break out depreciation as a separate line item on our Income Statement. Depreciation increased $2.6 million to $3.1 million, largely reflecting the depreciation of capitalized IT expenditures associated with our separation from Morgan Stanley. During 2008, we added approximately $31 million of capitalized IT and leasehold improvements of which approximately $26 million was paid for in cash during 2008. When comparing Q1 2009 to Q1 2008, the impact of changes in foreign exchange rates had a net favorable impact of $2.5 million on adjusted EBITDA, with the $3.6 million favorable impact on expenses offset by an unfavorable impact of $1.1 million on revenues.

Approximately $14 million, or 13%, of our Q1 revenues were denominated in non-US dollars. Approximately $22 million, or 31%, of our Q1 expenses were denominated in non-US dollars. In Q1 2008, 20% of our expenses were non-dollar. The increase in non-dollar expenses reflects lower Morgan Stanley allocations that are paid in US dollars and higher replacement expenses that are paid in non-dollars. Our largest non-dollar revenues are denominated in euros and yen, and our largest non-dollar expenses are denominated in British pounds and Swiss francs.

The biggest difference in FX rates for the major non-dollar currencies we transact in occurred in the British pound. In Q1 2008, the average US dollar to British pound rate was $2 to GBP1. In Q1 2009, the average rate was $1.46 to GBP1, so you can see the US dollar strengthened substantially.

Our cash earnings for Q1 2009 were $24.7 million or $0.24 on a diluted per share basis, compared to $25.4 million or $0.25 per diluted share for Q1 2008. We calculate cash earnings of $24.7 million by taking net income of $16.7 million and adding back the after-tax impact of the founders grant and that equals $3.9 million, and the after-tax impact of the amortization of intangibles that equals $4.1 million.

Net income for the first quarter 2009 declined 6.7% to $16.7 million from first quarter 2008. The decline in net income primarily reflects higher depreciation of $2.6 million and higher founders grant expense of $1.4 million. Our diluted EPS for Q1 2009 was $0.16 per share, a decline from Q1 2008 reflecting lower net income.

Now a little bit about our balance sheet. As of February 28, 2009, we had $277 million of cash on our balance sheet which is an increase of nearly $9 million from our cash balance of $268 million at fiscal year end 2008. This $9 million cash increase is after cash bonus payments of approximately $45 million made in January, after $6 million of CapEx related to the PP&E purchases made in 2008, and $6 million of debt repayments. Largely all of the $6 million of CapEx is related to PP&E purchased in 2008 for which a payable existed at fiscal year end 2008. For 2009, we still expect new PP&E purchases of approximately $10 million; however, as a result of this carryover from 2008, we expect that Capital Expenditures shown on our cash flow statement for all of 2009 to be approximately $16 million.

Other cash commitments for the year include scheduled debt repayments under our credit facility which are approximately $5.5 million per quarter. Our outstanding debt at the end of the first quarter 2009 was $393 million. Credit ratios remained significantly better than required under our credit agreements. In terms of leverage, as defined by total debt divided by the latest 12 months adjusted EBITDA, we are at 1.9 times, well below the 3.75 time requirement. Our coverage ratio as defined by the latest 12 months adjusted EBITDA divided by interest expense is at 9.49 times, well above the required three times.

For the quarter ended February 28, 2009, our effective all in interest rate including the swap was approximately 4.88%. Under our credit facility we have the option to choose one month or three months LIBOR as a reference rate, and given how much one month LIBOR rates have fallen and the large spread between one month and three months LIBOR, we opted to have the 40% portion of our debt that is not tied to our swap reference one month LIBOR. So for Q2 2009, we expect our effective all in interest rate to be approximately 4.25% based on one month LIBOR rates as of February 28.

Our operating metrics are provided in Tables two to four of our Earnings Release, however let me spend a few minutes on our retention rates. Our aggregate retention rate declined to 90.8% for first quarter 2009 from 96.6% in first quarter 2008. Product swaps had a much less of an impact in Q1 than they did in Q4. Excluding product swaps, the retention rate was 91.6% which compares to 97.2% in Q1 2008. The aggregate retention rate in Q4 2008 was 80.6%.

Let me briefly summarize how we calculate our quarterly retention rates. The quarterly retention rates are calculated by annualizing the actual cancellations recorded during the quarter, dividing that figure by the beginning subscription run rate and subtracting from 100%. So let me review the first quarter. So in the first quarter aggregate cancels were $8.2 million. $8.2 million of actual cancels is multiplied by four, and that result equals $32.8 million which is then divided by $355 million, the subscription run rate at the beginning of the year, to derive a cancel rate of 9.2%. The 9.2% cancel rate is then subtracted from 100% to derive the retention rate of 90.8%.

So let me give you a little bit of color on the $8.2 million of cancellations that we recorded in the first quarter 2009. They break down largely as follows. Over 50% reflects some type of budget constraint or strategy change resulting in office closures, employee departures or fund closure. Approximately 25% reflect fee changes, and 10% reflect product issues. Just over 5% is from product swaps.

And with that, we'll turn the call back to the Operator for questions.

Thank you. (Operator Instructions) We'll take our first question from James Kissane with Banc of America.

Hi, good job guys. Henry, can you provide us a little more color on the sales cycle, and maybe on both sides of the business in terms of what customers are saying? Are decisions being delayed or are they just being put so far out that they are just coming out of the pipeline?

I think that it's all of the above. In an environment like this, what you're seeing is that there are some clients that are simply not buying anything, particularly somewhat the very large clients with centralized decisions for budgets, and therefore we're not finding a significant amount of fruitful activity of new sales with them. Mid size clients and smaller clients in which the decision maker of the purchase may be reporting directly to the head of the business or to somebody who reports the head of the business may have more flexibility in convincing the organization of buying additional tools that are needed in this environment.

And bear in mind that it is an environment like this that performance and risk analytics are in even more demand than in a normal environment. So the entities that do have money to spend, the sales cycle is longer for a variety of reasons. There's more scrutiny of the expense, there are more approvals, there are more stages in that process, there's more testing of the product, there's more checking against all of the products and in terminal systems and the like that they can use. So that hopefully gives you some color of what's happening.

Related to that just you mentioned some pricing concessions. Can you talk about the pricing environment in the index business as well as the Barra business?

Yes, the index business, the pricing environment for us is very robust and we're benefiting from the price increases that we started rolling out last year and are filtering through the run rate and through the accounting numbers now. And we continue to be optimistic about further price increases, maybe a little more modest rate than before. We are not finding and we're not doing much of any price concessions for clients on equity indices.

On equity analytics, I think what we have been doing is being more flexible with respect to retaining the client, retaining the use of the product and therefore selectively offering certain price concessions as a way to insure that we remain the product of choice within the client base, and also that when the upturn comes back in the market that we go back to the original levels of revenue for that particular client. This is not prevalent throughout every client. It's on a case-by-case basis and is selective depending on the circumstances.

In multi-asset class analytics, there is not a lot of price concession either. At times, maybe we elongate the product testing period that they have and therefore they may have the benefit of the product for longer than has been the case before but once the contract is signed, we typically have been able to hold prices pretty robustly. And we haven't really been increasing prices on multi-asset class analytics at all in the last couple years.

That sounds great. A quick question for Mike. What portion of your expenses are denominated in Swiss francs and what portion is in British pounds if possible?

I think, let me give you an annual number and then I can convert it to the percentages. So in terms of British pounds we have expenses of just shy of $20. So I'll come up with some percentages in a minute. And in Swiss francs, these are annual numbers now, the expense base is about $15 million. These are both US dollar equivalents. So the Swiss franc is about 7.1% and the British pound is about 9%.

And you're benefiting on both sides now?

Yes, especially the British pound.

Excellent. Great job, thanks.

As a reminder, we ask that you limit yourselves to one question. We'll take our next question from Andrew Fones with UBS.

Yes, thanks. I was wondering if you could talk about the impact of the potential sale of BGI and any impact he could have in terms of the renegotiating the contract, thanks.

Yes, so as you all know, (inaudible) disclosed that Barclays has put up for potential sale the iShare unit within BGI, the asset management company. And the iShare unit represents about 60% or so, 61% or so of the revenues in our ETF fees -- I'm sorry, of the AUM of our ETFs in general. Not the fees but the AUM. So I think we are neutral to positive on the sale of that unit with pretty much wherever the buyer ends up being.

On the neutral part, the MSCI index linked ETF that BGI has represents a meaningful part of the revenues of the entire product line, so from that perspective we feel that any potential renegotiation of the contract may be in our favor. And, if anything,, whoever buys the unit will be with a view to try to increase or enhance the revenue and the profitability of that unit by launching even more products, and therefore we expect to get our fair share of that, so that's why we look at it in a neutral to positive basis.

If I could, in terms of the fees that you receive on those BGI assets under management, how do they compare to fees that you charge other clients? Are they roughly in line, above or below, as far as you can tell versus the rest of the industry?

I cannot really comment at all about our fees regarding one client. What we tried to do is be pretty similar across-the-board.

Okay. Thanks. And then on hiring plans, I saw you continue to add people particularly in low cost locations. Can you give us any color of what your thoughts are there in terms of hiring over the balance of the year?

I think we will continue to hire selectively at maybe a less aggressive pace than we have been doing in the last few quarters. For sure, the vast majority of the new hires will come in the emerging market centers. We're very pleased with the development of our Monterrey office, I think we're up to about 15 or so new hires there, and that office will help us serve more effectively the clients in the Americas. And that continues to be the plan.

I don't think you will necessarily see an acceleration of hiring. On the contrary, a slowdown will be appropriate. But if the operating environment, particularly the revenue that we will receive from asset based fees were to increase with any kind of recover in the equity markets in the second half of the year, we will go back to our ambitious plans of hiring to continue a high level of investment in the business.

Right, thanks, and then just one final one. In terms of the comment about the completion of the transition from Morgan Stanley, should we expect that by the end of the second quarter or the third quarter? Thanks?

Well right now we hope it will take place by the end of the second quarter but it may run into part of the third quarter. Our second quarter ends at the end of May, so we're hopeful by some time in June that we'll be done with it almost entirely.

That's great. Thank you very much.

We'll take our next question from Andre Glukhov with Brean Murray.

Yes, thanks, congratulations on a solid quarter. Two things, on the ETF question. Henry, can you talk about maybe what are you seeing in terms of the pipeline of new MSCI linked ETFs? You've done a very solid job this quarter in signing new ETFs. What do you expect in the near term?

In the near term, the pipeline is very robust. I think what has happened, particularly in the last quarter of '08, was that the pipeline was also very robust but given the dislocations in the market, a lot of the ETF vendors slowed down but did not cancel, at least not the MSCI index ones, but did not cancel many of the launches that they had in their pipeline. What we are seeing now is that people are dusting off those plans, preparing for launches, are talking to us about other indices that can be launched. You saw the announcement we made on our factory indices and we're hoping to be launching products on that, so I think the overall environment for ETF vendors is very positive. Clearly, even though there have been significant market depreciation, but everyone has been highly encouraged by the significant influx of funds into ETF, and therefore that has encouraged many of the units that are managing large ETF funds to continue to work hard on their launch plans.

And to follow-up on Andrew's question about Barclays, would you guys expect to have to renegotiate this fee that the BGI pays upon the change of control?

No. Our expectations will be that there's no renegotiation but obviously the unit hasn't been sold, and not clear it will completely be sold, and we don't know who the buyer is and anything like that.

Okay and then the last question on the renewal rate, maybe Mike better directed to you, do you think that in some of the softer areas on the renewal rate, like equity portfolio analytics, have you guys washed through some of the clients who have the major issues and declines on the headcount? Or is it still going to be staying below let's call it normalized level for a while?

Let me answer that. It's Henry. Clearly, as you all know, the fourth quarter of every year is the quarter that has relatively higher contracts up for renewal in the equity analytics world for us, and that's what you saw happening in the fourth quarter '08. Now I think a lot of the impact was exacerbated by the way we compute the cancellation rate or the retention rate which is by annualizing the cancels and dividing it by the run rate that led us to believe that the retention rate was lower than it actually was in some corners of the market.

On a seasonal basis, Q1, Q2, and Q3 have relatively lower contract up for renewal than the fourth quarter so you will see that reflected this quarter. You saw it in the first quarter, you're going to see it in the second and the third. So if the environment continues to be pretty challenging, I think the next quarter to observe and watch is the fourth quarter of this year in terms of what ends up happening with cancellations in this product line.

Okay, thank you.

We'll take our next question from John Neff with William Blair.

Hi, guys, congratulations and also just wanted to commend you for the amounts of disclosure you guys provide. It just keeps going up and it's already very high so I think you're to be commended for that.

Thank you.

The average EPS assets in the quarter were $126 billion but you started the quarter at $119 billion and you finished the quarter at less than $108 billion. So the average was higher than either the start or the finish so what happened during the quarter to drive that average so much higher than where you started or ended the quarter?

Okay, so, at the end of November, we were at $119 billion, and then by the end of December, early January, the markets had rebounded quite a bit. Our balance is actually, at one point, close to $140 billion, and then there was quite a decline during the month of February, consistent with the overall equity markets or global equity markets decline, so over the period, it averaged out to a little bit more than $126 billion.

Okay, that's helpful. And then one of the things I tend to look at is the equity index asset fee run rate as a percentage or basis point of the quarter end ETF assets and it was 4.69 basis points this quarter which is the third sequential increase. And I was just wondering is that reflective of any changes in pricing that you're seeing or is that reflective of growth or some other dynamic in some of he non-ETF based asset fees? In other words, you seem to be getting more money as expressing the run rate as a percentage of the ETF assets than has been the case.

Right. Well I guess the first thing, when you express the run rate, you're probably expressing the run rate for the entire product category in the numerator, and in the denominator you're only taking ETF balances because that's the only balances we disclose. So your number's a little bit inflated as a result of that on a basis point basis. So probably the other item in the first quarter, we had a couple of ETF vendors where there was a minimum fee that we had in the run rate, and I'd say that minimum fee is a higher level than what the AUM would give us under that contract at this point in time. So those two factors would really explain your basis point increases.

A couple of ETF vendors with the minimum fees that were higher than usual?

No, no. For example, what I meant is that in the quarter we had some new ETF providers come in to us and there's a minimum fee associated with that relationship. And so that minimum fee is part of the run rate but the AUM balances that that provider has are much lower than what that minimum fee is giving us. So eventually over the term of the contract the idea would be that the minimum fee would be lower than what we would get from the AUM, but right now the minimum fee is distorting your calculation.

I see, so there's an up-front and there's little in the way of assets there at this point?

Right. Well, you say it's an up-front, it's a minimum fee so it continues on a recurring basis but the idea is that eventually the fee from the AUM balances would be greater than the minimum fee.

Got you. That's helpful. And then I think Henry, you mentioned you had $11 million in gross subscription sales during the quarter. I just want to make sure, number one, that was $11 million referred to subscription sales. And was that a number that was adjusted to adjust for the product switching between total risk in BarraOne?

Yes, the $11 million is what we call gross sales, gross recurring sales not including any one-time fees or the like, and those reflect the product swaps.

Okay, great and then last question, Mike, I just want to make sure I understood. You say the ETF balances were $124 billion. Is that current or is that at the end of March?

That's at the end of the March so March 31.

Okay. $124 billion. Thank you very much.

You're welcome.

We'll take our next question from Murali Gopal with KBW.

Good morning. Thanks for taking my call. A couple of quick questions. In terms of your comments on the pipeline for new subscriptions, you say that it remains pretty solid, and I'm looking at it and looking at your comments that you made last quarter. I just want to understand, is it a reasonable characterization to say you sound relatively more positive in terms of the pipeline than where you were last quarter?

I would not categorize it like that. Maybe we all were so shell shocked last quarter, right, as to what was happening in the world and are adjusting to that environment. I would say that the environment, I would not say that the pipeline, by the way, is very solid, I would say it's solid. The second thing, the environment continues to be very challenging. We have a lot of items in the pipeline but the probability of any one item is lower and there's a lot more standard deviation around the pipeline probabilities, so we're managing through that process that way. There are certain areas of the pipeline that have higher confidence such as the equity index data part and there are other areas such as equity analytics that we're less confident about. But the overall pipeline is good and now it's a question of making sure that we realize it during this quarter.

Right, and in terms of the equity index licensing and when I look at that from the perspective of the pipeline what's driving a strong pipeline? Is it portfolio managers wanting to understand the benchmarks better, in which case if that's what is driving the pipe now I would imagine the sales cycle there being reasonably short because it's something they want to understand today. Can you just elaborate on that a little bit?

You're talking about the data subscription or the equity index licensing?

The index licensing and the data subscription.

I think overall, I don't think there is a particular micro story that you can say that because there are more product launches or less product launches, or more offices opening up, or less offices opening up. I think what this equity index data subscription business is is that it has an inherent amount of growth embedded in the normal progression of data usage within clients, within existing clients and new clients around the world. Nobody wants the environment. There's going to continue to be demand in that. Now in a good market the demand is much higher, in a market like this the demand is lower. But I think it would not be appropriate to look at the macroeconomic element and say people are paralyzed or they aren't doing more, they're not launching any new funds or any new business, or any of that. It's just an embedded basic level of growth that exists in this business, regardless, within certain constraints, but regardless of the operating environment.

Right, right. Okay. And then can you quickly comment on the (inaudible) business, the in flows. You had $2.4 billion that was down from about $16 billion from the last quarter, and Q4 was a pretty challenging quarter and you did see some investors coming back, the ETF, if they wanted international exposure. What changed between Q4 and Q1 that you had pretty significant drop off in in flows?

I think, the dynamics of what you have in a lot of the ETF is complicated, but as far as we can observe, what you have, first, in a market, like in a volatile and difficult market, if somebody wants to be invested in the equity market and not sitting in cash or in treasuries, but if somebody wants to be invested, they typically are looking for products that are extremely transparent, that they know exactly what the portfolio is, and an index gives you that, right?

Secondly, they are products that if they change their minds, within seconds or minutes or days, they can sell the investment as opposed to giving the mandate to a money manager that they have this very elaborate process of taking the money away. So therefore, our observation is when you have very very high levels of risk aversion in volatile markets and people want to be fully invested, you see good demand for ETFs. When that risk aversion begins to recede a little bit, people may be more willing to give the assets at the margin, on a longer term basis, to a money manager, or may be more willing to pick stocks one by one as opposed to put them in index ETFs basically.

Okay, that's helpful. And lastly, in terms of the EBITDA margin, I know you have guided to the low 40% range in the last couple quarters but you've consistently hit more closer to the mid 40% range even in this challenging environment. Is there any reason to believe that a mid 40% range isn't sustainable?

So you're telling us we haven't been succeeding at achieving the target of low 40s? That is correct. And I think because there is a little bit of a migration going on, particularly in a difficult year like this, from strictly targeting an EBITDA margin to targeting the EBITDA absolute level. So therefore, our sense will be that this is not an either/or at this point. It's a combination of the two metrics. But our sense could be that if we continue in a challenging environment and if we continue to be successful, at a very disciplined expense management process, the margin may also lay more and it may graduate upwards, or not graduate but it may migrate upwards because we may be targeting more the absolute level of EBITDA rather than just the margin.

Again we ask that you limit yourself to one question. If you have a follow-up question you may re-queue. We'll take our next question from David Scharf with JMP Securities.

Hi, good morning. Henry, I just want to understand a little bit of how to think about within equity index subscription the retentions going forward. I think last quarter you said about 10% or 11% of the revenue run rate were user based fees. Right now, do you get a sense from your client base whether or not all of the office closures, headcount consolidation, employee run rates have stabilized? Because it would seem like unless we see, people who are open for business now are going to be open for the rest of the year, just trying to get a sense of whether or not there's still a fair amount of geographic consolidation that can still transpire or if we've run that already.

I will say that our sense is that our client base that subscribes to the equity index data will continue to see consolidation in their headcount and will continue to see closure of remote offices or marginal offices, will continue to see significant cost cutting. We got to keep in mind that this downdraft that took place from, say, September, October to now, it happened really rapidly, and therefore a lot of these businesses that are managing money have not completely adopted their cost structure to the new revenue levels, maybe with the expectation that it will get better, or it's just a process of trying to do it a step at a time. So we're very realistic that our clients' constraints on headcount and budgets and the like will continue unabated and typically lag the decline of the revenues.

That's in terms of that environment. With respect to the equity index data and the headcount, the part of it that is driven by user fees and headcount, there is a little bit of pressure on it but it is not yet significant because typically in a lot of our client bases, the number of people that are authorized to use or touch our data is significantly low compared to the people that want to use or touch our data. So from that point of view the levels of penetrations are relatively low compared to the people that should be using the data or equipped to use the data, so there will have to be a very dramatic continuation of headcount cost cutting for us to see meaningful and dramatic changes to the part of the revenue or the run rate that is based on headcount. But if the environment continues very very harsh, some of that could come, but we're seeing only small effects of that right now.

Okay, that's helpful. Now user fees are about 10% or 11%. Where has it peaked at as a percentage of equity index run rate?

Where what?

Where has the user fees as a percentage of the equity index revenue peaked at? I guess it's about 10% or 11% now. Has it been as high as 20%?

No, no, it's consistent, 10%, 11% has been consistent. And that, remember, keep in mind that 10%, 11% is based on user fees. What is not in the 10%, 11% is the office locations, right? The office locations and the like. But that's pretty consistent. If anything, particularly in this environment, if we sell more and more to medium and small size clients, we sell more and more equity in this data to mid and small sized clients, a lot of those sales are almost 100% content sales. So if that continues we may see a small decline in the user fees relative to the pie.

We'll take our next question from Ivy De Dianous with Fox-Pitt Kelton.

Good morning Harry, Mike, congratulations for a good quarter in a challenging environment.

Thank you.

My question is for the employees increased about 32 employees compared to last quarter, what percentage is in the sales area and what percentage is in emerging markets?

The majority of the headcount addition on a net basis, on a net basis which is the number you're looking at, is in the sales and client organization. We still have some hires that were done on the separation from Morgan Stanley but it's not significant. And that's a trend that you'll continue to see in the balance of the year.

The plan will be to not grow or potentially reduce the headcount of our business in the non-client organization, as we call it, and therefore any growth that you see in the headcount will be in the client organization which entails salespeople, the consultants that help the clients use the analytics products, the client service staff, the (inaudible) plan service staff, and the like. Because, as we have described in the past, we continue to believe that we're punching below our waste and that our client organization is not as large as it should be even in a market like this one, and therefore we want to insure that even in this difficult environment we continue to make investments and add headcount to this area.

That's great, and are most of these employees hired for emerging markets?

Yes. Not all of them but the majority of them are. I don't have the numbers in front of me here but I'm sure some of that headcount was the build out of the Monterrey office. At the end of last quarter we had no employees in Monterrey. We're up to 15, 17 employees now. Some of those happened in February, and a small number of those happened in February so that will be in that number, for example. We also have added employees in that number in Mumbai in the client organization, for example.

Thank you. Due to time constraints that will conclude today's question and answer session as well as today's conference call. On behalf of MSCI we would like to thank you for your participation and you may disconnect at any time.

Thank you. Thank you. everyone, for participating.